Corporations and contract law [Second edition.] 9780455240572, 0455240574

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CORPORATIONS AND CONTRACT LAW

Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] http://legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only) INTERNATIONAL AGENTS & DISTRIBUTORS NORTH AMERICA Thomson Reuters Eagan United States of America

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EUROPE Thomson Reuters London United Kingdom

CORPORATIONS AND CONTRACT LAW Compiled by Alex WAN

LLB(Hons) Birm, GradCertLaw Well, LLM(Commercial Law)

Northumbria, PCertTL Swinburne, GradCertArts Eastern, MTheol(Dist) Newcastle, PhD Swinburne

Lecturer Business Law Swinburne University of Technology

SECOND EDITION LAWBOOK CO. 2018

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 100 Harris Street, Pyrmont, NSW ISBN: 9780 455 240 572

© 2018 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. Product Developer: Vickie Ma Editor: Lara Weeks Printed by Ligare Pty Ltd, Riverwood, NSW

PUBLISHER’S NOTE Text compilation

This publication has been prepared for students of Swinburne University of Technology by drawing upon material from the following Thomson Reuters (Professional) Australia titles: • Graw, S, An Introduction to the Law of Contract (9th ed Lawbook Co., 2017) • Lipton P, Herzberg A and Welsh M, Understanding Company Law (19th ed, Lawbook Co., 2018) Pagination, paragraphs, cross-references and footnotes

The content of this book has been re-paginated and re-paragraphed to run consecutively. Where a reference is made to text not contained within this publication, the original reference remains, with an indication of its origin, ie (Graw) and (Lipton). Footnoting in the text has been re-numbered to run chronologically within each chapter.

v

TABLE OF CONTENTS

Publisher’s Note Table of Cases Table of Statutes

PART 1: CONTRACT LAW

Chapter 1: An introduction to the Australian legal system Chapter 2: An introduction to contract

v ix xxix 1

3

29

Chapter 3: The offer

33

Chapter 5: Intention to be bound

83

Chapter 4: Acceptance

Chapter 6: Consideration

57 99

Chapter 7: Contents of a contract

109

Chapter 9: Discharging a contract

203

Chapter 8: Misrepresentation Chapter 10: Remedies

163 225

PART 2: CORPORATIONS LAW

257

Chapter 12: Types of companies

281

Chapter 14: The company’s relations with outsiders

319

Chapter 16: Good faith and proper purpose

369

Chapter 11: Registration and its effects Chapter 13: Constitution and replaceable rules Chapter 15: Directors

259 299

359

Chapter 17: Conflicts of interest and disclosure

395

Chapter 19: Directors of insolvent companies

469

Index

515

Chapter 18: Duties of care, skill and diligence

Chapter 20: Remedies and penalties for breach of duty

437 493

vii

TABLE OF CASES A

ACCC v ASIC [2000] NSWSC 316 .................................................................................. 19.125 ACN 002 804 702 v McDonald [2009] NSWSC 610 ......................................................... 9.135 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 .................................... 10.420, 10.450 AMP Society v Chaplin (1978) 18 ALR 385 ...................................................................... 3.190 ANZ Banking Group Ltd v Beneficial Finance Corp [1983] 1 NSWLR 199 ..................... 7.660 ASC v AS Nominees Ltd (1995) 62 FCR 504 ................................................................... 15.20 ASC v Donovan (1998) 28 ACSR 583 ............................................................................. 20.140 ASIC v Adler [2002] NSWSC 171 ...... 16.06, 16.235, 16.240, 16.242, 16.245, 16.255, 17.35, 17.130, 18.125, 18.165, 18.170, 18.200, 20.130, 20.140, 20.145 ASIC v Adler (No 3) (2002) 20 ACLC 576 ...................................................................... 20.135 ASIC v Adler (No 5) [2002] NSWSC 483 ........................................................... 20.145, 20.150 ASIC v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267 .......................... 17.60 ASIC v Cassimatis (No 8) [2016] FCA 1023 ................................................................... 18.150 ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27 ............................................. 18.142 ASIC v Citrofresh International Ltd (No 3) [2010] FCA 292 ........................................... 20.145 ASIC v Edwards (2005) 220 ALR 148 ............................................................................... 4.110 ASIC v Elm Financial Services Pty Ltd [2005] NSWSC 1065 ........................................ 20.145 ASIC v Healey [2011] FCA 717 ........................................................................... 18.115, 18.175 ASIC v Healey (No 2) [2011] FCA 1003 .......................................................................... 20.140 ASIC v Hellicar [2012] HCA 12 ............................................................................. 18.97, 18.145 ASIC v Macdonald (No 11) [2009] NSWSC 287 ............................................................. 18.145 ASIC v Macro Realty Developments Pty Ltd [2016] FCA 292 .......................... 16.260, 20.153 ASIC v Maxwell [2006] NSWSC 1052 ......................... 16.06, 16.245, 16.250, 17.155, 20.145 ASIC v Plymin [2003] VSC 123 .... 19.35, 19.40, 19.50, 19.60, 19.75, 19.110, 19.155, 20.135 ASIC v Rich [2003] NSWSC 85 .................................................................. 18.25, 18.30, 18.60 ASIC v Rich [2009] NSWSC 1229 ...................................................................... 18.165, 18.170 ASIC v Somerville [2009] NSWSC 934 ............................................................................ 20.130 ASIC v Soust [2010] FCA 68 ............................................................................................ 17.135 ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224 ....... 16.250, 18.140 ASIC v Vines [2003] NSWSC 1116 .................................................................................... 18.65 ASIC v Vines [2005] NSWSC 738 ..................................................................................... 18.15 ASIC v Vizard [2005] FCA 1037 ............................................................ 17.315, 20.125, 20.145 ASIC v Warrenmang Ltd [2007] FCA 973 ........................................................................ 17.155 ASIC v White [2006] VSC 239 ......................................................................................... 20.145 ATCO Controls Pty Ltd v Newtronics Pty Ltd (2009) VR 411 ............................................ 5.20 AWA Ltd v Daniels (1992) 7 ACSR 759 ................................................... 18.35, 18.60, 18.175 Abeles v PA (Holdings) Pty Ltd [2000] NSWSC 1008 ...................................................... 20.30 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 ................................................ 17.10 Abram v AV Jennings (2002) 84 SASR 363 ...................................................................... 7.210 Adams v Cape Industries plc [1990] 1 Ch 433 ............................................................... 11.150 Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250 .......................................... 4.350, 4.360 Addis v Gramophone Co Ltd [1909] AC 488 ................................................................... 10.280 Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274 ................................ 7.770 Adler v ASIC [2003] NSWCA 131 ........................................................... 16.240, 17.80, 17.130 Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 ..................... 16.200 Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 ................ 14.220 ix

Corporations and Contract Law

Advocate-General of Bengal v Ranee Surnomoye Dossee (1863) 9 Moo Ind App 391 ............................................................................................................................ 1.20 Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 .............................. 7.10 Ailakis v Olivero (No 2) (2014) 100 ACSR 524 ................................................................... 5.40 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 ............. 4.120 Akerhielm v De Mare [1959] AC 789 ................................................................................. 8.540 Akot Pty Ltd v Rathmines Investments Pty Ltd [1984] 1 Qd R 302 ................................ 7.200 Alati v Kruger (1955) 94 CLR 216 ................................................... 8.550, 8.570, 8.600, 8.660 Aldersea v Public Transport Corporation (2001) 3 VR 499 ............................................ 10.290 Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 ................ 7.1030 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 ................................................. 13.160 Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd (2013) 296 ALR 465 .................................................................................................................................. 7.770 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 .............. 4.110, 4.170 Andre & Cie v Ets Michel Blanc & Fils [1979] 2 Lloyds LR 427 ..................................... 8.310 Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205 .... 10.410, 10.420, 10.430, 10.450, 10.480 Andy Kala Pty Ltd v E J Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630 ............... 13.140 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 .................................................................................................................................. 7.650 Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 ........................................................................................................................... 7.770 Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328 .............. 10.470 Arfaras v Vosnakis (2016) 18 BPR 35,819 .......................................................................... 5.40 Armstrong World Industries (Australia) Pty Ltd v Parma [2014] FCA 743 .................. 13.3.305 Artedomus v Del Casale [2006] NSWSC 146 ................................................................. 17.275 Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 ............................................. 11.130 Ashbury Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653 ................................ 13.75 Ashton v Pratt (2015) 88 NSWLR 281 ................................................................................ 5.40 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 .............................................. 7.570 Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455 .................................................................................................................................. 13.95 Athens–MacDonald Travel Service Pty Ltd v Kazis [1970] SASR 264 .......................... 10.320 Attorney-General (NSW) v Mutual Home Loan Fund (Aust) Ltd [1971] 2 NSWLR 162 .................................................................................................................... 3.150 Attwood v Small (1838) 6 Cl & Fin 232; 7 ER 684 .......................................................... 8.440 Australia and New Zealand Banking Group Ltd v Australian Glass and Mirrors Pty Ltd (1991) 9 ACLC 702 ......................................................................................... 14.245 Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd [2013] NSWCA 459 ................................................................................................................. 14.220 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 .............................................................................................................. 4.120 Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119 .......................................................................... 14.220 Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 ....... 16.145, 16.230 Australian Staging & Rigging – Events Pty Ltd v Elite Systems Australia Pty Ltd [2016] SASC 204 ......................................................................................................... 20.105 Australian Woollen Mills Pty Ltd v Cth (1954) 92 CLR 424 ............................................... 3.50 Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34 .............. 15.45 Aviet v Smith & Searls Pty Ltd (1956) 73 WN (NSW) 274 .............................................. 4.490 x

Table of Cases

B

BP Australia Pty Ltd v Nyran Pty Ltd (2003) 198 ALR 442 .............................................. 7.210 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 ................. 7.770 Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374; 134 FLR 279 ............................. 8.730 Baker v Palm Bay Island Resort Pty Ltd [1970] Qd R 210 .............................................. 17.15 Baldwin v Everingham [1993] 1 Qd R 10 .......................................................................... 5.150 Balfour v Balfour [1919] 2 KB 571 ................................................................ 5.70, 5.110, 5.190 Ballas v Theophilos (No 2) (1957) 98 CLR 193 ................................................................ 3.610 Balmain New Ferry Co v Robertson (1906) 4 CLR 379 ................................................... 7.920 Baltic Shipping Co v Dillon (1993) 176 CLR 344 ..................... 9.610, 10.140, 10.330, 10.340 Banco de Portugal v Waterlow [1932] AC 452 ................................................................ 10.380 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 ................ 14.220, 14.235, 14.315 Banks, Re; Weldon v Banks (1912) 56 Sol Jo 362 .......................................................... 5.210 Bannerman v White (1861) 10 CB (NS) 844; 142 ER 685 .............................................. 7.340 Barnes v Addy (1874) LR 9 Ch App 244 ......................................................................... 20.105 Barnes v Forty Two International Pty Ltd (2014) 316 ALR 408 ....................................... 7.770 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 .................................................................................................................... 4.110 Baume v Commonwealth (1906) 4 CLR 97 ....................................................................... 10.80 Beattie v Lord Ebury (1872) LR 7 Ch App 777 ................................................................. 8.310 Bell v Lever Bros Ltd [1932] AC 161 ............................................................................... 17.345 Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 ...... 16.06, 16.225, 16.235, 20.105, 20.110, 20.112 Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307 ........................................................................................................... 16.85 Beswick v Beswick [1968] AC 58 ..................................................................................... 10.570 Bettini v Gye (1876) 1 QBD 183 ........................................................................................ 7.610 Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171 ..................................... 8.280 Bishopsgate Investment Management Ltd v Maxwell (1993) 11 ACLC 3128 ................ 16.215 Bisset v Wilkinson [1927] AC 177 ...................................................................................... 8.250 Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 ........................ 8.300 Bolton v Madden (1873) LR 9 QB 55 ...................................................................... 6.90, 6.100 Bolton v Mahadeva [1972] 1 WLR 1009 ............................................................................ 9.130 Bonchristiano v Lohmann [1998] 4 VR 82 ....................................................................... 10.340 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 ................................ 17.180 Boulton v Jones (1857) 2 H & N 564; 157 ER 232 ............................................................ 4.50 Boyd v Ryan (1947) 48 SR (NSW) 163 .......................................................................... 10.630 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 .................. 3.10, 3.20 Brambles Holdings Ltd v Carey (1976) 15 SASR 270 .......................................... 14.75, 14.80 Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 ................ 7.40, 7.50 Breen v Williams (1996) 186 CLR 71 ................................................................................ 7.720 Brentwood Village Limited (in liq) v Terrigal Grosvenor Lodge Pty Limited (No 4) [2016] FCA 1359 ..................................................................................................... 17.150 Bressan v Squires [1974] 2 NSWLR 460 .......................................................................... 4.420 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 ............................................... 14.140, 14.185, 14.220, 14.275, 14.280, 14.315, 14.350 Brien v Dwyer (1978) 141 CLR 378 ................................................................................ 10.500 Briginshaw v Briginshaw (1938) 60 CLR 336 .................................................................. 20.135 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 .............................................................................................................................. 4.490 Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 ............................ 9.230 xi

Corporations and Contract Law

British & American Telegraph Co v Colson (1871) LR 6 Exch 108 ................................. 4.390 British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176 ................................................................................................................................ 14.320 Broadcasting Station 2GB Pty Ltd, Re [1964-1965] NSWR 1648 .................................... 16.60 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 ............................................. 4.260 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 ............................................................ 8.910 Brown v Smitt (1924) 34 CLR 160 ..................................................................................... 8.570 Brownlie v Campbell (1880) 5 App Cas 925 ..................................................................... 8.170 Brunninghausen v Galvanics (1999) 46 NSWLR 538; [1999] NSWCA 199 ......... 4.110, 16.35 Burazin v Blacktown City Guardian (1996) 142 ALR 144 ............................................... 10.290 Burg Design Pty Ltd v Wolki (1999) 162 ALR 639 ........................................................... 8.220 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 ......................... 10.140, 10.370 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 .............................. 8.220, 8.760 Butler v Fairclough (1917) 23 CLR 78 ................................................................... 6.210, 10.60 Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd [1979] 1 WLR 401 ............ 3.390 Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 ................................................................................................................... 15.20 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 ........................................................ 7.770 Byrne v van Tienhoven (1880) 5 CPD 344 ....................................................................... 3.480 Byron v Southern Star Group Pty Ltd (1997) 136 FLR 267 ........................................... 19.135

C

C Czarnikow Ltd v Rolimpex [1979] AC 351 ..................................................................... 9.350 CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1 ............... 8.170 Cameron v Hogan (1934) 51 CLR 358 .................................................................. 5.140, 5.150 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 ................................... 8.220 Campomar v Nike International (2000) 202 CLR 45 .................................. 8.830, 8.870, 8.880 Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 .............................. 8.560, 8.620 Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84 ........................................... 14.260 Caratti Holding Co Pty Ltd, Re [1975] 1 ACLR 87 ......................................................... 13.130 Cardiff Bank, Re; Marquis of Bute’s Case [1892] 2 Ch 100 ........................................... 18.155 Carew-Reid v Public Trustee (1996) 14 ACLC 1106 ....................................................... 13.125 Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 .................................................................................................. 7.160 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 ............ 3.170, 3.250, 4.240, 5.270, 5.280, 6.120 Carrier Australasia Ltd v Hunt (1939) 61 CLR 534 ......................................................... 13.165 Carter v Hyde (1923) 33 CLR 115 ....................................................................................... 4.40 Casper Corp Pty Ltd v Gorman [2011] QSC 3 ................................................................ 10.700 Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 ......................... 10.190 Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd (2014) 45 VR 79 ...................... 10.450 Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28 ............ 19.50 Chandler v Webster [1904] 1 KB 493 ................................................................................ 9.570 Chanter v Hopkins (1838) 4 M & W 399 ; 150 ER 1484 ............................................... 7.1050 Chaplin v Hicks [1911] 2 KB 786 ..................................................................................... 10.230 Charnock v Liverpool Corp [1968] 1 WLR 1498 ............................................................... 7.470 Chattis Nominees v Norman Ross Homeworks (1992) 28 NSWLR 338 .......................... 7.970 Chew v R (1992) 173 CLR 626; (1991) 4 WAR 21 ..... 16.05, 16.06, 17.115, 17.160, 17.170, 17.295 Chew Investment Australia Pty Ltd v General Corp of Australia Ltd (1988) 6 ACLC 87 ......................................................................................................................... 13.95 xii

Table of Cases

Chisum Services Pty Ltd, Re (1982) 1 ACLC 292 ............................................................ 14.85 Chow v Harris [2010] FamCA 366 ..................................................................................... 7.180 Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427 .......................................................................................................................... 7.970 Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 ............................. 18.130 City & Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 ................................... 7.520 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407 ...................... 18.10, 18.155, 18.200 Clark v Kirby-Smith [1964] Ch 506 ................................................................................... 10.260 Clarke v Dunraven [1897] AC 59 ......................................................................................... 3.20 Claude Neon Ltd v Hardie [1970] Qd R 93 ....................................................................... 9.470 Clay v Clay (2001) 202 CLR 401 ......................................................................................... 2.20 Clef Aquitaine SARL v Laporte Ltd [2001] QB 488 ........................................................... 8.580 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 .......... 10.680, 10.690 Coates v Sarich [1964] WAR 2 ........................................................................................ 10.530 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 ............... 7.185, 7.210, 7.250, 7.680, 7.730, 7.770, 9.230, 9.280, 9.450, 9.510, 9.570 Codot Developments Ltd v Potter [1981] 1 NZLR 729 ................................................... 10.530 Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636 ............................................................. 10.700 Cohen v Cohen (1929) 42 CLR 91 ...................................................................................... 5.80 Coleman v Myers [1977] 2 NZLR 225 .................................................................... 16.30, 16.45 Coleman v R [1988] WAR 196 ......................................................................................... 19.185 Commercial Bank of Australia Ltd v GH Dean & Co Pty Ltd [1983] 2 Qd R 204 ......... 4.120, 4.180 Commercial Banking Co (Sydney) Ltd v RH Brown & Co (1972) 126 CLR 337 ............ 8.350 Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 .................................... 7.720 Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 ............ 18.10, 18.40, 19.20 Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 ................................... 8.190 Commonwealth Oil Refineries Ltd v Hollins [1956] VLR 169 ......................................... 10.700 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 ...... 10.50, 10.140, 10.210 Con-stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 .............................................................................. 7.690 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 .......................... 8.800 Conlon v Simms [2006] 2 All ER 1024 .............................................................................. 8.160 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 .................. 20.105 Continental C & G Rubber Co Pty Ltd, In re (1919) 27 CLR 194 ....................... 9.580, 9.610 Cook v Deeks [1916] 1 AC 554 ............................................................................ 17.210, 20.95 Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 ...................................... 15.15 Correa v Whittingham [2013] NSWCA 263 ...................................................................... 14.350 Cottrill v Steyning and Littlehampton Building Society [1966] 1 WLR 753 .................... 10.190 Cowan v O’Connor (1888) 20 QBD 640 ............................................................................ 4.360 Coward v Motor Insurer’s Bureau [1963] 1 QB 259 .......................................................... 5.120 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 33 CLR 72 ........................................................................................... 14.210 Cummings Engineering Holdings Pty Ltd, Re [2014] NSWSC 250 ................................ 16.120 Currie v Misa (1875) LR 10 Exch 153 ................................................................................. 6.10 Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 ............................................. 7.870 Cutter v Powell (1795) 6 TR 320; 101 ER 573 .................................... 9.50, 9.60, 9.70, 9.120

xiii

Corporations and Contract Law

D

DFC of T v Austin (1998) 16 ACLC 1555 .......................................................................... 15.15 DJ Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 ........................... 7.840, 7.930 Daniels v Anderson (1995) 37 NSWLR 438 ........ 18.15, 18.35, 18.40, 18.80, 18.100, 18.155, 18.175 Darbishire v Warran [1963] 1 WLR 1067 ......................................................................... 10.350 Darby, Re [1911] 1 KB 95 ................................................................................................. 11.110 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 .............. 7.980, 7.1040 Darmanin v Cowan [2010] NSWSC 1118 ............................................................................ 5.40 Darvall v North Sydney Brick & Tile Co Ltd (1987) 6 ACLC 154 .................................... 16.10 Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1989) 16 NSWLR 260 ................... 16.10 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 .................................................................................................................................. 8.310 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 ............ 9.220, 9.270, 9.290, 9.440, 9.570 De Lassalle v Guildford [1901] 2 KB 215 .......................................................................... 7.400 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 .............................................. 8.60, 8.190 Dempster v Mallina Holdings Ltd (1994) 15 ACSR 1 ...................................................... 18.200 Dencio v Zivanovic (1991) 105 FLR 117 ........................................................................... 3.590 Denne v Light (1857) 8 De GM & G 774; 44 ER 588 ................................................... 10.590 Derry v Peek (1889) 14 App Cas 337 ............................................................................... 8.530 Dewhurst (WA) & Co Pty Ltd v Cawrse [1960] VR 278 ................................................... 4.490 Diamond v Campbell-Jones [1961] Ch 22 ....................................................................... 10.190 Dibble v Aidan Nominees Pty Ltd [1986] ATPR 40-693 .................................................... 7.550 Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 .............. 7.300, 7.310, 7.330 Dickinson v Dodds (1876) 2 Ch D 463 ....................................................... 3.510, 3.560, 4.200 Dignan v Australian Steamships Pty Ltd (1931) 45 CLR 188 .......................................... 1.170 Dimmock v Hallett (1866) LR 2 Ch App 21 ............................................................... 8.20, 8.30 Director of Consumer Affairs Victoria v The Good Guys Discount Warehouses (Australia) Pty Ltd (2016) 245 FCR 529 ....................................................................... 8.810 Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 ............................................................................................................................. 8.170 Dome Resources NL v Silver [2008] NSWCA 322 ............................................................ 13.55 Dougan v Ley (1946) 71 CLR 142 ................................................................................... 10.560 Downs v Chappell [1997] 1 WLR 426 ............................................................................... 8.570 Doyle v ASIC [2005] HCA 78 ........................................................................................... 17.165 Doyle v ASIC [2005] WASCA 17 ...................................................................................... 20.145 Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 ............................................................ 8.570 Duke Group Ltd v Pilmer (1999) 73 SASR 64 ................................................................ 18.180 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 ............ 10.430, 10.440 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 ................................ 6.10 Dunton v Dunton (1892) 18 VLR 114 ......................................................... 6.180, 6.200, 6.210

E

E v Australian Red Cross Society (1992) 31 FCR 299 .................................................... 8.810 Eastwood v Kenyon (1840) 11 Ad & El 438; 113 ER 482 ................................................ 6.140 Ecay v Godfrey (1947) 80 Ll L R 286 ............................................................................... 7.360 Edgington v Fitzmaurice (1885) 29 Ch D 459 ....................................................... 8.290, 8.500 Edwards v ASIC [2009] NSWCA 424 ................................................................................. 19.10 xiv

Table of Cases

Edwards v Skyways Ltd [1964] 1 WLR 349 ...................................................................... 5.390 Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640 .......... 7.210, 7.250 Eley v Positive Government Security Life Assurance Co (1875) 1 Ex D 20 ................. 13.105 Eliason v Henshaw 4 Wheaton 225 (1819) ....................................................................... 4.320 Elizabeth City Centre v Corralyn (1994) 63 SASR 235 .................................................... 4.430 Elliott v ASIC [2004] VSCA 54 ................................................................... 19.60, 19.75, 19.155 Embiricos v Sydney Reid & Co [1914] 3 KB 45 ............................................................... 9.330 Empirnall Holdings v Machon Paull (1988) 14 NSWLR 523 ................................... 3.20, 4.270 Entores Ltd v Miles Far East Corp [1955] 2 QB 327 ............................................ 4.480, 4.490 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 ............ 11.175, 16.95 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 .......... 7.20, 7.800 Ermogenous v Greek Orthodox Community (2002) 209 CLR 95 ..... 5.40, 5.160, 5.260, 5.320 Errington v Errington [1952] 1 KB 290 ................................................................................. 2.30 Es-me Pty Ltd v Parker [1972] WAR 52 .......................................................................... 17.300 Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131 ........................................... 10.450 Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] SASC 84 ......................................................................................................................... 7.210 Esso Petroleum v Mardon [1976] QB 801 ......................................................................... 8.270 Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 .......................................................................... 5.40 Express Airways v Port Augusta Air Services [1980] Qd R 543 ...................................... 4.490

F

FC Shepherd & Co Ltd v Jerrom [1987] QB 301 ....................................... 9.320, 9.330, 9.540 Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167 .......................... 8.195 Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 ........................................................... 17.270 Falko v James McEwan & Co Pty Ltd [1977] VR 447 ................................................... 10.310 Farley v Skinner [2002] 2 AC 732 .................................................................................... 10.340 Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 ............................................. 4.230 Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 .......... 9.600, 9.610, 9.620 Fiorelli Properties Pty Ltd v Professional Fencemakers Pty Ltd (2011) 34 VR 257 ................................................................................................................................ 10.530 Fisher v Bell [1961] 1 QB 394 ................................................................................ 3.140, 3.150 Fitch v Snedaker 38 NY 248 (1868) ......................................................................... 3.270, 4.30 Fitzgerald v Masters (1956) 95 CLR 420 ........................................................................ 10.700 Fitzwood v Unique Goal (2001) 188 ALR 566 .............................................. 3.30, 8.300, 8.510 Fleming v Bank of New Zealand [1900] AC 577 ................................................................. 6.60 Forbes v Australian Yachting Federation Inc [1996] ATPR (Digest) 46-158 ..................... 8.810 Forbes v New South Wales Trotting Club Ltd [1977] 2 NSWLR 515 ............................ 13.120 Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 ......................................... 7.910 Forkserve Pty Ltd v Jack & Aussie Forklift Repairs Pty Ltd [2000] NSWSC 1064 .............................................................................................................................. 17.290 Forty Two International Pty Ltd v Barnes (2014) 97 ACSR 450 ...................................... 7.680 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 .................................... 7.210 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 ........................................................................................ 14.200, 14.210, 14.245, 14.320 Frontlink Pty Ltd v Feldman [2016] VSC 691 ...................................................................... 3.20 Furs Ltd v Tomkies (1936) 54 CLR 583 ............................................... 17.190, 17.235, 17.390

xv

Corporations and Contract Law

G

GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd [1987] NSW Conv R 55-324; (1986) 40 NSWLR 631 ................................................ 4.110, 4.120, 6.150 Gallie v Lee [1969] 2 Ch 17 ........................................................................ 7.880, 7.890, 7.910 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 ................................ 7.520 Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 ......................................................................................... 4.120, 4.180 George Hudson Holdings Ltd v French (1973) 128 CLR 387 .......................................... 4.300 Getreide-Import GmbH v Contimar SA Compania Industrial, Comercial y Maritima [1953] 1 WLR 207 .......................................................................................... 4.460 Gibbins Investments Pty Ltd v Savage [2011] FCA 527 ................................................. 13.132 Gibbons v Pozzan [2007] SASC 99 ................................................................................... 14.95 Gilford Motor Co Ltd v Horne [1933] Ch 935 .................................................................. 11.120 Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 ........................................... 7.120 Gillfillan v ASIC [2012] NSWCA 370 ................................................................................ 20.145 Godecke v Kirwan (1973) 129 CLR 629 ............................................................................ 4.130 Gold Ribbon (Accountants) Pty Ltd v Sheers [2005] QSC 198 ...................................... 18.155 Gold Ribbon (Accountants) Pty Ltd v Sheers [2006] QCA 335 ........................................ 18.50 Golden Key Ltd, Re [2009] EWCA Civ 636 ....................................................................... 7.250 Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674 ................................................ 3.460 Goodwins (Newtown) Pty Ltd v Gurry [1959] SASR 295 .................................................. 3.150 Gordon v Gordon (1821) 3 Swan 400; 36 ER 910 ........................................................... 8.180 Goss v Lord Nugent (1833) 5 B & Ad 58; 110 ER 713 ...................................................... 7.20 Goulburn-Murray Rural Water Authority v Rawalpindi [2010] VSC 166 ........................... 4.120 Gould v Vaggelas (1984) 157 CLR 215 ................................................................. 8.500, 8.590 Grainger & Sons v Gough [1896] AC 325 ................................................................ 3.90, 3.100 Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513 .............................. 17.85 Gray v Motor Accident Commission (1998) 196 CLR 1 .................................................... 10.60 Great Investments Ltd v Warner [2016] FCAFC 85 ........................................................ 14.250 Green v Bestobell Industries Pty Ltd [1982] WAR 1 ................. 11.140, 17.260, 17.265, 20.25 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 .......................................................... 16.10 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 ................................. 15.15, 20.150 Grove v Flavel (1986) 43 SASR 410 .................................................................. 17.115, 17.335

H

H Dakin & Co Limited v Lee [1916] 1 KB 566 .................................................................. 9.120 H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 ........................... 10.180 HIH Insurance Ltd, In the Matter of [2016] NSWSC 482 ................................................... 5.36 HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 ................. 14.30 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 ...................................... 10.130, 10.300 Hall v Poolman [2007] NSWSC 1330 ................................................................................ 19.90 Hamer v Sidway 124 NY 538 ............................................................................................. 6.110 Hamilton Jones v David and Snape [2004] 1 All ER 657 ............................................... 10.340 Hamlin v Great Northern Railway Co (1856) 1 H & N 408; 156 ER 1261 .................... 10.300 Hampstead Meats Pty Ltd v Emerson & Yates Pty Ltd [1967] SASR 109 ...................... 4.490 Hannes v MJH Pty Ltd (1992) 10 ACLC 400 .................................................................. 16.180 Harvey v Facey [1893] AC 552 ............................................................................................ 3.70 Hawkins v Bank of China (1992) 26 NSWLR 562 ........................ 11.155, 19.10, 19.20, 19.30 Hawkins v Clayton (1988) 164 CLR 539 ................................................................ 7.690, 7.770 Hedley Byrne & Co v Heller and Partners Ltd [1964] AC 465 ............................. 1.220, 8.610 Heilbut Symons & Co v Buckleton [1913] AC 30 .................................................. 7.390, 7.410 xvi

Table of Cases

Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 ..................................... 5.40 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 ............................................ 14.140, 14.325 Henderson v Arthur [1907] KB 10 ........................................................................................ 7.30 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; 79 ALR 83 ............................................................................................................................ 8.190 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 .................... 7.690, 7.960 Henthorn v Fraser [1892] 2 Ch 27 ......................................................................... 3.490, 4.370 Henville v Walker (2001) 206 CLR 459 ............................................................................. 8.500 Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 ..................................................... 9.420 Hewison v Negus (1853) 16 Beav 594; 51 ER 909 ......................................................... 5.210 Heywood v Wellers [1976] QB 446 .................................................................................. 10.340 Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881 .... 13.85, 13.90, 13.95, 13.100 Hill v Rose [1990] VR 129 .................................................................................................. 8.150 Hillig v Darkinjung [2006] NSWSC 594 .............................................................................. 13.75 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 ........... 17.350, 17.355 Ho v Akai Pty Ltd [2006] FCAFC 159 ................................................................................ 15.20 Hoenig v Isaacs [1952] 2 All ER 176 ................................................................................. 9.110 Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 ....................................................... 7.930 Holmes v Jones (1907) 4 CLR 1692 ................................................................................. 8.460 Holwell Securities Ltd v Hughes [1974] 1 All ER 161 ................................ 4.390, 4.410, 4.440 Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154 ............................ 17.370 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 ............. 7.630 Hoobin, In re [1957] VR 341 ............................................................................................ 10.530 Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 ................................. 7.770 Hornal v Neuberger Products Ltd [1957] 1 QB 247 .......................................................... 8.570 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 .......... 7.230, 7.330, 7.480, 7.770 Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216 ............................................................................................................. 4.450, 4.460 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 ..... 16.145, 16.160, 16.165, 16.170 Howe v Smith (1884) 27 Ch D 89 ................................................................................... 10.500 Howe v Teefy (1927) 27 SR (NSW) 301 ......................................................................... 10.240 Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 ......................................................... 7.50, 7.510 Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653 ..................................... 14.160 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499 ........................................ 16.45 Husain v O & S Holdings (Vic) Pty Ltd [2005] VSCA 269 ................................................. 3.20 Hutton v Warren (1836) 1 M & W 466; 150 ER 517 ............................................. 7.110, 7.690 Hutton v West Cork Railway Co (1883) 23 Ch D 654 ...................................................... 16.06 Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 ............................................................... 3.340

I

IATA v Ansett Australia Holdings Ltd (2008) 234 CLR 151 ................................... 7.250, 7.770 Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] Lloyd’s Rep 611 ........................... 7.500 Insight Vacations Pty Ltd v Young (2011) 243 CLR 149 ................................................. 7.1010 Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia) Ltd (1988) 5 BPR 11,110 ............................................................................... 3.20 International Cat Manufacturing (in liq) v Rodrick [2013] QCA 372 ................................. 19.50 International Greetings UK Ltd v Stansfield [2010] NSWSC 1357 ................................. 19.150

xvii

Corporations and Contract Law

J

J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 ................ 7.490 JAG Investments Pty Ltd v Strati [1981] 2 NSWLR 600 ................................................ 10.720 JC Williamson Ltd v Lukey (1931) 45 CLR 282 .............................................................. 10.670 JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 ............................................. 7.430 JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 ............................................................... 10.250 JS McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337 ............................................. 8.810 Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 ..................................................... 10.320 Jarvis v Swans Tours [1973] QB 233 ............................................................................... 10.320 Jeffree v NCSC [1990] WAR 183 ........................................................................ 11.130, 17.145 Jelin Pty Ltd v Johnson (1987) 5 ACLC 463 ..................................................................... 19.20 Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 ............................................ 16.105 John Graham Reprographics Pty Ltd v Steffens (1987) 5 ACLC 904 .............................. 19.35 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 .............................................. 15.50 Jones v Lipman [1962] 1 WLR 832 .................................................................................. 11.125 Jones v Schiffman (1971) 124 CLR 303 .......................................................................... 10.220 Jones v Vernons Pools Ltd [1938] 2 All ER 626 ............................................................... 5.340 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 ............................................................................................................................ 9.550 Junker v Hepburn [2010] NSWSC 88 .............................................................................. 14.185

K

KMS Imports (Aust) Pty Ltd (In Liq), In the matter of [2016] FCA 1571 ......................... 19.15 Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235; [2000] NSWCA 313 ........................................................................................ 10.350, 10.380 Kell v Harris (1915) 15 SR (NSW) 473 ........................................................................... 10.640 Kellas-Sharpe v PSAL Ltd [2012] 2 Qd R 233 ................................................................ 10.490 Keller v Holderman 11 Mich 248 (1863) ................................................................. 5.290, 5.300 Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533 ..................................................... 19.55 Kennedy v Vercoe (1960) 105 CLR 521 .......................................................................... 10.580 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 ................................................. 20.70 Knott Investments Pty Ltd v Fulcher [2014] 1 Qd R 21 ................................................. 10.350 Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 ........................... 16.185 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 .................................................................................................................................. 7.650 Koufos v C Czarnikow Ltd [1969] 1 AC 350 ................................................................... 10.140 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 ......................... 8.90, 8.540, 8.660 Krell v Henry [1903] 2 KB 740 ........................................................................................... 9.400

L

L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 ................................... 7.640 L Shaddock & Associates v Council of the City of Parramatta (1981) 150 CLR 225 .................................................................................................................................. 8.610 L’Estrange v F Graucob Ltd [1934] 2 KB 394 ....................................................... 7.790, 7.800 La Rosa v Nudrill Pty Ltd [2013] WASCA 18 .................................................................... 7.930 Lam v Ausintel Investments Australia Pty Ltd [1990] ATPR 50,866 ................................. 8.190 Lancaster v Walsh (1838) 4 M & W 16 ............................................................................... 4.60 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 ................................................................................................................................ 7.1060 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661 ....................................... 7.850 Leaf v International Galleries [1950] 2 KB 86 ........................................................ 8.690, 8.730 xviii

Table of Cases

Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381 ............................ 8.710, 8.730 Lee v Lee’s Air Farming Ltd [1961] AC 12 ........................................................................ 11.50 Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741 ....................................................... 19.25 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 ........................... 14.15 Leonard v Pepsico Inc 88 F Supp 2d (SDNY 1999) ......................................................... 3.240 Levin v Clark [1962] NSWR 686 ........................................................................................ 16.70 Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320 ..... 4.370, 4.490 Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 .................................. 8.210 Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095 ................................... 9.380 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 .................. 7.210 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144 .................................................................................. 7.210, 13.55, 13.80 Loan Investment Corp of Australasia v Bonner [1970] NZLR 724 ................................. 10.580 Lockhart v Osman [1981] VR 57 ........................................................................................ 8.110 Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14,799 ................................... 10.610 Lubidineuse v Bevanere Pty Ltd (1984) 3 FCR 1; 55 ALR 273 ....................................... 8.190 Lucke v Cleary (2011) 111 SASR 134 ................................................................................ 4.110 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 86 ....... 10.90, 10.250 Lyford v Media Portfolio Ltd (1989) 7 ACLC 271 ............................................... 14.220, 14.240

M

MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 ....................................................... 7.210 MLC Assurance Co v Evatt (1968) 122 CLR 556 ................................................. 1.220, 8.610 MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24 ................ 14.105, 14.285, 14.290 Mabo v Queensland [No 2] (1992) 175 CLR 1 ................................................................... 1.20 MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 .............................................. 7.170 MacLeod v The Queen (2003) 214 CLR 230 .................................................................... 11.65 Macaura v Northern Assurance Co Ltd [1925] AC 619 .......................................... 11.15, 11.60 Madi Pty Ltd, Re (1987) 5 ACLC 847 .............................................................................. 14.245 Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 .......................... 7.210 Manchester Diocesan Council for Education v Commercial & General Investments Ltd [1970] 1 WLR 241 .............................................................................. 3.600 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 ......................... 9.510, 9.530 Markit Pty Ltd v Commissioner of Taxation [2007] 1 Qd R 253 ....................................... 8.810 Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508 ........... 17.345, 20.40 Marson Pty Ltd v Pressbank Pty Ltd [1989] 1 Qd R 264 ............................................... 17.325 Massey v Crown Life Insurance Co (1978) 1 WLR 676 ................................................... 3.190 Masters v Cameron (1954) 91 CLR 353 .................. 4.100, 4.110, 4.120, 4.130, 4.150, 4.180 Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 ................................................ 7.500 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 ................................................. 7.940 McGellin v Mount King Mining NL (1998) 144 FLR 288 ................................................... 17.85 McGregor v McGregor (1888) 21 QBD 424 ........................................................... 5.180, 5.190 McLellan v Carroll [2009] FCA 1415 .................................................................................. 19.80 McMahon v National Foods (2009) 25 VR 251 ..................................................... 7.410, 7.500 McNamara v Flavel (1988) 6 ACLC 802 ............................................................ 17.300, 17.340 McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455 .......................................................................................................................... 8.850 Meates v Attorney-General [1983] NZLR 308 ...................................................................... 3.10 Mehmet v Benson (1965) 113 CLR 295 .......................................................................... 10.700 Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 366 .................. 4.490 Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 .......................................... 7.20 xix

Corporations and Contract Law

Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3245 ................................................................................................................ 14.20 Mernda Developments Pty Ltd v Rambaldi [2011] VSCA 392 .............................. 16.06, 16.92 Merritt v Merritt [1970] 1 WLR 1211 ................................................................................... 5.200 Metro-GoldwynMayer v Greenham [1966] 2 NSWLR 717 ................................................................. 10.480 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 ......... 19.85, 19.120, 19.155 Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 ..................................... 9.370 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 ...................................................................................................... 8.195 Milliner v Milliner (1908) 8 SR (NSW) 471 ........................................................................ 5.210 Millington v Waste Wise Environmental Pty Ltd (2015) 295 FLR 301 ........................... 10.380 Mills v Mills (1938) 60 CLR 150 ......................................................................................... 16.50 Millstream Pty Ltd, The v Schultz [1980] 1 NSWLR 547 ................................................ 10.710 Milner v Carnival plc [2010] 3 All ER 701 ....................................................................... 10.320 Milner v Delita Pty Ltd (1985) 61 ALR 557 ....................................................................... 8.360 Mitchell v Valherie (2005) 93 SASR 76 .................................................................... 3.220, 8.30 Moorcock, The (1889) 14 PD 64 ........................................................................................ 7.770 Mordecai v Mordecai (1988) 12 NSWLR 58 ...................................................... 17.230, 17.365 Morgan v Manser [1948] 1 KB 184 ........................................................................ 9.260, 9.310 Morley v ASIC [2009] NSWSC 287 .................................................................................... 18.95 Morley v ASIC (No 2) [2011] NSWCA 110 ....................................................................... 20.140 Morris v Kanssen [1946] AC 459 ........................................................................ 14.160, 14.355 Morton v Elgin-Stuczynski (2008) 19 VR 294 .................................................................... 7.210 Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 .............................................................................................................. 7.210, 7.250 Murphy v Simpson [1957] VR 598 ..................................................................................... 5.100 Myers v Aquarell Pty Ltd [2000] VSC 429 ....................................................................... 14.295

N

NLS Pty Ltd v Hughes (1966) 120 CLR 583 ................................................................... 10.500 NRMA v Parker (1986) 6 NSWLR 517 .............................................................................. 15.40 NRMA Ltd v Snodgrass [2001] NSWSC 76 ....................................................................... 13.80 National Australia Bank Ltd v Sparrow Green Pty Ltd [1999] SASC 280 ...................... 14.190 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 .............. 9.300, 9.330, 9.560 Nelson v Dahl (1879) 12 Ch D 568 ................................................................................... 7.690 Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 ................................ 7.40, 7.90, 7.290 Netline Pty Ltd v QAV Pty Ltd [No 2] [2015] WASC 113 .................................. 10.680, 10.690 Ngurli Ltd v McCann (1953) 90 CLR 425 ........................................................................ 16.155 Nguyen v Nguyen (1990) 169 CLR 245 ............................................................................ 1.260 Nicholas v Thompson [1924] VLR 554 .............................................................................. 8.480 Nicholls v Taylor [1939] VLR 119 ....................................................................................... 8.570 Niesmann v Collingridge (1921) 29 CLR 177 .................................................................... 4.150 Nissho Iwai Australia Ltd v Malaysian International Shipping Corp, Berhad (1989) 167 CLR 219 .................................................................................................... 7.1130 North-West Transportation Co v Beatty (1887) 12 App Cas 589 ................................... 17.380 Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 ..... 14.10, 14.100, 14.175, 14.180, 14.220, 14.315, 14.340, 14.345 Northumberland and Durham District Banking Co, Re; Ex parte Bigge (1858) 28 LJ (Ch) 50 ................................................................................................................. 8.400 Norton v Angus (1926) 38 CLR 523 ................................................................................ 10.600 xx

Table of Cases

Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 .......................... 4.420 Nyulasy v Rowan (1891) 17 VLR 663 ............................................................................... 5.310

O

O’Brien v Smolonogov (1983) 53 ALR 107 ....................................................................... 8.810 O’Brien v Walker (1982) 1 ACLC 59 .................................................................................. 20.95 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 ......................... 10.450 O’Neall v Barra Rosa Pty Ltd (1989) 96 FLR 436 ............................................................ 7.660 OOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 ............. 9.230, 9.510 Ocean Tramp Tankers Corp v V/O Sovfracht (“The Eugenia”) [1964] 2 QB 226 ............ 9.510 Olivaylle Pty Ltd v Flottweg AG (No 4) (2009) 255 ALR 632 ........................................... 4.490 Olley v Marlborough Court [1949] 1 KB 532 ..................................................................... 7.920 Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166 ............ 17.220, 17.260 195 Crown St Pty Ltd v Hoare [1969] 1 NSWR 193 ........................................................ 14.95 Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 .............. 14.225, 14.230, 14.350, 14.355 Oscar Chess Ltd v Williams [1957] 1 All ER 325 .................................................. 7.300, 7.320 Overend & Gurney & Co v Gibb (1872) LR 56 HL 480 ................................................... 18.10

P

PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd (2008) 20 VR 481 .............. 4.280 PT Arutmin Indonesia v PT Thiess Contractors Indonesia [2013] QSC 332 ................... 9.480 PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 ......................................................... 7.910 Pacific Carriers Ltd v BNP Paribus (2004) 218 CLR 451 .............. 7.210, 7.240, 7.250, 13.80 Paciocco v ANZ Banking Group Ltd (2014) 309 ALR 249 ............................................. 10.420 Paciocco v ANZ Banking Group Ltd (2016) 90 ALJR 835; 333 ALR 569 ....... 10.430, 10.450, 10.460 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 ...................................................................................................................... 14.335 Paradine v Jane (1647) Aleyn 26; 82 ER 897 .................................................................. 9.170 Parastatidis v Kotaridis [1978] VR 449 ................................................................................ 6.20 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 ............. 8.820, 8.830, 8.900 Parke v Daily News Ltd [1962] Ch 927 .............................................................. 16.120, 16.125 Parland Pty Ltd v Mariposa Pty Ltd (1995) 5 Tas R 121 ................................................... 4.40 Partridge v Crittenden [1968] 2 All ER 421 ....................................................................... 3.110 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 ........................................................................................................ 10.680 Patterson v Dolman [1908] VLR 354 ................................................................................... 4.70 Paul A Davies (Aust) Pty Ltd v Davies [1983] 1 NSWLR 440 ....................................... 20.100 Payne v Cave (1789) 3 TR 148; 100 ER 502 ................................................................... 3.420 Payzu Ltd v Saunders [1919] 2 KB 581 .......................................................................... 10.360 Pearce v Merriman [1904] 1 KB 80 ................................................................................... 5.210 Peek v Gurney (1873) LR 6 HL 377 .................................................................................. 8.330 Pender v Lushington (1877) 6 Ch D 70 ............................................................................ 13.95 Peninsula Kingswood Country Golf Club, Re [2014] VSC 437 ....................................... 13.175 Percival v Wright [1902] 2 Ch 421 ..................................................................................... 16.20 Permanent Building Society v Wheeler (1994) 11 WAR 187 .............. 16.145, 16.210, 18.135, 18.200 xxi

Corporations and Contract Law

Permanent Trustee v FAI General (2003) 214 CLR 514 .................................................. 8.520 Perry v Sidney Phillips & Son [1982] 3 All ER 705 ........................................................ 10.340 Peskin v Anderson (2001) 19 ACLC 3001 ......................................................................... 16.25 Peso Silver Mines v Cropper (1966) 58 DLR (2d) 1 ....................................................... 17.245 Petelin v Cullen (1975) 132 CLR 355 .................................................................... 7.900, 7.910 Pharmaceutical Society (GB) v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 ........................................................................................................................... 3.130 Phipps v Boardman [1967] 2 AC 46 .................................................................................. 17.15 Photo Production Ltd v Securicor Ltd [1980] AC 827 ........................................ 7.1050, 7.1100 Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 .................................... 10.580 Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13 ............................................... 14.255 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467 ........................... 11.195 Pipeworks Australia v Betcorp Pty Ltd [2015] QSC 284 ................................................... 4.120 Placer v Thiess (2003) 196 ALR 257 ............................................................................... 10.220 Playspace Playground Pty Ltd v Osborn [2009] FCA 1486 .............................................. 19.45 Plimer v Roberts (1997) 80FCR 303 .................................................................................. 8.810 Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 .................... 3.20 Pondcil Pty Ltd v Tropical Reef Shipyard Pty Ltd [1994] ATPR (Digest) 46-134 ............ 7.930 Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 ....... 10.380, 10.400 Potts v Miller (1940) 64 CLR 282 ...................................................................................... 8.570 Poussard v Spiers and Pond (1876) 1 QBD 410 .............................................................. 7.590 Powell v Fryer [2001] SASC 59 ........................................ 11.155, 19.20, 19.50, 19.75, 19.155 Powell v Lee (1908) 99 LT 284 .......................................................................................... 4.210 Powierza v Daley [1985] 1 NZLR 558 ............................................................................... 3.370 Prest v Petrodel Resources Ltd [2013] UKSC 34 ........................................................... 11.100 Price v Strange [1978] 1 Ch 337 ..................................................................................... 10.620 Property Force Consultants Pty Ltd, Re [1997] 1 Qd R 300 .......................................... 18.200 Pym v Campbell (1856) 6 El & Bl 370; 119 ER 903 ........................................................ 7.140

Q

QBiotics Ltd, In the matter of [2016] FCA 873 ................................................................ 13.125 Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109 ................. 11.180 Qintex Ltd, Re (1990) 8 ACLC 811 .................................................................................. 14.320 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 ................................................. 19.70 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 ..................................... 17.240, 17.400 Queensland Power Co Ltd v Downer EDI Mining Pty Ltd [2010] 1 Qd R 180 ............... 7.210

R

R v Byrnes (1995) 183 CLR 501 ............................................................ 17.35, 17.120, 17.125 R v Clarke (1927) 40 CLR 227 ................................................................................. 3.310, 4.30 R v Cook; Ex parte Director of Public Prosecutions (Cth) [1996] 2 Qd R 283 ............. 17.125 R v Donald; Ex parte Attorney-General [1993] 2 Qd R 680 ........................................... 17.170 R v Fodera [2007] NSWSC 1194 ..................................................................................... 20.155 Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109 ....................................... 3.580 Ratcliffe v Evans [1892] 2 QB 524 ................................................................................... 10.220 Redgrave v Hurd (1881) 20 Ch D 1 ....................................................................... 8.420, 8.510 Reed Constructions (Qld) Pty Ltd v Martinek Holdings Pty Ltd [2011] 1 Qd R 28 ...................................................................................................................................... 3.20 Reese Bros Plastics Ltd v Hamon-Sobelco Aust Pty Ltd (1988) 5 BPR 11,106 ............. 4.490 xxii

Table of Cases

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n ................. 17.100, 17.105, 17.110, 17.235, 17.245, 17.395, 20.50 Regional Development Australia Murraylands and Riverland Inc v Smith (2015) 251 IR 317; [2015] SASCFC 160 ...................................................................... 9.230, 9.510 Regreen Asset Holdings Pty Ltd v Castricum Bros Australia Pty Ltd [2015] VSCA 286 ......................................................................................................................... 7.10 Rich v ASIC [2004] HCA 42 ............................................................................................. 20.140 Riches v Hogben [1986] 1 Qd R 315 ................................................................................ 5.230 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 ........................................ 10.450 Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238 ............................. 17.285, 17.360 Robinson v Harman (1848) 1 Ex 850; 154 ER 363 ............................... 10.50, 10.200, 10.210 Rose & Frank Co v Crompton (JR) & Bros Ltd [1925] AC 445 ....................................... 5.360 Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269 ......................................................... 17.300 Roufos v Brewster (1971) 2 SASR 218 ............................................................................. 5.210 Routledge v Grant (1828) 4 Bing 653; 130 ER 920 ......................................................... 3.440 Routledge v McKay [1954] 1 All ER 855 ........................................................................... 7.270 Roxborough v Rothmans of Pall Mall (2001) 208 CLR 516 ............................................. 9.610 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 .................................................................................................................... 7.210 Royal British Bank v Turquand (1856) 6 E & B 327; 119 ER 886 ................................ 14.165 Ruben v Great Fingall Consolidated [1906] AC 439 ....................................................... 14.360 Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150 .............................. 19.20, 19.35 Ruxley Electronics Ltd v Forsyth [1996] 1 AC 344 .............................................. 10.70, 10.340 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 .............................................. 5.40

S

Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 ...................................................................................................................... 10.370 Salomon v A Salomon & Co Ltd [1897] AC 22 ........................................... 11.35, 11.45, 11.70 Salomon v Salomon & Co Ltd [1897] AC 22 ..................................................................... 11.40 San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 ................................................................. 8.610 Saunders v Leonardi (1976) 1 BPR 9409 ....................................................................... 10.530 Saunders (Executrix of the Estate of Gallie, deceased) v Anglia Building Society [1971] AC 1004 ................................................................................................. 7.890 Scandrett v Dowling (1992) 27 NSWLR 483 ..................................................................... 5.150 Scanlan’s New Neon Ltd v Tooheys Ltd; Caldwell v Neon Electric Signs Ltd (1943) 67 CLR 169 ............................................................................................. 7.760, 7.770 Schawel v Reade [1913] 2 IR 81 ....................................................................................... 7.380 Scottish Co-operative Wholesale Soc Ltd v Meyer [1958] 3 All ER 66 ................ 16.75, 16.80 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 ........................................................................................... 7.720, 7.770 Seddon v North Eastern Salt Co [1905] 1 Ch 326 ................................................ 8.730, 8.920 Selen v Selen [2011] FamCA 310 ........................................................................................ 5.40 Service v Federal Commissioner of Taxation (2000) 171 ALR 248 .................................. 5.210 Shafron v ASIC [2012] HCA 18 .............................................................................. 18.30, 18.97 Shahid v Australasian College of Dermatologists (2008) 168 FCR 46; [2008] FCAFC 72 ............................................................................................................... 5.30, 5.40 Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 ................................................. 7.450 Sheahan v Verco [2001] SASC 91 ..................................................................... 18.105, 18.190 Sheehan v Zaszlos [1995] 2 Qd R 210 ............................................................................. 4.120 xxiii

Corporations and Contract Law

Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 .................................................. 7.770 Sheppard v Municipality of Ryde (1952) 85 CLR 1 .......................................................... 7.410 Shipton, Anderson & Co v Weil Bros & Co [1912] 1 KB 574 ............................................ 9.90 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 .................................. 7.730, 7.770 Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 ................................... 13.155 Sibley v Grosvenor (1916) 21 CLR 469 ............................................................................ 8.570 Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358 ..................................................... 9.250 Simpkins v Pays [1955] 1 WLR 975 .................................................................................. 5.250 Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 ........................................................ 4.110 Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609 ..................................... 20.112 Sino Australia Oil and Gas Limited (in liq), In the matter of [2016] FCA 1488 ............. 20.140 Sino Australia Oil and Gas Limited (in liq), In the matter of [2016] FCA 934 ............... 18.117 Sion v NSW Trustee & Guardian [2013] NSWCA 337 ........................................................ 5.40 Sklavos v Australasian College of Dermatologists [2016] FCA 179 ................................... 5.30 Smilevska v Smilevska (No 2) [2016] NSWSC 397 ............................................................ 5.40 Smith v Butler [2012] EWCA Civ 314 .............................................................................. 14.320 Smith v Hughes (1871) LR 6 QB 597 ................................................................................. 8.60 Smith v Land & House Property Corp (1884) 28 Ch D 7 ....................................... 8.40, 8.260 Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 ..... 11.190, 11.195 Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254 ............................................. 8.570 Smolarek v Liwszyc [2006] WASCA 50 ............................................................................. 13.10 Smorgon v Australia and New Zealand Banking Group Ltd (1976) 134 CLR 475 .......... 14.10 Smyth v Jessep [1956] VLR 230 ...................................................................................... 10.530 South Australia v Clark (1996) 66 SASR 199 ........................................................ 17.30, 18.70 Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2005] QSC 233 ......................................................................................................... 17.255, 17.405 Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 ............................................... 13.170 Southern Real Estate Pty Ltd v Dellow [2003] SASC 318 ................... 17.110, 17.320, 17.365 Spargos Mining NL, Re (1990) 3 WAR 166 .................................................................... 16.105 Spencer v Harding (1870) LR 5 CP 561 ........................................................................... 3.190 Spreag v Paeson Pty Ltd (1990) 94 ALR 679 ................................................................. 11.195 Standard Chartered Bank v Pakistan National Shipping Corporation (No 3) [1999] 1 Lloyd’s Rep 747 ............................................................................................ 10.350 Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 .................... 15.20 State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 .................... 7.50 State Rail Authority of New South Wales v Heath Outdoors Pty Ltd (1986) 7 NSWLR 170 ...................................................................................................................... 7.40 Statewide Tobacco Services Ltd v Morley [1993] 1 VR 423 ............................... 18.10, 19.135 Stedman v Swan’s Tours (1951) 95 Sol Jo 727 .............................................................. 10.320 Stephenson v Dwyer [2008] NSWCA 123 .......................................................................... 5.400 Stevens v Spotless Management Services Pty Ltd (2016) 68 AILR 250-068 .................... 6.10 Stevenson, Jaques & Co v McLean (1880) 5 QBD 346 ....................................... 3.360, 3.470 Stockloser v Johnson [1954] 1 QB 476 .............................................................. 10.510, 10.530 Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 ............................ 14.220, 14.360 Stoyanova v Equity-One Mortgage Fund Ltd [2016] VSC 414 ....................................... 10.490 Strode v Parker (1694) 2 Vern 316; 23 ER 804 ............................................................. 10.480 Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 9 ACLC 1018 .............................. 15.35 Summers v Commonwealth (1918) 25 CLR 144 ............................................................... 7.700 Sumpter v Hedges [1898] 1 QB 673 ................................................................................. 9.140 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 ................................................. 10.710 Sunburst Properties Pty Ltd v Agwater Pty Ltd [2005] SASC 335 ................................. 14.355 xxiv

Table of Cases

Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361 ................................ 10.100 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 ............................................................. 10.610 Sydney Constructions & Developments Pty Ltd v Reynolds Private Wealth Pty Ltd (2016) 311 FLR 217 .............................................................................................. 10.240 Sydney Council, City of v West (1965) 114 CLR 481 ..................................................... 7.1110

T

TNT Ltd v May and Baker Ltd (1966) 115 CLR 353 ....................................................... 7.1110 Taco Co v Taco Bell (1982) 42 ALR 177 ........................................................................... 8.820 Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 ........................................................................................................................ 4.370, 4.380 Tatem (WJ) Ltd v Gamboa [1939] 1 KB 132 ..................................................................... 9.510 Tavistock Holdings Pty Ltd v Saulsman (1991) 9 ACLC 450 ................................ 20.15, 20.55 Taxation, Deputy Commissioner of v Clark [2003] NSWCA 91 ...................................... 19.130 Taxation, Federal Commissioner of v Whitfords Beach Pty Ltd (1982) 150 CLR 355 .................................................................................................................................. 14.65 Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 .................................. 9.190, 9.210, 9.250 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 263 ....................................................................................................... 7.210 Telstra Corp Ltd v Australis Media Holdings (1997) 24 ACSR 55 .................................... 4.110 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 .............................................. 4.110 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 .................................. 11.145, 14.40, 14.45 “The Moorcock” (1889) 14 PD 64 ...................................................................................... 7.740 Thomas v Thomas (1842) 2 QB 851; 114 ER 330 ........................................................... 6.170 Thomas Borthwick & Sons Ltd v South Otago Freezing Co Ltd [1978] 1 NZLR 538 ................................................................................................................................ 10.650 Thomas Marshall (Exporters) Ltd v Guinle [1978] 3 WLR 116 ........................... 17.280, 20.85 Thorby v Goldberg (1964) 112 CLR 597 ......................................................................... 16.260 Thorley v Heffernan (unreported, Supreme Court of New South Wales, 25 July 1995) ............................................................................................................................... 5.150 Toben v Mathieson [2013] NSWSC 1530 .......................................................................... 8.810 Todd v Nicol [1957] SASR 72 ............................................................................................. 5.230 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 ......................... 7.230, 7.810 Toteff v Antonas (1952) 87 CLR 647 ................................................................................. 8.570 Tourprint International Pty Ltd v Bott [1999] NSWSC 581 ................................ 19.100, 19.125 Traderight (NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94 ....................... 8.195 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 .................................................................................................................................. 7.570 Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488 .................................................................................................. 17.25, 17.85 Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 .................................. 9.450, 9.560 Tummon Investments Pty Ltd, Re (1993) 11 ACLC 1139 ............................................... 14.320 Turner v Bladin (1951) 82 CLR 463 ................................................................................. 10.540 Turner, Kempson and Co Pty Ltd v Camm [1922] VLR 498 .............................................. 4.80

V

V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16 .......................... 20.150 Van den Esschert v Chappell [1960] WAR 114 ....................................................... 7.70, 7.280 Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547 .................... 5.40 Veremu Pty Ltd v Ezishop.Net Ltd (2003) 47 ACSR 681 ................................................. 9.510 Vero Insurance Ltd v Kassem [2010] NSWSC 838 ......................................................... 14.265 xxv

Corporations and Contract Law

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 .................. 10.160 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528) ................. 10.190 Village Building Co Ltd v Canberra International Airport Pty Ltd (No 2) (2004) 208 ALR 98 .................................................................................................................... 8.810 Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) 9 NSWLR 731 ...................................... 8.730 Vines v ASIC [2007] NSWCA 75 ................................................................. 18.05, 18.85, 18.90 Viro v The Queen (1978) 141 CLR 88 .............................................................................. 1.350 Vitek v Taheri [2013] NSWSC 589 ..................................................................................... 8.730 Vosnakis v Arfaras [2015] NSWSC 625 ............................................................................... 5.40 Vrisakis v ASC (1993) 9 WAR 395 .................................................................................. 18.155 Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 ....................................... 3.20, 4.120

W

W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 .............................................................. 8.60 Wakeling v Ripley (1951) 51 SR (NSW) 183 .................................................................... 5.220 Waldorf Apartment Hotel, The Entrance Pty Ltd v Owners Corp SP 71623 [2010] NSW Titles Cases 80-137 .................................................................................. 4.280 Walker v Wimborne (1976) 137 CLR 1 .............................................................................. 16.90 Wallersteiner v Moir (No 2) [1975] QB 373 ..................................................................... 11.195 Wallis, Son and Wells v Pratt and Haynes [1911] AC 394 ............................................. 7.1000 Walton Harvey Ltd v Walker and Homfrays Ltd [1913] 1 Ch 274 ........................ 9.500, 9.510 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 .......................... 13.10 Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 ............................. 4.370 Waterside Workers’ Federation of Australia v Stewart (1919) 27 CLR 119 ................... 10.480 Watts v Morrow [1991] 1 WLR 1421 .................................................................. 10.330, 10.340 Weinstock v Beck [2013] HCA 14 ...................................................................................... 15.60 Wenham v Ella (1972) 127 CLR 454 ............................................................................... 10.140 Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1 ................. 7.210 Westminster Estates Pty Ltd v Calleja (1970) 91 WN (NSW) 222 ..................................... 4.40 Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 ....................................................................................................... 16.225, 19.05, 20.112 White v Bluett (1853) 23 LJ Ex 36 ......................................................................... 6.180, 6.190 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ................................ 16.170, 16.175 Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71 ........................................................... 10.60 Wickman Machine Tool Sales Ltd v L Schuler AG [1972] 1 WLR 840 ............................ 7.660 Wilcox v Kogarah Golf Club Ltd (1996) 14 ACLC 415 ..................................................... 13.80 Wilde v Gibson (1848) 1 HLC 605 ..................................................................................... 8.730 Williams v Carwardine (1833) 5 Car & P 566; 172 ER 1101 ................................. 3.290, 4.30 Williams v Pisano (2015) 90 NSWLR 342 ......................................................................... 8.810 Williams v Scholz [2007] QSC 266 .................................................................................... 19.65 Wilson v Northampton & Banbury Junction Railway Company (1874) LR 9 Ch App 279 ........................................................................................................................ 10.560 With v O’Flanagan [1936] 1 Ch 575 .................................................................................. 8.130 Wood v Odessa Waterworks Co (1889) 42 Ch D 636 ..................................................... 13.95 Woodward v Woodward (1863) 3 De G J & J 672; 46 ER 797 ...................................... 5.210 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 ....................................... 6.150, 17.35, 17.380 Woolworths Ltd v Olson (2004) 184 FLR 121 ................................................................. 10.100 Workers Trust Bank Ltd v Dojap Ltd [1993] AC 573 ....................................................... 10.520 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 .......................................................... 17.270 Wright v Hamilton Island Enterprises Ltd [2003] Q Conv R 54-588 ................................ 7.520 xxvi

Table of Cases

Z

Zamperoni Decorators Pty Ltd v Lo Presti [1983] VR 338 ............................................... 9.135 Zhu v Treasurer (NSW) (2004) 218 CLR 530 ................................................................... 7.250

xxvii

TABLE OF STATUTES COMMONWEALTH Administrative Decisions (Judicial Review) Act 1977: 1.340 Australia Act 1986: 1.350 Australian Charities and Not-for-profits Commission Act 2012 s 25-5(5): 12.20, 13.50 Australian Securities and Investments Commission Act 2001: 20.05 ss 12DA to 12DC: 8.760 s 50: 20.05 Commonwealth of Australia Constitution Act 1901: 1.140, 1.320, 1.340 s 109: 1.150 s 122: 1.150 Competition and Consumer Act 2010: 1.340, 7.720, 8.195, 8.200, 8.210, 8.220, 8.740, 19.125 s 2A(1): 8.810 s 4(2)(a): 8.790 s 6: 8.780 s 131A: 8.760 Schedule 2, Australian Consumer Law : 7.540, 8.190, 8.640, 8.740, 8.750, 8.780, 8.910, 8.920 s 4(2): 8.790 s 18: 7.540, 7.550, 7.560, 8.190, 8.640, 8.760, 8.770, 8.780, 8.790, 8.800, 8.810, 8.820, 8.830, 8.840, 8.860, 8.880, 8.890, 8.900 s 18(1): 8.760, 8.770 s 18(2): 8.760 s 29: 8.190, 8.750 ss 29 to 38: 8.750 s 30: 8.190, 8.750 s 31: 8.190, 8.750 s 32: 8.750 s 33: 8.190, 8.750 s 34: 8.190, 8.750 s 35: 8.750 s 36: 8.750 s 37: 8.190, 8.750 ss 39 to 43: 8.750 ss 44 to 46: 8.750 ss 47 to 48: 8.750

s 49: 8.750 s 151(1)(i): 14.40 s 232: 8.910 s 236: 7.550, 8.640, 8.910 s 237(1)(b): 8.910 s 237(2): 8.910 s 243: 7.550, 8.910 Sch 2 Ch 2: 8.750 Sch 2 Ch 2, Pt 2-3: 7.1140 Sch 2 Ch 3, Div 1: 8.750 Sch 2 Ch 5: 8.910 Sch 2 Pt 4: 8.750 Corporations Act 2001: 11.15, 11.30, 11.35, 11.45, 11.80, 11.90, 11.150, 11.160, 11.200, 12.05, 12.40, 12.50, 12.65, 12.75, 12.105, 13.05, 13.10, 13.15, 13.20, 13.35, 13.40, 13.50, 13.75, 13.180, 14.175, 15.05, 15.10, 15.25, 15.35, 15.55, 15.60, 16.135, 16.245, 16.250, 17.40, 17.85, 17.90, 17.155, 17.375, 18.90, 18.115, 18.125, 18.140, 18.142, 18.150, 18.155, 18.200, 19.10, 19.180, 20.05, 20.80, 20.120, 20.135, 20.152, 20.160, 20.165, 20.170, 20.175, 20.180, 20.185 s 9: 12.15, 12.20, 12.25, 12.45, 13.175, 14.245, 15.10, 15.15, 15.20, 17.55, 18.65, 18.90, 18.95, 19.15, 19.55 s 45A: 12.100 s 45A(2): 12.100 s 45A(4): 12.100 s 45A(5): 12.100 s 45A(6): 12.100 s 45B: 12.20 s 50AA: 17.55 s 57A: 11.15, 12.05 s 79: 16.255, 20.130 s 95A: 19.50 s 95A(1): 19.50 s 95A(2): 19.50 s 112: 11.20, 13.50 s 112(1): 12.10, 12.45 s 112(2): 12.30, 13.30 s 112(3): 12.30 s 112(4): 12.30 s 113: 12.45, 12.55 s 113(1): 12.45 xxix

Corporations and Contract Law

Corporations Act 2001 — cont s 113(2): 12.45 s 113(3): 12.45, 12.80 s 113(3A): 12.45 s 113(4): 12.45 s 114: 11.45, 12.55 s 117(2)(a): 12.10 s 117(2)(m): 12.20 s 119: 11.10 s 120(1): 15.05 s 123(1): 11.15, 14.90, 14.100 s 123(2): 14.115 s 123(3): 11.15 s 124: 11.15, 13.65, 13.75 s 124(1): 11.15, 13.70, 13.75 s 124(2): 13.70 s 125: 13.75 s 125(1): 13.75 s 125(2): 13.60, 13.75, 14.90 s 126: 11.15, 14.05, 14.135 s 126(1): 14.90 s 127: 14.95, 14.125 s 127(1): 11.15, 14.120, 14.125, 14.130, 14.260, 14.265, 15.35 s 127(2): 14.100, 14.125, 14.130, 14.260, 14.290, 14.295, 14.315, 15.35 s 127(2)(b): 14.280 s 127(3): 11.15, 14.95 s 127(4): 14.130, 14.265 s 128: 14.220 s 128(1): 14.220, 14.255 s 128(3): 14.360 s 128(4): 14.90, 14.170, 14.220, 14.225, 14.235, 14.240, 14.245, 14.250, 14.255, 14.260, 14.280, 14.345, 14.350, 14.355, 20.75 ss 128 to 130: 14.135, 14.180, 15.60 s 129: 11.15, 14.90, 14.170, 14.220, 14.230, 14.345, 14.350, 14.355, 14.360, 15.35 s 129(1): 14.170, 14.225, 14.230, 14.235 s 129(2): 14.240, 14.245, 14.260, 14.310 s 129(3): 14.220, 14.240, 14.245, 14.260, 14.265, 14.310 s 129(4): 14.220, 14.230, 14.250, 14.255, 20.75 s 129(5): 14.130, 14.260, 14.265, 14.270, 14.300, 15.35 s 129(6): 14.130, 14.260, 14.270, xxx

s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s s

14.275, 14.280, 14.285, 14.290, 14.295, 14.300, 15.35 129(7): 14.305 129(8): 14.220 130: 13.75 130(1): 14.155 134: 12.65, 13.05, 13.40 135: 13.10 135(1): 12.65, 13.20 135(1)(a)(i): 13.10 135(1)(a)(ii): 13.10 135(2): 13.10, 13.175 135(3): 13.10 136(1)(a): 13.45 136(1)(b): 13.45, 13.175 136(2): 13.80, 13.150, 13.175 136(5): 13.45, 13.175, 14.155 137(a): 13.175 138: 13.175 139: 13.45 140: 13.10, 13.80, 13.135 140(1): 13.80, 13.100, 13.180 140(1)(a): 13.80, 13.85, 13.90, 13.95, 13.100, 13.135, 13.145, 13.170 140(1)(b): 13.80, 13.100, 13.145, 13.150, 13.170 140(1)(c): 13.80, 13.100, 13.125, 13.130, 13.135, 13.140, 13.145, 13.170 141: 13.15 144: 12.95 145: 12.95 148(2): 12.15, 12.60 148(3): 12.60 148(4): 12.30 150(1): 12.20, 13.50 156: 12.30 157(3): 13.175 162: 12.30 164(4)(b): 14.355 164(5): 13.175 165: 12.45 175: 13.125 180: 16.05, 16.235, 16.250, 18.117, 18.125, 18.140, 18.145, 18.150, 20.05 180(1): 18.05, 18.15, 18.25, 18.60, 18.65, 18.90, 18.97, 18.115, 18.125, 18.130, 18.142, 18.145, 18.160, 18.165, 18.205, 19.75, 20.120, 20.155

Table of Statutes

Corporations Act 2001 — cont s 180(1)(a): 18.20 s 180(1)(b): 18.30, 18.60, 18.95 s 180(2): 18.05, 18.160, 18.165, 18.170 s 180(2)(a): 18.160, 18.170 s 180(2)(b): 18.160, 18.170 s 180(2)(c): 18.160, 18.170 s 180(2)(d): 18.160, 18.170 s 180(3): 18.165 ss 180 to 183: 16.235, 16.255, 20.60, 20.130 s 181: 16.145, 16.235, 16.240, 16.245, 16.250, 16.255, 16.260, 17.15, 17.20, 17.110, 17.150, 17.155, 17.175, 17.200, 17.300, 17.320, 17.325, 18.140, 18.170, 19.05, 20.05, 20.153 s 181(1): 16.235, 16.245, 16.255, 17.220, 17.325, 17.370, 18.165, 20.120, 20.153 s 181(1)(a): 16.05 s 181(2): 20.120, 20.130 ss 181 to 183: 17.15, 20.155 s 182: 16.05, 16.235, 16.242, 17.15, 17.20, 17.110, 17.120, 17.130, 17.140, 17.150, 17.155, 17.160, 17.165, 17.170, 17.175, 17.200, 17.295, 19.05, 20.05 s 182(1): 17.220, 17.370, 20.120 s 182(2): 17.110, 20.120, 20.130 s 183: 16.05, 16.242, 17.15, 17.20, 17.275, 17.295, 17.300, 17.315, 17.320, 17.325, 17.330, 17.335, 19.05, 20.05 s 183(1): 17.220, 13.3.305, 17.370, 20.120 s 183(2): 20.120, 20.130 s 184: 16.255, 18.205, 20.05, 20.155 s 184(1): 16.255, 20.160 s 187: 16.100 s 188: 18.95 s 188(1): 18.95, 20.120, 20.140 s 188(2): 20.120, 20.140 s 189: 18.05, 18.185, 18.200 s 189(a)(i): 18.185 s 189(a)(ii): 18.185 s 189(a)(iii): 18.185 s 189(a)(iv): 18.185 s 189(b): 18.185 s 189(c): 18.185, 18.200 s 190: 18.05, 18.200

s 190(1): 18.200 s 190(2): 18.200 s 191: 17.35, 17.85, 17.90, 17.235, 17.375, 17.410 s 191(1): 17.410 s 191(2): 17.410 s 191(2)(ii): 17.410 s 191(2)(iii): 17.410 s 191(3)(a): 17.410 s 191(3)(b): 17.410 s 191(4): 17.410 s 191(5): 17.410 s 192(1): 17.410 s 192(5): 17.410 s 192(6): 17.410 s 192(7): 17.410 s 193: 17.410 s 194: 13.10, 13.15, 17.35, 17.90, 17.380, 17.410 s 194(c): 17.380 s 195: 12.70, 17.410 s 195(1): 17.85 s 195(1A)(b): 17.85 s 195(2): 17.85 s 195(4): 17.85 s 196(1): 17.85 s 197(1): 11.75 s 198A: 13.15, 13.145, 15.35, 15.45 s 198A(1): 15.35 s 198A(2): 15.35 s 198B: 13.15, 14.315, 15.35 s 198C: 13.15, 14.185, 15.35 s 198D: 15.35, 18.200 s 198D(3): 18.200 s 198E: 12.65 s 198E(1): 13.20 s 198E(2): 13.20 s 201A: 12.70 s 201A(1): 15.05 s 201A(2): 15.05 s 201E(1): 12.70 s 201F: 12.65, 13.20 s 201G: 13.15, 13.145, 13.170, 15.05 s 201H: 13.15, 13.145, 15.05 s 201J: 13.15, 14.185, 16.260 s 201K: 13.15 s 201M: 15.60 s 202A: 13.15, 13.145 s 202C: 13.20 s 203A: 13.15 s 203C: 12.70, 13.15, 13.160 xxxi

Corporations and Contract Law

Corporations Act 2001 — cont s 203D: 12.70, 13.160 s 203E: 12.70 s 203F: 13.15, 16.260 s 204A(1): 12.75 s 204A(2): 12.75 s 204E: 15.60 s 204F: 13.15, 13.145 s 205B: 14.240, 15.10 s 205E: 15.10 s 205G: 17.415 s 206C: 18.205, 19.145, 20.120, 20.135, 20.145 s 206C(1): 20.145 s 206C(2): 20.145 s 207: 17.40 s 208: 12.70, 16.245, 17.45, 17.75, 17.80, 17.375 s 208(1): 17.45 s 208(1)(a)(i): 17.45 s 208(1)(a)(ii): 17.45 s 208(1)(b): 17.45 s 209(1): 17.75 s 209(2): 17.75, 20.120 s 209(3): 17.75, 20.160 s 210: 17.60, 17.80 s 210(a): 17.60 ss 210 to 216: 17.45, 17.60 s 211(1): 17.60 s 211(2): 17.60 s 212(1): 17.60 s 212(2): 17.60 s 213: 17.60 s 214: 17.60 s 215: 17.60 ss 217 to 227: 17.45 s 218(1): 17.65 s 218(2): 17.65 s 219: 17.65 s 219(2): 17.65 s 220: 17.65 s 221(b): 17.65 s 221(d): 17.65 s 224: 17.70 s 224(1): 17.70 s 224(2): 17.70 s 224(4): 17.70 s 224(6): 17.70 s 224(8): 17.70 s 226: 17.70 s 228: 17.55 xxxii

s s s s s s s s s s s s s s s s s s s s s

228(1): 17.55 228(2): 17.55 228(2)(a): 17.55 228(2)(b): 17.55 228(2)(d): 17.55 228(3): 17.55 228(4): 17.55 228(5): 17.55 228(7): 17.55 229: 17.50, 17.80 229(1): 17.50 229(2): 17.50 229(3): 17.50 229(3)(b): 17.50 229(3)(c): 17.50 229(3)(d): 17.50 229(3)(e): 17.50 229(3)(f): 17.50 230: 17.40 231: 12.15 232: 13.110, 13.130, 16.50, 16.60, 16.80, 16.105, 16.150, 16.230 s 233: 13.45, 13.75 s 236: 16.150, 18.205 ss 236 to 242: 11.15 s 246D: 13.175 s 247D: 13.15 s 248A: 13.15 s 248C: 13.15, 15.35 s 248D: 13.35 s 248E: 13.15 s 248F: 13.15 s 248G: 13.15 s 249A: 12.85 s 249C: 13.15, 15.10, 15.35, 15.60 s 249J(2): 13.15 s 249J(3)(cb): 13.15 s 249J(4): 13.15 s 249J(5): 13.15 s 249L(1)(c): 13.175 s 249M: 13.15 s 249S: 13.35 s 249T: 13.15 s 249U: 13.15 s 249W(2): 13.15 s 249X: 12.65, 13.10, 13.15 s 250C(2): 13.15 s 250E: 13.15, 13.95 s 250E(1): 13.95 s 250F: 13.15 s 250G: 13.15

Table of Statutes

Corporations Act 2001 — cont s 250J: 13.15 s 250M: 13.15 s 250N: 12.85 s 250N(1): 12.85 s 251A: 18.200 s 251A(3): 15.10 s 254B(2): 12.30 s 254B(3): 12.30 s 254B(4): 12.30 s 254D: 13.15, 13.135 s 254D(1): 13.135 s 254L(2): 20.120 s 254M(2): 12.30 s 254P(1): 12.30 s 254P(2): 12.30 s 254Q(1): 12.30 s 254Q(2): 12.30 s 254Q(3): 12.30 s 254Q(7): 12.30 s 254Q(9): 12.30 s 254R: 12.30 s 254U: 13.10, 13.15, 15.35 s 254W(2): 13.15 s 254SA: 12.20 s 256D(3): 20.120 s 259F(2): 20.120 s 260A: 11.90, 16.245 s 260D: 11.90 s 260D(2): 20.120 s 285A: 12.20 s 286: 12.105, 19.55 s 286(1): 19.55 s 286(2): 19.55 s 292: 12.20, 12.105 s 293: 12.105 s 293(2): 12.105 s 293(3)(a): 12.105 s 293(3)(c): 12.90, 12.105 s 294: 12.90, 12.105 s 295(4)(c): 19.15 s 295(4)(d): 18.110 s 296: 11.160 s 298: 12.20 s 300(10): 18.155 s 300B: 12.20 s 301: 12.20, 12.105 s 314: 12.105 s 316A: 12.20 s 319: 12.105 ss 324CA to 324CD: 12.90, 12.105

ss 324CE to 324CG: 12.90, 12.105 s 324CH: 12.90 s 344: 18.115 s 344(1): 20.120 s 346C: 14.240 s 461(1)(k): 13.75 s 509(3): 19.150 s 515: 12.15 s 516: 11.20, 11.70, 12.15 s 517: 12.20 s 520: 12.15 s 521: 12.15 s 522: 12.15 s 556: 11.30 s 558G: 16.255 s 588D: 19.155 s 588E: 19.55 s 588E(3): 19.55 s 588E(4): 19.55 s 588E(5): 19.55 s 588E(6): 19.55 s 588E(9): 19.55 s 588G: 11.75, 15.20, 18.165, 19.05, 19.10, 19.20, 19.55, 19.60, 19.70, 19.75, 19.85, 19.90, 19.130, 19.135, 19.145, 19.150, 19.155, 19.165, 19.180 s 588G(1A): 19.20, 19.180 s 588G(1): 19.100 s 588G(1)(a): 19.15 s 588G(1)(b): 19.25, 19.50 s 588G(1)(c): 19.60 s 588G(2): 19.75, 19.80, 19.140, 20.120 s 588G(2)(a): 19.75 s 588G(2)(b): 19.75 s 588G(3): 11.75, 19.10, 19.145 s 588H: 19.10, 19.80 s 588H(2): 19.85, 19.90, 19.195, 19.100 s 588H(3): 19.105, 19.115, 19.120 s 588H(3)(a): 19.105 s 588H(3)(b): 19.115 s 588H(4): 19.125 s 588H(5): 19.135 s 588H(6): 19.135, 19.165 s 588J: 11.75, 19.10, 19.150, 19.155 s 588J(1)(b): 19.155 s 588K: 11.75, 19.10, 19.150, 19.155 s 588K(b)(i): 19.155 s 588M: 11.75, 19.10, 19.150, 19.155 s 588M(1)(c): 19.155 s 588M(1)(e): 19.150 xxxiii

Corporations and Contract Law

Corporations Act 2001 — cont s 588M(1)(f): 19.150 s 588M(3): 19.150, 19.155 s 588R(1): 19.150 ss 588R to 588U: 19.150 s 588S: 19.150 s 588T(2)(b): 19.150 s 588U(1): 19.150 s 588V: 19.140 ss 588V to 588X: 11.155 s 588Y: 19.160 s 588Y(1): 19.160 s 588Y(2): 19.160 s 588Y(3): 19.160 s 588FB: 11.80, 19.05, 19.20, 19.180 s 588FE(3): 11.80 s 588FE(5): 19.05 s 588FF: 19.150 s 588FP: 11.85 s 588FP(1): 11.85 s 588FP(3): 11.85 s 588FP(4): 11.85 s 588GA: 19.140 s 588GA(1): 19.140 s 588GA(2): 19.140 s 588GA(4): 19.140 s 588HA: 19.140 s 588FDA: 19.05 s 592(6): 19.185 s 593(2): 19.185 s 596AB: 19.180 s 596AC: 19.180 s 601AD(1): 11.15 s 601FC(5): 20.120 s 601FD(3): 20.120 s 601FE(3): 20.120 s 601FG(2): 20.120 s 601JD(3): 20.120 s 638(1): 18.90 s 674: 18.145 s 674(2): 20.120 s 674(2A): 20.120 s 675(2): 20.120 s 675(2A): 20.120 s 722: 17.155 s 723: 17.155 s 727: 17.155 s 728(1)(a): 18.117 s 734: 17.155 s 798H(1): 20.120 s 945A(1)(b): 18.150 xxxiv

s 945A(1)(c): 18.150 s 961K: 20.120 s 961L: 20.120 s 961Q: 20.120 s 962P: 20.120 s 963E: 20.120 s 963F: 20.120 s 963G: 20.120 s 963J: 20.120 s 963K: 20.120 s 964A: 20.120 s 964D: 20.120 s 964E: 20.120 s 965: 20.120 s 985E(1): 20.120 s 985H(1): 20.120 s 985J(1): 20.120 s 985K: 20.120 s 985L: 20.120 s 985M: 20.120 s 1041A: 20.120 s 1041B(1): 20.120 s 1041C(1): 20.120 s 1041D: 20.120 s 1041H: 5.36, 18.142, 18.145 ss 1042A to 1043O: 13.3.310 s 1043A(1): 20.120 s 1043A(2): 20.120 s 1071F: 16.230 s 1072A: 13.15 s 1072B: 13.15 s 1072D: 13.15 s 1072F: 13.15, 15.35, 16.230 s 1072F(3): 15.35, 16.230 s 1072F(4): 15.35 s 1072G: 12.55, 13.15, 15.35, 16.230 s 1311(1): 20.160 s 1311(1A): 20.160 s 1311(2): 20.170 s 1311(3): 20.170 s 1311(4): 20.170 s 1311(5): 20.170, 20.175 s 1313: 20.175 s 1317E: 16.255, 17.75, 17.110, 18.205, 20.140, 20.145 s 1317E(1): 20.05, 20.135 s 1317E(2): 20.135 s 1317G: 18.205, 19.145 s 1317G(1B): 20.120 s 1317G(1B)(a): 20.140 s 1317G(1B)(b): 20.140

Table of Statutes

Corporations Act 2001 — cont s 1317G(1BA): 20.120, 20.140 s 1317G(1): 20.120, 20.140 s 1317G(2): 20.140 s 1317H: 18.205, 20.60, 20.120, 20.150 s 1317H(2): 20.60, 20.150 s 1317J: 20.150 s 1317J(1): 20.135 s 1317J(2): 20.135 s 1317J(3): 20.135 s 1317L: 20.135 s 1317P: 20.155 s 1317Q: 20.155 s 1317S: 19.80, 19.165, 20.150 s 1317S(2): 19.165 s 1317S(3): 19.165 ss 1317AA to 1317AE: 20.185 s 1317AB(1)(a): 20.185 s 1317AB(2): 20.185 s 1317AC: 20.185 s 1317DA: 20.120 s 1317HA: 20.120 s 1317HB: 20.120 s 1318: 17.105, 19.80, 20.150 s 1322(2): 13.95 s 1322(4)(a): 13.125 s 1324: 13.10, 17.75, 20.80, 20.152, 20.153 s 1324(4)(a): 15.60 Ch 2D: 16.235 Ch 2E: 12.70, 17.15, 17.40, 17.45, 20.160 Ch 6D: 12.45, 12.80 Ch 13.2: 17.110 Pt 1.5: 12.40 Pt 2D: 18.185 Pt 2D.6: 20.145 Pt 2F.1A: 20.05 Pt 2J.1, Div 1: 19.20 Pt 5.3A: 14.285 Pt 5.8A: 11.30, 16.125 Pt 9.4B: 11.75, 19.10, 20.05 Sch 3: 20.160, 20.170 Corporations Amendment (Crowd-sourced Funding) Act 2017: 12.80 Crimes Act 1914 s 173: 11.65 Criminal Code: 14.45 s 3.1(1): 20.165 s 3.1(2): 20.165

ss 4.1 to 4.3: 20.165 ss 5.1 to 5.6: 20.165 s 6.1(1)(a): 20.165 s 6.1(1)(b): 20.165 s 6.2(1): 20.165 Ch 2: 20.165 Fair Work Act 2009 s 392(4): 10.290 Family Law Act 1975: 1.340 Federal Circuit Court of Australia Act 1999: 1.340 Federal Circuit Court of Australia Legislation Amendment Act 2012: 1.340 Federal Court of Australia Act 1976: 1.340 Federal Magistrates Act 1999: 1.340 Income Tax Assessment Act 1997: 11.95 Insurance Contracts Act 1984: 8.170 s 17: 11.60 Personal Liability for Corporate Fault Reform Act 2012: 20.180 Privy Council (Appeals from the High Court) Act 1975: 1.350 Privy Council (Limitation of Appeals) Act 1968: 1.350 Superannuation Guarantee Charge Act 1992 s 229(3)(a): 17.50 Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017: 19.80, 19.140 AUSTRALIAN CAPITAL TERRITORY Civil Law (Wrongs) Act 2002: 8.920 s 173(b)(ii): 8.730 s 174: 8.640 s 175: 8.640 Fair Trading (Australian Consumer Law) Act 1992 s 7: 8.740 Sale of Goods Act 1954 s 55: 10.560

xxxv

Corporations and Contract Law

NEW SOUTH WALES

VICTORIA

Associations Incorporation Act 2009: 12.20

Associations Incorporation Reform Act 2012: 12.20

Companies Act 1961 s 40(1): 3.150 Contracts Review Act 1980: 7.1140 Fair Trading Act 1987 s 28: 8.740 Frustrated Contracts Act 1978: 9.620 Sale of Goods Act 1923 s 4(2A)(b): 8.730 NORTHERN TERRITORY Consumer Affairs and Fair Trading Act s 27: 8.740 QUEENSLAND Fair Trading Act 1989 s 16: 8.740

Australian Consumer Law and Fair Trading Act 2012 s 8: 8.740 s 24: 8.730 Pt 3.2: 9.620 Goods Act 1958 s 58: 10.560 WESTERN AUSTRALIA Fair Trading Act 2010 s 19: 8.740 Sale of Goods Act 1895 s 51: 10.560 NEW ZEALAND Workers’ Compensation Act 1922: 11.50

Land Act 1910: 10.600

UNITED KINGDOM AND IMPERIAL

Sale of Goods Act 1896 s 53: 10.560

Australian Constitutions Act (No 1) 1842: 1.20

SOUTH AUSTRALIA

Australian Courts Act 1828: 1.20

Fair Trading Act 1987 s 14: 8.740 Frustrated Contracts Act 1988: 9.620 s 7(1): 9.620 Misrepresentation Act 1972: 8.920 s 6(1)(b): 8.730 s 7: 8.640 Sale of Goods Act 1895 s 51: 10.560 TASMANIA Australian Consumer Law (Tasmania) Act 2010 s 6: 8.740 Sale of Goods Act 1896 s 56: 10.560

xxxvi

Commonwealth of Australia Constitution Act 1900: 1.140 s 71: 1.320 Companies Act 1862: 11.40 Companies Act 2006: 16.125 Judicature Act 1873: 1.110 Merchant Shipping Act 1894 s 502: 14.15 Pharmacy and Poisons Act 1933: 3.130 Protection of Birds Act 1954: 3.110 Reform Act 1832: 1.130 Restriction of Offensive Weapons Act 1959: 3.140, 3.150 Sale of Goods Act 1893: 7.1000 s 14: 7.120

PART 1

CONTRACT LAW 1

An introduction to the Australian legal

2

An introduction to contract

4

Acceptance

3 5 6 7 8 9

10

system

The offer

Intention to be bound Consideration

Contents of a contract Misrepresentation

Discharging a contract

Remedies

1

CHAPTER 1

An introduction to the Australian legal system 1.1 What is law? ............................................................................................ [1.10] Definition and origins ................................................................................ [1.10] 1.2 The origins of Australian law ................................................................... [1.20] Terra nullius, received law and Australian law-making power ................ [1.20] English law received into Australia ........................................................... [1.30] 1.3 The common law ..................................................................................... [1.40] The development of the common law ...................................................... [1.40] The modern meaning of the common law ............................................... [1.50] Characteristics of the common law .......................................................... [1.60] 1.4 Equity ........................................................................................................ [1.70] The reason for equity ................................................................................ [1.70] The development of equity ....................................................................... [1.80] The difference between common law and equity .................................... [1.90] Equity continues to develop .................................................................... [1.100] The fusion of common law and equity ................................................... [1.110] 1.5 Statute .................................................................................................... [1.120] Law from parliament ............................................................................... [1.120] The development of parliament and its legislative power ..................... [1.130] 1.6 The Australian statutory position ........................................................... [1.140] Parliament’s legislative power ................................................................. [1.140] State and federal legislative powers ...................................................... [1.150] 1.7 The doctrine of separation of powers ................................................... [1.160] The three arms of government ............................................................... [1.160] Separation of powers in practice ............................................................ [1.170] 3

Corporations and Contract Law

1.8 The Australian law-making bodies ......................................................... [1.180] Parliamentary power in Australia ............................................................ [1.180] How legislation is passed ....................................................................... [1.190] 1.9 The doctrine of precedent ..................................................................... [1.200] The idea of precedent ............................................................................. [1.200] Not following a precedent ....................................................................... [1.210] Ratio decidendi and obiter dictum .......................................................... [1.220] Ratio decidendi and multi-judge decisions ............................................. [1.230] Binding and persuasive precedents ....................................................... [1.240] Distinguishing ........................................................................................... [1.250] Changing a precedent ............................................................................. [1.260] 1.10 The courts ............................................................................................ [1.270] The courts’ role ....................................................................................... [1.270] The Australian court hierarchies (civil jurisdiction) ................................. [1.280] Magistrates (or Local) Courts ................................................................. [1.290] District (or County) Courts ...................................................................... [1.300] The Supreme Court ................................................................................ [1.310] The High Court ........................................................................................ [1.320] Specialist courts ...................................................................................... [1.330] Federal courts ......................................................................................... [1.340] The Privy Council .................................................................................... [1.350] 1.11 Tribunals ............................................................................................... [1.360] The function of tribunals ......................................................................... [1.360] Tribunals and courts ................................................................................ [1.370]

4

Chapter 1 An introduction to the Australian legal system [1.20]

Extracts from Graw, An Introduction to the Law of Contract, Ch 1.

1.1 WHAT IS LAW? Definition and origins

[1.10] “Law” is simply a body of generally accepted “rules of behaviour” that a particular society, acting collectively, accepts as appropriate for its own selfgovernance. In a national context, “laws” tend to be handed down by a “sovereign body” – a king, a tribal chief, a council of state, a parliament or some other sufficiently authoritative body, and they tend to be handed down to that sovereign body’s “subjects”. Those subjects are then expected to obey those laws – usually under threat of some generally accepted criminal punishment or civil sanction for failing to do so. Australian law (which has its origins in the English law we inherited on settlement in 1788) comes from two sources: our various parliaments and/or the courts. Law that comes to us from parliament is called “statute”, and it is an example of “enacted law”. Enacted law, as law, is made not only by our State, Territory and federal parliaments, but also by other legislative bodies acting under the authority of those parliaments. Our city, town and shire councils are good examples of such other bodies. They all get their legislative power – their power to pass by-laws and ordinances – through the Local Government Acts passed by their respective State or Territory parliaments. Unenacted law is law that is made by the courts (which are presided over by judges), without direct parliamentary involvement. The law made by the courts is known as “case law” or “precedent”.

1.2 THE ORIGINS OF AUSTRALIAN LAW Terra nullius, “received law” and Australian law-making power

[1.20] When the colony of New South Wales was founded in 1788 (and the other colonies thereafter), it (and they) immediately became subject to so much of the then existing English law as was reasonably applicable to the circumstances existing in Australia. This was because, when Captain Arthur Phillip arrived with the First Fleet in 1788, he “settled” Australia rather than “conquered” it. This (arguably fine) distinction was important because, under the then accepted views of international law, if a territory was “conquered”, the local established or customary laws continued to apply – at least until the conqueror displaced them or replaced them with laws of its own. On the other hand, under the doctrine of “terra nullius” (literally, “empty land”), if a country was “settled” – because it was either uninhabited or without a settled

5

[1.20] Corporations and Contract Law

system of law (as Australia was seen to be) – the laws of the “settling” nation applied immediately to it, at least in so far as they were necessary or appropriate to the conditions in the settled territory. The principle was well enunciated by Blackstone in his Commentaries on the Laws of England in 1765 when he said: It hath been held that if an uninhabited country be discovered and planted by English subjects all the English laws then in being, which are the birthright of every English subject, are immediately in force.

There is an excellent discussion of the doctrine of terra nullius and of the concept of received law in Mr Justice Brennan’s judgment in the Mabo case (Mabo v Queensland [No 2] (1992) 175 CLR 1). He repeats there part of Lord Kingsdown’s judgment in Advocate-General of Bengal v Ranee Surnomoye Dossee (1863) 9 Moo Ind App 391 at 428; 19 ER 786 at 800. What Lord Kingsdown said (and what Brennan J cited with approval) was: Where Englishmen establish themselves in an uninhabited or barbarous country, they carry with them not only the laws but also the sovereignty of their own State; and those who live amongst them and become members of their community become also partakers of, and subject to the same laws.

English law, therefore, became the law of Australia and it affected not only the settlers, but also everyone else within the then colonies – including the indigenous population. Further, having become the law of Australia, it was the sole law – at least until the infant colonies were given legislative powers of their own (in and after 1824, when the first Legislative Council was set up). English law’s position as “received law” in the Australian colonies was put beyond doubt by the United Kingdom Parliament in 1828, when it passed the Australian Courts Act 1828 (Imp). That Act proclaimed that all laws that were in force in England on 25 July 1828 were to apply equally in the colonies – and were to be enforced by the colonial courts – at least in so far as they could be, given the conditions in those colonies. After 1828, new United Kingdom laws only applied in Australia if they were clearly expressed to do so. For example, in 1842 the United Kingdom Parliament passed the Australian Constitutions Act (No 1) 1842 (Imp) to permit the Australian colonies to establish their own parliaments and to pass their own laws. It is a clear example of a United Kingdom Act which, although passed after 1828, applied to Australia because it was clearly expressed to apply to it. Apart from such specific statutes, the law that applied in Australia after 1828 was the whole law of England as it stood in 1828 and the laws that were passed by the various colonial and other legislatures thereafter. English law is, therefore, a very important part of our law.

6

Chapter 1 An introduction to the Australian legal system [1.40]

English law “received” into Australia [1.30]

The English law that was received into Australia was in three parts:

(a)

common law;

(b)

equity; and

(c)

statute.

Common law and equity were “judge-made” law. Statute was law that had been enacted by the United Kingdom Parliament.

1.3 THE COMMON LAW The development of the common law

[1.40] The development of the common law was a long and gradual process and it has its roots deep in English history. At the time of the Norman Conquest in 1066, a network of local courts existed across England, and these local courts administered the laws of the local people. That is, they administered customary law, much of which was heavily influenced by which group of invaders – Danes, Saxons and so on – had settled in that particular area. The major difficulty with this system was that there were variations between the customary laws of different areas of the country and “justice” often depended on where your case was heard, with no real uniformity throughout the realm. Following the Norman Conquest, William the Conqueror left the local courts and their laws largely intact, but he did make them subject to the ultimate superiority of the justice that he dispensed personally. He did this by appointing a number of judges whom he sent out to all parts of his realm with directions (among other things) to administer a uniform system of law in the name of the king. They were to do this by applying an amalgam of the customary law that had been created by the Anglo-Saxons before the conquest and the better features of Norman law. (This was because, in an attempt to win the population’s support, William had assured them that their traditional laws would continue to apply.) This unified system of law came to be referred to as the “Norman Compilation” and it was the beginning of what ultimately became the common law. However, the main function of the “judges” was really to report to William on any abnormal ambitions or usurping of power by the nobles and to assess the wealth of the country through a systematic survey of land ownership (which was recorded in what was called the Domesday Book). It was not really to set up a centralised system of law. Therefore, the formal establishment of a common law for the entire country still had some way to go. By about the end of the 12th century the kings who succeeded William (Henry II, in particular) had established a strong central government in London and had formalised the practice of sending judges out on circuit throughout England at regular 7

[1.40] Corporations and Contract Law

intervals. This marked the real beginning of the development of the “common law”, because the main function of these judges (who all had a common understanding of what the law was) was to administer the King’s justice (that is, to help keep the “King’s peace” by hearing criminal charges brought against subjects and by settling disputes that had arisen between subjects over personal property and land) in a uniform way. Further, because these visiting representatives (who became known as the King’s Justices) had the royal power behind them, the law they dispensed became more popular with subjects than the law that was being dealt out by the local courts (because it could be more easily and more authoritatively enforced). The proceedings conducted by the King’s Justices gradually became more formalised (that is, more court-like in nature), the law they dispensed gradually became common throughout England and, in consequence, the relevance of the local courts waned and they gradually disappeared. By the 14th century the courts conducted by the King’s Justices had become known as common law courts because the law that was administered in them was truly common to the whole realm. Also, by this time, the Justices had, of necessity, become specialist lawyers, because the body of law over which they presided had expanded and developed.

The modern meaning of the “common law”

[1.50] In its current national and international context, the term “common law” now has two connotations: 1.

It means the law made by judges in the common law courts, as distinct from either the law made in the courts of equity or statute law. The “common law” developed in the common law courts through the use of the doctrine of precedent. Precedent involves decisions being recorded so that other judges can use them as authority to guide or perhaps bind them in subsequent cases on similar facts (see 1.9 [1.200] below).

2.

It has the broader meaning of the entire legal system of England (which has since been adopted in many countries of the world, including Australia, the United States, Canada, India, Malaysia, Hong Kong, New Zealand, various nations in Africa and in the Caribbean and elsewhere where the English established colonies). In this sense, the term refers to the common law legal system as opposed to the Roman or Civil law legal system that is used in the European countries or other legal systems that are used elsewhere in the world.

Characteristics of the common law

[1.60] The common law exhibits a number of characteristics that are fundamental to any system of law. Those characteristics include: (a) 8

uniformity;

Chapter 1 An introduction to the Australian legal system [1.80]

(b)

certainty; and

(c)

fairness.

The common law, as the law that was exercised in the King’s Court, was applied uniformly throughout the realm. Further, the doctrine of precedent ensured that decisions were consistent so that persons in like situations were treated alike. In addition, judges in the common law system are generally appointed from the ranks of the practising legal profession. The aim of only appointing lawyers to the judiciary has always been to ensure that our judges exhibit a good knowledge of the law, fairness and impartiality. Finally, the common law provides an appeal system that ensures that any improper decisions can be rectified or put back in line with the existing law. Appellate courts overturn any incorrect decisions of lower courts. The appeal system is, therefore, available to correct any inaccurate, arbitrary, capricious or improper exercise of power by a member of the judiciary.

1.4 EQUITY The reason for equity

[1.70] Just as the term “common law” refers to that branch of the law that was developed in the common law courts, “equity” refers to that branch of the law that was developed in the courts of equity. Equity really evolved in or about the 14th century, and its development was directly attributable to deficiencies of the common law. The common law courts had become highly formalised and inflexible because the judges adhered rigidly to the laid-down law and the rules of procedure. To invoke the jurisdiction of the common law courts, plaintiffs had to bring their actions under one of only a few forms of “wrong” that the common law courts recognised. These included “trespass to land or to goods”, “detinue” for the wrongful detention of goods, and “debt” for the recovery of money. If a plaintiff had a complaint outside one of these recognised actions, the common law courts were of little assistance. In addition, damages (a monetary award designed to compensate the injured party for his or her actual losses), which was the sole remedy provided by the common law courts, was often an inadequate or an inappropriate remedy. For instance, if a vendor refused to complete a contract for the sale of land, the common law courts could only give the aggrieved purchaser monetary compensation, which was frequently not a satisfactory remedy. A purchaser in that situation wanted an order compelling the vendor to complete the contract. Equity could provide such a remedy in the form of an order for “specific performance” (see [9.680] (Graw)).

The development of equity

[1.80] People who were disgruntled with the treatment that they received in the common law courts could, at least initially, petition the king directly for justice. The 9

[1.80] Corporations and Contract Law

king eventually handed these petitions over to his Secretary of State and the Keeper of the Royal Seal, a cleric called the Lord Chancellor, for investigation. (The Lord Chancellor was also the Royal Chaplain and “the Keeper of the King’s Conscience”.) In the early cases, once the Lord Chancellor had completed his investigation, he referred the matter in question (and his recommendation) back to the king, who then made the formal decree or order remedying the situation. However, by about the 15th century the Lord Chancellor had been given power to make the orders himself, and by about the 16th century the proceedings conducted by the Lord Chancellor had developed into a proper court, which was called the “Court of Chancery”. The position of Lord Chancellor was always held by an ecclesiastic (that is, someone from the hierarchy of the Church) and, while his jurisdiction was not clearly defined, he remedied defects in the common law on the grounds of good conscience, fairness and natural justice, and with a view to doing what was morally right between the parties. He was also not unnecessarily hampered by inflexible rules, such as those that hampered the operations of the common law courts. As there were no inflexible rules and because justice was dispensed according to the requirements of fairness, a criticism of the Court of Equity, as it became known, was that justice administered in the court “varied according to the length of the Chancellor’s foot”. This meant that as different persons occupied the position of Lord Chancellor, the court’s ideas of what was fair and equitable also changed and justice became rather arbitrary. From about 1672, lawyers rather than ecclesiastics were appointed as judges and equity, too, started to evolve its own set of rules.

The difference between common law and equity

[1.90] A major difference between common law and equity can be found in the type and availability of their respective remedies. At common law, litigants who can make out a good cause of action are entitled to damages (that is, they have an undeniable right to monetary compensation for their loss regardless of any misconduct on their part). The Court of Chancery could also award “equitable damages” but, in addition could award a range of other remedies including, in particular, specific performance and injunctions (see 10.9 at [10.540] and [9.860] (Graw)). In equity, the remedies awarded are also discretionary. This means that if the judge thinks that a litigant “has not come to court with clean hands” (that is, that he or she is guilty of some misconduct in the circumstances of the case), the judge can refuse to grant a remedy, even though that party may have made out a case. For instance, if a plaintiff is suing for an order for specific performance to enforce a contract for sale of land and the contract was induced by the plaintiff’s fraud, the judge in equity could refuse the order. There are a number of “equitable maxims” that indicate the principles upon which equitable remedies are granted. Some of the more important are: 1. 10

Equity acts on the conscience (that is, it tries to ensure that fairness is done).

Chapter 1 An introduction to the Australian legal system [1.90]

2.

Equity will not suffer a wrong to be without a remedy (that is, even if the common law cannot or will not help, equity will step in to ensure that anyone whose rights have been infringed is helped by the law).

3.

Equity follows the law (that is, while equity is prepared to augment deficiencies in the common law, it will not depart unnecessarily from the common law and it will generally produce the same result unless it is manifestly unfair).

4.

He who seeks equity must do equity (that is, the plaintiff must be prepared to see that justice is done to both parties).

5.

He who comes to equity must come with clean hands (that is, equity will not assist a plaintiff who is himself or herself guilty of misconduct).

6.

Equity delights in equality (that is, it attempts to adjudicate fairly or equally between the parties).

7.

Where there are equal equities, the law prevails (that is, where both parties have an equal claim to a decision, the party with the common law on his or her side will win).

8.

Where there are equal equities, the first in time prevails (that is, where both parties have an equal claim, the party whose rights arose first will win).

9.

Equity, like nature, does nothing in vain (that is, equity will not order anything that will either not solve the problem or which it cannot enforce).

10.

Time defeats equities (that is, people seeking equity’s help must not delay because that could affect the rights of others. If that occurs equity will not intervene and upset the status quo).

11.

Equity aids the vigilant (that is, you are expected to take due care of your own interests and equity is more likely to assist you if you detect the problem and seek assistance early).

12.

Equity will not assist a volunteer (that is, equity will normally only provide a remedy if the defendant has acted unconscionably. A volunteer is someone who is to receive a benefit without providing “consideration” for it – that is, without paying for it – and the traditional view is that in such cases it is not unconscionable for the promisor to withdraw his or her promise. Consequently, if he or she does, equity will not intervene with a remedy, such as specific performance, to compel performance of the “gratuitous promise”: see [6.10] (Graw) below).

Another limitation is that equitable remedies are only obtainable where the common law remedy of damages is either not available or inappropriate. Equity can grant specific performance, injunction, declaration and rescission. Damages are not a “normal” remedy in equity (although they can be awarded in appropriate cases).

11

[1.100] Corporations and Contract Law

Equity continues to develop

[1.100] Equity has become a very important part of our law and, like the common law, it continues to develop to meet the changing requirements of the modern world. For instance, in recent years the courts of equity have formulated and granted a new type of injunction called a Mareva injunction. It can be granted even before judgment has been given in a case and it is designed to prevent a person, who might otherwise do so, from taking property out of the country to defeat any anticipated judgment.

The “fusion” of common law and equity

[1.110] From the initial development of the courts of equity and common law until the 19th century, the two courts operated side by side, and they were regularly in direct conflict. To resolve this conflict and to make the justice system more economical and efficient, the United Kingdom Parliament passed the Judicature Act 1873 (Imp). This statute provided that equity and common law were both to be administered in the one High Court of Justice. If there was a conflict between the two forms of law, equity was to prevail (thus confirming a jurisdictional priority that James I had established in 1620, when the question of which of the two systems was to be paramount first became a real problem). The passage of the Judicature Act 1873 (Imp) did not mean that equity and common law were fused. It merely meant that there was to be only one court, but that it would have both equity and common law at its disposal when it adjudicated in disputes. What this meant was that the judge could apply the common law to the problem, reach a decision and, if that decision was unfair or if it required one of the equitable remedies to make it fair, he or she could then use equity to provide a just result. Equity and common law did, however, remain separate. In fact, it has been said about this fusion of the jurisdictions that “the two streams of jurisdiction, though they run in the same channel, run side by side and do not mingle their waters”. The fusion of equity and the common law operates in all Australian jurisdictions and, today, all State and Territory Supreme Courts exercise both common law and equitable jurisdictions in the one court.

1.5 STATUTE Law from parliament

[1.120] The two authoritative sources of law in the Australian legal system are the parliaments (State, Territory and federal) and the courts (again, State, Territory and federal). The various parliaments declare the law by legislation (Acts of Parliament, or “statute”), and the courts declare the law by their decisions in the cases before them (precedent).

12

Chapter 1 An introduction to the Australian legal system [1.130]

The development of parliament and its legislative power

[1.130] Following the Norman Conquest, William the Conqueror simply claimed the whole of England for himself. He then granted out parts of the realm to his chief followers (both lay and ecclesiastical), who, in return, gave him oaths of allegiance and promised to serve in and provide men for his armies should he go to war. These nobles also fulfilled an advisory function. When the king was about to make an important decision, he generally called a group of the more powerful barons together to seek their advice and approval. Although the king could make laws by himself, there were advantages in making them with the counsel and consent of the barons, because those laws were then less susceptible to challenge and dissent. This body of advisers was the forerunner of what became the House of Lords. By about the end of the 13th century, this “panel” of the king’s advisers had been expanded to include two knights from each shire and two representatives from each city, in addition to the nobles who were already involved. At first the knights and citizens used to sit with the nobles but, by the early 14th century, the shire and city representatives began to sit separately and this separate body was referred to as “the commons”. It was this separation that ultimately led to the formation of the two Houses of Parliament, the upper house being the House of Lords and the lower house being the House of Commons. The House of Lords and the House of Commons together formed the Parliament. Initially, proposed laws were introduced to Parliament by the king and, after consent by both the Lords and the Commons, they became “law”. Over time this balance of legislative power changed. When the monarch was weak or the country was doing poorly, the power of the Houses of Parliament grew and, gradually, Parliament achieved legislative ascendancy (that is, it proposed and passed the laws and the Crown’s role was reduced to one of “Assent”). Finally, in 1688, when King James II fled England, Parliament seized the opportunity to consolidate its own power by imposing conditions on its offer of the now vacant throne to William and Mary of Orange. William and Mary accepted those conditions, and in 1689 they were enshrined in law by the Bill of Rights. This provided that the king could not suspend laws, dispense laws, appropriate money or keep an army without the consent of Parliament. Thereafter, the sovereign had no right to rule by prerogative or without reference to the wishes of Parliament and all new laws were initiated by Parliament. The last step in the development of our modern legislative process was the reform of Parliament itself – to make the lawmakers more representative of those they were governing. This entailed some form of democracy. Democracy, in a very basic form, arrived in England with the passage of the Reform Act 1832 (Imp). It set up a system of representative government under which the members of the lower house were no longer appointed on the basis of the position they held in society, as they had been to that point. Instead, members of parliament 13

[1.130] Corporations and Contract Law

were popularly elected, even if not then on a universal franchise (that is, Parliament was elected by a majority of qualified voters in ballots held in each borough). Membership of the House of Lords continued to be on the basis of peerage (that is, it was a matter of birthright – a situation that has only recently been abolished in the United Kingdom). Since then, the franchise (the right to vote) has been considerably expanded, and in both the United Kingdom and Australia (and in other countries where the parliamentary process is based on the United Kingdom’s model), parliaments are now elected on a universal adult franchise.

1.6 THE AUSTRALIAN STATUTORY POSITION Parliament’s legislative power

[1.140] Australia became a nation in its own right in 1901 as the result of an Act of the Imperial Parliament – the Commonwealth of Australia Constitution Act 1900 (Imp). That is, our Australian Constitution is simply part of an Act of the United Kingdom Parliament. The Commonwealth Constitution created a federal parliament and gave it a limited legislative power, which was to coexist with the legislative power of the parliaments of the new States. That is, both the Federal Parliament and the various State and Territory parliaments have power to make laws for the “peace, order and good government” of their citizens – within both their constitutional powers and their territorial limits. What this means, for example, is that no State or Territory parliament can pass laws to regulate how a citizen of another State or Territory is to behave – unless that person comes into that State or Territory and thereby becomes subject to its laws.

State and federal legislative powers

[1.150] The Commonwealth Parliament’s legislative powers are divided into concurrent legislative powers and exclusive legislative powers. Concurrent legislative powers (for example the powers to pass laws in areas such as taxation, banking and insurance) are shared between the Commonwealth and the States and Territories, and both legislative bodies may make laws governing such matters – at least within their own territorial limits. Exclusive powers (for example, powers to make laws in areas such as defence, customs and excise) are vested in the Commonwealth Parliament alone and are only exercisable by the Commonwealth Parliament. If there is an inconsistency between a valid State or Territory law and a valid Commonwealth law, the Commonwealth law will prevail to the extent of the inconsistency. With State laws this is because s 109 of the Commonwealth Constitution expressly provides that “when a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid”. With Territory laws, it comes about because s 122 of the Commonwealth Constitution gives the Commonwealth Parliament a general 14

Chapter 1 An introduction to the Australian legal system [1.170]

power to make laws for the government of the Territories. It can exercise that power either directly or by setting up Territory legislatures with their own legislative powers. However, even where Territory legislatures have been set up, they are still subordinate to the Commonwealth Parliament and, therefore, it can override any legislation they pass.

1.7 THE DOCTRINE OF SEPARATION OF POWERS The three arms of government

[1.160] Australia’s system of government at both State (and Territory) and federal levels is based on the doctrine of separation of powers – a concept that we inherited from England. The doctrine of separation of powers is based on the idea that government is divided between three separate and theoretically independent organs: (a)

the legislature (parliament), which makes the laws;

(b)

the executive (the Crown, the Ministry and the public service), which administers the laws and conducts affairs of state; and

(c)

the judicature (the judges and the courts), which interprets, applies and enforces the laws.

Separation of powers in practice

[1.170] In practice, there is no strict separation of powers in Australia – at least as between the legislative and executive arms of government. This is a direct result of our system of “responsible government” under which the executive (effectively the Ministers who control the various government departments and the public servants employed in them) is drawn from the ranks of elected parliamentarians (members of the legislature). In this way, parliament, theoretically at least, can control what the executive does because the ministers are “responsible” (immediately accountable) to parliament. One result of this is that parliament has been able to “delegate” some of its law-making functions to the executive by express authority. That is, many Acts of Parliament now contain specific provisions delegating some legislative power to officers of the executive. This is particularly so in the case of the power to make regulations. Most Acts of Parliament contain some provision whereby the responsible Minister (the one whose department administers that Act) is empowered to make regulations “not inconsistent with the Act” for the purpose of furthering the objectives of the Act. This mechanism enables the government to give detailed effect to the more general intentions expressed in the Act itself without having to go back to pass an amending Act every time some minor change has to be made to the way in which the Act is being administered. The High Court of Australia confirmed in Dignan’s case (Dignan 15

[1.170] Corporations and Contract Law

v Australian Steamships Pty Ltd (1931) 45 CLR 188) that the Commonwealth Parliament has the power to delegate (but not abdicate) this subordinate law-making function to members of the executive. Parliament retains ultimate control over subordinate or delegated legislation in that it can, at any time, repeal the legislation that authorised the subordinate legislation, and any subordinate legislation already brought into being can also be negated by the same repealing Act. In addition, the courts can always inquire into the validity of all subordinate legislation and invalidate any they find to be deficient. That is, subordinate legislation is not an original source of law – its validity is derived from an Act of Parliament and both parliament and the courts can exercise control over it. If any subordinate legislation is not within the scope of the authority conferred by the Act of Parliament supposedly authorising it, it is said to be “ultra vires” (beyond power) and it is therefore unenforceable. Unlike the situation with the legislative and executive arms of government, there is a practical and very real separation of the judiciary from both the legislature and the executive. There can be no overlap between these arms of government and our judges cannot, at the same time, also occupy positions in either the legislature or the executive. There are, however, numerous “administrative” tribunals (for example, the Administrative Appeals Tribunal, the National Native Title Tribunal, the Australian Competition Tribunal and the various State and Territory Civil and Administrative Tribunals), which are not courts and which have been established to adjudicate upon certain “administrative” matters that can be better dealt with by specialised tribunals than by the courts. The tribunals are part of the executive, but they exercise quasi-judicial power (that is, they can make decisions that will be binding unless those decisions are overturned by a court). They do, however, exercise this power in a less formal and less legalistic manner than the courts. Tribunals are dealt with in more detail at 1.11 [1.360] below.

1.8 THE AUSTRALIAN LAW-MAKING BODIES Parliamentary power in Australia

[1.180] In Australia, legislation emanates from parliament at both State, Territory and federal levels. It can be found in Acts, regulations, rules, orders, ordinances and by-laws passed by all levels of government. Parliament is our sovereign law-making body and this has a number of consequences. First, our legislation is not legally subject to any “higher law” such as rules of morality or international law. Therefore, parliament does not have to take such matters into account when deciding whether to legislate on a particular topic (although by adopting international treaties our parliaments do restrict, in a practical sense, some of their legislative freedom). 16

Chapter 1 An introduction to the Australian legal system [1.200]

Second, parliament cannot destroy (or “fetter”) its own future sovereignty by legislating now to bind future parliaments (that is, a parliament today cannot pass a law prohibiting future parliaments from amending or repealing present legislation). Third, the doctrine of parliamentary sovereignty also means that a judge cannot override or annul a law made by parliament, unless that law is constitutionally invalid. On the other hand, statute, as the will of the people – expressed through our elective representatives – can override all forms of unenacted or “judge-made” law. Therefore, because statutes can alter existing law more rapidly and in a manner not available to the courts, statute is our most flexible method of law making.

How legislation is passed

[1.190] The draft of a proposed Act of Parliament is referred to as a Bill. A Bill consists of a series of numbered clauses usually drafted by the parliamentary counsel at the request of the government, and it is introduced to parliament by the appropriate minister. Each Bill has to go through three readings in each House of Parliament. At the first reading, the title of the Bill is merely read and a formal motion is made that it be read a first time and printed. There is no debate and, if the motion is carried, a date for the second reading is fixed. At the second reading, the Bill is debated on general principles rather than on detailed provisions. The Bill is not amended at this stage. If the motion for a second reading is passed, the Bill is referred to a committee for a detailed clause-by-clause examination and specific amendments are debated. If the motion for a third reading is carried, the Bill is deemed to have passed through that House. The Bill is then sent to the other House of Parliament, where a similar procedure is followed. If a Bill passes both Houses it is submitted for Royal Assent, which is given by the Queen or her representative, the Governor-General, or the relevant State Governor or the Territory Administrator as the case may be. After Royal Assent the Bill becomes an Act of Parliament and it becomes law from the date of its proclamation (or some later date if that is what parliament decides).

1.9 THE DOCTRINE OF PRECEDENT The idea of precedent

[1.200] The doctrine of precedent is fundamental to the common law legal system. A “precedent” is simply a decided case, the reasoning in which must be followed by other courts dealing with similar fact situations when they make their decisions. The doctrine of precedent is expressed in the maxim “stare decisis” (abide by the precedent or “stand by the decision”). What it means is that every court in a particular court hierarchy must follow the reasoning used in decisions by courts above it (in its own hierarchy), provided the fact situation in the later case is identical to, or sufficiently similar to, the fact situation in the earlier case. If the fact situation is 17

[1.200] Corporations and Contract Law

identical or sufficiently similar, the judge must follow the precedent rather than decide the case as he or she likes. The earlier decision in such situations is called a “binding” or “authoritative” precedent.

Not following a precedent

[1.210] A judge who fails or refuses to follow a binding precedent is said to be acting “per incuriam” (that is, “through want of care”). A decision that is made per incuriam will normally be reversed on appeal, or it will be overruled in a subsequent case. A judge may only decide a case “as he or she likes” in the following situations: (a)

where there is no binding precedent (either no precedent at all or only one from a court by which the judge is not bound, such as a lower court in the same hierarchy or a court in a different jurisdiction);

(b)

where there is a precedent, but it can be distinguished on its facts (the process of “distinguishing” is discussed at [1.250] below); and

(c)

where there are two equally authoritative precedents on similar facts but with differing decisions (as was possible, for example, when the Australian State and Territory courts were bound by decisions of both the High Court of Australia and the Privy Council in England, particularly as those courts were not always in full agreement on all points of law).

Even where there is a precedent on similar facts, there may not be a binding decision. For example, if the judges in a multi-judge decision reach the same conclusion but reach it for different reasons, the judge in a later case will only be partially fettered. His or her ultimate decision cannot be different from that which the earlier court reached, but the judge can “take his or her pick” of the available reasons for reaching that decision. In other words, he or she will not be bound to follow the reasons of any particular judge in the earlier case, because there was no “ratio decidendi of the court” in that earlier case (the concept of “ratio decidendi” is explained at [1.220] below). Therefore, the judge can choose his or her own reason or reasons for reaching the same end result that was reached in the earlier case. The doctrine of precedent applies to both the common law and equity. Therefore, courts deciding cases on common law and/or equitable principles must follow the decisions of earlier courts where the application and operation of the same principles was in issue.

Ratio decidendi and obiter dictum

[1.220] The binding part of a precedent is called the “ratio decidendi” (the reason for deciding). The ratio decidendi (or “rationes decidendi” (pl)) is the principle of law, based upon the material facts, that caused the judge to decide the case as he or she did. By contrast, “obiter dicta” (or “obiter dictum” (sing)) are statements of law of peripheral relevance to the case that the judge did not really need to consider to 18

Chapter 1 An introduction to the Australian legal system [1.240]

decide the particular factual issues that were before him or her. A judge may make observations or raise examples or comparisons as obiter dicta. For example, if a particular case was being fought on the liability of a motorist who had been hit from the left, the judge could say: “The defendant’s failure to give right of way makes him fully responsible for the accident.” That would be the ratio decidendi, because that statement of law would be the basis upon which the judge would then award damages for the effects of the collision. The judge might, however, have gone on to say something like: “But, if the plaintiff had been drinking I may well have apportioned liability between them instead of finding the defendant entirely liable.” That would be obiter dicta. It is a statement of law, but it is a statement “by the way”. The judge did not need to say it, it did not affect his or her decision and it was simply an observation about what the result “might have been” if the facts had been different. An obiter dictum is not a binding part of a precedent. It can, however, become the ratio decidendi of a subsequent case. For example, in the development of the law of negligence, obiter dicta in Hedley Byrne & Co v Heller and Partners Ltd [1964] AC 465 was subsequently adopted by the High Court of Australia and became the ratio decidendi in MLC Assurance Co v Evatt (1968) 122 CLR 556.

Ratio decidendi and multi-judge decisions

[1.230] To find the ratio decidendi in a multi-judge decision, you need to look at all of the points of law that the judges in the majority relied on and see which of those points, if any, they relied on in common. Where a large number of judges reach the same decision but rely on different legal reasons or consider different facts as material, there is no ratio decidendi of the court. The case is said to have been decided “on its facts”. In such cases, the court’s decision will stand and it will bind the parties, but there will be no ratio decidendi that will bind subsequent courts. When searching for the ratio decidendi of a court, ignore minority or dissenting judgments. A ratio decidendi in a particular case is never found in a minority or dissenting judgment.

Binding and persuasive precedents

[1.240] A binding precedent is basically a case on similar facts that was decided by a court at a higher level in the same court hierarchy. By contrast, a persuasive precedent is a decision in a case involving similar facts that was decided by a court in a different court hierarchy or by a lower court in the same court hierarchy but which, because of its merits, may persuade another court that is not bound to follow it that it should follow it anyway. A persuasive precedent that an Australian court is referred to in a case being argued before it (for example a decision of an English court) would not bind that court. 19

[1.240] Corporations and Contract Law

However, the Australian court could well choose to follow that decision because of the regard in which the English court and its decisions are held. Factors that determine how persuasive a persuasive precedent is include: 1.

Date. The more recent a persuasive precedent is, the more persuasive it will be. This is because a recent persuasive precedent will probably have examined all of the latest authorities and will probably have either approved or rejected them. For example, a recent English decision may well have reviewed all the relevant Australian authorities and may have found and indicated an error in the Australian approach. However, following that persuasive English precedent would only be a viable option for the Australian court if it were not itself bound by the earlier Australian decisions.

2.

The level of the court in the other hierarchy. The United Kingdom Supreme Court (which replaced the Appellate Committee of the House of Lords from 1 October 2009) is the highest court in the United Kingdom court hierarchy and its decisions would be more persuasive than, for example, the decisions of the Court of Appeal, which is immediately below it.

3.

Status of the particular judge. The opinion of a well-known and highly regarded judge of some years’ standing will often carry more weight than that of a recent appointee at the same level.

4.

Whether the decision was or was not reserved. Where the court’s decision in the earlier case was reserved, the judge will have taken time to consider the questions of law before him or her and, therefore, that decision may carry more weight than one that was not reserved. (When a decision has been reserved, that fact will be apparent because the case report will be annotated with the abbreviation “cur adv vult” or “curia advisari vult”, meaning “the court took time to consider”.) If the judge’s decision was reserved, he or she will probably have considered all the relevant precedents and statutes and, therefore, it will be less likely that his or her decision will be wrong. Consequently, it is equally unlikely that that decision will be reversed on appeal or overruled in a subsequent case.

5.

Whether there were strong dissenting judgments. If the court is nearly evenly split and the dissenting judges are in accord, particularly if those judges are highly regarded, severe doubt can be cast upon the accuracy and hence the persuasiveness of the court’s majority decision.

6.

Whether the persuasive precedent can be distinguished on its facts. (See the discussion of “distinguishing” in [1.250] below.)

Distinguishing

[1.250] A precedent is only important where a similar fact situation applies in both the present case and in the precedent. If the facts of the two cases are materially different, the precedent may be “distinguished on its facts” and the ratio decidendi of 20

Chapter 1 An introduction to the Australian legal system [1.260]

the precedent will not bind the present judge. Distinguishing is a means whereby a court may disregard a precedent that it does not wish to follow provided the facts are sufficiently dissimilar. The technique of distinguishing a case is based on the principle that a ratio decidendi is only binding in an identical or sufficiently similar fact situation. The later court may decide that, because of differences between the facts of the two cases, the decision in the earlier case is not relevant to the present case. The practice of distinguishing effectively limits the application of precedent to cases of identical or sufficiently similar facts. For instance, if we take the “right of way” example that was used earlier, a later judge may be able to distinguish that decision. He or she could say, for example: It is established law that defendants who fail to give right of way to cars approaching from their right are liable for the consequences of any collisions that result. Here, however, the plaintiff was also at fault because he failed to obey the “Stop” sign prominently displayed on his side of the road. Accordingly, he must be held at least partially responsible for the accident that occurred. The general rule simply cannot apply in this case because the presence of the “Stop” sign brings an entirely new element into the question of liability.

Changing a precedent

[1.260] A precedent that establishes a legal principle that no longer accords with the needs and expectations of society can also be changed and, if that happens, it ceases to have effect as a binding authority. Such change can occur in any of three ways: 1.

Through legislation. As the sovereign law-making body, parliament can enact statutes that are inconsistent with existing case law. If it does, those cases cease to be authoritative, at least to the extent of the inconsistency and, thereafter, all courts in the affected jurisdiction must apply the provisions of the statute instead of the principles from those cases. The cases simply cease to be binding precedents.

2.

By a more senior court overruling a previous decision of a lower court which, until then, had been a binding precedent. For example, the High Court of Australia (our most senior court: see [1.320] below) could decide that a previous decision of one of the State appeal courts, even a decision that had been a binding precedent for many years, is no longer appropriate and should no longer be applied. If it does, the appeal court’s decision ceases to be a binding precedent and, thereafter, all Australian courts (including the court of appeal whose decision had been overruled) have to follow the High Court’s decision instead.

3.

By a senior court reversing its own previous decision which, until then, had been used as a binding precedent. Just as a more senior court can overrule a previous decision of a more junior court in its own hierarchy, so too can the senior appellate courts in all jurisdictions reverse their own prior decisions. 21

[1.260] Corporations and Contract Law

The situations in which they do so are rare and infrequent (because otherwise there would be no certainty in the law) and when they do, it is, as the High Court noted in Nguyen v Nguyen (1990) 169 CLR 245 at 269, “cautiously and only when compelled to the conclusion that the earlier decision is wrong”. The net result therefore is that legal principles established by precedent can be changed if they become obsolete (or just no longer reflect the needs of society), and that allows the law to develop and remain relevant.

1.10 THE COURTS The courts’ role

[1.270] In contract we are concerned with civil law (particularly contract and tort) as opposed to criminal law. (“Civil law” in this context is simply a subdivision of the common law – it is not the same thing as the Civil or Roman law that is used in Europe and which was referred to earlier.) Therefore, we need to look at the courts in their role as adjudicators in civil disputes rather than in their role as enforcers of the criminal law. The courts perform their civil adjudication functions in a two-step process. First, they determine the facts of the dispute by hearing evidence from both parties and their witnesses in accordance with the rules of evidence. Second, they apply the law, as it exists, to the facts as they have found them, to arrive at a decision. This second step may involve enforcement of a statute, interpretation of statute, application of the common law and/or an application of equity.

The Australian court hierarchies (civil jurisdiction) [1.280]

There are three levels of courts in most Australian jurisdictions. They are:

(a)

the Magistrates (or Local) Courts;

(b)

the District (or County) Courts (except in Tasmania, the Australian Capital Territory and the Northern Territory); and

(c)

the Supreme Court.

At each level the respective State or Territory parliaments have given the relevant court an “original jurisdiction” to hear and determine disputes between citizens “at first instance”. That is, different disputes are started in different courts depending, normally, on the amount of money involved in the case or the type of remedy that is being sought. The jurisdiction of each of the various courts varies with the knowledge, background and expertise of the judges or magistrates who have been appointed to preside over them. In addition to their original jurisdiction, the District (or County) and Supreme Courts also have an “appellate jurisdiction”. The term “original jurisdiction” refers to the court’s power to hear matters “at first instance” – that is, to be the first point at which the dispute can be litigated. The more 22

Chapter 1 An introduction to the Australian legal system [1.300]

serious the matter, or the more money that is involved, the higher up the court hierarchy the plaintiff starts his or her case. The term “appellate jurisdiction” refers to the court’s power to hear appeals from the decisions of courts lower than it in its own hierarchy – and to either reverse or affirm those decisions on appeal. Both original and appellate jurisdiction is conferred by Acts of Parliament and the powers of the courts at each level are closely regulated by those Acts.

Magistrates (or Local) Courts

[1.290] Magistrates (or Local) Courts sit at the lowest level in our State and Territory court hierarchy. They deal with civil disputes where the amount in question is relatively small and they also deal “summarily” with the less serious criminal matters. They also have a role with the more serious criminal matters (called “indictable offences”), where they conduct preliminary hearings (called “committals”) to determine whether the matter should proceed to trial in a higher court. The Magistrates or Local Courts in all jurisdictions are presided over by magistrates who are appointed by the relevant State Governor – or the Executive (Australian Capital Territory) or the Administrator (Northern Territory). In their original civil jurisdiction, Magistrates Courts (Victoria, Queensland, South Australia, Western Australia, Tasmania and the Australian Capital Territory) or Local Courts (New South Wales and the Northern Territory) can hear matters where the amount in dispute (or the damages being claimed) does not exceed a stated monetary limit. That limit is $100,000 in New South Wales ($60,000 for matters involving personal injury or death), South Australia and Victoria (though there is no limit in Victoria for WorkCover and industrial matters), $150,000 in Queensland, $50,000 in Tasmania (though the parties can agree to an expanded jurisdiction), $75,000 in Western Australia and $250,000 in the Australian Capital Territory and the Northern Territory. Depending on the State or Territory in which the original action was brought, a party who is dissatisfied with a Magistrates or Local Court decision can appeal it to the District or County Court and/or the Supreme Court of the relevant jurisdiction. Magistrates and Local Courts have no appellate jurisdiction (because there is no court below them from which an appeal could be brought).

District (or County) Courts

[1.300] The court immediately above the Magistrates or Local Court is the District Court (New South Wales, Queensland, South Australia and Western Australia) or the County Court (Victoria). There is no equivalent intermediate court in Tasmania, the Australian Capital Territory or the Northern Territory and all trials in those jurisdictions take place before either the Magistrates Court (or, in the Northern Territory, the Local Court) or the Supreme Court. District (or County) Courts are presided over by District (or County) Court judges and they, too, have an original jurisdiction to hear disputes where the amount in issue 23

[1.300] Corporations and Contract Law

or the value of the property involved does not exceed a specified amount – except in Victoria and South Australia where the amount is unlimited. That amount is $750,000 in Queensland, Western Australia (except in personal injuries claims where it is unlimited) and in New South Wales (except where the claim is for personal injuries arising out of use of a motor car, when there is no limit, or if the parties consent to it dealing with matters that exceed the “standard” $750,000 limit). In South Australia, the District Court functions as the principal trial court and, therefore, it exercises essentially the same unlimited jurisdiction as the Supreme Court – except for Probate and Admiralty matters, which are dealt with in the Supreme Court alone. In Victoria a similar system operates but the Supreme Court normally deals with matters where the amount involved exceeds $200,000. In their appellate jurisdiction, District (or County) Courts can hear appeals from the decision of a magistrate. A magistrate may also state a special case for the opinion of the District (or County) Court on any question of law. This merely means that if the magistrate hearing a matter is unsure of the law, he or she may refer that question of law to the District (or County) Court for its advice. The District (or County) Court will then normally give its opinion on that question of law and remit the matter to the magistrate so that he or she can proceed with the trial and, ultimately, hand down a decision. The procedure of stating a case is designed to avoid unnecessary appeals that could arise if the parties are dissatisfied with the way the magistrate interprets a question of law.

The Supreme Court

[1.310] The Supreme Court can sit as either a single judge or a Full Court. The Full Court usually consists of either three or five Supreme Court judges sitting together. In New South Wales, Victoria and Queensland, the Full Court’s place has been taken by a separately constituted Court of Appeal – a separate division of the Supreme Court – with its own “Judges of Appeal”. Single judges of the Supreme Court (or, in Queensland, of the Trial Division of the Supreme Court) mainly exercise the court’s original jurisdiction. The Full Court (or the Court of Appeal) exercises an exclusively appellate jurisdiction. Decisions in any appeal are made in accordance with the opinion of the majority of the judges hearing the appeal.

The High Court

[1.320] The High Court of Australia, which normally sits in Canberra, is our highest appeal court and the final court of appeal in our legal system. It hears appeals from all of the jurisdictions at both State and federal levels. The High Court consists of a Chief Justice and six other “Justices of the High Court”. The Full Bench of the High Court consists of all seven judges and the Full Court of the High Court consists of five judges. 24

Chapter 1 An introduction to the Australian legal system [1.330]

The High Court was created under s 71 of the Commonwealth of Australia Constitution Act 1900 (Imp) to serve three purposes: 1.

To exercise a defined original jurisdiction. The original jurisdiction of the High Court includes jurisdiction over all matters arising out of the Constitution or involving its interpretation, disputes between residents of different States or between different States themselves and disputes involving the Commonwealth government and its officials.

2.

To serve as the final court of appeal within the Australian legal system. In its appellate jurisdiction, the High Court can hear appeals from single judges of the High Court, from the Full Court of the Federal Court (see [1.340] below), and from the Full Courts of the State and Northern Territory Supreme Courts (or, where they exist, their Courts of Appeal). Appeals from the Full Courts of the State and Northern Territory Supreme Courts (or from their Courts of Appeal) and from the Full Court of the Federal Court are by special leave only. This means that special leave must be obtained from the High Court itself before the appeal can be commenced. Such “special leave to appeal” may be granted: (a) in cases of public importance;

3.

(b)

to resolve differences of opinion between different State Supreme Courts; and

(c)

in cases that involve interpretation of the Constitution.

To act as a guardian and interpreter of the Australian Constitution. The High Court of Australia performs a function that no English court could ever perform. That is, it can declare Acts of Parliament invalid. The United Kingdom Parliament has no fetters on its legislative power, but the Australian Constitution only allows the Commonwealth Parliament to pass laws where it has specific legislative power to do so. (So, for example, the Commonwealth Parliament has no power to legislate to control the activities of state police forces – because the Constitution does not give it that power.) Where the Commonwealth Parliament acts beyond power by passing laws that it is not entitled to pass, the High Court can declare those laws invalid, and that legislation will then have no force and effect.

Specialist courts

[1.330] Within the Australian State and Territory court hierarchies there are a number of specialist state courts, such as the Children’s Court, the Coroner’s Court, the Industrial Court, the Land Court, the Local Government Court, the Mining Warden’s Court and the Small Debts Court. These courts have little or no bearing on the enforcement of the law of contract, and therefore they are not dealt with any further in this chapter. 25

[1.340] Corporations and Contract Law

Federal courts

[1.340] In addition to the State and Territory courts and the High Court of Australia, a number of Federal courts also operate within Australia. They generally have very specific jurisdiction under the Australian Constitution (that is, they adjudicate in respect of matters involving Commonwealth Acts of Parliament), although a number of those Acts (for example the Competition and Consumer Act 2010 (Cth)) do impinge on the law of contract so a number of their decisions can be important. The more important of the Federal courts are: 1.

The Federal Court of Australia: The Federal Court of Australia Act 1976 (Cth) established the Federal Court to replace both the Australian Industrial Court and the Federal Court of Bankruptcy. It also took over part of the jurisdiction that was previously exercised by the High Court of Australia. The Federal Court is a superior court of record and it applies both common law and equity. It has original jurisdiction to hear matters under more than 150 Commonwealth Acts of Parliament in areas including immigration, human rights, native title, admiralty, bankruptcy and insolvency, trade practices, consumer protection, taxation, industrial and intellectual property and federal industrial disputes. It also has jurisdiction to review administrative decisions by Commonwealth authorities such as the Administrative Appeals Tribunal and the National Native Title Tribunal (under the Administrative Decisions (Judicial Review) Act 1977 (Cth)). The court also has an appellate jurisdiction, and the Full Court of the Federal Court can hear appeals from decisions of the Federal Circuit Court of Australia (in non-family law matters), from single judges of the Federal Court and from the Supreme Court of Norfolk Island. It can also hear appeals from certain decisions of the various State Supreme Courts exercising federal jurisdiction (particularly in relation to intellectual property – where all appeals are to the Full Federal Court).

2.

The Family Court of Australia: The Family Law Act 1975 (Cth) created the Family Court of Australia and gave it exclusive jurisdiction in respect of divorce, custody of nuptial children and property division upon dissolution of marriage (except in Western Australia, where that jurisdiction is exercised by the Family Court of Western Australia). It handles all matters arising directly or indirectly out of the breakdown of marriage. The Family Court now shares its jurisdiction with the Federal Circuit Court of Australia (see below).

3.

The Federal Circuit Court of Australia (formerly the Federal Magistrates Court): The Federal Circuit Court of Australia Legislation Amendment Act 2012 (Cth) amended and renamed the Federal Magistrates Act 1999 (Cth) as the Federal Circuit Court of Australia Act 1999 (Cth) and established the Federal Circuit Court of Australia. The change took effect from 12 April 2013 but the jurisdiction, status and arrangements under which the new court operates did not change. Therefore, like its predecessor, the Federal Circuit Court of Australia provides a simple and accessible alternative to proceedings

26

Chapter 1 An introduction to the Australian legal system [1.360]

in the Federal Court or the Family Court to reduce the caseloads of those courts. It has jurisdiction to deal with cases in a number of areas governed by Commonwealth legislation, including trade practices, consumer protection, bankruptcy, family law and child support, admiralty, human rights, industrial law, migration, privacy and intellectual property. It can also review matters under the Administrative Decisions (Judicial Review) Act 1977 (Cth) and can hear appeals from the Administrative Appeals Tribunal when they are referred to it by the Federal Court.

The Privy Council

[1.350] The Judicial Committee of the Privy Council (normally referred to simply as the Privy Council) was established as an appeal court for the British colonies, for the British Trust Territories and Protectorates and for the countries of what became the British Commonwealth. The judges who sit on the Privy Council are almost always English and they are usually the same judges who sit in what was, until October 2009, the Appellate Committee of the House of Lords (usually referred to simply as the House of Lords), which was then replaced by a new United Kingdom Supreme Court. The Privy Council is no longer part of the Australian court hierarchy, although it was until 1986. The abolition of appeals from the Australian courts to the Privy Council was a slow process. In 1968 the Privy Council (Limitation of Appeals) Act 1968 (Cth) abolished appeals from the High Court to the Privy Council on constitutional matters. It also abolished all appeals from inferior federal courts and from the Supreme Courts of the Territories (but not from those of the States). The Privy Council (Appeals from the High Court) Act 1975 (Cth) abolished all appeals to the Privy Council in matters concerning Commonwealth law or where there had already been an appeal to the High Court of Australia. In 1978, the High Court, in Viro v The Queen (1978) 141 CLR 88, unanimously decided that the High Court would no longer be bound by Privy Council decisions. A majority also said that where a State Supreme Court was confronted with conflicting decisions of the High Court and the Privy Council, the High Court decision should be preferred. Finally, in 1986, the proclamation of the Australia Act 1986 (Cth) terminated all remaining appeals to the Privy Council from all Australian courts. Consequently, the High Court of Australia is now the final court of appeal for all Australian courts. The Privy Council’s present function in the Australian legal system is simply as a source of persuasive precedent.

1.11 TRIBUNALS The function of tribunals

[1.360] The function of a tribunal is to adjudicate over administrative matters, such as disputes concerning decisions of government or of Ministers or their departments 27

[1.360] Corporations and Contract Law

(see, for example, the jurisdiction of the Administrative Appeals Tribunal at Commonwealth level). Tribunals, at a State level, regulate administrative matters, such as planning, land utilisation, workers’ compensation and industrial relations. Tribunals were essentially established to avoid the delays and costs of court procedures. All States and Territories (except Tasmania) now have generalist “Civil and Administrative Tribunals” with jurisdiction to hear and determine relatively minor disputes in a broad range of matters. The matters with which those tribunals can deal differ from jurisdiction to jurisdiction but typically include tenancy disputes, neighbourhood disputes, mental health and guardianship orders, discrimination complaints and review of governmental administrative decisions. They may also deal with minor debt and contract and consumer disputes. The tribunals in question are the ACT Civil and Administrative Tribunal, the NSW Civil and Administrative Tribunal, the Northern Territory Civil and Administrative Tribunal, the Queensland Civil and Administrative Tribunal, the South Australian Civil and Administrative Tribunal, the State Administrative Tribunal (in Western Australia) and the Victorian Civil and Administrative Tribunal.

Tribunals and courts [1.370]

The essential differences between tribunals and courts are as follows:

1.

Under the doctrine of separation of powers, courts (the judicature) are independent of both parliament (the legislature) and the government (the executive). Tribunals are a branch of the executive arm of government.

2.

A tribunal can review any decision brought before it for review “on the merits of the case” and can substitute its own decision for the decision being challenged. If the courts did this it would breach that traditional “separation of powers” between the executive and the judiciary. Therefore, the courts simply determine whether the relevant law has been followed and, if not, they order that the decision-making body retake the decision.

3.

Courts are presided over by judges drawn from the legal profession. Tribunals can be presided over by non-legally qualified experts.

4.

Courts must abide by the rules of evidence. Tribunals can often “inform themselves in such manner as they see fit”.

5.

Tribunal proceedings are usually less formal than those before a court.

6.

Courts are a permanent part of our constitutional framework and they administer a wide body of law. Tribunals usually have a limited jurisdiction.

28

CHAPTER 2

An introduction to contract 2.1 What is a contract? .................................................................................. [2.10] Definition .................................................................................................... [2.10] 2.2 Unilateral and bilateral contracts ............................................................. [2.20] 2.3 The elements of a contract ..................................................................... [2.50]

29

[2.10] Corporations and Contract Law

Extracts from Graw, An Introduction to the Law of Contract, Ch 2.

2.1 WHAT IS A CONTRACT? Definition

[2.10] There have been many attempts to define what the law regards as a “contract”. The words that have been used have differed but the essence of every definition has been basically the same. In all cases certain key elements stand out. The following are always included: (a)

the need for a promise or promises;

(b)

the need for the promise or promises to be between two or more legally capable persons (called “parties to the contract”);

(c)

the need for the promises to create an obligation; and

(d)

the need for that obligation to be enforceable at law.

The essentials of any contract, therefore, are the rights, duties and liabilities that arise from the promise or promises that the parties make. The law does not lay down any comprehensive set of rights, duties and liabilities; it merely sets out parameters within which the parties’ agreement must fall if it is to be legally enforceable. In other words, the law of contract is not concerned so much with the specifics of the obligation (these will differ from agreement to agreement), but with the mechanics involved in and the principles regulating the formation, performance, continuance and discharge of the parties’ individually created obligations. Therefore, when a court is called upon to intervene in a contractual dispute, it does two things: 1.

It applies the law of contract to see whether the agreement is a contract at all, and if so, whether it is legally valid and enforceable.

2.

If it decides that there is a valid contract, it interprets the words of that contract to determine the true nature and extent of the rights, duties and obligations to which the parties have agreed.

Only after both steps have been taken can a court properly adjudicate on the dispute. What we have in contract, then, is something that exists in no other area of the law – a situation where the parties create the obligations and liabilities that form the substance of their relationship. The courts then simply enforce those individually agreed obligations and liabilities as legally binding. In other words, the parties are, in law, the real masters of their own contracts. The sole restraint on the parties’ freedom of contract is the fact that their agreement must not go outside the general parameters of principle that form what we know as the law of contract. Provided those principles are adhered to, the parties’ agreement will be legally enforced. 30

Chapter 2 An introduction to contract [2.40]

2.2 UNILATERAL AND BILATERAL CONTRACTS

[2.20] All contracts are between “parties” and there must be at least two parties to every contract. The High Court explained the reasons for this “two-party rule” in Clay v Clay (2001) 202 CLR 401 at [51] saying that the resulting “contract” would lack “intrinsic validity” because there would be “no contract which could be sued upon, the principle being that ‘no man can be at the same time plaintiff and defendant’”. Consequently, in the normal course of events it is legally impossible to have a contract with only one party because there could not be any agreement (the exception is where one person contracts in two different capacities as, for example, in his or her individual capacity and in his or her capacity as a trustee or agent for some third party. In such cases, in law, there will be two parties to the resulting contract). However, the mere fact that there must be at least two parties does not mean that all parties must be obligated to do something. It may well be that only one party must do something, the other or others may have no obligation whatsoever. For instance, if a reward is offered for the return of a lost dog, those who hear of the reward do not have to look for the dog. However, if they do and if the dog is found and returned, the owner is then obligated to pay the reward. Such contracts, where one party promises something in return for an act by the other, which that other is not under any enforceable obligation to perform, are called, perhaps somewhat misleadingly (because there will still be two parties), unilateral contracts. See, for example:

Errington v Errington Errington v Errington [1952] 1 KB 290

[2.30] Facts: Errington bought a house in which he intended his son and daughter-in-law would live. He paid the deposit, the home was in his name but he told his son and daughter-in-law that, if they paid the mortgage, the house would be theirs. The couple lived in the house and made all of the mortgage payments. In 1945 Errington died and left all his property (including the house) to his wife. The son and daughter-in-law subsequently separated and the son left the home and went to live with his mother. The mother, Errington’s widow, then sued the daughter-in-law for possession of the house.

Held: Her action failed. Her deceased husband’s promise to transfer the house to the couple if they paid off the mortgage had been converted into a binding unilateral contract by their assumption of responsibility for the mortgage payments (an obligation they could have refused). Therefore, because those payments were still continuing, the daughter-in-law was entitled to remain in possession.

[2.40] All other contracts (those requiring performance by both parties) are called bilateral contracts (because of the bilateral obligations). Bilateral contracts are much more common. 31

[2.50] Corporations and Contract Law

2.3 THE ELEMENTS OF A CONTRACT

[2.50] To be a contract (that is, an agreement enforceable at law), the arrangement between the parties must exhibit certain key characteristics. If those characteristics are not present, the agreement is not a contract and the courts will not assist in its enforcement. The situation is really one of: “If you want us to adjudicate, your agreement must fall within our guidelines.” The characteristics that are required are the essential elements of any contract. Briefly, they are: (a)

offer;

(b)

acceptance;

(c)

consideration (not required for contracts under seal);

(d)

intention to be bound;

(e)

mutuality;

(f)

capacity; and

(g)

legality.

The offer and acceptance, taken together, form the “agreement” that is to be given legal force; in simple contracts that agreement must be supported by consideration to establish the obligation; the parties must intend the agreement to have legal force (because the courts will only enforce what the parties intend should be enforced); the parties must agree on the same thing (that is, their agreement must be mutual); the parties must be legally capable of reaching a binding agreement; and the subject matter of their agreement must be legal. If all seven elements are present, the agreement will be a contract that will be legally enforced.

32

CHAPTER 3

The offer 3.1 Agreement and the role of the offer ....................................................... [3.10] Offers need not always be separately identifiable ................................... [3.10] The language of offer and acceptance .................................................... [3.30] 3.2 What is an offer? ..................................................................................... Definition .................................................................................................... Offers and a mere supplying of information ............................................ To whom may offers be made .................................................................

[3.40] [3.40] [3.60] [3.80]

3.3 Offers and invitations to treat .................................................................. [3.90] The importance of intention ...................................................................... [3.90] 3.4 Instances of invitation to treat ............................................................... [3.100] Advertisements ........................................................................................ [3.100] Displays of goods in shops .................................................................... [3.120] 3.5 Offers – not invitations to treat ............................................................. Offers to the world at large .................................................................... Distinguishing invitations to treat from offers to the world at large ...... The terminology used .............................................................................

[3.160] [3.160] [3.180] [3.190]

3.6 Offers and puff ....................................................................................... [3.210] 3.7 Offers become effective when communicated ...................................... [3.260] The requirement for communication ....................................................... [3.260] Motive of the acceptor is immaterial ...................................................... [3.280] 3.8 The offeree’s response .......................................................................... [3.320] The available alternatives ....................................................................... [3.320] Counter-offers .......................................................................................... [3.330] Mere inquiry ............................................................................................. [3.350] The battle of the forms ........................................................................... [3.380] 33

Corporations and Contract Law

3.9 Termination of an offer ........................................................................... [3.400] 3.10 Revocation ............................................................................................ [3.410] Definition .................................................................................................. [3.410] Options ..................................................................................................... [3.430] The need for communication .................................................................. [3.470] The method of communication ............................................................... [3.500] 3.11 Rejection ............................................................................................... [3.530] General rule ............................................................................................. [3.530] Need for communication ......................................................................... [3.540] 3.12 Lapse of time ....................................................................................... [3.550] Significance of time ................................................................................. [3.550] Express stipulation .................................................................................. [3.560] Implied time limits ................................................................................... [3.570]

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Chapter 3 The offer [3.20]

Extracts from Graw, An Introduction to the Law of Contract, Ch 3.

3.1 AGREEMENT AND THE ROLE OF THE “OFFER” Offers need not always be separately identifiable

[3.10] As was seen in Chapter 2, the basis of all contracts is “agreement” – which usually consists of an identifiable offer and an identifiable acceptance. However, a separate offer and a separate acceptance might not always be clearly obvious from the way in which the parties reached their agreement. Therefore, there can be cases where it is not possible to say with certainty which party made the offer and which party accepted it. However, there can still be a contract – provided the parties did reach final agreement. As Heydon JA put it in Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 179, in such cases: it is relevant to ask: in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the [plaintiff] and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?

The “acid test” in such cases is, as Cooke J described it in Meates v Attorney-General [1983] NZLR 308 at 377, “whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain”

(emphasis added). Therefore, while an offer need not always be readily and separately identifiable, something must clearly indicate that the parties intended to deal on (and be bound by) particular, clearly defined terms. In appropriate cases that intention and the resulting agreement can even be implied from the parties’ conduct. See, for example:

Clarke v Dunraven Clarke v Dunraven [1897] AC 59 [3.20] Facts: The parties entered their yachts in a regatta organised by their club

– each signing a letter addressed to the club undertaking to be bound by its sailing rules. Those rules, inter alia, made the owner of any yacht that breached the rules “liable for all damages arising therefrom”. Clarke’s yacht fouled and sank Dunraven’s yacht. Dunraven sued. Clarke denied liability – arguing that there was no enforceable contract. Held: There was a contract and Clarke was liable. While it was difficult (perhaps impossible) to discern a clear offer by one party and an acceptance by the other, the parties’ clear intent was to create a contractual obligation to race in accordance with the rules.

See also, for example, Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia) Ltd (1988) 5 BPR 11,110 at 11,117; Vroon BV v

35

[3.20] Corporations and Contract Law Clarke v Dunraven cont. Foster’s Brewing Group Ltd [1994] 2 VR 32 at 79–83; Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 535; Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105; Husain v O & S Holdings (Vic) Pty Ltd [2005] VSCA 269 at [51]; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 178; Reed Constructions (Qld) Pty Ltd v Martinek Holdings Pty Ltd [2011] 1 Qd R 28 at [54]; and Frontlink Pty Ltd v Feldman [2016] VSC 691 at [195].

The “language” of offer and acceptance

[3.30] It should therefore also be clear that no formal language is needed to make an offer. Anything can be an offer – provided it clearly manifests the offeror’s intention. As Finkelstein J noted in Fitzwood v Unique Goal (2001) 188 ALR 566 at 591: The objective theory of contract … requires an outward manifestation of an intention to form a contract. Traditionally this is established by showing an offer and the acceptance of that offer. This does not mean that contracting parties must use language such as: “I promise to do X if you pay me Y”, followed by a statement such as “I agree”. Whether a particular proposal amounts to an offer, and whether a response is to be regarded as an acceptance of that offer, are questions of fact, the resolution of which must take account of the past communications between the parties, the precise language used by them when it is said they reached agreement, and the circumstances in which the parties communicated with one another.

3.2 WHAT IS AN OFFER? Definition

[3.40] So, what is an offer? In its strict contractual sense, an offer is a clear statement of the terms upon which an offeror is prepared to be contractually bound. It generally takes the form of a promise to do or to refrain from doing something, and usually upon condition that the offeree (the party to whom it is addressed) agrees to do or to refrain from doing something else. An offer may be “express”, using written or spoken words, or it may be “implied” from the offeror’s conduct. In either case the one essential is that the offer must be promissory. That is, the offeror must intend that it can be converted into a binding obligation by valid acceptance. In other words, the offeror must be prepared to honour the terms of the offer if called upon to do so. For an illustration of an “offer” that was not an offer at all, see:

36

Chapter 3 The offer [3.70]

Australian Woollen Mills Pty Ltd v Commonwealth Australian Woollen Mills Pty Ltd v Cth (1954) 92 CLR 424 [3.50]

Facts: To keep the cost of woollen goods down the Australian government announced that it would subsidise the purchase of raw wool by woollen manufacturers, thereby reducing the cost of their wool purchases. When the scheme was later discontinued the plaintiff company had wool that it had bought but for which it had not received the subsidy. The Commonwealth refused to pay. The plaintiff sued it for “breach of contract”.

Held: There was no contract because the announcement of the subsidy was merely a statement of government policy and not an “offer” capable of acceptance. The High Court’s reasoning was explained (at 457): what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation … in the absence of such an intention, actual or imputed, the alleged “offer” cannot lead to a contract: there is, indeed, in such a case no true “offer”.

Offers and a mere supplying of information

[3.60] An offer can only exist if there is a firm promise to do or to refrain from doing something. If there is no firm promise, there is no offer. So, if an “offeror” makes a statement that is only intended to supply information upon which some future dealing may or may not be negotiated, that statement is not an offer and it cannot be made binding by acceptance. The mere supplying of information, whether in response to a request or otherwise, is not an offer to deal. See, for instance:

Harvey v Facey Harvey v Facey [1893] AC 552 [3.70]

Facts: Harvey telegrammed Facey: “Will you sell us Bumper Hall Pen? Telegraph lowest price.” Facey replied: “Lowest cash price for Bumper Hall Pen, £900.” Harvey answered: “We agree to buy Bumper Hall Pen for £900 asked by you. Please send us your title deeds in order that we may get early possession.” Facey did not reply and refused to go through with the sale. Harvey sued.

Held: There was no contract. The second telegram was not an offer, merely a supply of information – the price at which Facey might have been prepared to deal if he was made an appropriate offer. Consequently, the third telegram was not an acceptance but an offer to buy. That offer was never accepted and, thus, there was no contract.

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[3.80] Corporations and Contract Law

To whom may offers be made

[3.80] Apart from specific statutory restrictions (for example offering to sell alcohol to minors, prescription pharmaceuticals to persons without a prescription, firearms to unlicensed persons, etc), there is no general restriction on the type or number of persons to whom an offer may be made. It is solely a matter for the offeror and the offer may be addressed to one person, to a particular group of people, to a class of persons generally or even to the world at large. The decision as to whom the offer will be made is important because offers can be accepted by all those to whom they are addressed – but only by them.

3.3 OFFERS AND INVITATIONS TO TREAT The importance of intention

[3.90] Nothing an offeror says or does can result in contractual obligation unless he or she intended that what was being put forward as a proposal could be accepted, thereby creating a binding obligation. Often, what may appear to be an offer will not be an offer at all because it does not expressly or impliedly contain a definite declaration (or promise) by the offeror that it will be honoured upon acceptance. In such cases all that exists is a statement of willingness to contract upon certain terms if the other party offers to deal on those terms. In other words, the statement is not an offer but an invitation to others asking them to make offers (and indicating in some detail the terms in which those offers should be couched to make their acceptance likely). Such invitations are called “invitations to treat”. (In this context, the words “to treat” are used in their old English sense of “to deal”. Consequently, an “invitation to treat” is merely an initial approach to others inviting them to deal – or to instigate dealings – with you on certain specified terms which, if offered, you will probably accept.) The distinction between offers and invitations to treat can be readily justified on a commercial basis. When a shopkeeper, or any person for that matter, advertises a willingness to deal on certain terms, it is always possible that there will be more acceptors than can be supplied from available stock. In such cases the shopkeeper would be forced to breach at least some of the resulting “contracts”. Forcing anyone into that situation is clearly absurd and the concept of the invitation to treat avoids the absurdity. As Lord Herschell said in Grainger & Sons v Gough [1896] AC 325 at 334 (a case fought on the question of the contractual bindingness of a circular sent out by a wine merchant listing his wines and their prices): The transmission of such a price list does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited. 38

Chapter 3 The offer [3.120]

3.4 INSTANCES OF INVITATION TO TREAT Advertisements

[3.100] Advertisements are usually regarded as invitations to treat. This is especially so with those advertising goods for sale, whether the advertisement is in a catalogue or circular published by the offeror, as in Grainger & Sons v Gough [1896] AC 325, or in a newspaper or periodical. See, for example:

Partridge v Crittenden Partridge v Crittenden [1968] 2 All ER 421

[3.110] Facts: Partridge was charged with “offering for sale” a brambling (a wild bird), contrary to the provisions of the Protection of Birds Act 1954 (UK). He had placed an advertisement in a periodical called Cage and Aviary Birds, which read in part: “Bramblefinch cocks, bramblefinch hens, 25 s each”. A Mr Thompson read the advertisement, sent Partridge 25 shillings for a hen and Partridge filled his order. He was charged. Held: He was found not guilty. The advertisement was not an offer for sale but an invitation to treat. Therefore, the offence charged, “offering for sale”, had not been committed.

(It is a curious aspect of this case that Partridge was charged with “offering for sale” rather than “selling”. Both were offences under the Act. He was quite rightly, if somewhat semantically, acquitted on the charge of “offering for sale” but he should have been found guilty on the alternative charge of “selling” – a clear illustration of the need to choose one’s words carefully.)

Displays of goods in shops

[3.120] Most retail stores display their goods in shop windows and on the shop floor, usually with the prices clearly marked. While such displays might seem to be offers to sell the goods at those prices, that is not the case. A mere display of goods for sale at marked prices is generally regarded as an invitation to treat. See, for instance:

39

[3.130] Corporations and Contract Law

Pharmaceutical Society (GB) v Boots Cash Chemists (Southern) Ltd Pharmaceutical Society (GB) v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795

[3.130] Facts: The Pharmacy and Poisons Act 1933 (UK) prohibited the sale of any listed poison unless it was “effected under the supervision of a registered pharmacist”. Boots was a retail pharmaceutical company and it had converted one of its shops to self-service. Customers chose the products required, took them to a cash desk and paid for them. Near the cash desk was a registered pharmacist who was authorised, if necessary, to stop the sale of any particular item. Boots was charged with breaching the statutory prohibition. It was alleged that the display of the goods was an offer to sell, that the offer was accepted when the customer selected those goods and that the contract of sale, therefore, arose at a point that was not under the immediate supervision of the pharmacist who could not see all parts of the shop from the cash desk.

Held: Boots were not in breach of the Act. The display of the goods was only an invitation to treat. Customers “offered to buy” when they took goods to the counter and at that point Boots decided whether to accept their offers or not. That part of each transaction formed the culmination of the sale and it was supervised by a pharmacist.

Displays of items in shop windows are treated similarly. See, for instance:

Fisher v Bell Fisher v Bell [1961] 1 QB 394

[3.140] Facts: The defendant had displayed a flick knife with a clearly inscribed price tag in his shop window. The Restriction of Offensive Weapons Act 1959 (UK) made it an offence to “offer for sale” any offensive weapon listed by the Act and flick knives were included on the list. The defendant was prosecuted for offering a prohibited item for sale.

Held: He was acquitted. The display of the weapon, even with a price tag, was merely an invitation to treat. Consequently, it was not an offer to sell and the offence had not been established. As Lord Parker said (at 399): It is perfectly clear that according to the ordinary law of contract the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale, the acceptance of which constitutes a contract.

40

Chapter 3 The offer [3.160]

[3.150] The attitude displayed by the court in Fisher v Bell [1961] 1 QB 394 was probably overly legalistic and, on balance, went too far in treating questions of fact (the shopkeeper’s intention to sell the item) as questions of pure law. The United Kingdom solved the problem by changing the law. The Restriction of Offensive Weapons Act 1959 (UK) was amended to extend its coverage to include what the common law would regard as mere invitations to treat. In Australia the problem has not really arisen because the courts have adopted a much more pragmatic approach. Their attitude seems to have been that the words should be given their usually accepted and wider meaning, in preference to a narrow legalistic meaning. In this way they have attempted to give full effect to parliament’s intentions. For example, in Attorney-General (NSW) v Mutual Home Loan Fund (Aust) Ltd [1971] 2 NSWLR 162, the Supreme Court of New South Wales held that the word “offer” in s 40(1) of the then Companies Act 1961 (NSW) (regulating advertisements offering shares for sale) had to be read to include invitations to treat as well as offers. Similarly, in Goodwins (Newtown) Pty Ltd v Gurry [1959] SASR 295, the South Australian Supreme Court accepted the ordinary rather than the strictly technical meaning of the word “offer” in a South Australian statute regulating retail shopping hours. Brazel J said (at 299): I think the words “offered for sale by retail” in an Act designed to regulate retail shopping hours must be construed in the sense in which those words are understood in ordinary everyday use … The [goods] were “presented”, or put forward, or displayed for sale … This amounts, in my opinion, to offering goods for sale by retail.

3.5 OFFERS – NOT INVITATIONS TO TREAT Offers to the world at large

[3.160] The essential difference between an offer and an invitation to treat is the offeror’s intention to be bound by any potential acceptance. With offers, that intention is present; with invitations to treat, it is not. Therefore, it is quite possible for any statement – even a statement in an advertisement aimed at the public generally – to be an offer and not just an invitation to treat if that is what the person making the statement or authorising the advertisement intended. Because such offers are not directed to any specific group of possible acceptors but to anyone who becomes aware of them, they are called “offers to the world at large”. The most common examples of offers to the world at large are found in the reward cases. In such cases a reward is offered to whomever performs the required act. That may be a single (though as yet unidentified) possible acceptor, such as “the person who finds my lost dog”, or it can be a much wider group of potential acceptors. This latter possibility is particularly common in what some United States judges have called the “prove me wrong” cases. These are cases where the advertiser (usually) 41

[3.160] Corporations and Contract Law

makes some sort of extravagant claim about the efficacy or trustworthiness of his or her products and then offers a reward to anyone who can “prove me wrong”. The classic example of an offer to the world at large in a “prove me wrong” case can be found in:

Carlill v Carbolic Smoke Ball Co Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 [3.170]

Facts: The Carbolic Smoke Ball Company manufactured and supplied the carbolic smoke ball – an anti-cold and influenza preparation. It advertised a £100 reward for anyone who contracted influenza, a cold or any disease caused by taking cold after using its carbolic smoke ball according to the printed directions. The advertisement went on to say that £1000 had been deposited in the company’s bank to show the sincerity of its offer. Mrs Carlill bought and used the smoke ball as directed but still caught influenza. She claimed the £100 and, when her claim was rejected, she sued. The company raised a number of defences, including the argument that offers had to be made to a specific person or to a specific class or classes of person and not just to anyone who might read an advertisement. They also argued that it was not reasonable to assume that they had really intended to pay £100 to everyone who caught a cold. The advertisement, they said, was only an inducement to customers, not a true offer.

Held: The court found for Mrs Carlill. On the first argument it pointed out that an offer could be made to the world at large if that was the advertiser’s objectively determined intention. This did not mean that the company necessarily contracted with everyone in the world. They contracted only with so many of the recipients of their offer as actually accepted it – in this case by buying and using the smoke ball and contracting either influenza or a cold. No one else could claim the reward. On the second point, the court found that the terms of the offer were quite specific – the company would pay £100 to anyone who used the ball as directed and still caught a cold. Again, the intention of the company was clear. Why else would it have deposited £1000 to cover contingent claims?

Distinguishing invitations to treat from offers to the world at large

[3.180] The real distinction between invitations to treat and offers to the world at large lies in the offeror’s intention – did he or she intend the “offer” to be promissory? The problem is that that intention must be ascertained when the statement was made – and the evidence that the parties give in court will inevitably be in conflict. From this conflicting evidence the court has to determine, as objectively as possible, what was intended, and this can only be achieved by considering the individual facts of each case. There are a number of common factors that the courts take into account and three of the more important are: 42

Chapter 3 The offer [3.220]

(a)

the terminology that the offeror used;

(b)

any limitation imposed on who could accept; and

(c)

any limitation imposed upon what was being offered.

The terminology used

[3.190] Merely calling something an offer does not necessarily mean that it is really an offer in the legal sense. The courts recognise that non-lawyers tend to use the word rather loosely and that it is not always intended to have its full legal meaning. One need only think of the number of “special offers” that appear in daily newspapers and on supermarket shelves to understand the courts’ reluctance to read too much into the use of this one word. See, for example, how the court effectively ignored the fact that the defendant used the word “offer” in its advertising circular in Spencer v Harding. However, if all the other evidence does not clearly point to a statement being (or not being) an offer, the courts can fall back on the words used to ascertain what was intended. For an example (although in a different context), see Lord Denning MR’s comments in Massey v Crown Life Insurance Co (1978) 1 WLR 676 at 679 (subsequently approved and applied in Australia in AMP Society v Chaplin (1978) 18 ALR 385). He said: If their relationship is ambiguous and is capable of being one or the other … then the parties can remove that ambiguity by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true legal relationship between them.

3.6 OFFERS AND PUFF

[3.210] A clear distinction must be drawn between offers and what is called “puff”. Puff consists of all those statements which, while made to induce contracts, are so clearly far-fetched or exaggerated that no reasonable person would believe them to be binding statements of fact on which they should rely. Consequently, such statements, although they may induce a contract, are not binding on the party making them and do not give the other party any grounds on which to seek a remedy (compare this with actionable misrepresentations which may provide the misled party with some form of remedy). See, for example:

Mitchell v Valherie Mitchell v Valherie (2005) 93 SASR 76 [3.220]

Facts: Before purchasing a house from the defendants the plaintiff had seen it advertised as “Cosy – Immaculate Style”. When she subsequently inspected it, she was also handed a brochure which included the words “Nothing

43

[3.220] Corporations and Contract Law Mitchell v Valherie cont. to Spend – Perfect Presentation”. After settlement, a number of faults, including cracking and damage due to soil movement, became apparent. The plaintiff sued.

Held: The representations were mere promotional puffery and did not support an action for damages. In the context of advertising material, the words used were really “a pithy promotion of the property”, like a headline – designed to attract the eye of a reader. The words “Perfect Presentation” in particular were clearly promotional puffery and a reasonable purchaser of real estate would not understand them as anything else. The same could be said of the words “Nothing to Spend” – particularly in the context of a real estate sale where, as White J noted “some hyperbole is commonplace”. He also noted that: Exaggerated descriptions of houses is a common, even expected, feature of real estate advertising. Reasonable persons would not, in my opinion, understand words of this kind to be conveying a representation about the structural integrity of the property.

[3.230] Common examples of puff appear in television and other commercials, where it provides product identification or just visual effect. Puff draws the consumer’s attention to the product, but no one really believes that buying the product will also give them an entitlement to the more outrageous and exaggerated “promises” the advertisements make. See, for example, the United States case:

Leonard v Pepsico Inc Leonard v Pepsico Inc 88 F Supp 2d (SDNY 1999), aff’d 210 F 3d 88 (2nd Cir 2000)

[3.240] Facts: As a promotional gimmick Pepsi offered a range of products (T-shirts, baseball caps, sunglasses, etc) which customers could redeem for specified numbers of “Pepsi Points”. They could collect the required points by either buying Pepsi products or by buying the points for 10 cents each. The advertisement for the promotion showed a teenager getting ready for school – putting on each of the advertised items – and showing the number of Pepsi Points needed to redeem them. The scene then switched to the school – with the teenager arriving in a Harrier Jump Jet, under which appeared the legend “Harrier Fighter, 7,000,000 Pepsi Points”. Leonard acquired the required number of points and claimed the jet. Pepsi said it was a joke and rejected his claim. He sued.

Held: He failed. The court found that, in the circumstances, the inclusion of a Harrier Fighter as one of the “prizes” was clearly intended just to inject humour into the advertisement. No reasonable person seeing the advertisement would really believe that Pepsi would (or could) ever be called on to supply one.

[3.250] The most notable case in which puff was argued (unsuccessfully) was Carlill v Carbolic Smoke Ball Co (see [3.170] above). In that case, one of the

44

Chapter 3 The offer [3.280]

arguments that the company advanced was that their offer of a reward was so far-fetched as not to be seriously believable by any reasonable person. In other words, the company was saying: “Our advertisement was clearly an advertising gimmick and nothing more. No-one would think we intended to honour it.” That argument failed. The fact that the company had deposited £1000 to cover possible claims did not help, but even in the absence of that deposit, it is quite possible that the statement would still have been seen as an offer. In determining whether a statement is an offer or just puff, the courts read it as it would be understood by members of the general public, in its context and given normal English language usage. On those tests the Pepsi advertisement was clearly puff but the Carbolic Smoke Ball Company’s was not – on its face it appeared to be serious.

3.7 OFFERS BECOME EFFECTIVE WHEN COMMUNICATED The requirement for communication

[3.260] The basis of any contract is the joining of the offer and the acceptance as an agreement. Logically, an offer cannot be accepted unless and until the “acceptor” is aware of both its existence and its terms. Therefore, as a principle, offers are only effective and can only be accepted after they have been communicated. Only then can an “acceptor” validly argue that he or she acted in reliance on the offer when “accepting”. See, for instance:

Fitch v Snedaker Fitch v Snedaker 38 NY 248 (1868) [3.270]

Facts: A reward was offered for information leading to the arrest and conviction of a murderer. The plaintiff, who was unaware of the offer, gave the required information but later claimed the reward when he found out about it.

Held: He was not entitled to recover. He had given the information in ignorance of the reward and, consequently, his actions, not being directly referable to the offer, were not an acceptance of it.

Motive of the acceptor is immaterial

[3.280] The requirement for communication only exists to ensure that the “acceptor” was, in fact, aware of the offer before “accepting”. Once he or she has become aware of the offer, it can be accepted and the acceptor’s motive for accepting it is immaterial. Knowledge of the offer is the only essential. See, for instance:

45

[3.290] Corporations and Contract Law

Williams v Carwardine Williams v Carwardine (1833) 5 Car & P 566; 172 ER 1101 [3.290]

Facts: A reward was offered for information leading to the arrest and conviction of Walter Carwardine’s murderer. The plaintiff, who knew of the reward, gave the information – although her motivation was not to claim the reward but remorse for her own misconduct and “to ease my conscience and in the hopes of forgiveness hereafter” (because she believed she did not have long to live).

Held: She was entitled to the money. Her motive for giving the information was irrelevant. Her acceptance was related to the offer because she knew of it and because it was in her mind at the point of acceptance. As Parke J said (at 1104): I think she is entitled to the reward. The jury will probably find that the [reward] was not the motive … The motive was the state of her own feelings. My opinion is that the motive is not material.

[3.300] However, while knowledge is essential, mere knowledge by itself will not suffice. The existence of the offer must be in the offeree’s mind at the time of purported acceptance and the “acceptance” must be both in response to and as a result of the offeree’s knowledge of the offer. See, for example:

R v Clarke R v Clarke (1927) 40 CLR 227 [3.310]

Facts: The West Australian government had offered a reward for information leading to the arrest and conviction of the murderers of two police officers. Clarke had been arrested, and although he had heard of the reward, he gave the necessary information and evidence, not intending to claim it but to save himself from the murder charge. He subsequently lodged a claim and, when it was rejected, sued. Held: His action failed. Clarke did not have the offer in mind at the time of his supposed acceptance and his actions, therefore, were not a true acceptance. As Higgins J said (at 241): The motive inducing consent may be immaterial but the consent is vital. Without that there is no contract … Clarke had seen the offer, indeed; but it was not present to his mind – he had forgotten it, and gave no consideration to it, in his intense excitement as to his own danger. There cannot be assent without knowledge of the offer; and ignorance of the offer is the same thing whether it is due to never hearing of it or to forgetting it after hearing.

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Chapter 3 The offer [3.340]

3.8 THE OFFEREE’S RESPONSE The available alternatives [3.320] can:

In essence, an offeree can respond to an offer in one of five ways. He or she

(a)

accept the offer in its terms;

(b)

reject it;

(c)

make a counter-offer;

(d)

ask for further information or clarification before making a final decision; or

(e)

do nothing at all.

If the offer is accepted, there is agreement, and if the remaining required elements are present, there may be a contract. If the offer is rejected, there is no agreement and no contract. In either case the situation is quite clear and the law simply follows the offeree’s intentions. It imposes obligations to perform in the first instance and none in the second. Similarly, if the offeree simply does nothing, the offer will eventually lapse (see 3.12 [3.550] below) and, again, no obligation will arise for either party. Only where there is a counter-offer or a request for further information has there been any real need for legal principles to intervene.

Counter-offers

[3.330] A counter-offer occurs when an offeree indicates a willingness to deal on terms slightly different from those of the original offer, although still in respect of the same or substantially the same subject matter. It is not an acceptance because the terms of the original offer are not all accepted. It is, in fact, a rejection of that offer and a substitution of a new offer for it. It is then up to the original offeror to either accept or reject the counter-offer. If the counter-offer is rejected, the original offeree cannot then turn around and accept the original offer. The counter-offer, acting as a rejection, destroys the original offer and, thereafter, it cannot be accepted. For an illustration of the effect of counter-offers, see:

Hyde v Wrench Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 [3.340] Facts: On 6 June the defendant offered to sell his farm for £1000. The

plaintiff replied, offering £950, which the defendant refused. The plaintiff then agreed to pay the originally asked £1000. The defendant, although he had not withdrawn his offer at that stage, neither assented to nor rejected this proposal but he subsequently refused to go through with the sale. The plaintiff sued.

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[3.340] Corporations and Contract Law

Hyde v Wrench cont. Held: The plaintiff had made a counter-offer, which effectively rejected the defendant’s original offer. It had, therefore, ceased to exist at that point. Consequently, when the plaintiff “agreed” to pay the asked price, his “agreement” was not an acceptance of the defendant’s now defunct offer to sell but a fresh offer to buy. As that offer was never accepted, there was no contract.

Mere inquiry

[3.350] Merely asking whether an offeror might be prepared to modify the offer must be distinguished from a counter-offer. A mere inquiry is not an acceptance, but neither is it a rejection. It has an entirely neutral effect on the offer, and when the offeror replies, the offeree still has the option of accepting or rejecting. The effect of inquiry is illustrated in:

Stevenson, Jaques & Co v McLean Stevenson, Jaques & Co v McLean (1880) 5 QBD 346

[3.360] Facts: McLean telegraphed Stevenson offering to sell 3800 tons of iron “at 40 s net cash per ton, open till Monday”. On Monday morning Stevenson telegrammed McLean: “Please wire whether you would accept 40 for delivery over two months or if not longest limit you would give.” McLean did not respond and at 1.34 pm Stevenson telegrammed again, accepting the original offer. Unfortunately, between Stevenson’s morning and afternoon telegrams, McLean sold the iron to a third party. He then sent a telegram (at 1.25 pm) advising Stevenson. That telegram crossed with Stevenson’s second telegram. Stevenson sued.

Note: Under the postal rule (see [4.470] (Graw)), acceptance is complete immediately an offeree posts or telegrams acceptance – but that rule does not apply to revocations of an offer. So, in this case, Stevenson could recover if McLean’s offer was still open when he sent his 1.34 pm telegram of acceptance. McLean’s argument was that Stevenson’s first telegram was a counter-offer and that it had destroyed the original offer on Monday morning.

Held: Stevenson’s first telegram was not a counter-offer. It was a mere inquiry. Consequently, McLean’s offer was still open at 1.34 pm, it had been validly accepted, a contract had arisen and McLean was in breach of that contract. As Lush J said (at 350): Here there is no counter-proposal. The words are: “Please wire whether you would accept forty for delivery over two months, or if not, the longest limit you would give”. There is nothing specific by way of offer or rejection, but a mere inquiry, which should have been answered and not treated as a rejection of the offer.

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[3.370] The problem is, of course, how do you decide whether a particular response to an offer is in fact a counter-offer or just making an inquiry; the distinction between the two can be very fine. Cooke J acknowledged that difficulty in Powierza v Daley [1985] 1 NZLR 558 and then noted that, when drawing the necessary distinction “the basic test is the effect [of the response] on a reasonable person standing in the offeror’s shoes”.

The battle of the forms

[3.380] The law relating to counter-offers has assumed a greater importance with modern commercial practices. It is now quite common for firms to have their own preprinted purchase order forms, which contain the terms under which their orders are sent. Similarly, it is quite common for the firms that receive those orders to have their own preprinted shipping vouchers or delivery dockets, which contain the terms under which they will supply goods. Obviously, problems can arise when there is a difference between the two sets of terms – which set takes precedence? The answer, which originates in the rules governing counter-offers, is “the set submitted last”. Each set, as it is submitted, constitutes a counter-offer. Each therefore destroys the offer contained in the previous set and substitutes its own terms as the new offer. When acceptance finally occurs, it must be on the terms contained in the last offer. As an example of how the courts have approached the problems raised by the “battle of the forms”, see:

Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd [1979] 1 WLR 401 [3.390] Facts: On 23 May the plaintiffs offered to sell the defendants a machine

tool for £75 535, with delivery in 10 months. The offer stated that orders would only be accepted on the terms set out in the plaintiff’s quotation. They were to prevail over any terms in the buyer’s order. The plaintiff’s terms included a price variation clause whereby goods would be charged at prices existing at the date of delivery. The defendants submitted an order on 27 May. It differed from the seller’s quotation and was on terms that made no provision for price variation. The order had a tear-off slip for signature and return, which accepted the order “on the terms and conditions thereon”. On 5 June the sellers returned the tear-off slip duly completed with a covering letter stating that delivery was to be “in accordance with our revised quotation of May 23 for delivery in March/April 1970”. The buyers could not accept delivery until November 1970. The sellers invoked the price increase clause and claimed £2892 for increased costs. The defendants refused to pay. 49

[3.390] Corporations and Contract Law

Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd cont. Held: The defendants were not liable. Their order of 27 May was not an acceptance of the seller’s offer of 23 May but a counter-offer to purchase. The sellers had accepted this by their letter of 5 June, at which point the contract was complete without any price variation clause. Hence the sellers were not entitled to a price variation – it was not part of the final contract.

3.9 TERMINATION OF AN OFFER

[3.400] The underlying principle is that an offer can be terminated at any time before acceptance. The corollary of this, of course, is that an offer cannot be terminated once it has been accepted. Given this general background, an offer may be terminated in any of the following ways: (a)

revocation by the offeror;

(b)

rejection by the offeree;

(c)

lapse of time;

(d)

change of circumstances;

(e)

failure of a condition;

(f)

death of a party; and

(g)

supervening incapacity.

3.10 REVOCATION Definition

[3.410] Revocation occurs when the offeror formally withdraws the offer. Once revoked, the offer comes to an end, and thereafter it cannot be accepted. It follows from this that an offer can be revoked at any time before acceptance. See, for instance:

Payne v Cave Payne v Cave (1789) 3 TR 148; 100 ER 502 [3.420]

Facts: The defendant bid £40 for goods that were being auctioned, but before they were knocked down to him, he withdrew his bid. The question was whether he could withdraw the bid in this fashion.

Held: A bid is merely an offer and it may be revoked at any time prior to acceptance. Acceptance at auctions occurs on the fall of the hammer, and as the defendant had withdrawn his bid before that happened, his offer had terminated and the auctioneer could not accept.

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Chapter 3 The offer [3.460]

Options

[3.430] The offeror’s entitlement to revoke is absolute. Even if there is a promise to keep the offer open for a particular time, the offeror cannot normally be held to it, and if the offer is revoked despite the promise, the promisee cannot do anything about it. See, for example:

Routledge v Grant Routledge v Grant (1828) 4 Bing 653; 130 ER 920 [3.440]

Facts: The defendant offered to buy the plaintiff’s house and gave the plaintiff six weeks to think about it. Before the six weeks were up the defendant revoked his offer. The plaintiff sued.

Held: He failed. Because the defendant’s offer had not been accepted he was entitled to revoke it, even during the six weeks that he had promised to hold it open.

[3.450] Only if the promisee has paid to keep the offer open or if the promise to keep it open has been made by deed will the offeror not be able to withdraw it. In both cases the offeror will have created a new and quite separate contractual obligation to keep the offer open. Where either consideration has been provided or a deed is involved, the agreement to keep the offer open is called an option. If an offeror tries to revoke the original offer despite granting the option, the offeree can take action, not on the basis of the unaccepted offer but on the basis of the option (that is, the separate contract to keep the offer open). See, for example:

Goldsbrough Mort & Co Ltd v Quinn Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674 [3.460]

Facts: Quinn granted the company the following option:

I, Quinn, in consideration of the sum of five shillings paid to me hereby grant to Goldsbrough Mort & Co Ltd the right to purchase the whole of my freehold … lands … within one week from this date at the price of £1 10s per acre, calculated on a freehold basis, and subject to the usual terms and conditions of sale relating to such lands, and upon the exercise of this option I agree to transfer the whole of the said lands to Goldsbrough Mort & Co Ltd or its nominee.

Before the week had expired or the plaintiff had accepted, Quinn informed the company that he had been mistaken as to the meaning of the document and that

51

[3.460] Corporations and Contract Law Goldsbrough Mort & Co Ltd v Quinn cont. he was withdrawing his offer. Notwithstanding this, the company formally accepted the offer within the time and sued for specific performance.

Held: Having been given for value (that is, the 5 shillings), the option was enforceable and non-revocable. Consequently, the company’s acceptance was good and there was a binding contract. That contract was properly enforceable by an order for specific performance. As Griffith CJ said (at 678): An offer may be withdrawn at any time before acceptance. A mere promise to leave it open for a specified time makes no difference, because there is, as yet, no agreement, and the promise, if made without some distinct consideration, is nudum pactum [a naked promise – an agreement made without consideration which, therefore, is unenforceable] and not binding. But if there is (as in the present case) a consideration for the promise it is binding. This is often expressed by saying that an option given for value is not revocable.

The need for communication

[3.470] Like the offer itself, any revocation must be communicated to the offeree before it becomes effective. Until the offeree becomes aware of the revocation, he or she can accept the offer and any such acceptance will create a valid and binding contract. An illustration of this principle was seen in Stevenson, Jaques & Co v McLean (see [3.360] above). A further and more obvious example appears in:

Byrne v van Tienhoven Byrne v van Tienhoven (1880) 5 CPD 344 [3.480]

Facts: On 1 October the defendants wrote to the plaintiffs offering to sell them a quantity of tin plate and suggesting a reply by cable. When the plaintiffs had not replied by 8 October, the defendants wrote revoking their offer. The plaintiffs, who had cabled an acceptance on 11 October, did not receive that letter until 20 October. Was the revocation effective or was there a binding contract?

Held: While an offer can be revoked at any time before acceptance, a revocation is not effective until it has been communicated to the offeree. Here, the revocation was not effective until 20 October, by which time the defendants’ offer had been validly accepted. Accordingly, an enforceable contract had arisen on 11 October.

[3.490] The rule was succinctly put by Lord Herschell in Henthorn v Fraser [1892] 2 Ch 27 at 32. He said simply, “[a revocation] can be no more effectual than the offer itself, unless brought to the mind of the person to whom the offer is made”.

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Chapter 3 The offer [3.530]

The method of communication

[3.500] The law does not lay down any particular means by which revocations must be communicated. All that is required is that the offeree should become aware that the offer has been withdrawn. Consequently, any means of communication will suffice provided the fact of revocation actually comes to the offeree’s notice. Further, revocation need not be by words; an offeror can validly revoke an offer by doing something that is inconsistent with the continuation of the offer. Again, the inconsistent act must come to the attention of the offeree before revocation will be effective. On both points, see:

Dickinson v Dodds Dickinson v Dodds (1876) 2 Ch D 463

[3.510] Facts: On Wednesday Dodds offered to sell Dickinson some houses for £800. His letter stated that the offer was “to be left over until Friday, 9 am”. Despite this, Dodds sold the houses to a third party on Thursday. Dickinson heard of this sale from a fourth person on Thursday evening and, before 9 am on Friday morning, attempted to accept Dodds’ offer by handing him a formal acceptance. Held: The acceptance was invalid. The offeror need not give notice of revocation personally for it to be effective. If the offeree becomes aware of it from a reliable source, that will suffice. Here, the offer had been validly revoked before acceptance because Dickinson had received notice of it, albeit from someone other than the offeror.

[3.520] Simply stated, the rule is: “No-one can accept an offer which he or she knows to have been withdrawn.”

3.11 REJECTION General rule

[3.530] Offers terminate upon rejection and, thereafter, cannot be accepted. If an offer is rejected, the offeree cannot later reconsider and accept it. Should he or she purport to do so, the legal position is that the “acceptance” is not an acceptance at all (because there is no offer left to accept); it is a fresh offer that the original offeror may then either accept or reject. Rejection of an offer can be express or it can be implied from the offeree’s actions (for example by the offeree doing something inconsistent with an intention to accept). All counter-offers act as rejections of the offers to which they relate. On the other hand, mere requests for further information (see [3.350] above) are not rejections and the offer in question will still remain open for acceptance. 53

[3.540] Corporations and Contract Law

Need for communication

[3.540] As with offers and revocation, rejection has to be communicated before it becomes effective. Therefore, an offer will remain open and can be accepted even though the offeree has rejected it – provided the rejection has not come to the offeror’s attention. Consequently, an offeree who has a change of mind may be able to retrieve the situation by sending an acceptance that will reach the offeror before the rejection arrives. This would be the case, for instance, where the rejection is sent by mail and, before it is delivered, the offeree telephones an acceptance.

3.12 LAPSE OF TIME Significance of time

[3.550] Very few offers are so completely open-ended that they can be accepted at any time unless expressly revoked. Such offers do exist and they are called “standing offers” (although, strictly speaking, standing offers can be subject to time limitations in exactly the same way as all other offers). Time can terminate offers in two specific instances: (a)

where the offeror expressly imposes a time limit; or

(b)

where a time limit is implied from the circumstances.

Express stipulation

[3.560] An offeror can always stipulate a time by which the offer must be accepted if it is to be accepted at all. Dickinson v Dodds (see [3.510] above) was an example of just that occurring. If a time stipulation is imposed, the offer automatically terminates unless it is accepted by that time. If the offeree purports to accept after the stipulated time, the “acceptance” is not an acceptance at all and it cannot bind the offeror. What it is, if anything, is a fresh offer to deal on terms identical to those of the original offer, but the option of accepting or rejecting that offer has now passed to the original offeror.

Implied time limits

[3.570] Where no time limit is stipulated, the offer must still be accepted within a “reasonable time”. Once that reasonable time expires, the offer automatically comes to an end. For an illustration of this principle, see:

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Chapter 3 The offer [3.600]

Ramsgate Victoria Hotel Co v Montefiore Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109 [3.580]

Facts: Montefiore applied for shares in the plaintiff company in June. He heard nothing until November, when the company informed him that shares had been allotted and that the balance subscription moneys were due. Montefiore refused to accept the allotment or to pay the money, alleging that his offer to buy had lapsed through expiry of time. Held: In the circumstances his refusal to accept the allotment was justified. The notification was too late to be an acceptance of his offer; the delay of some five months between the offer and “acceptance” was unreasonable.

A more modern application of the rule can be found in:

Dencio v Zivanovic Dencio v Zivanovic (1991) 105 FLR 117

[3.590] Facts: In September 1990 the plaintiff offered to settle her personal injuries claim against the defendant for $20,000 plus $3000 costs. The defendant did nothing for 11 months (during which time preparations for trial continued and costs increased) but he then purported to accept the offer of settlement. The plaintiff refused, saying that the offer had lapsed. Held: While the plaintiff had not specified a time within which her offer had to be accepted, it was implied that it had to be accepted within a reasonable time. Here, the defendant’s delay in accepting was unreasonable (especially given the increase in costs in the interim), the offer had therefore lapsed and the “acceptance” was too late.

[3.600] The obvious problem is determining what constitutes “a reasonable time”. There is no hard and fast standard and each case is dealt with on its own facts and on its own merits. However, certain matters will clearly affect the determination and they should be considered. In Manchester Diocesan Council for Education v Commercial & General Investments Ltd [1970] 1 WLR 241, the court thought that at least two considerations were important: (a)

the nature of the subject matter of the contract (and, in particular, whether it was of a wasting nature); and

(b)

the means used to communicate the offer (the more urgent the means used, the more reasonable it would be to presume that a rapid reply was required).

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[3.600] Corporations and Contract Law

Clearly then, what a “reasonable time” is will differ from case to case and will depend heavily on what the court thinks is fair on the facts before it. This was well illustrated in the cases summarised above and it was also the basis of the decision in:

Ballas v Theophilos (No 2) Ballas v Theophilos (No 2) (1957) 98 CLR 193 [3.610]

Facts: A partnership deed gave the survivor of two partners an option to purchase the deceased partner’s share of their business. The deed did not specify any time within which the option had to be exercised and the survivor purported to exercise it 16 months after the deceased’s death. The question before the High Court was, was the offer still open for acceptance?

Held: The offer in the option agreement had lapsed. The value of the business assets could be expected to fluctuate over time and, therefore, it was reasonable to expect that, if the option was going to be exercised at all, it would be exercised soon after the deceased’s death. Here, 16 months was too long.

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CHAPTER 4

Acceptance 4.1 What is acceptance? ............................................................................... [4.10] Definition .................................................................................................... [4.10] Cross-offers ............................................................................................... [4.20] 4.2 Who may accept? .................................................................................... [4.30] The general rule ........................................................................................ [4.30] Acceptance by someone other than the offeree ..................................... [4.40] Acceptance by more than one person ..................................................... [4.60] 4.3 What may be accepted? .......................................................................... [4.80] General rule ............................................................................................... [4.80] Conditional acceptance ............................................................................. [4.90] Reaching finality – the critical consideration .......................................... [4.120] Reaching finality – the principles ........................................................... [4.180] 4.4 The manner of acceptance .................................................................... [4.190] The general rule ...................................................................................... [4.190] Acceptance must be communicated by the offeree .............................. [4.200] Silence is ineffective ............................................................................... [4.220] An offeror may waive the right to communication ................................. [4.240] Conduct can constitute acceptance ........................................................ [4.250] The offeror may stipulate the method of communication ...................... [4.290] When no means of acceptance is stipulated ......................................... [4.330] The postal rule ........................................................................................ [4.340] The parties must contemplate acceptance by post ............................... [4.370] Negating the postal rule .......................................................................... [4.400] The strict effect of the postal rule .......................................................... [4.440] Misdirected acceptances ......................................................................... [4.460] The limits of the postal rule .................................................................... [4.470] 4.5 Revocation of acceptance ..................................................................... [4.500] 57

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General position ...................................................................................... [4.500] Revocation of posted acceptance .......................................................... [4.510]

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Chapter 4 Acceptance [4.30]

Extracts from Graw, An Introduction to the Law of Contract, Ch 4.

4.1 WHAT IS ACCEPTANCE? Definition

[4.10] An acceptance is a final and unqualified assent to the terms of the offer, made in the manner specified or indicated by the offeror. It can occur orally, in writing or, occasionally, it may be implied from the offeree’s conduct.

Cross-offers

[4.20] Accordingly, it should be clear why cross-offers (see [3.460] (Graw)) cannot give rise to a contract. A party cannot give “a final and unqualified assent to the terms of an offer” if he or she is not aware of the offer at the time of the supposed “assent”. The fact that the parties’ intentions at that point might be identical is immaterial. In cases other than those that were discussed at 3.1 [3.10] above (where identifying a clearly separate offer and acceptance may be difficult or even impossible) the law of contract demands an acceptance, and with cross-offers there is no acceptance.

4.2 WHO MAY ACCEPT? The general rule

[4.30] As a general rule, an offer can only be accepted by those persons to whom it was made. This general rule results in a number of subrules: 1.

Acceptance cannot occur unless and until the offeree has received the offer (because the offeree must be aware of the existence and terms of the offer before he or she can accept it: see [3.260] above).

2.

An act done in ignorance of an offer cannot be an acceptance of it: Fitch v Snedaker (see [3.270] above).

3.

The offer must be present in the mind of the “acceptor” when the “acceptance” occurs or there is no true acceptance (that is, the act of acceptance must have been in response to, and as a result of, the offer): R v Clarke (see [3.310] above).

4.

Provided the offer is in the mind of the “acceptor” at the time of acceptance, motive is not a material consideration: Williams v Carwardine (see [3.290] above).

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[4.40] Corporations and Contract Law

Acceptance by someone other than the offeree

[4.40] From the general rule above, it should be apparent that there are only very limited circumstances in which someone other than the offeree will be able to accept. In all of those exceptional cases the right to accept arises, not because of some peculiar principle of law, but because it was the intention of the offeror that some outsider might accept. One instance of this has already been seen, where the estate of a deceased offeree may be able to accept an offer made to the deceased: Carter v Hyde (1923) 33 CLR 115. Other instances occur where the offer is made to “X or his nominee” (see Westminster Estates Pty Ltd v Calleja (1970) 91 WN (NSW) 222 and Parland Pty Ltd v Mariposa Pty Ltd (1995) 5 Tas R 121), or where, for example, an option to extend the term of a contract is granted to “X or his lawful assignee”. In both cases the “nominee” or the “assignee” will be able to accept because he or she was always a contemplated acceptor. Apart from these very limited exceptions, only the person to whom the offer is directed can accept it. Others who purport to accept do so at their own peril for they have no rights under the resulting “contract”. For an illustration of the potential problems, see:

Boulton v Jones Boulton v Jones (1857) 2 H & N 564; 157 ER 232

[4.50] Facts: Jones, who had previously dealt with Brocklehurst, sent him an order for 50 feet of leather hose. Unknown to Jones, Boulton had that day taken over Brocklehurst’s business and, without informing Jones of the change, Boulton filled the order. Jones had only ever intended to deal with Brocklehurst because he had a set-off against him (that is, a claim for money) and he wanted to use his order to recover the set-off. Thus, when Boulton demanded payment, Jones refused. He said that his offer had only been intended for Brocklehurst and, therefore, Boulton could not accept it. As a result, there was no contract under which he could be forced to pay. Held: Jones was not liable. He had obviously intended to contract only with Brocklehurst and had never contemplated doing business with Boulton. Therefore, there was no contract to give rise to the debt. As Bramwell B said (at 233): When a contract is made, in which the personality of the contracting party is or may be of importance … no other person can interpose and adopt the contract.

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Chapter 4 Acceptance [4.80]

Acceptance by more than one person

[4.60] How and to whom offers are made are matters for the offeror to decide. However, offerors are expected to exercise some care in the way in which they make their offers, so that they are not committed to obligations they cannot meet. Where an offer can be accepted by more than one offeree, even though only one contract can be performed, the offeror’s liability will depend upon the way in which the terms of the offer are construed. In some cases, notably reward cases where more than one person can give the required information, the tendency has been for the offer to be construed as capable of acceptance by only the first person to come forward – especially if it is clear that the offeror intended to offer only one reward. As Parke B put it in Lancaster v Walsh (1838) 4 M & W 16 at 23; 150 ER 1324at 1327, “if there is to be but one reward alone, the party first giving that information, and he alone, is to have the benefit”. In other cases, unless the offeror makes it quite clear that the offer can only be accepted by the first “acceptor”, he or she can be held liable to all those who accept. If only one of those resulting contracts can be performed, the offeror may have to pay damages to all other acceptors. See, for instance:

Patterson v Dolman Patterson v Dolman [1908] VLR 354 [4.70]

Facts: On 11 May the defendant posted identical offers to sell a particular stack of hay to the plaintiff, with whom he had been negotiating, and to a third party. Both offers were delivered on 14 May. The third party accepted the same day; the plaintiff accepted the following day. Both acceptances reached the defendant by the same post. The defendant treated himself as bound only to the third party and completed the sale with him. The plaintiff sued for breach of contract.

Held: As there was nothing in the defendant’s offer to the plaintiff to indicate that it was subject to non-acceptance by the third party, it was not so limited. Therefore, as both parties had accepted, two contracts had arisen. The defendant could perform only one and was liable for breach of the other. The plaintiff was awarded damages.

4.3 WHAT MAY BE ACCEPTED? General rule

[4.80] As a general rule, what must be accepted is what was offered, without addition, deletion or qualification (that is, an acceptance must be “unequivocal”). Acceptance is, after all, a final and unqualified expression of assent to the terms of the 61

[4.80] Corporations and Contract Law

offer. Therefore, any attempt to introduce a new term at the point of “acceptance” will result in the “acceptance” not being an acceptance but a counter-offer (see [3.330] above). This will be so even if the new term merely adds detail which is not inconsistent with the terms of the original offer. See, for example, Turner, Kempson and Co Pty Ltd v Camm [1922] VLR 498 at 503 where the “new” terms were merely a slightly different description of the goods and a more detailed delivery schedule. That was still enough to convert what Camm had thought was an acceptance into a counter-offer instead.

Conditional acceptance

[4.90] A conditional acceptance, put very simply, is an acceptance with strings attached – the offeree accepts “subject to” some reservation. Accordingly, at that point, there is no “final and unqualified assent to the terms of the offer” and so there is no contract. In other words, a conditional acceptance is no true acceptance at all. It can become a true acceptance if the condition is removed but such conversion will depend on whether the offer is still open when that happens. This explanation may be a little too simplistic. What may appear to be a conditional acceptance at first glance may not be a conditional acceptance at all. The key with conditional acceptances is the question of finality. Have the parties finally agreed on the terms that will bind them or can the “condition” result either in the contract not proceeding at all (as might be the case with a contract made “subject to planning approval” where that approval is not received) or in the initially agreed terms being altered? If the parties have finally agreed on the terms that will bind them the acceptance is not really conditional at all and the agreement will be enforced. If the condition can result in the contract either not proceeding at all or proceeding on different terms the acceptance is conditional, no final agreement has been reached and, therefore, there is nothing to enforce – there is no contract. For a clear illustration of the way in which the courts look at agreements that appear to be conditional, especially those that are made “subject to formal contract”, see:

Masters v Cameron Masters v Cameron (1954) 91 CLR 353

[4.100] Facts: The parties signed a memorandum whereby Cameron agreed to sell – and Masters agreed to buy – Cameron’s farm for £17 500. Masters paid a deposit of £1750. The memorandum contained the following clause: “This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my [Cameron’s] solicitors on the above terms and conditions.” The sale did not eventuate. Who was entitled to the deposit? If the contract was enforceable, it went to Cameron; if not, it went to Masters.

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Chapter 4 Acceptance [4.110]

Masters v Cameron cont. Held: The contract was not enforceable and Masters got his deposit back. The reason was that the agreement was not in its final form – it had to be acceptable to Cameron’s solicitors. Presumably they could have altered it quite substantially, adding, deleting and modifying terms. Whether they did so was immaterial; the agreement gave them that power and, hence, it was not final.

[4.110] The court discussed in some detail the three possible categories into which, it said, agreements expressed to be “subject to contract” could fall and the legal position of the agreements in each category. The three categories it recognised were: (a)

where the parties have reached final agreement on the terms of their bargain, intend to be immediately bound, but want those terms to be set out in a more precise but not materially different form;

(b)

where the parties have reached finality and do not intend to alter their agreement, but want to defer performance of all or part of it until it has been incorporated into a formal document; and

(c)

where the parties do not intend to make a concluded bargain unless and until they sign a formal contract (which is the situation the court found in Masters v Cameron (1954) 91 CLR 353 itself).

Since then, the courts have recognised a fourth category – where the parties reach agreement, intend to be “immediately and exclusively” bound by it but also intend to make a further contract in substitution for it (after they have agreed on additional terms), at some time in the future. It is this intent to substitute a later agreement for it with the probability of additional terms that makes the fourth category different from the first. That also means that if the courts find that the “additional terms” were really intended to form a necessary part of the original agreement there is no agreement, even within the fourth category, at that point in time. Citing Knox CJ, Rich and Dixon JJ in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 at 317, McLelland J formally acknowledged the existence of this fourth category of case in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 (affirmed in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631), and his view has been accepted ever since: see, for example, Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486; Telstra Corp Ltd v Australis Media Holdings (1997) 24 ACSR 55; Brunninghausen v Galvanics (1999) 46 NSWLR 538; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101; ASIC v Edwards (2005) 220 ALR 148 and Lucke v Cleary (2011) 111 SASR 134 (among others). What McLelland J said (Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628) was:

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[4.110] Corporations and Contract Law

There is in reality a fourth class of case … one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

In cases that fall into either of the first two or the fourth categories, the parties have really reached finality in their agreement and, consequently, they have a binding and enforceable contract. In cases in the first category, where the parties simply want their agreement to be set out in a more precise but not materially different form, what this means is that each party must perform the obligations undertaken, whether the formal document comes into existence or not. Each may also require the other to do all that is necessary to create the formal document – if that is what they want. In second category cases, because the parties have agreed that performance should be deferred until a formal document is signed, neither of them can demand immediate performance, but both may demand that the other do all that is necessary to get the formal contract written and signed. Once that happens, of course, performance becomes due and can be demanded. In fourth category cases, provided the agreement already reached is complete in itself, both parties can immediately enforce it – though, of course, the only terms that can be enforced are those that are set out in that agreement. Any terms not then agreed (that is, those that were only expected to be included in some possible substitute agreement) cannot then be enforced. Only in the third category of cases is there really a “conditional acceptance”. In those cases there is no enforceable contract unless and until the agreement is reduced to writing. This may be because the parties intended that their final agreement might include other matters on which they have not already agreed or they might simply want to leave themselves with a way of backing out of the agreement unless and until a formal document is signed. Whatever the reason, if they did not intend to make a concluded bargain until a formal contract was concluded, there is nothing to enforce – what has been agreed is merely the intended basis of a future contract and not a contract in itself. Such “agreements to agree” are not enforceable.

Reaching finality – the critical consideration

[4.120] Whether the parties have reached finality is therefore the critical consideration and, whether that has happened always depends on what the parties intended – as disclosed by their language and/or inferred from their conduct. The question of what the parties intended is therefore a question of fact (see Pipeworks Australia v Betcorp Pty Ltd [2015] QSC 284 at [36]) “which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances”: per McHugh JA in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634 (see also Australian 64

Chapter 4 Acceptance [4.130]

Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548–49). Those surrounding circumstances can include an examination of the parties’ conduct, not only before but (unusually) also after their “agreement”: see, for example, Commercial Bank of Australia Ltd v GH Dean & Co Pty Ltd [1983] 2 Qd R 204 at 209 – because what the courts are trying to determine is, as Ross J put it in Goulburn-Murray Rural Water Authority v Rawalpindi [2010] VSC 166 at [153], “[w]hat would a reasonable person infer or deduce from observing the totality of the dealings between the parties?” In making that determination, Mahoney JA said, in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326, that it was useful to consider three questions: … did the parties arrive at a consensus?; (if they did) was it such a consensus as was capable of forming a binding contract?; and (if it was) did the parties intend that the consensus at which they arrived should constitute a binding contract?

Consequently, in Sheehan v Zaszlos [1995] 2 Qd R 210, for example, a partnership was held to exist even though the intended partnership agreement was never written. The court held that, while the parties had intended to reduce their agreement to writing “at some stage”, they had in fact reached final agreement without it. That was evident from their words and from their conduct in opening a joint bank account, making a joint application for finance, sharing the costs of obtaining building approvals and commencing work on the site. In the circumstances, their words and their conduct made it clear that they had intended to be immediately bound and that the formal document, when it was written, would be simply fuller, more precise but not materially different. In other words, their intention to be bound could be inferred from their conduct and their agreement clearly fell into the first of the three categories in Masters v Cameron (1954) 91 CLR 353. Similar reasoning was applied to produce almost identical results in both Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 and Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551. It was also used by the High Court in:

Godecke v Kirwan Godecke v Kirwan (1973) 129 CLR 629 [4.130] Facts: A document headed “offer and acceptance” contained both

Godecke’s offer to sell Kirwan a parcel of land for $110,000 and Kirwan’s acceptance of that offer. It also contained a clause which provided: “if required by the vendor the purchaser will execute a further agreement to be prepared by [the vendor’s] solicitors containing the foregoing and such other covenants and conditions as they may reasonably require”.

Held: The agreement was valid and enforceable. It was an example of the “first” category of contract discussed in Masters v Cameron (1954) 91 CLR 353. The effect of the clause was simply to allow the vendor (through his solicitor) the 65

[4.130] Corporations and Contract Law Godecke v Kirwan cont. choice of inserting further terms provided they were not inconsistent with those already agreed, and provided they were reasonable in an objective sense. Therefore, unlike Masters v Cameron, the clause did not permit substantial variation of what had been agreed.

[4.140] With agreements that fall into the second category, it is also clear that the parties have reached finality. Therefore, those agreements are contracts and immediately binding – even though they may, possibly, not be immediately enforceable. The “subject to formal contract” condition in such cases operates, at best, as a deferral of the obligation, not as a chance to vary it. The parties are bound and must perform. See, for instance:

Niesmann v Collingridge Niesmann v Collingridge (1921) 29 CLR 177 [4.150]

Facts: The appellant agreed to give the respondent “the firm offer” of his farm. The written agreement stated that the price was to be paid as to £1000, “on the signing of the contract”, as to £500, three months afterwards, and as to the balance, within three years. The respondent accepted the offer. Was the agreement a binding contract at that point or did a “contract” only arise when they signed the formal document?

Held: The use of the term “firm offer” indicated that the parties intended that a binding contract would immediately result from acceptance of the offer. The reference to the signing of the contract merely meant that a formal document acknowledging the terms of the agreement was to be signed before the first instalment of the purchase price became due. The formal document was not intended to alter what the parties had already agreed; finality had been reached in the oral agreement. This was therefore an example of an agreement of the “second” category discussed in Masters v Cameron (1954) 91 CLR 353, and it was immediately enforceable.

[4.160] Agreements in the fourth category are also clearly “final” and therefore enforceable – even if the intended substitute agreement never eventuates. See, for example:

Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 [4.170] Facts: The parties were two mining companies that had been engaged in negotiations to allow the appellant to explore and mine the respondent’s tenements. Eventually, the appellant wrote to the respondents proposing five

66

Chapter 4 Acceptance [4.180] Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd cont. terms as heads of agreement – that the appellant would pay the respondent $250,000, that it would expend a further $500,000 on exploration work to earn a 100% interest in any base metals discovered, that the respondent would retain a 1% gross royalty on any revenue from those base metals (capped at $10 million), that the respondent would retain a 100% interest in any precious metals discovered and that, if both base and precious metal were discovered, priority of work would be determined by the mineral with the greatest recoverable value. The letter ended with the words: “The above forms a heads of agreement which constitutes an agreement in itself intended to be replaced by a fuller agreement not different in substance or form.” The respondent signed and returned a copy of the letter agreeing to its terms. Further negotiations to reach the “fuller agreement” were unsuccessful and the appellant sought to enforce the terms of the “heads of agreement”.

Held: The agreement fell within the fourth category and was therefore enforceable. It was clear that the parties had reached finality in their “heads of agreement” and had intended it to be immediately and exclusively binding. The further anticipated agreement was merely an expectation, not a prerequisite to the enforceability of the existing agreement.

Reaching finality – the principles

[4.180] The principles that the courts use when determining whether the parties really intended their original agreements to be “final” were neatly summarised by Kirby P in Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 (where the parties’ oral agreement was held to be enforceable). He said (at 14,569-14,570): 1

The mere fact that the parties contemplate the execution of a formal contract, subsequent to an informal agreement, does not mean that the informal agreement is not presently binding.

2

The fact that the parties contemplate the drawing up and execution of a formal contract is a consideration which may point to the conclusion that no presently binding agreement was intended until that formal contract is executed.

3

The existence of matters of importance in which the parties have not reached consensus in their informal agreement will render it less likely that they intended immediately to be bound before the execution of a formal document. Even where the parties have agreed on the “major matters”, their subsequent conduct may indicate that they did not intend to be bound until the other issues between them were resolved in a formal document …

4

In order to determine in what areas the parties were, and were not, in agreement, and what matters they considered necessary in order for an agreement to exist, it is legitimate to examine their subsequent conduct. Where correspondence between the parties after an informal agreement refers to important terms and

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[4.180] Corporations and Contract Law

conditions not mentioned during that informal discussion, it may more readily be inferred that the earlier discussion was simply a preliminary negotiation and not a binding agreement. 5

Depending on the size, importance and complexity of the subject matter, the less formal the initial agreement, the less likely it will be that it was intended to be legally binding and enforceable. Thus, an oral discussion which contemplates a subsequent formal written agreement is less likely to have been intended to have been immediately binding.

6

It is necessary in every case to consider the nature and importance of the transaction which the parties contemplate. Where the agreement concerns a large sum, or concerns a significant transaction, it is less likely to have been intended to be presently binding.

7

Depending on the subject matter, where the parties have not used solicitors but intended to do so for the drawing up of their formal agreement, that may also be a factor which will point to the non-existence of a binding agreement until the contemplated formalities have been agreed.

8

Where a binding agreement is said to have been formed as a result of correspondence, it is necessary to look at that correspondence as a whole. It is wrong to isolate any part of the correspondence from the rest in order to prove or disprove the existence of a binding agreement. The same approach should be taken to the analysis of words and phrases within the correspondence. Reference to an “agreement” having been reached does not necessarily prove the existence of a presently binding contract. Conversely, references to a “proposed agreement”, and similar expressions, will not necessarily mean that no agreement presently exists. It is a question of how the words are to be interpreted in their context, and in the light of the correspondence, viewed as a whole.

In conclusion, the law in this area was well summarised by the Queensland Supreme Court in Commercial Bank of Australia Ltd v GH Dean & Co Pty Ltd [1983] 2 Qd R 204. The essence of the court’s decision was that if an agreement is made “subject to formal contract” (or some such similar form of words), a presumption will arise that no contract then exists, merely an agreement upon matters that may subsequently be embodied in contract. However, this presumption will either not arise at all or will be overturned if the court can see that: (a)

the parties have agreed on all matters which in law amount to a concluded contract; and

(b)

they intend the execution of a written contract to be a mere formality.

This reasoning is consistent in all respects with the decision in Masters v Cameron (1954) 91 CLR 353.

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4.4 THE MANNER OF ACCEPTANCE The general rule

[4.190] As a general rule, acceptance must be communicated to be effective. However, the manner of that communication is up to the parties and, more particularly, up to the offeror should he or she wish to prescribe a particular mode of acceptance. In the absence of any such stipulation, the offeree may communicate acceptance in any way he or she wishes – by words, actions or a combination of both. The only proviso is that the acceptance must come to the notice of the offeror before the offer terminates.

Acceptance must be communicated by the offeree

[4.200] An acceptance can only be communicated by the offeree or by an agent duly appointed for that purpose. In this respect the law differs from, say, the law regarding communication of revocation. With revocation, as was seen in Dickinson v Dodds (see [3.510] above), it is immaterial how or from whom the offeree becomes aware of it – once the revocation comes to the offeree’s attention, the offer terminates. The difference stems from the fact that until the offeror becomes aware of the acceptance, the acceptor is not bound. If an acceptor chooses not to communicate, it may be that the decision to accept is tentative or that it is being reconsidered. In such cases, it would be wrong if the acceptor could suddenly become liable because of an unauthorised communication by some interfering third party. For an illustration of the principle, see:

Powell v Lee Powell v Lee (1908) 99 LT 284

[4.210] Facts: The plaintiff had applied for a headmastership. By a narrow majority the school managers decided to appoint him and one of the majority, without any authority, sent him a telegram telling him he had been appointed. The managers met again later, rescinded their earlier decision and appointed someone else. The plaintiff sued for breach of contract.

Held: He failed. Acceptance is not effective unless it is communicated by the acceptor or by an authorised agent. Here, communication was from someone not authorised. Therefore, there was no valid acceptance and no contract that could be breached.

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[4.220] Corporations and Contract Law

Silence is ineffective

[4.220] While an offeror can generally stipulate the means by which the offer is to be accepted, he or she cannot stipulate that silence is one of those means. In other words, the offeror cannot say to the offeree: “If I do not hear from you to the contrary, I will take it you have accepted.” The offeree cannot be put in the position of having to communicate refusal in order to avoid contractual obligation. The reason is obvious: acceptance is a deliberate, willed act; silence, a non-reply, could occur because of forgetfulness, bad manners, inadvertence or any of a number of reasons. All would fall short of an intention to accept. For this reason the offeror cannot impose silence as the means of acceptance. See, for example:

Felthouse v Bindley Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037

[4.230] Facts: The plaintiff, Paul Felthouse, wrote to his nephew John on 2 February, offering to buy his horse for £30 15s and adding: “If I hear no more about him, I consider the horse mine at that price.” John did not reply to his uncle but he did tell the auctioneer that the horse was to be kept out of the sale. The auctioneer inadvertently sold it and the uncle sued him in conversion.

Held: The action failed. The nephew had not accepted his uncle’s offer. His silence did not constitute acceptance, and although he had told Bindley to keep the horse back from the auction, that fact had not been communicated to his uncle and was not an acceptance. Accordingly, there was no sale to the uncle and he had no title to ground an action in conversion.

An offeror may waive the right to communication

[4.240] While offerors cannot stipulate silence as a means of acceptance, they can waive their right to have acceptance communicated to them. The effect of this is that an offeree can decide to accept, can in fact accept, and the offeror will be bound, even though he or she is totally unaware of the offeree’s decision or intentions. All that is required is that: (a)

the offeror must indicate that a particular form of acceptance, not involving communication, will suffice;

(b)

the offeree must decide to accept; and

(c)

there must be some overt act by the offeree evidencing a decision to accept and conforming to the mode of acceptance stipulated by the offeror – if there is one.

Such waivers are often found in unilateral contracts, particularly in the reward cases. What the offeror wants is not formal acceptance, just performance. The performance then constitutes the acceptance whether the offeror is aware of it taking place or not. 70

Chapter 4 Acceptance [4.260]

A very clear example can be found in Carlill v Carbolic Smoke Ball Co (see [3.170] above). The company clearly indicated that all that was required was use of the smoke ball and the catching of a cold. Mrs Carlill bought and used the smoke ball with the intention of accepting, her acts were a clear indication of that intention and they complied with the mode of acceptance stipulated by the company. She had therefore quite validly accepted the company’s offer without any communication, and the company was bound. Waiver operates in this way because the requirement for communication is essentially for the offeror’s protection. If the offeror is prepared to abandon the benefit of that protection and to run the risks that that entails, he or she may do so and the law will not interfere.

Conduct can constitute acceptance

[4.250] All that is required is that the offeror become aware that his or her offer has been accepted. This usually happens by the acceptor communicating a formal acceptance, but if this does not happen, the parties can still be bound if their conduct indicates a mutual belief that a contract has arisen. The classic authority for the proposition that acceptance can occur through conduct is:

Brogden v Metropolitan Railway Co Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 [4.260]

Facts: Brogden, who had been supplying coal to the defendant company for several years, requested a written contract. A draft was drawn up and sent to him, he filled in some blanks, including the name of an arbitrator, and sent it back. The company’s agent put it in his desk and nothing more was done. However, the parties’ subsequent dealings were clearly made on the basis of its terms (which differed from those that had prevailed previously) and it was mentioned in occasional discussions between them. A dispute eventually arose and Brogden refused to continue supplying coal. He contended that there had been no formal acceptance of his offer and that, therefore, there was no contract in existence by which he was bound.

Held: There was a contract. Even though Brogden’s filling in of the blanks could be considered a counter-offer, a “contract” had come into existence when the company placed its first order for coal, apparently in accordance with the terms of the draft contract, and when that order was filled by Brogden, also apparently in accordance with those terms. Thus, even though no formal written contract had arisen, the fact that the parties had conducted themselves as if they were bound was sufficient to establish a binding contractual relationship. Brogden was liable.

The same reasoning was applied to achieve the same result in:

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[4.270] Corporations and Contract Law

Empirnall Holdings v Machon Paull Empirnall Holdings v Machon Paull (1988) 14 NSWLR 523 [4.270]

Facts: Empirnall Holdings engaged Machon Paull to do some construction work. Machon Paull agreed to do the work but only on the terms of a written agreement which it sent Empirnall for signature. (That document was, therefore, effectively, the offer.) The written agreement was never signed or returned, but the work was done and the parties conducted their dealings as if they were bound by it.

Held: The parties were bound by the terms of the written agreement. Even though Empirnall had never signed it, it had taken the benefit of Machon Paull’s work knowing the terms on which Machon Paull had offered to do it. That constituted acceptance of the terms of Machon Paull’s offer. Noting that whether an acceptance has occurred is always a question of fact, McHugh JA went on to say (at 535): [W]here an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms.

[4.280] See also PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd (2008) 20 VR 481 (where an agreement to undertake electrical work at the defendant’s goldmine, which was not intended to be effective until it was reduced to writing and signed, was enforced because the parties, in substantially performing their obligations, had both complied with its terms and otherwise behaved as if it was binding) and Waldorf Apartment Hotel, The Entrance Pty Ltd v Owners Corp SP 71623 [2010] NSW Titles Cases 80-137 (where the appointment of a building manager, which had never been formally executed as required, was upheld because the parties had, thereafter, acted as though they were bound by it).

The offeror may stipulate the method of communication

[4.290] As already seen, the offeror may prescribe the means by which the offer is to be accepted. If a particular means of acceptance is stipulated, then, prima facie, that is the only means by which a valid acceptance can occur. However, a strict application of this rule could lead to absurdity and, more importantly, might not give effect to the offeror’s intentions. For instance, if the offeror were to stipulate that the acceptance was to be by return mail, there are two possible explanations for that stipulation – the offeror actually wanted acceptance in written form and in no other, or all that was required was a rapid answer. If the latter were the case, it would be absurd, for instance, to hold that an acceptance that was telephoned immediately upon receipt of the offer was invalid simply because it was not “by return mail”. 72

Chapter 4 Acceptance [4.320]

To cater for the two possibilities, the law has developed two rules: 1.

If the offeror stipulates a particular means of acceptance as the only means of accepting, the offeree must accept in that way or not at all. Nothing else can or will bind the offeror to performance of the promise.

2.

However, if the offeror stipulates a means of acceptance without indicating that it is the only means of accepting, then the offeree can accept by that means or by any other means no less advantageous to the offeror. So, an offer requiring acceptance by return post can also be accepted by telephone, fax or email – all are at least as fast as the stipulated method. See, for example:

George Hudson Holdings Ltd v French George Hudson Holdings Ltd v French (1973) 128 CLR 387

[4.300] Facts: The appellant made a takeover offer for a company in which French held shares. The offer document required shareholders in the target company to post their acceptances to the appellants, but French personally delivered his acceptance and the accompanying share certificates. Was this a valid acceptance?

Held: It was. As Menzies J put it (at 394-395), it was clear “that the offeror [George Hudson] was concerned with the delivery or receipt of the acceptance … rather than the forwarding … and the receipt by the appellant company … was, without question … an acceptance.”

[4.310] The converse, of course, is that, for the offeree, accepting by a means other than that stipulated can have pitfalls. If the stipulated means is used, the offeror bears the risk of any delay, misdelivery, or other non-receipt. If a non-stipulated means is used, the acceptance will only be effective if it, in fact, turns out to be no less advantageous than the stipulated means. In other words, the offeree bears the risk. See, for example:

Eliason v Henshaw Eliason v Henshaw 4 Wheaton 225 (1819) [4.320]

Facts: Eliason sent a letter to Henshaw by wagon, offering to buy flour. He requested that an answer be sent to him at Harpers Ferry by the same wagon. Despite this, Henshaw sent his letter of acceptance to Georgetown by mail, believing that this would reach Eliason faster. He was wrong. The letter arrived six days after the wagon and, in the interim, Eliason arranged to buy flour elsewhere. Henshaw sued for breach of contract.

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[4.320] Corporations and Contract Law

Eliason v Henshaw cont. Held: His action failed. His acceptance was not in the stipulated manner nor, as it turned out, in one equally advantageous to the offeror. Consequently, it was not a valid acceptance and there was no contract.

When no means of acceptance is stipulated

[4.330] If the offeror does not stipulate how acceptance should be communicated, the method the offeree should use will depend on a number of factors, including the nature of the subject matter (for example a sale of land would normally require acceptance to be in writing), the nature of the offer and the means by which the offer was made. As a general rule of thumb, acceptance should be communicated by the same means that were used to send the offer. This generalisation is subject to: (a)

the proviso that a means that is more advantageous to the offeror may also be used; and

(b)

the overall requirement that the offeree act reasonably and in accordance with what the offeror intended.

In all cases the courts will look at the surrounding facts and circumstances to determine, as objectively as possible, what was reasonable. If a particular mode of acceptance is reasonable in the circumstances, it will bind the offeror and a contract will result.

The postal rule

[4.340] There is one major exception to the rule that acceptance must be formally communicated, and that is the “postal rule”. In brief, the postal rule states that where the parties contemplate acceptance by mail, acceptance will be complete as soon as the letter is properly posted. An early illustration of the rule can be found in:

Adams v Lindsell Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250 [4.350]

Facts: The plaintiffs were woollen manufacturers in Bromsgrove. The defendants were wool dealers in St Ives. On 2 September 1817 the defendants wrote to the plaintiffs offering to sell them a quantity of wool and requiring an answer “in the course of post”. The letter was misdirected and it did not reach the plaintiffs until the evening of 5 September. That same night they posted their acceptance and it was delivered on 9 September. If the original offer had been properly addressed, a reply would have been received by 7 September, and because they had not then received a reply, the defendants sold the wool elsewhere on 8 September. The plaintiffs sued for breach of contract.

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Chapter 4 Acceptance [4.370]

Adams v Lindsell cont. Held: The defendants were liable. Both parties had known that the post would be used as the means of communicating acceptance – the offeror had even stipulated it as the required method of communication. Therefore, acceptance was complete when the letter was posted on 5 September, and a contract arose on that date. The defendants, now unable to supply the wool, were in breach of that contract.

[4.360] The views expressed in Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250 have been consistently applied ever since, and they were even extended to include acceptances by telegram: see Cowan v O’Connor (1888) 20 QBD 640.

The parties must contemplate acceptance by post

[4.370] As Lord Herschell put it in Henthorn v Fraser [1892] 2 Ch 27 at 33, the only limitation on the application of the postal rule, is that: the circumstances [must be] such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer.

In Australia this has been interpreted to mean that it must be possible to infer from the parties’ dealings that “the offeror contemplated and intended that his offer might be accepted by the doing of that act” (per Dixon CJ and Fullagar J in Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 at 111 – see [4.380] below). That is, it must be possible to infer that the act of posting the letter of acceptance was, itself, the intended means of acceptance – not simply the means whereby the acceptance could be communicated. See also Wardle v Agricultural and Rural Finance Pty Ltd [2012] NSWCA 107 at [135] and Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320 at [150]. One instance in which the courts have consistently found that acceptance by post was probably “within the contemplation of the parties” in the required sense is where the offer was made by post. In such cases, the courts generally presume that acceptance by post was also contemplated – unless the offeror, either expressly or by implication, indicated that he or she required actual receipt. Where the postal rule does not usually apply, even where the offer was made by mail, is where the dealings that culminated in the acceptance were protracted and contentious. In such cases it is unlikely, and therefore cannot be “inferred”, that the parties would have intended that a binding agreement would result from anything other than actual communication. See, for example:

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[4.380] Corporations and Contract Law

Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93

[4.380] Facts: Following protracted correspondence over the defendant’s alleged wrongful failure to take delivery of a consignment of bullets, the plaintiff’s solicitors wrote “accepting” a compromise offer that the defendant’s solicitors had put forward in a previous letter.

Held: In the circumstances the mere posting of the “acceptance” did not give rise to a completed contract. Dixon CJ and Fullagar J explained why (at 111–112): In such a case as the present, where solicitors are conducting a highly contentious correspondence, one would have thought that actual communication would be regarded as essential to the conclusion of agreement on anything.

[4.390] Similarly, the postal rule will not apply if using it would produce manifest inconvenience or absurdity. This is because it is usually clear that the parties never really intended it to apply in those cases (so intent cannot be inferred). Lord Bramwell’s example (given in British & American Telegraph Co v Colson (1871) LR 6 Exch 108 – and subsequently cited with approval in Holwell Securities Ltd v Hughes at 161: see [4.410] below) was: If a man proposed marriage, and the woman was to consult her friends and let him know, would it be enough if she wrote and posted a letter which never reached him? … [That] would be wholly unjust and unreasonable.

Negating the postal rule

[4.400] Because offerors can stipulate the required method of acceptance, they can negate the operation of the postal rule by simply requiring actual communication (instead of the constructive communication envisaged by the postal rule). In other words, the offeror can say to the offeree: “I must receive your acceptance for it to be effective.” Such a stipulation can arise expressly (when the offeror expressly demands communication) or by implication (where it is clear that uncommunicated acceptance was not intended). For an example of implied negation, see:

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Chapter 4 Acceptance [4.430]

Holwell Securities Ltd v Hughes Holwell Securities Ltd v Hughes [1974] 1 All ER 161 [4.410]

Facts: On 19 October 1971, Hughes granted the plaintiff company a six-month option to purchase a property he owned in Wembley. The agreement provided that the option was exercisable “by notice in writing to the intending vendor at any time within [the] six months”. On 14 April 1972, the plaintiff’s solicitors wrote to Hughes’ solicitors advising that the plaintiff intended to exercise its option and enclosing a cheque for the required deposit. That letter was hand-delivered. On the same day, they posted a copy of it to Hughes. That letter was never delivered. Hughes refused to sell and the plaintiff company sued. It argued that the postal rule applied and that, accordingly, a valid contract had arisen when they posted the letter on 14 April – just inside the six-month period.

Held: Even though the parties had probably contemplated that the post could be used to communicate acceptance, that was not the end of the matter. The essential consideration was whether they had intended use of the post to displace the usual requirement for actual communication. In this case, that did not seem to be their intention. Their use of the words “notice in writing to the … vendor” was held to mean that actual communication was required. Accordingly, as the letter had never been received by Hughes, there was no acceptance and no contract under which he could be forced to sell.

[4.420] Similar reasoning was used to produce exactly the same result in Bressan v Squires [1974] 2 NSWLR 460, and in Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 (where the statement, “This contract is forwarded on the basis that it will be held by you on our behalf pending receipt by us of an identical contract signed by the vendor company” was held to indicate that receipt of the counterpart agreement – and not just its posting – was needed before acceptance occurred). It can also be seen in:

Elizabeth City Centre v Corralyn Elizabeth City Centre v Corralyn (1994) 63 SASR 235 [4.430] Facts: Corralyn sent Elizabeth City Centre a notice accepting an option

to renew a sublease, posting it by ordinary mail. It was never received. The agreement granting the option stipulated that a notice exercising the option would be “deemed duly served if mailed by registered or certified letter” and that service would be deemed to occur “on the third business day next following that on which it was posted”.

Held: In the circumstances, it was clear that the postal rule was not intended to apply. It was impliedly excluded by the express provision and, although the option could be accepted by other than registered or certified mail, the “deemed service”

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[4.430] Corporations and Contract Law Elizabeth City Centre v Corralyn cont. provision would not then apply and actual communication of acceptance would be required. That had not happened here, so there was no acceptance and, therefore, no contract. Corralyn was not entitled to demand renewal of its sublease.

The strict effect of the postal rule

[4.440] The importance of finding that an offeror had required actual communication of acceptance cannot be understated. Had the postal rule – or even some “deemed acceptance” provision – applied to Dr Hughes (in Holwell Securities Ltd v Hughes: see [4.410] above), for example, he would have had to sell, even though he had never received the notice. Where the postal rule – or a “deemed acceptance” provision – applies, a posted acceptance will be effective, even though it becomes lost or is never delivered. The same result arises if the acceptance is abnormally delayed. See, for example:

Household Fire & Carriage Accident Insurance Co (Ltd) v Grant Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216 [4.450]

Facts: Grant applied for shares in the plaintiff company. They were allotted and a properly addressed letter of allotment was posted to his home. It was never delivered. Grant never paid the amount due on the shares and, when the company went into liquidation, it was still owing. The liquidator demanded payment. Grant refused, arguing that his offer to purchase the shares had never been accepted, that he was not a shareholder and that he was not liable to pay calls.

Held: He was liable. The postal rule applied because the parties had contemplated that the acceptance would be by mail. Accordingly, the company’s acceptance of his offer to take up shares (the allotment) was complete upon posting and Grant was a shareholder from that point. Therefore, he was liable to the liquidator for the uncalled amount. The non-delivery of the acceptance was immaterial.

Misdirected acceptances

[4.460] The one possible “out” that an offeror may have in cases such as Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216 is to argue that the acceptance was not delivered through some fault of the acceptor. If the acceptor addresses the letter incorrectly, if the address is incomplete or if the letter is

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incorrectly stamped, the postal rule will probably not apply: see, for example, Getreide-Import GmbH v Contimar SA Compania Industrial, Comercial y Maritima [1953] 1 WLR 207. What this means is that, while the courts are prepared to subject an offeror to the risks normally attendant upon posted communication, they are reluctant to impose responsibility for the carelessness of the acceptor as well. This only applies, however, where the error is the fault of the acceptor. Where the letter is misdirected because the offeror gave an incorrect or incomplete address, the offeror will usually have to bear the risk of not receiving the reply.

The limits of the postal rule

[4.470] The postal rule specifically applies to acceptances by mail and by telegram. Attempts have been made to extend its operation to other means of communication (for example fax), but these have not been successful. The courts have consistently held that the general rule (that acceptance is not complete until it is received) applies to acceptances by telephone, telex, teleprinter, facsimile machine and other forms of instantaneous or near-instantaneous communication. Acceptance therefore occurs when and where the offeror receives the communication. See, for example:

Entores Ltd v Miles Far East Corp Entores Ltd v Miles Far East Corp [1955] 2 QB 327

[4.480] Facts: The plaintiffs, a London company, telexed an offer to the defendants in Amsterdam. They accepted it, also by telex. The defendants then allegedly breached the resulting contract and the plaintiffs wanted to sue. Which court had jurisdiction? According to English law the plaintiffs could only sue in England if the contract had been made in England. The defendants argued that as their acceptance had been telexed from Holland, the contract had been made in Holland. Held: The contract had been made in England. The postal rule did not apply to telexes. Therefore, the acceptance was not effective until it had been actually communicated to the offeror. That was when the telexed acceptance was received in its London office. Therefore, the contract was made in England and Entores could sue in the English courts using English law.

[4.490] The principle in Entores Ltd v Miles Far East Corp [1955] 2 QB 327 has since been applied in a variety of cases covering acceptance by nearly all means of instantaneous or near-instantaneous communication. In every case the courts have held that the acceptance only becomes effective once it has been actually communicated. See, for example: Express Airways v Port Augusta Air Services [1980] Qd R 543; Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 366; and Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH 79

[4.490] Corporations and Contract Law

[1983] 2 AC 34 (all dealing with telexed acceptances); Aviet v Smith & Searls Pty Ltd (1956) 73 WN (NSW) 274; Dewhurst (WA) & Co Pty Ltd v Cawrse [1960] VR 278; and Hampstead Meats Pty Ltd v Emerson & Yates Pty Ltd [1967] SASR 109 (all involving telephoned acceptances); Reese Bros Plastics Ltd v Hamon-Sobelco Aust Pty Ltd (1988) 5 BPR 11,106 (dealing with a faxed acceptance); and Olivaylle Pty Ltd v Flottweg AG (No 4) (2009) 255 ALR 632 (dealing with an emailed acceptance). Even letters delivered by courier instead of by post have been held not to be affected by the postal rule so, in such cases, actual delivery is required before there is an acceptance (Lew Footwear Holdings Pty Ltd v Madden International Ltd [2014] VSC 320). As yet there have been no decisions on acceptances via interactive websites but, given the courts’ general reluctance to expand the operation of the postal rule, it is likely that such acceptances will be treated exactly like all other forms of instantaneous or near-instantaneous communication and the acceptance will be deemed to occur when and where it is received.

4.5 REVOCATION OF ACCEPTANCE General position

[4.500] As a general statement, an acceptance can be revoked provided the revocation is communicated to the offeror before he or she receives the acceptance. The revocation acts, in effect, as a rejection of the offer. The offer therefore terminates at the point of communication and, when the (usually written) acceptance arrives later, there is no offer left to accept.

Revocation of posted acceptance

[4.510] Clearly, this general proposition cannot operate where the postal rule applies. In such cases, the offer will have been converted into an agreement by the acceptance (the posting) and cannot therefore be destroyed. Any attempt to retract the acceptance will probably be in vain and, when the offeror becomes aware of the acceptance, he or she will be entitled to demand performance. On the other side of the coin, it would be wrong if the offeror could be disadvantaged by acting in reliance on what appears to be a rejection of the offer. If he or she receives the revocation, believes that the offer has been rejected and then deals with the subject matter in a manner inconsistent with the “rights” of the acceptor, the acceptor should not be entitled to complain. In other words, the acceptor cannot rely on the earlier posted acceptance to confer rights to performance. Why this should be so is a little unclear; however, it may be explained in two ways. First, the later revocation could act as a repudiation of the already constituted contract. The innocent party, the offeror, may accept that repudiation and bring the contract to an end. By dealing with the subject matter in a manner inconsistent with 80

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the continued subsistence of the contract, the offeror will probably be accepting the repudiation. Accordingly, the contract will come to an end, the offeror will not be in breach and the acceptor will have no cause of action. Alternatively, it may be argued that by inducing the offeror to act inconsistently with the terms of the contract (by encouraging the belief that the offer has been rejected), the offeree is estopped from asserting the fact of acceptance. In other words, having led the offeror to act as if there were no contract, the offeree cannot then assert that there is a contract and demand performance or damages. In either case, the acceptor cannot demand performance. However, he or she can be liable to the offeror (if the offeror continues to act consistently with the contract) if the offeror decides to enforce it.

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CHAPTER 5

Intention to be bound 5.1 The need to show an intention to be bound .......................................... [5.10] The test of intention .................................................................................. [5.20] 5.2 Social and domestic agreements – the traditional approach ................. [5.50] The old presumption ................................................................................. [5.50] The normal case – husband and wife agreements ................................. [5.60] The normal case – other family agreements ........................................... [5.90] The normal case – purely social agreements ........................................ [5.110] Rebutting the old presumption – husband and wife agreements ......... [5.170] Rebutting the old presumption – family agreements ............................. [5.210] Rebutting the old presumption – purely social agreements .................. [5.240] The effect of the decision in Ermogenous ............................................. [5.260] 5.3 Business or commercial agreements – the traditional approach ......... [5.270] The old presumption ............................................................................... [5.270] Successful rebuttal .................................................................................. [5.280] The effect of the decision in Ermogenous ............................................. [5.320] 5.4 Expressly excluding intention ................................................................ [5.330] Honour clauses ....................................................................................... [5.330] Excluding the jurisdiction of the court .................................................... [5.370] Ambiguous language ............................................................................... [5.380]

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Extracts from Graw, An Introduction to the Law of Contract, Ch 5.

5.1 THE NEED TO SHOW AN INTENTION TO BE BOUND

[5.10] The essence of a contract is the promise or promises made by the parties, and the resulting creation of a legally enforceable obligation. An agreement (an offer and a corresponding acceptance) is not sufficient by itself to constitute a contract. The additional element of “legal obligation” is required, and legal obligation will only be present if the parties intended their agreement to have legal significance. If the parties did not intend that their agreement would have legal consequences, there can be no contract and the courts will not intervene in any dispute.

The test of intention

[5.20] What the parties intended will often be clear from the nature of their agreement and, therefore, the question of intention will not arise. Agreements that are obviously social in nature are not normally intended to be contractual and, therefore, should not attract legal consequences (that is, no right to sue should arise upon a breach). On the other hand, contracts that have an obvious business nature usually do involve the requisite intention, and if one of the parties fails to perform, the other (innocent) party should be entitled to seek recourse through the courts. Where the parties’ intention is not immediately obvious, the court must determine whether their agreement was intended to have contractual force before it can adjudicate in any dispute. The test the courts use is objective so, as it was put in ATCO Controls Pty Ltd v Newtronics Pty Ltd (2009) VR 411 at 424, they look at “what a reasonable person would take to be the intent of the parties as evidenced by their actions in the circumstances of the case, and not according to the subjective interpretations of the parties”. Consequently, the courts look at the subject matter of the agreement, at the circumstances surrounding it, at the words the parties used, at their status and any relationship between them, at the effect of the agreement on them and at whether their subsequent actions indicate a belief that the agreement was binding. See, for example: Shahid v Australasian College of Dermatologists (2008) 168 FCR 46; [2008] FCAFC 72 [5.30] Facts: Over a number of years, the appellant, a doctor, applied

unsuccessfully to be selected for the only trainee registrar in dermatology position in Western Australia. She also appealed, unsuccessfully, against her nonselection. She sued, arguing that the College had not adhered to its own published appeals procedure, a failure which, she said, breached several implied terms of a contract between her and it (including that “the appeal process was genuine and effective”, “the appeal would be heard in a timely manner” and that the College “would not finalise its decision on selection until the time for lodgment or determination of an appeal had passed”). The College responded by denying that

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Chapter 5 Intention to be bound [5.40] cont. there was any such contract, arguing that the parties’ dealings “were not accompanied by an intention to create legal relations” (at [209]).

Held: Looking objectively at all the circumstances (including the fact that the selection process “was clearly a subject of the greatest importance” to both the College and those seeking selection; the fact that the handbooks detailing the appeal process were “comprehensive, and left the reader in no doubt as to importance of the matters covered … or as to the significance of the obligations undertaken”; the fact that “the context was a businesslike one”; and the fact that a not insignificant fee was charged to appeal – in exchange for which it was likely that a “disinterested bystander” would think that the College would be obliged to follow its own processes (the detailed nature of which also “strongly bespoke an intention to create legal relations”), the Court held that the requisite “mutual intention to create legal relations” was present. There was a contract. [See also, Sklavos v Australasian College of Dermatologists [2016] FCA 179 at [267].]

[5.40] In addition to looking at all of the surrounding circumstances, the courts also take cognisance of the fact that the parties can always negate intention by an express provision to that effect. That is, in cases of doubt the parties can include an express statement in their agreement to the effect that it is not intended to create legally enforceable obligations (see the discussion of “Honour Clauses” at 5.4 [5.330] below). Wherever there is a question, however, and the courts have had to determine the question of intention, the traditional starting point was to try to classify the agreement as either “social or domestic” or “business or commercial”. This was because the courts presumed (in the absence of evidence to the contrary) that the parties did not intend their social or domestic agreements to have legal consequences (and, therefore, that they would not be legally enforceable), but that they did intend (again, in the absence of evidence to the contrary) that their business or commercial agreements would have such consequences (and that they would therefore be legally enforceable). In Ermogenous v Greek Orthodox Community ([5.160] below), the High Court discussed the usefulness of this traditional “presumptions” approach to determining legal intention, and doubted its validity, Gaudron, McHugh, Hayne and Callinan JJ saying (at [25]–[26]): Because the inquiry about [legal intention] may take account of the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances, not only is there obvious diffıculty in formulating rules intended to prescribe the kinds of cases in which an intention to create contractual relations should, or should not, be found to exist, it would be wrong to do so. … In this context … there is frequent reference to “presumptions”. … For our part, we doubt the utility of using the language of presumptions in this context. At best, the use of that language does no more that invite attention to identifying the party who bears the onus of proof. (emphasis added)

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[5.40] Corporations and Contract Law

Whether this means that the old “presumptions” no longer have any place in determining the question of the parties’ intention is not entirely clear from the cases that followed Ermogenous. Some, such as Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 at [12], clearly held that Ermogenous “rejected the use of presumptions as a basis for ascertaining whether parties intended to enter into contractual relations” (see also Ashton v Pratt (2015) 88 NSWLR 281 at [73]). Others, such as Shahid v Australasian College of Dermatologists (2008) 168 FCR 46 have been more guarded, with Jessup J noting in that case at [211], “I would pause before regarding it as self-evident that … the High Court had … dispensed with the presumption”. Some, like Darmanin v Cowan [2010] NSWSC 1118 [206] and [213] have simply continued to apply the old presumptions and others, while not directly applying the old presumptions, have accepted the realities that “[g]enerally in commercial agreements there is a strong presumption in favour of an intention to create legal relations, a presumption that will only be rebutted with difficulty” (see Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 at [48]) – and that “as a matter of human experience, when family members make a promise to each other it is unlikely that they intend it to be legally binding”: Sion v NSW Trustee & Guardian [2013] NSWCA 337 at [40] (see also Vosnakis v Arfaras [2015] NSWSC 625, especially at [148], confirmed on appeal in Arfaras v Vosnakis (2016) 18 BPR 35,819; [2016] NSWCA 65 [58]–[65]). Most cases now, however, do not refer to the presumptions at all and simply refer to and apply the objective test instead, answering the question of whether the parties truly intended their agreement to be contractual by looking at what they said, at what they did and at the circumstances in which they reached their agreement. In other words, as the Court put it in Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547 at [99] (echoing Ermogenous at [25]): “whether a completed and binding agreement has been made is to be assessed objectively, and the search for an intention to create contractual relations is not a search for the uncommunicated subjective motives or intentions of the parties”. Instead, it is a search for “the intention that a reasonable person, with the knowledge of the words and actions of the parties communicated to each other, and the knowledge that the parties have of the surrounding circumstances, would conclude that the parties had, concerning the subject matter of the alleged contract” (per Campbell JA in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 [262]). Therefore, the real question now is simply the question of “proof” – with the party who asserts that there is a legally binding contract bearing the onus of proving that that was what the parties really intended. Satisfying that onus will, of course, normally be easier where the agreement is of a business or commercial nature (where the circumstances are more likely to point to that conclusion) and more difficult where the agreement is of a purely social or domestic nature: see for example, Slattery J’s comments in Smilevska v Smilevska (No 86

Chapter 5 Intention to be bound [5.70]

2) [2016] NSWSC 397 at [151]. In both cases, however, the other party will, of course, still also have the opportunity to present evidence to rebut any such conclusion. Therefore, the present position seems to be that, while the courts should no longer formally apply the old presumptions, they may still take notice of what Austin J referred to as the “usual expectation” that family agreements are not normally intended to be enforceable (see Selen v Selen [2011] FamCA 310 at [50]) and of the fact that “significant commercial characteristics of … arrangements [can] … strongly support an inference that [the parties] intended those arrangements to be enforceable” (Ailakis v Olivero (No 2) (2014) 100 ACSR 524; [2014] WASCA 127 at [91]). To that extent many of the old cases, particularly those dealing with the rebuttal of the presumptions, are still likely to be relevant.

5.2 SOCIAL AND DOMESTIC AGREEMENTS – THE TRADITIONAL APPROACH The “old” presumption

[5.50] With social and domestic agreements, the traditional approach was to presume that the parties did not intend to create legal relations. That is, there was a presumption of fact that they did not intend their agreement to be legally enforceable. That presumption was, however, only a presumption and, like all other presumptions of fact, it could be rebutted if the evidence disclosed a contrary intention. Social and domestic agreements were seen as falling into three sub-classifications: (a)

husband and wife agreements;

(b)

other family agreements; and

(c)

purely social agreements.

The presumption applied in all three cases but was dealt with in slightly different ways.

The normal case – husband and wife agreements

[5.60] In normal circumstances the courts simply refused to become involved. This was particularly so in husband and wife cases where the agreement arose out of their normal day-to-day domestic arrangements. As an example, see: Balfour v Balfour [1919] 2 KB 571 [5.70] Facts: The Balfours spent the first 15 years of their marriage in Ceylon. In

1915 they went to England on leave and, when the husband returned to Ceylon, his wife was too ill to accompany him. He agreed to pay her a monthly allowance of £30 until she could rejoin him – but she never did. The husband ceased payment. Mrs Balfour sued, alleging a contractual right to the money.

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[5.70] Corporations and Contract Law

cont. Held: Their agreement was not a contract, merely an ordinary domestic arrangement. They had not intended to create legal relations and, therefore, no action lay for any alleged breach. As Atkin LJ said (at 578): There are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer and acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangements which are made between husband and wife … they are not contracts because the parties did not intend that they should be attended by legal consequences.

The Australian courts took basically the same view. See, for example: Cohen v Cohen (1929) 42 CLR 91 [5.80] Facts: Before they married, Mr Cohen promised his future wife an annual dress allowance of £100, payable in quarterly instalments. The payments fell £275 into arrears and, when the couple finally separated, Mrs Cohen sued for (inter alia) that sum, alleging that it was contractually due and owing.

Held: There was no contract to pay her the money. The parties had done no more than discuss and agree upon a proposal for a regular allowance which the future Mrs Cohen considered appropriate to their circumstances at that time. The parties had never intended to create legal relations and thus Mrs Cohen’s action failed.

The normal case – other family agreements

[5.90] While arrangements between husband and wife traditionally carried with them a greater presumption that no legal relations were intended, other purely family agreements would not be enforced either if the parties had not contemplated legal enforcement. See, for instance: Murphy v Simpson [1957] VR 598 [5.100]

Facts: After Matthew Simpson (senior) died in 1935, various members of his family occupied his home until, finally, his son Matthew (junior) moved in. The administration of the estate was badly neglected and his daughter, Clara Murphy, was not granted letters of administration until 1956. She then sought possession of the house as administratrix and Matthew (junior) refused to move out. He claimed that he and his wife were in lawful possession as tenants because, he said, he had agreed with Clara that he would pay the rates and all outgoings if she allowed him to reside in the home.

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cont. Held: There was no lease and Clara was entitled to possession. The arrangement between her and her brother was one of mutual convenience and was not intended to give rise to any legal relationship. Matthew had to vacate. As Gavan Duffy J said (at 600): the parties had no intention of creating legal rights or obligations, or of making an agreement which was to be enforceable at law.

The normal case – purely social agreements

[5.110] Similar applications of the presumption could be found in any purely social arrangement. Good examples included those that Atkin LJ used in Balfour v Balfour, “where two parties agree to take a walk together, or where there is an offer and acceptance of hospitality”. However, these are relatively insignificant examples and the principle was not restricted to instances of such narrow effect – it had a much wider application. See, for example: Coward v Motor Insurer’s Bureau [1963] 1 QB 259 [5.120] Facts: Mrs Coward’s husband was killed in a motor cycle accident while

riding as a pillion passenger. The driver, Cole, was also killed, and the accident was the direct result of his negligent riding. Mrs Coward sued Cole’s estate for damages and obtained judgment, but because Cole was uninsured and had no assets, she got nothing. She then sought to recover against the Motor Insurer’s Bureau, which was required to satisfy judgments where a negligent motorist should have been insured but was not. To succeed, Mrs Coward had to show that Cole had carried her husband “for hire or reward”. Cole and her husband had worked at the same factory and, for about 18 months, Cole had given Coward a lift to and from work on his motor bike. Coward had also agreed to pay, and had paid Cole a weekly amount for taking him to work. Held: The arrangement between Coward and Cole was not a contract of carriage for hire or reward. That had not been what the parties had intended. Consequently, Cole had not been bound to insure and Mrs Coward could not succeed against the Bureau. As Upjohn LJ said (at 271): The practice whereby workmen go to their place of business in the motor car or on the motor cycle of a fellow workman upon the terms of making a contribution to the costs of transport is well known and widespread. In the absence of evidence that the parties intended to be bound contractually, we should be reluctant to conclude that the daily carriage by one of another to work upon payment of some weekly (or it may be daily) sum involved them in a legal contractual relationship.

[5.130] The presumption against any intention to create legal relations was also often found in cases involving members of mere voluntary associations such as clubs and societies. The courts generally accepted that such associations are founded on

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[5.130] Corporations and Contract Law

consent rather than on contract. Therefore, if a dispute did arise, the courts did not normally intervene – at least not on contractual grounds. See, for example: Cameron v Hogan (1934) 51 CLR 358

[5.140] Facts: Hogan, who had been the Labor Premier of Victoria, was refused re-endorsement by the party’s State executive and was expelled from the party. He alleged that both actions contravened the party’s rules and he sought a declaration that they were wrongful and of no effect.

Held: The party’s rules were not an enforceable contract between either the members themselves or the members and the executive because party membership had never been intended to confer any legally enforceable rights or liabilities. Consequently, Hogan had no legal right to demand that the party’s membership and pre-selection rules be followed.

[5.150] Cameron v Hogan (1934) 51 CLR 358 has been followed – at least as regards the non-contractual nature of club rules – in both Baldwin v Everingham [1993] 1 Qd R 10 (although Dowsett J intervened and granted declaratory relief on other grounds, noting that the expectations of members of political parties and the statutory recognition of such bodies had changed since the 1930s) and Thorley v Heffernan (unreported, Supreme Court of New South Wales, 25 July 1995). Its underlying reasoning can also be seen in Scandrett v Dowling (1992) 27 NSWLR 483, where the Constitution of the Anglican Church was held to be simply a “consensual compact” – something binding in conscience but lacking any contractual force. However, if the relationship between the association and its members involved property or economic entitlements (which could be seen to be the case in groups such as quasi-commercial organisations) the “consensual compact” may well have evolved into a contract – giving both parties the right to seek legal enforcement. See, for example: Ermogenous v Greek Orthodox Community (2002) 209 CLR 95 [5.160] Facts: Ermogenous had been the Archbishop of the Greek Orthodox

Church in Australia. When he resigned he asked to be paid out for his unused annual and long service leave. The Church refused. He sued.

Held: Although the relationship between a minister of religion and his church is pre-eminently spiritual (in the sense that he “serves God” rather than the administrators of the church), aspects of that relationship can give rise to legally enforceable rights. Here, there was, in reality, an employment relationship with clear proprietary and economic entitlements. Therefore, there was no reason to believe that there had been no intention to enter into legal relations. The matter was therefore to be decided solely on the parties’ intention, as demonstrated by the facts, and on that basis Ermogenous was entitled to recover.

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Rebutting the “old” presumption – husband and wife agreements

[5.170] As already seen, husband and wife agreements traditionally carried with them a very strong presumption that they were not intended to be legally binding. However, this was only true where the agreement fell within the ambit of normal domestic relations. An agreement between a husband and wife could be contractually binding if it was clearly commercial or if it fell outside those “normal” relations. Arrangements falling outside normal domestic relations included all those agreements that are entered into between husbands and wives to finalise their relationship when the marriage breaks down. Especially good examples are agreements concerning maintenance and property settlement. See, for example: McGregor v McGregor (1888) 21 QBD 424 [5.180] Facts: A husband and wife had taken out summonses against each

other for assault. Before the summonses were heard, they agreed to withdraw them and to live apart. The husband agreed to allow the wife a weekly sum for maintenance and the wife agreed to support herself and her children and to indemnify the husband against any debts she contracted. The agreed payments fell into arrears. The wife sued.

Held: On the facts, the parties had intended their agreement to have legal effect and Mrs McGregor was entitled to recover. Their agreement was not one governing the day-to-day arrangements of a marriage; it was reached in compromise of legal action and to facilitate separation. Consequently, it had been intended to be and was enforceable.

[5.190] The critical point in cases such as McGregor v McGregor (1888) 21 QBD 424 was simply that the traditional presumption of lack of intention that was the basis of the decision in Balfour v Balfour [1919] 2 KB 571 did not apply if the couple was not living in amity. For a more modern illustration, see: Merritt v Merritt [1970] 1 WLR 1211

[5.200] Facts: Mr Merritt had left his wife. She pressed him to finalise arrangements between them, so they met, discussed matters and Mr Merritt finally wrote, signed and dated a note in the following terms: In consideration of the fact that you will pay all charges in connection with the house … until such time as the mortgage repayment has been completed, when the mortgage has been completed I will agree to transfer the property into your sole ownership.

Relying on this undertaking, the wife paid off the mortgage. The husband refused to transfer the home. She sued. Held: The agreement was contractually binding and Mrs Merritt was entitled to the house. Discussions involving matters such as separation and maintenance do

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[5.200] Corporations and Contract Law cont. not fall within the area of “normal” domestic agreement and, therefore, the traditional presumption that there was no intention to be bound did not arise.

Rebutting the “old” presumption – family agreements

[5.210] Again, the critical factor with any family agreements has always been the question of the parties’ objectively determined intention. While many agreements between members of the same family may not be intended to give rise to legal obligations, others may be, especially if they involve some form of overtly commercial arrangement. Examples of “family” agreements that have been found to be clearly commercial, and therefore legally enforceable, have included contracts of partnership (Milliner v Milliner (1908) 8 SR (NSW) 471), contracts between directors of family companies and those companies (Service v Federal Commissioner of Taxation (2000) 171 ALR 248), contracts of tenancy (Pearce v Merriman [1904] 1 KB 80), contracts of indemnity (Re Banks; Weldon v Banks (1912) 56 Sol Jo 362), contracts involving sale and purchase of property (Hewison v Negus (1853) 16 Beav 594; 51 ER 909), contracts involving use of a vehicle for transporting commercial quantities of goods (Roufos v Brewster (1971) 2 SASR 218) and contracts of loan (Woodward v Woodward (1863) 3 De G J & J 672; 46 ER 797). In every case, the court’s job has been to look at the facts and ascertain as objectively as possible whether the parties intended their agreements to be legally enforceable. Often, this can be achieved by looking at the nature of the transaction (as in each of the examples given above). In others, the consequences of acting in reliance on the agreement can be important – on the basis that the more serious the consequences, the more likely it is that the parties intended to be bound. See, for example: Wakeling v Ripley (1951) 51 SR (NSW) 183 [5.220] Facts: The defendant, a bachelor, lived alone in Sydney. The plaintiffs

were his sister and her husband, a Cambridge University lecturer. In 1946, the defendant wrote to his sister to persuade her and her husband to come to live with him. He promised that he would leave them all his property upon his death and that, in the meantime, he would provide them with a home and a living. Considerable correspondence ensued and eventually the plaintiffs agreed. The husband resigned his lectureship, they sold their house and they came to live with the defendant. Just over a year later the parties quarrelled, the defendant reneged on his promise, sold his house and disinherited the plaintiffs. They sued. The defendant argued (inter alia) that the agreement was purely social and thus unenforceable. Held: He failed. The voluminous correspondence and the seriousness of the move for the plaintiffs showed that the parties had intended their agreement to be

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Chapter 5 Intention to be bound [5.260] cont. binding. Consequently, it was binding and the defendant was liable for his unjustified breach. As Street CJ said (at 187): The consequences for the plaintiffs were so serious, in taking the step that they did, that it would seem obvious that they were anxious to get a definite assurance and a definite agreement as to the provision that was to be made for them, and accepting … their account of the letters … I think that the parties did intend to enter into a binding and enforceable contract.

[5.230] Similar decisions on similar facts can be found in both Todd v Nicol [1957] SASR 72 and Riches v Hogben [1986] 1 Qd R 315. The common thread flowing through all these decisions is that whether there is an intention to be bound depends upon the facts of each case and the answer to the question: “Would reasonable people think that this agreement was intended to be legally binding?”

Rebutting the “old” presumption – purely social agreements

[5.240] Most social agreements are just that, agreements that have little significance to the parties and are unlikely to have any serious consequences. Breach of a social agreement is not usually a matter of grave concern, and the courts have therefore been reluctant to find that such agreements were intended to be binding. However, they are not always without serious consequences, and something that appears to be merely a friendly pact can go much deeper – and, therefore, may be contractually enforceable. Agreements to participate jointly in competitions, lotteries and the like have traditionally been seen as good examples. See, for instance: Simpkins v Pays [1955] 1 WLR 975 [5.250] Facts: The defendant, her grand-daughter and the plaintiff regularly

entered a fashion competition run by a Sunday newspaper. The entries were always made in the defendant’s name, but they all contributed to the postage and other expenses, and agreed that any prizes would be shared. They eventually won a prize, but the defendant refused to share it, arguing that there was no contract. The agreement between them was, she said, merely a friendly adventure and not something intended to create legal relations.

Held: In the circumstances, it was clear that the parties must have contemplated that their agreement would be enforceable in the event of a win. The plaintiff was therefore contractually entitled to a share of the prize.

The effect of the decision in Ermogenous

[5.260] Under the “presumptions” model, social and domestic agreements were presumed not to be intended to have legal consequences. Consequently, they were not normally enforceable and a party who wanted to enforce such agreements had to produce evidence to “rebut” that presumption. 93

[5.260] Corporations and Contract Law

Following Ermogenous v Greek Orthodox Community (2002) 209 CLR 95 the practical effect does not seem to be radically different. There is, of course, no presumed lack of intention, but the party who asserts that the agreement was intended to be contractual will still have the onus of proving that it was. In other words, he or she will still, effectively, have the same onus of proof. The only real practical difference seems to be how difficult that onus will be to satisfy. The “presumption” that the parties did not intend legal relations in such cases created a significant “perception” obstacle, as the High Court acknowledged in Ermogenous, noting (at [27]) that presumptions “may rapidly ossify into a rule of law”. Therefore, because plaintiffs no longer have to overcome a “presumption” and merely have to establish the requisite intent on the normal standard of proof, they may find it easier to succeed. This, of course, does not unduly disadvantage the other party either, because they can still adduce evidence to show that there was no such intent. What it does do, arguably, is to “level the playing field” between the parties – and make it clear that the sole question that the courts have to ask is: “Taking all the facts and circumstances into account, did the parties objectively intend to enter into a binding contract?”

5.3 BUSINESS OR COMMERCIAL AGREEMENTS – THE TRADITIONAL APPROACH The “old” presumption

[5.270] With business or commercial agreements the traditional presumption was that the parties did intend to create legal relations. Therefore, the courts normally enforced such agreements unless there was very clear and cogent evidence that that is not what they intended. The onus of proving that there was no such intention fell on the party alleging it and that onus could be quite severe. For example, in Carlill v Carbolic Smoke Ball Co ([3.170] above), one of the defences raised by the company was that it had not intended to create legal relations. Its advertisement, it said, was “mere puff”, something that no reasonable person would take seriously. That defence failed. On the face of it the offer appeared serious and it was of a type that might be expected in a commercial context. That seriousness was enhanced by the statement that £1000 had been deposited with the company’s bankers to cover contingent claims, thus “showing our sincerity in the matter”. The company therefore failed to rebut the presumption of intention.

Successful rebuttal

[5.280] From decisions like Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, it should be obvious that proving lack of intention can be difficult. In most cases the defendant was expected to show that no one could reasonably expect performance 94

Chapter 5 Intention to be bound [5.320]

because no one would believe that the promise was made seriously. For an example of a successful rebuttal, see the American case: Keller v Holderman 11 Mich 248 (1863) [5.290] Facts: Keller gave Holderman a cheque for $300 for an old silver watch

which was worth about $15. The cheque was not paid and Holderman sued. At trial it appeared that the whole transaction had been intended as mere “frolic and banter” and that neither party had intended that it would have legal consequences.

Held: No contract had arisen and there was no right to remedy. There had been no serious intention to create legal relations and this fact was, or should have been, obvious to all.

[5.300] Care had to be exercised however; practical jokes can backfire. In Keller v Holderman 11 Mich 248 (1863) the defendant succeeded because the joke was obvious. Where it is not so obvious and the plaintiff honestly believes that he or she had a binding contract, the practical joker can be required to perform. See, for instance: Nyulasy v Rowan (1891) 17 VLR 663 [5.310] Facts: The defendant verbally offered to purchase 400 shares from the plaintiff for £8 per share. The offer was to remain open for three months. The plaintiff did not accept immediately but did so within the time allowed. The defendant then refused to buy them, stating that it had all been a joke. Evidence was adduced, however, to show that the plaintiff and a number of others had taken the offer seriously.

Held: If an offer that appears serious on its face is made and “while it is open and unretracted the other party duly accepts, then there is an agreement and both are bound”. In the present case there was nothing to show that the defendant’s offer was not meant seriously and thus he was liable for his non-performance.

The effect of the decision in Ermogenous

[5.320] Under the old “presumptions” model it was presumed that business or commercial agreements were intended to have legal consequences and they were, therefore, normally legally enforceable. If one of the parties wanted to show that that was not the case the onus was on him or her to produce evidence to rebut that presumption. Following Ermogenous v Greek Orthodox Community (2002) 209 CLR 95 this situation has been effectively reversed. The party who alleges that there was the requisite intent can no longer simply assert the “business or commercial” nature of the agreement and then rely on the presumption to give it legal enforceability. He or she now has to produce positive evidence to show that the agreement was indeed intended to be an enforceable contract. Only then will the onus pass to the other party who can try to rebut that conclusion by producing evidence to the contrary. That party, 95

[5.320] Corporations and Contract Law

therefore, no longer bears the primary responsibility of disproving intent and the question of intent will be decided, as it should be, on the evidence and not on the basis of a presumption that may or may not be warranted on the facts. Of course, in many cases the circumstances surrounding a business or commercial arrangement will be enough, by themselves, to establish the necessary contractual intent but, as we saw with social and domestic agreements above, in every case that intent will now have to be determined by asking the single (and simple) question: “Taking all the facts and circumstances into account, did the parties objectively intend to enter into a binding contract?”

5.4 EXPRESSLY EXCLUDING INTENTION Honour clauses

[5.330] One way in which the parties could (and still can) avoid contractual liability is to include an express stipulation in their agreement to the effect that it is not intended to be legally binding. Such stipulations are called “honour clauses” and they make the agreement unenforceable at law. Honour clauses are commonly inserted in competition, lottery and pools entry forms. See, for instance: Jones v Vernons Pools Ltd [1938] 2 All ER 626 [5.340] Facts: The plaintiff sued on a football pools coupon which he alleged he

had posted and the defendants had lost. The defendants relied on a clause in the document which stated that neither the conduct of the pools nor any associated agreement or transaction would create a legal relationship between the parties or be legally enforceable. It specifically went on to say that the arrangements were “binding in honour only”. Held: The insertion of this “honour clause” meant that the agreement had not been intended to give rise to a legally binding contract. Consequently, the plaintiff had no contract and no cause of action.

[5.350] Honour clauses are not restricted to competition entries. They may also be inserted into straight business agreements, and if so, they have exactly the same effect – the agreement is not enforceable at law. See, for example: Rose & Frank Co v Crompton (JR) & Bros Ltd [1925] AC 445 [5.360] Facts: The plaintiffs, an American firm that had dealt with the defendant

company for some years, the defendant and the defendant’s supplier entered into an agreement to continue dealing with one another for three years, subject to termination on six months’ notice. The written agreement went on to provide: “This arrangement is not entered into … as a formal or legal agreement, and shall not be subject to legal jurisdiction – in the law courts … it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves … that it will be carried through

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Chapter 5 Intention to be bound [5.390] cont. … with mutual loyalty and friendly co-operation.” A dispute arose and the English companies terminated the arrangement without notice. Were they entitled to do so or were they legally bound to give six months’ notice?

Held: The agreement was not a legally binding contract. The “honourable pledge” clause showed that it was intended to be binding in honour only and not intended to create legal obligations. Accordingly, the English companies were not bound to give the notice and their termination was valid and effective.

Excluding the jurisdiction of the court

[5.370] While honour clauses are perfectly permissible, care must be taken in their drafting. A clause that reads: “This agreement does not give rise to any legal relationship, nor is it intended by the parties that legal consequences shall flow from it” is perfectly acceptable. However, it would not be if it read: “No court shall have power or jurisdiction to arbitrate in respect of any matter arising out of this agreement or any breach thereof.” The difference between the two is that the first denies the existence of a contract (which is permissible), while the second acknowledges the existence of a contract but attempts to exclude the jurisdiction of the courts to adjudicate in respect of it (which is not permissible). The second is not permissible because considerations of public policy demand that wherever legal relations are created, the courts must have the power to intervene if that becomes necessary. If there is a contract, there are legal rights, duties and obligations, and the jurisdiction of the courts cannot be denied, even by agreement between the parties (see [14.670] (Graw)).

Ambiguous language

[5.380] While it is clear that the parties may disavow intention and make theirs an agreement in honour only if they wish to do so, they must make that intention manifestly apparent by their words. Should there be any doubt, the courts can disregard the words used, look at the surrounding circumstances and independently determine their true intention. See, for instance: Edwards v Skyways Ltd [1964] 1 WLR 349 [5.390] Facts: The plaintiff was employed as an aircraft pilot. He was a member

of the defendant company’s contributory pension fund, under the rules of which he was entitled to a choice of two options when he left the company’s service: (a)

to withdraw his contributions to the fund; or

(b)

to take a pension, payable at the retirement age of 50.

He had no right to the company’s contribution if he left before retirement age. On 8 February 1962 the company, having decided upon a redundancy plan, agreed that pilots who were declared redundant would be given an “ex gratia” payment,

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[5.390] Corporations and Contract Law cont. equivalent to the company’s contribution. This was published in the pilots’ association newsletter in March. On 1 May, Edwards accepted redundancy and elected to withdraw his contributions and to take the ex gratia payment. He received his contributions on 2 May. The company then rescinded its decision to make the ex gratia payments. Edwards, who had then left the company, sued. The company argued that there was no contractual entitlement because the words “ex gratia” excluded any intention to be bound. Held: This was a commercial agreement and therefore, prima facie, enforceable. If the company wanted to argue that it was not, it was up to it (as the party making that assertion) to prove that that had not been the parties’ intention. That onus was heavy and, in the circumstances, the company had failed to discharge it. Edwards was entitled to the money. As Megaw J said (at 356): The words “ex gratia” do not … carry a necessary, or even probable, implication that the agreement is to be without legal effect … I see nothing in the mere use of the words “ex gratia” … to warrant the conclusion that this promise, duly made and accepted, for valuable consideration, was not intended by the parties to be enforceable at law.

[5.400] On the other hand, if the words the parties use do clearly disavow an intention to be bound, there will be no binding contract. For example, in Stephenson v Dwyer [2008] NSWCA 123 the parties signed a document containing an “agreement” for the release of rights of way in relation to neighbouring residential properties. It was headed “Proposal” and contained a provision that “each owner signifies their in principle approval”. The document was held not to be contractually binding because the use of the words “in principle approval” clearly indicated, and would have led reasonable people to conclude, that that was not what the parties had intended.

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CHAPTER 6

Consideration 6.1 What is consideration? ............................................................................ [6.10] Definition .................................................................................................... [6.10] 6.2 Features of consideration ........................................................................ [6.40] Consideration is the price paid for the promisor’s promise .................... [6.40] Consideration moves from the promisee ................................................. [6.50] Consideration need not flow to the promisor ........................................... [6.80] Consideration may be a benefit to the promisor or a detriment to the promisee ............................................................................. [6.100] Consideration may be executed, executory, but not past ..................... [6.130] Consideration must be something of value ........................................... [6.150] Consideration must be distinguished from motive ................................. [6.160] Forbearance as consideration ................................................................ [6.210]

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[6.10] Corporations and Contract Law

Extracts from Graw, An Introduction to the Law of Contract, Ch 6.

6.1 WHAT IS CONSIDERATION? Definition

[6.10] Consideration has been defined in various ways. In Currie v Misa (1875) LR 10 Exch 153, Lush J said (at 162): A valuable consideration in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, Lord Dunedin adopted Pollock’s definition and used the statement: “an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable” (Pollock on Contracts, 8th ed, p 175). Whether these are good or all-encompassing definitions is not really important. What is important is that they clearly indicate two things. First, consideration need not take any particular form – it can be money, the provision of goods or services or simply an exchange of promises (as, for example, in Stevens v Spotless Management Services Pty Ltd (2016) 68 AILR 250-068; [2016] VSCA 299, where the appellant’s promise to “leave quietly” was held to be good consideration for the respondent’s promise to pay him out his retention bonus if he did). It can also be some combination of those things. Secondly, at common law, a promise must be paid for to be enforceable. That, at least, is the situation with simple contracts. A gratuitous promise that is not under seal is not enforceable and the promisee has no rights at law. He or she is called a “volunteer” and cannot enforce the promise. See, for example: Parastatidis v Kotaridis [1978] VR 449 [6.20] Facts: The plaintiff lent the defendant $9000 interest-free and promised

not to seek repayment for two years. Before that period was up, he demanded its return. The defendant refused to pay, citing the agreement.

Held: The plaintiff was entitled to be repaid. The defendant had given him nothing in exchange for his promise (had not provided consideration) and the promise not to demand early repayment was, therefore, not enforceable.

[6.30] Even where a gratuitous promise is contained in a deed (so consideration is not required for it to be enforceable: see [2.150] (Graw)) the beneficiary of the promise is still a “volunteer”. Consequently, the promise is only enforceable at common law and then only by an award of damages (instead of by, for example, specific performance). This is because equity only acts where there is some element of unconscionability and, if a promise is not “bought” for good consideration, it is not 100

Chapter 6 Consideration [6.60]

regarded as unconscionable for the promisor to withdraw it. This is reflected in the maxim, “equity will not assist a volunteer” (see [1.90] above). Consequently, even if the contract is set out in the form of a deed, providing consideration can still be important if the parties want access to the full range of available remedies in the event of a breach.

6.2 FEATURES OF CONSIDERATION Consideration is the price paid for the promisor’s promise

[6.40] That consideration is the price paid for the promisor’s promise is not so much one of its features as its essential nature. Without the price, the promisor’s promise cannot be enforced and the “other” features of consideration stem from this very basic aspect of its nature.

Consideration moves from the promisee

[6.50] Very simply, the expression “consideration moves from the promisee” means that a person who wants to enforce a promise must have paid for it. Only by providing consideration can he or she establish a right to have it enforced. This requirement is strictly construed. Consideration must flow from either the promisee or from someone acting on the promisee’s behalf – that is, from an agent appointed for the purpose of making the payment. For agency to apply, the third party must, in fact, pay the consideration on the promisee’s behalf; it is not sufficient that he or she merely pay it for the promisee’s proposed benefit. This is an application of the maxim, “qui facit per alium facit per se” (he who does through another does himself). The net effect is that the

promisee can validly do through an agent what should be done personally. Consequently, the requirement for personal payment is still met. See, for example: Fleming v Bank of New Zealand [1900] AC 577 [6.60] Facts: Fleming arranged, through an agent, for the defendant bank to

honour four of his cheques. The agent made the necessary arrangements and gave the bank security over 2250 of Fleming’s sheep as consideration for its promise. The bank subsequently dishonoured the cheques. Fleming sued. The bank argued that, as he had not personally provided any consideration for its promise, his action could not succeed.

Held: Because consideration had been given by Fleming’s agent, at his instructions and on his behalf, it had, in law, been given by Fleming. Consequently, he was not merely a third party beneficiary of the bank’s promise and he could enforce it.

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[6.70] Corporations and Contract Law

[6.70] With bilateral contracts (those in which both parties have an obligation to do something) there are, in fact, two promisees. Each party receives the benefits arising out of the obligations imposed on the other. Accordingly, consideration must move from them both. This does not mean that consideration always has to be established on both sides to prove the existence and enforceability of an obligation. Only the plaintiff has to show that he or she has provided consideration because the court is only being asked to enforce the defendant’s promise. Therefore, only the defendant’s promise has to be formally supported by consideration in that particular action.

Consideration need not flow to the promisor

[6.80] While consideration must flow from the promisee, it need not flow to the promisor. If the promisor wishes, he or she may direct that the consideration be provided to some third party. If the promisee does provide the consideration to the third party, it will be good and, therefore, the promisor’s promise will be binding. See, for example: Bolton v Madden (1873) LR 9 QB 55 [6.90] Facts: The parties were members of a charitable society and were both

entitled to vote on how the charity’s funds were spent. They agreed that, in consideration of the plaintiff using 28 of his votes to support a child the defendant wished to benefit, the defendant would use 28 of his votes to support a child the plaintiff wished to benefit. The plaintiff performed his part of the bargain, but the defendant did not. Consequently, the plaintiff had to subscribe a further £7 7s to acquire an additional 28 votes. He sued for that amount. The defendant argued that the plaintiff had not provided him with consideration for his promise and, therefore, could neither enforce it nor recover damages.

Held: The argument failed. Consideration had moved from the plaintiff because he had conferred a benefit on a third party at the promisor’s request. The fact that the promisor had not gained personally was immaterial.

Note: It could also have been argued that the question of benefit was immaterial. Consideration could have been found in the legal detriment suffered by the plaintiff in voting as he did – in a manner in which he had not previously been obliged to vote and at the request of the defendant (see [6.100] below).

Consideration may be a benefit to the promisor or a detriment to the promisee

[6.100] As the note to Bolton v Madden ([6.90] above) indicates, consideration may take the form of either: (a)

a benefit to the promisor; or

(b)

a detriment to the promisee incurred at the promisor’s request.

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Chapter 6 Consideration [6.120]

In both cases, however, there must be a clear connection between the promise and either the benefit or the detriment – in the sense that the benefit must have been conferred, or the detriment suffered, because of and in response to the promise. What constitutes a “benefit” is relatively self-explanatory. A promisor who obtains a benefit from the promisee in exchange for his or her promise has clearly received a price for the promise and he or she will be held to it. Occasionally, however, particularly with unilateral contracts, the promisor obtains no specific benefit but the promisee is put out or otherwise suffers some form of detriment in reliance on the promise. In such cases, the detriment incurred by the promisee (found in the act or forbearance performed at the promisor’s request) is good consideration. The promisee has done something that he or she was not otherwise obliged to do and only did it because of the promisor’s request. See, for example: Hamer v Sidway 124 NY 538, 27 NE 256 (1891) [6.110] Facts: William Story promised to pay his nephew $5000 if he refrained

from drinking, smoking, swearing and gambling until he was 21. He did – but the money was still owing when the uncle died and the uncle’s executor refused to pay him. Held: The nephew was contractually entitled to the money. His forbearance was good consideration and, although his uncle received no direct benefit from it, it was sufficient to make his promise enforceable.

[6.120] Examples of the way in which benefit and detriment are both regarded as consideration can be found in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. In that case, one of the arguments the company put forward was that Mrs Carlill had not provided consideration for its promise of the reward. It might be suggested that in buying the smoke ball (that is, paying the price), Mrs Carlill had provided consideration. However, it is equally open to argue that the price of the smoke ball was merely the consideration for the sale and not consideration for the promise of the reward as well. In fact, the court itself did not push the argument that the purchase price constituted consideration for that further promise. Instead, it investigated the circumstances surrounding the transaction in the light of advantage and detriment. Lindley LJ said that there was a possible advantage to the company if it could engender confidence in the public in the use of its product. But, he went on, Mrs Carlill had clearly put herself to some inconvenience at the company’s request. She had purposely and religiously used the smoke ball three times daily over a period of two weeks according to the printed directions and she had done so at the request of the company. This, said Lindley, was enough to constitute good consideration.

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[6.130] Corporations and Contract Law

Consideration may be executed, executory, but not past

[6.130] Consideration is said to be “executory” if the act or forbearance has still to occur. For example, if two people were to agree that one would mow the other’s lawn and that the other would pay for the mowing, the consideration on both sides would be executory; both parties would still have to perform the promised acts. Once the act that constitutes the consideration has been performed, the consideration is said to be “executed”. The party has done what was promised. “Past” consideration occurs where the act or forbearance pre-dates the promise. There can be a problem distinguishing between “executed” and “past” consideration and it is compounded because the former is good consideration, while the latter is not. To put the problem in context, the basic concept of consideration as “the price paid for the promisor’s promise” must be considered. If consideration is the price paid for the promisor’s promise, then the act or forbearance alleged to constitute that consideration must occur in response to the promise. Accordingly, the promise must have been in existence and must have been communicated to the promisee before any act or forbearance supposedly constituting consideration could occur. In other words, if what is done is not done as a reaction to the promise, it cannot be good consideration. If it pre-dates the promise, it is “past” consideration and “past” consideration is not good consideration. See, for instance: Eastwood v Kenyon (1840) 11 Ad & El 438; 113 ER 482 [6.140] Facts: When Sutcliffe died, his infant daughter Sarah was left as his sole

heir. Her guardian, Eastwood, spent considerable sums of his own money on Sarah’s education and for the maintenance and benefit of her estate during his guardianship. When Sarah came of age she promised to reimburse him. She later married the defendant Kenyon, and he made similar promises. However, after the marriage – when Sarah’s estate had vested in him – Kenyon reneged. Eastwood sued. Held: Eastwood had not provided consideration for Kenyon’s promises to reimburse him. The only possible consideration – the payments made for her education and for the upkeep of the estate – were things he had done before Kenyon made those promises. Therefore, they were past consideration and could not support the promises which, accordingly, were gratuitous; they gave rise to a mere moral obligation, which was not enforceable at law.

Consideration must be something of value

[6.150] For something to be good consideration it must have a value in the eyes of the law. This concept is sometimes expressed as “consideration needs to be sufficient but it need not be adequate”. What this means is that the consideration the promisee provides need not necessarily be equal in value to the promisor’s promise. It must, however, have a value.

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Chapter 6 Consideration [6.170]

The reason that consideration need only be sufficient and not adequate can be found in the court’s attitude to contracts generally. Contracts are seen as agreements freely entered into by parties. Should the parties, or one of them, decide to transfer an item of property or a benefit in consideration of a sum less than what might be regarded as its true value, that is that party’s business. What is received will be sufficient because it is what he or she asked for – provided, of course, it has some actual value. The concept of value in such cases is critical because, going back to our basic definition of consideration, it must be either a benefit to the promisor or a detriment to the promisee incurred at the promisor’s request. Usually, unless the item has some intrinsic value, it can be neither a benefit nor a detriment. In other words, to be sufficient the consideration must be real – a real benefit or a real detriment – and it is immaterial whether that benefit or detriment is of the same value as whatever the promisee receives in exchange. (However, if there is a substantial discrepancy in the adequacy of the consideration, there may be some doubt about whether the parties really intended their dealings to be legally binding: see, for example, GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd [1987] NSW Conv R 55-324 and Kirby P’s judgment in Woolworths v Kelly (1991) 22 NSWLR 189 at 193.)

Consideration must be distinguished from motive

[6.160] Motive and consideration are quite different. With consideration the promisor gets something in return for the promise; with motive that is not the case. In consideration terms, why the offeror makes the offer is immaterial; the motive behind the offer neither confers a benefit on the promisor nor imposes a detriment on the promisee. As a result, motive cannot be consideration. Care must be exercised in this area. Clearly, the offeror will always have a motive for making the offer. On occasion, that motive will be a desire to get the reciprocal act or obligation asked of the promisee. In that case, the promisee’s reciprocal act or obligation will constitute good consideration. As Chitty put it (Chitty on Contracts, 27th ed, 1994, p 1701): The consideration for a promise is (unless the consideration is nominal or invented) always a motive for promising; but a motive for making a promise is not necessarily consideration for it in law.

As an example of the difference between motive and consideration, see: Thomas v Thomas (1842) 2 QB 851; 114 ER 330

[6.170] Facts: When Mr Thomas died, the matrimonial home was in his name. He had verbally expressed a desire that his wife be permitted to remain in the house after his death and his executors, relying on that desire, agreed to her continued possession. Their permission was stated to be in consideration of the husband’s expressed wish, but they also required the wife to pay a nominal

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[6.170] Corporations and Contract Law cont. ground rent of £1 per annum and to undertake to keep the premises in good repair. The executors later refused to sign the deed formalising the arrangement. The wife sued.

Held: She succeeded. Whereas the executors’ motive (to carry out her husband’s last wishes) could not be consideration, her promise to pay £1 per annum in rent could be, and that was enough to make the agreement enforceable. That promise was valuable, it was sufficient and, needing only to be sufficient, it made the agreement binding. As Patteson J said (at 859; 333–34): Motive is not the same thing with consideration. Consideration means something which is of some value in the eye of the law, moving from the plaintiff … a pious respect for the wishes of the testator, does not in any way move from the plaintiff; it moves from the testator.

[6.180] Further examples of the distinction between motive and consideration can be seen in two other early cases, White v Bluett (1853) 23 LJ Ex 36 and Dunton v Dunton (1892) 18 VLR 114, below. White v Bluett (1853) 23 LJ Ex 36 [6.190] Facts: The defendant had borrowed money from his father. When his father died the debt was still outstanding and the executors sued. The son alleged that his father had promised to forgive him the debt and to discharge him from further liability in consideration of his promise to stop complaining that his brothers had received preferential treatment.

Held: The son had no legal right to complain in the first place. That is, in not complaining, he had suffered no legal detriment. The agreement, therefore, was wholly attributable to the father’s desire not to suffer further annoyance (his motive) and it was unenforceable.

Dunton v Dunton (1892) 18 VLR 114 [6.200] Facts: Mr Dunton agreed to pay his ex-wife a monthly sum provided

she “conduct herself with sobriety, and in a respectable, orderly and virtuous manner”. He later reneged on the promise and his ex-wife sued.

Held: She succeeded. While Mr Dunton’s motive in offering the payment, his desire that she conduct herself so as not to bring discredit on their five young children, could not be good consideration, Mrs Dunton’s promised forbearance was. She had a perfect legal right to act in a disorderly manner, to drink and to behave as she pleased within the limits of public decency. Giving up these rights constituted a detriment and thus was sufficient consideration to support the promise.

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Chapter 6 Consideration [6.210]

Forbearance as consideration

[6.210] Forbearance (deliberately not doing something or not exercising some right, usually at the request of another) can constitute good consideration. As in Dunton v Dunton (1892) 18 VLR 114, the consideration alleged need not be an act or a thing, it may simply be a promise not to do something that the promisee was entitled to do. Not exercising a present right, at the request of the promisor, can be good and sufficient consideration. A particular form of forbearance that is often advanced as good consideration is “forbearance to sue”. This occurs where one party has either commenced proceedings or is threatening to commence proceedings for an alleged violation of a right. If the other party asks that the action not be instituted or, if already commenced, that it be terminated in exchange for some payment, the question arises: “Does a promise not to institute, or to terminate, an action constitute good consideration?” Working from the concept of value (some benefit to the promisor or some detriment to the promisee incurred at the promisor’s request), it could be good consideration. There is at least a potential benefit to the promisor in not having the action proceed, particularly if it is likely to succeed. There is also a clear detriment to the promisee in giving up an action that he or she could possibly win. Therefore, forbearance to sue can constitute good consideration if the proposed action was one that the plaintiff could have won or, at least, which he or she honestly believed he or she could have won. See, for example, Butler v Fairclough (1917) 23 CLR 78 where Isaacs J noted at 96: A promise not to sue at all, that is, an abandonment of a substantive claim, is a valuable consideration, if there be either liability of a bona fide belief of liability.

On the other hand, if there is no such belief then, in giving up the action, the promisee has not really given up anything at all and the forbearance will not be good consideration. Therefore, for forbearance to sue to be good and sufficient consideration, the promisee must show that: (a)

the claim on which the action was based was reasonable (that is, not vexatious or frivolous);

(b)

he or she genuinely and honestly believed there was a good chance of success; and

(c)

he or she had not concealed from the defendant any fact that could affect the validity of the claim.

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CHAPTER 7

Contents of a contract 7.1 Determining the terms of a contract ....................................................... [7.10] Defining the problem ................................................................................. [7.10] Written contracts and the parol evidence rule ......................................... [7.20] The parol evidence rule and “entire agreement clauses” ....................... [7.40] Exceptions to the parol evidence rule ...................................................... [7.50] Partly written, partly oral contracts ........................................................... [7.60] Terms implied through trade usage or custom ...................................... [7.100] Suspension of operation ......................................................................... [7.130] Invalidity ................................................................................................... [7.150] Rectification ............................................................................................. [7.160] Ambiguity or uncertainty ......................................................................... [7.190] 7.2 Representation versus term of the contract ......................................... [7.220] General .................................................................................................... [7.220] Contractual intention as the test ............................................................ [7.230] Time ......................................................................................................... [7.260] Reduction into writing .............................................................................. [7.290] Reliance on special knowledge or skill .................................................. [7.300] Importance in the minds of the parties .................................................. [7.330] 7.3 An alternative – collateral contracts ...................................................... [7.390] Defining a collateral contract .................................................................. [7.390] Proving the existence of a collateral contract ........................................ [7.410] Agreement ............................................................................................... [7.420] Consideration ........................................................................................... [7.440] Intention ................................................................................................... [7.480] The promise must be consistent with the main contract ...................... [7.500] The effect of breach of a collateral contract .......................................... [7.530] The effect of the Competition and Consumer Act 2010 (Cth) .............. [7.540] 109

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7.4 The classification of terms ..................................................................... [7.570] General .................................................................................................... [7.570] Conditions ................................................................................................ [7.580] Warranties ................................................................................................ [7.600] Intermediate (or innominate) terms ........................................................ [7.620] Stipulation by the parties is not final ...................................................... [7.660] Conditions precedent and subsequent ................................................... [7.670] 7.5 Implied terms .......................................................................................... [7.680] Defining implied terms ............................................................................ [7.680] Terms implied by custom ........................................................................ [7.690] Terms implied at law ............................................................................... [7.720] Terms implied in fact (terms implied by the court) ................................ [7.730] 7.6 The notice required ................................................................................ [7.780] The effect of signature ............................................................................ [7.780] Exceptions to the rule ............................................................................. [7.820] Apparently non-contractual documents .................................................. [7.830] Misrepresentation .................................................................................... [7.860] Non est factum ........................................................................................ [7.880] The effect of a prior course of dealing .................................................. [7.920] 7.7 Limiting the scope of exemption clauses .............................................. [7.980] The courts’ general attitude .................................................................... [7.980] Exemption clauses are strictly construed ............................................... [7.990] The contra proferentem rule ................................................................. [7.1020] 7.8 Does the exemption clause excuse the breach? ............................... [7.1050] Fundamental breach – the underlying concept ................................... [7.1050] Fundamental breach and exemption clauses ...................................... [7.1080] The problem with this view of fundamental breach ............................ [7.1090] The Australian position .......................................................................... [7.1110] The current view – it is all a question of construction ........................ [7.1120] 7.9 Excluding versus limiting terms ........................................................... [7.1150] Is there a distinction? ............................................................................ [7.1150]

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Extracts from Graw, An Introduction to the Law of Contract, Chs 9 & 10.

7.1 DETERMINING THE TERMS OF A CONTRACT Defining the problem

[7.10] As already seen (at [2.10]), the law of contract is unique in that the parties themselves generally create the obligations and liabilities that form the substance of their relationship. The courts intervene only to enforce what has already been agreed and then only if there is a breach. These individually agreed obligations and liabilities are called “terms of the contract”. In determining whether something has become a term of the contract, whether it has been breached and, if so, what remedies might be appropriate, the courts do essentially four things: (a)

they ascertain what the parties actually said and agreed;

(b)

they determine whether they intended those statements to be contractually binding;

(c)

they determine the level of importance the parties intended to attach to those statements; and

(d)

they provide an appropriate and adequate remedy in the event of any breach.

Of these, the first two pose distinct practical problems that may not appear obvious at first glance. First, especially where the contract was not completely reduced to writing (or clearly articulated orally), the courts may have to determine what terms the parties intended to include by inferring them from what the parties said and did before their alleged agreement: see, for example, Regreen Asset Holdings Pty Ltd v Castricum Bros Australia Pty Ltd [2015] VSCA 286 at [73]–[74] (their subsequent conduct will not normally be taken into account in construing intent – for the simple reason that it may not reflect what they intended at the point of agreement, the point at which that must be determined: see Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at [35]). Secondly, the individual versions of what was said and what was intended will also quite often differ, and the courts then have to determine which party to believe. With written documents, it might be thought that the problem of what the parties intended would disappear, but that is not the case. They can argue that the written document does not constitute the whole agreement, that one of them orally agreed that he or she would not rely on the written document, that the written document misrepresents what was truly agreed, that it was orally agreed that the operation of the written document would be deferred until something happened, or that the document is somehow ambiguous. 111

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The court before which the dispute comes must, of course, consider all of these arguments but, at the end of the day, it must decide whether a particular statement has or has not become a term of the contract and whether it is, therefore, enforceable. The crucial test is “contractual intention” and, to help determine contractual intention,

the courts have developed a number of “rules” (see 7.2 below). These help determine, as objectively as possible, what the parties must have intended. With written contracts, the problem can also be significantly reduced by applying what is called “the parol evidence rule”. It can also be reduced if the parties have included an “entire agreement clause” in their contract.

Written contracts and the parol evidence rule

[7.20] The parol evidence rule was formulated in Goss v Lord Nugent (1833) 5 B & Ad 58; 110 ER 713 at 64–5 (B & Ad), 716 (ER) and it was concisely stated by Innes J in Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 at 262, where he said: [W]here a contract is reduced into writing, where the contract appears in the writing to be entire, it is presumed that the writing contains all the terms of it and evidence will not be admitted of any previous or contemporaneous agreement which would have the effect of adding to or varying it in any way.

What this means is that when the courts have to determine what the terms of a written contract are, they will normally only look at what is stated in the document. They assume that if the parties have taken the trouble to reduce their agreement to writing then, generally, they must have intended it to contain everything they agreed and to supersede anything else, including anything else that might have been said in the course of their negotiations. The importance of the written document was underscored in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 where the High Court noted (at 483–84): Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement … The obligations of written agreements cannot simply be ignored or brushed aside.

The operation of the parol evidence rule is not confined to evidence of inconsistent oral “agreements” that might add to, vary or contradict the written document. Evidence of such “agreements” may not be introduced for that purpose but, for the same reasons, previous drafts of the written document, copies of preliminary agreements and any letters or memoranda involved in the negotiations leading up to that written agreement are also excluded. The word “parol” in the context of the rule, therefore, simply means any extrinsic evidence. For an illustration of the strict application of the parol evidence rule, see: Henderson v Arthur [1907] KB 10 [7.30] Facts: The plaintiff leased the defendant a theatre. The lease provided for an annual cash rent of £2500, payable quarterly in advance. When the lessor sued to recover a quarter’s rent that was allegedly unpaid, the defendant tried to

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Chapter 7 Contents of a contract [7.40] cont. introduce evidence of a prior oral agreement that the lessor would accept payment via a post-dated bill of exchange rather than in cash. The defendant’s argument was that he had tendered such a bill of exchange in payment of the rent sued for, that the plaintiff had wrongfully refused to take it and that, as a result, the plaintiff had no cause of action. The plaintiff argued that evidence of the antecedent agreement was inadmissible.

Held: The lessee was not permitted to give evidence of the previous oral agreement. It contradicted the express terms of the written lease and the later, written expression of intention had to be preferred. As Collins MR said (at 12): Assuming that there was in fact such an agreement, the question is whether it is legally available for the purpose of defeating the claim of the lessor on the covenant. It seems to me that to admit evidence of such an agreement as being so available would be to violate one of the first principles of the law of evidence; because, in my opinion, it would be to substitute the terms of an antecedent parol agreement for the terms of a subsequent formal contract under seal dealing with the same subject matter. I do not see how, in this case, the covenant in the lease and the antecedent parol agreement can co-exist, and the subsequent deed has the effect of wiping out any previous agreement dealing with the same subject matter.

The parol evidence rule and “entire agreement clauses”

[7.40] An “entire agreement clause” is a clause that the parties insert into their contract – ostensibly to avoid any subsequent dispute about what they agreed. The wording may differ, but the clauses all invariably make it clear that what the parties intended was that their “entire agreement” is what they set down in their written document – and nothing more. Some go on to reinforce that basic statement by also providing that the written contract supersedes and overrides anything else that might have been discussed during negotiations, and that matters not included in the written document cannot be the basis for any claim. For example, in Nemeth v Bayswater Road Pty Ltd ([7.90]) the agreement contained a clause which read: “all the terms … are contained in this written agreement and … no representation, warranty, covenant or other matter or thing whatsoever not specifically contained herein shall have any force or effect, or be of any validity whatsoever”. As a result, an alleged oral promise that had not been included in the written document was held not to be enforceable. So, to some extent, entire agreement clauses perform much the same function as the parol evidence rule (in fact, in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [440] they were referred to as “the epitome of the operation of the parol evidence rule”). Both seek to give written contracts a degree of finality and both are intended to prevent the courts having to engage in, as Kirby P put it in State Rail Authority of New South Wales v Heath Outdoors Pty Ltd (1986) 7 NSWLR 170 at 177, “a minute examination of the wilderness of pre-contract conversations”. Each 113

[7.40] Corporations and Contract Law

recognises that the parties can discuss many things during negotiations but that they may not intend everything they discuss to become part of what they ultimately agree. That is, they may not intend all of those things to become terms of their eventual contract. Clearly, then, if there is a contract that has been reduced to writing, that appears to be entire and that also includes an “entire agreement clause” (particularly when the contract was purpose written for that particular dealing and is not just a standard form agreement with the blanks filled in), it is very likely that the courts will ignore – and refuse to enforce – anything not specifically included in it (though the inclusion of an entire agreement clause does not necessarily preclude terms being implied into a contract to give it business efficacy – see [7.770]).

Exceptions to the parol evidence rule

[7.50] The parol evidence rule (whether or not it is reinforced by an “entire agreement clause”) is clearly justifiable on the basis that, if the parties go to the trouble of writing their agreement down, the resulting document will probably be an accurate record of everything that was actually agreed. However, that need not always be the case and, if the parties clearly intended their agreement to be affected by other unwritten factors, the parol evidence rule must bend to admit that possibility. As Isaacs J put it in Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 at 143, the parol evidence rule applies “unless it can be shown that the document was not intended as the complete record of their bargain” (emphasis added).

McHugh JA took the matter even further in State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, saying (at 191) that: … in my opinion the correct rule is that the existence of writing which appears to represent a written contract between the parties is no more than an evidentiary foundation for a conclusion that their agreement is wholly in writing.

(See also, Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [280] and [293].) Consequently, before the courts apply the parol evidence rule to exclude particular evidence, they look closely at what was in fact said and done during negotiations to determine, objectively, what the parties really intended. From the cases there are at least six situations in which the parol evidence rule will not be strictly applied. They are: (a)

partly written, partly oral contracts;

(b)

contracts that are impliedly subject to some trade usage or custom;

(c)

contracts the operation of which is suspended by oral agreement;

(d)

invalid contracts;

(e)

where some mistake has been made in reducing the agreement to writing; and

(f)

where parol evidence is required to resolve some ambiguity or uncertainty.

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Partly written, partly oral contracts

[7.60] If one party asserts that the written agreement is not the whole agreement and that other (usually oral) terms were also intended, extrinsic evidence may be adduced to show: (a)

that the agreement is, in fact, partly written and partly oral; and (if that can be proved)

(b)

the nature and intended effect of the oral terms.

This exception may seem to negate the entire effect of the parol evidence rule but, in practice, it does not. The courts will only allow this exception where it is or should have been clear to all parties that the written document was not intended to be the whole agreement. This will often be the case where the parties’ agreement is simply contained in a standard printed form with the blanks filled in. In such cases the standard clauses may not exactly cover everything that was agreed and, if that is the case, the courts are more willing to treat the writing as an incomplete memorandum of the agreement and to admit evidence that other terms were also intended. For example, see: Van den Esschert v Chappell [1960] WAR 114 [7.70] Facts: Just before signing a contract to buy a house, the purchaser asked

the seller whether it was affected by white ants. The seller assured her that there were no white ants and the purchaser signed. Several months later she discovered white ants and had to pay £60 10s to have them destroyed and the affected timbers repaired. She sued the seller for the costs of eradication and repair.

Held: The seller’s verbal assurance that there were no white ants was a term of the contract even though it was not mentioned in the written document. Accordingly, its falsity constituted an actionable breach and the purchaser could recover damages. As Wolf CJ said (at 116): I would think that on the purchase of a house in this country an inquiry regarding the presence of white ants was most important: when (as in this case) the purchaser immediately before signing a contract makes a specific request to be informed about the matter and gets an affirmative answer such as the purchaser got in this case, it was intended to be made a part and parcel of the contract and was to be regarded as a term.

[7.80] However, where the parties’ contract is purpose-written, there is less scope to argue that the written document does not accurately record the entire agreement. The courts effectively ask themselves: “If the document did not contain the whole agreement, why did the parties sign it without amendment?” See: Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 [7.90] Facts: The parties contracted for the hire of an aircraft and recorded the

details of their agreement in an especially prepared written document. It also contained a specific acknowledgment that “all the terms … are contained in this

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[7.90] Corporations and Contract Law cont. written agreement”. The plaintiff later sued for additional hire charges that, it alleged, were due under an oral agreement entered into before the written contract was executed. Held: The plaintiff failed. The agreement was not partly written, partly oral – the written document contained all the terms of the contract and evidence of any other alleged “agreement or term” was inadmissible.

Terms implied through trade usage or custom

[7.100] Where the contract is impliedly made subject to some well-known trade usage or custom, the parol evidence rule cannot be used to exclude extrinsic evidence of that trade usage or custom. The matter will be dealt with in detail under implied terms (see 7.5 below). For the present, an illustration of the manner in which this exception operates will suffice. See: Hutton v Warren (1836) 1 M & W 466; 150 ER 517 [7.110] Facts: The plaintiff, a tenant who had been given notice to quit his

leased farm, claimed that there was a local custom that, if a tenant farmer had to quit his tenancy, he was entitled to receive a rebate or allowance from the landlord for both the seed he had used and his labour on the land in the last year of the tenancy. This right, he said, arose and subsisted even though there was no express mention of it in the written lease.

Held: The tenant’s action succeeded. His contract with the landlord had to be read in the light of the established custom and, following that custom, he had a contractual right to recover fair recompense for seed and labour.

[7.120] The same principle also applies to allow parol evidence to be admitted to establish the existence of any term that might be implied into a contract in any other way. So, for example, in Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59, oral evidence of statements that the parties had made during their negotiations was permitted to show that the buyers of goods had, in fact, made their purpose known, and had done so in circumstances showing that they were relying on the sellers’ skill or judgment. That was because that was the only way they could prove that the statutorily implied condition of “fitness for purpose” in s 14 of the Sale of Goods Act 1893 (UK) had become part of their contract.

Suspension of operation

[7.130] Where the operation of a contract evidenced in writing is orally made subject to the occurrence of some named event or to the continuation of some specific state of affairs, extrinsic evidence may be adduced to show that the contract has not

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yet come into operation or that it has ceased to operate. This exception is allowed because the extrinsic evidence does not “vary, add to or contradict” the written agreement. See, for example: Pym v Campbell (1856) 6 El & Bl 370; 119 ER 903 [7.140] Facts: Pym negotiated to sell Campbell and others an interest in his

invention (a crushing, washing and amalgamating machine). They agreed that Pym would explain the machine’s operation to two engineers and, if they approved, the defendants would buy the interest. A meeting was arranged and at the appointed time the defendants and their engineers were present but Pym was not. When Pym did arrive, only one of the engineers could be found and he approved of the machine. The parties then drew up and signed an agreement, which was to become the contract if the other engineer also approved. If he did not, the agreement was to be of no force and effect. He did not approve and the defendants contended that they were not bound. Pym argued that the written contract was enforceable and that oral evidence could not be adduced to show otherwise. Held: In the circumstances, that oral evidence was admissible. It did not vary, add to or contradict the written agreement. It merely showed that the writing was not intended to have any force and effect unless and until the second engineer approved the invention. As Lord Campbell CJ said (at 375; 905): No addition to or variation from the terms of a written contract can be made by parol: but in this case the defence was that there never was any agreement entered into. Evidence to that effect was admissible; and the evidence given in this case was overwhelming.

Invalidity

[7.150] Extrinsic evidence may be adduced to show that the contract is, or has become, invalid. This is because that evidence is not as to the contents of the contract but as to some defect in the manner in which it came into being. Evidence of matters not appearing on the face of the written document will be permitted to prove any alleged invalidity. Therefore, the courts can admit extrinsic evidence to show, for instance, that the contract was entered into because of duress, undue influence, incapacity, mistake or misrepresentation. It can also be used to show that consideration was not paid or that the contract has been frustrated (see, in particular, Chapters 11–15).

Rectification

[7.160] Where, because of a mistake, the written contract inaccurately records what the parties actually agreed (their continuing common intention), either of them may seek an order for rectification (that is, an order that the written document be amended so that it does represent what they agreed). There must, however, have been a mistake

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in reducing the agreement to writing; without that, rectification cannot be ordered: Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 at [39]–[40]. If rectification can be ordered, then, extrinsic evidence is not only allowable but necessary to show that there was a prior agreement and that a mistake was made in reducing it to writing. See, for example: MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 [7.170] Facts: The parties entered into a contract to buy and sell a home unit

“off the plan”. The floor plan formed part of the contract and showed that the unit was located on the northern side of the proposed building. The unit was actually located on the southern side. The vendor sought rectification of the contract, to make it reflect what it said was the parties’ “continuing common intention” to buy and sell the southern facing unit. The appellants, who wanted their deposit back, argued that parol evidence of that alleged “continuing common intention” could not be used to prove that a mistake had been made in writing up the contract, or to justify rectifying that “mistake”.

Held: The remedy of rectification operates outside the contract and despite the parol evidence rule. Therefore, the vendor could use other evidence to show that the unit designated on the floor plan was not the one the parties had intended to buy and sell – and the courts could rely on that parol evidence to rectify the contract.

[7.180] The same reasoning can be seen in Chow v Harris [2010] FamCA 366 where the parties had, by mistake, omitted to include a default interest rate in a Schedule to their loan agreement. It was held that the agreement could be rectified to include a 15.5% default interest rate, compounding annually, because that was what the parties had clearly intended. As O’Reilly J noted (at [36]): Put shortly the parol evidence rule does not apply in rectification cases the gist of which is that a written agreement whilst intending to record what the parties agreed or intended has failed to reflect that and failed thus to record their common intention such that oral evidence, necessarily, is admissible as to what the parties actually agreed or as to what was their common intention.

[7.185] met:

Rectification is not readily ordered and the following conditions must be

(a)

the parties must have reached a complete agreement that was then reduced to writing;

(b)

because of a mistake, the document supposedly evidencing that agreement must contain an error or omission;

(c)

there must be “clear and convincing” proof of what the parties did intend (hence the need for the parol evidence rule not to apply);

(d)

the proposed amendment must be capable of expression in clear, concise terms; and

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(e)

no third party must have acquired an interest in the subject matter of the contract which would be adversely affected by the rectification.

Rectification, as an exception to the parol evidence rule, must also be contrasted with implying terms into a contract for that purpose. When parol evidence is admitted to allow a court to rectify a contract, it is admitted so the court can give effect to what the parties actually agreed. When parol evidence is admitted to imply a term into a contract, it is allowed so the court can give effect to the parties’ presumed intention (ie what they would have agreed, if they had thought about it). See Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 346.

Ambiguity or uncertainty

[7.190] If the courts cannot determine with any certainty what the parties’ really intended, because their written contract is either ambiguous or uncertain, parol evidence of the circumstances surrounding the agreement (obtained, for example, through verbal testimony, copies of preliminary agreements, any lead-up correspondence, etc) has always been admitted to resolve the ambiguity or uncertainty and to allow the courts to determine what the parties really intended. This is especially so where extrinsic evidence is needed to identify the contract’s subject matter. See, for example: Akot Pty Ltd v Rathmines Investments Pty Ltd [1984] 1 Qd R 302 [7.200] Facts: The parties contracted to buy and sell “unit 115” on the fifth floor of a proposed apartment building. The floor plan attached to the contract showed five units on that floor but did not identify them by number. It was, however, clearly possible to determine which unit the parties had agreed on by referring to the brochure the buyer had been given and to supporting affidavit evidence by the agent who had accompanied him when he selected it.

Held: In the circumstances the brochure and affidavit evidence was admissible to identify the unit that was the subject of the contract.

[7.210] The same principle has also been applied to establish who the intended parties to the contract were, or the capacity in which they entered into the contract, where that is not clear from the written document. So, for example, in Abram v AV Jennings (2002) 84 SASR 363, extrinsic evidence of the circumstances surrounding a building agreement, in which Abram’s signature appeared above the word “Director”, was permitted to show that the contract was not merely between AV Jennings and Abram’s company but that Abram himself was an intended party and he had not signed merely as the company’s representative. It has also been used to allow courts to access extrinsic evidence to interpret individual provisions in an agreement and, thereby, to resolve any ambiguity. Therefore, in Morton v Elgin-Stuczynski (2008) 19 VR 294, evidence of the circumstances surrounding a loan was permitted to clarify whether the parties had intended the agreed interest to be “simple” or “compound”. 119

[7.210] Corporations and Contract Law

Similarly, in Queensland Power Co Ltd v Downer EDI Mining Pty Ltd [2010] 1 Qd R 180 it was held that, while earlier drafts of a final agreement are not admissible as an aid to its overall construction, the courts can use them to determine what the parties had intended a particular word or phrase to mean – provided it is clear that there was common agreement on that meaning and that it carried through to the final agreement. Mason J explained how the principle operates in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 – in words subsequently approved by the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 – saying: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

This “true rule” might seem to mean that if, on its face, the contract does not appear ambiguous it will be interpreted and enforced on its literal meaning, and extrinsic evidence will not be permitted to contradict that literal meaning. That was the view that RD Nicholson J took in BP Australia Pty Ltd v Nyran Pty Ltd (2003) 198 ALR 442, but it was subsequently doubted – as a result of the High Court’s decision in Pacific Carriers Ltd v BNP Paribus (2004) 218 CLR 451 ([7.240] below). In that case the High Court confirmed that contracts must always be construed objectively – by looking not only at the text of the agreement but also at the surrounding circumstances and the purpose and object of the transaction. Following that reasoning, Finn J held in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 at [78] that evidence of surrounding circumstances can be admitted to determine the parties’ true objective intention, even where the contract is not overtly ambiguous. That finding was subsequently unanimously affirmed by the Full Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at [45], [122] and [238] – and also applied in a number of other decisions in other courts (including Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [17] et seq and MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 at [195]–[204]). In 2011 however, in dismissing a special leave application in Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1, three members of the High Court held (at [3]) that this view was inconsistent with the “true rule” in Codelfa and that courts still had to follow that rule until it was considered and either disapproved or revised by the High Court. Three years later, when the High Court handed down its decision in Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640, confirming that terms must be construed taking into account “the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to 120

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be secured by the contract” (see [7.250] below), it was thought that, even though it had not expressly considered the question of ambiguity, its acceptance that matters other than the strict words of the contract could be taken into account meant that it had impliedly disapproved the “true rule” from Codelfa. That, at least, was the view that was taken in Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; 310 ALR 113 at [69]–[86] and Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] SASC 84, where Blue J noted at [203]: In light of the recent decision of the High Court, I consider that ambiguity is not a pre-requisite to the admission of evidence of surrounding circumstances in existence at the time of the contract known to both parties.

It was however rejected in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 263, where the Western Australian Court of Appeal refused to accept that Electricity Generation Corp v Woodside Energy Ltd had, in fact, had that effect and simply noted at [45]: Until the High Court expressly states its position on the subject, [we] propose to continue to apply the “true rule”.

Which view will ultimately be accepted is unclear. In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104, the High Court expressly refused to consider whether ambiguities must be found on the face of the contract or whether (more expansively) they can be identified through evidence of external matters. That was because, as Kiefel and Keane JJ noted at [113], the question “[did] not arise in this case and the issue … has not been the subject of submissions before this Court” (see also French CJ, Nettle and Gordon JJ at [52] and Bell and Gageler JJ at [118]). All members of the Court did however note, in relation to the decision in Western Export Services Inc v Jireh International Pty Ltd, that “statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no-one” (at [52], [112] and [119]). The net result therefore, unfortunately, is that whether extrinsic evidence is admissible to resolve both overt ambiguities and latent ambiguities (where a meaning which might seem clear on the face of the contract is shown to be ambiguous when all the surrounding circumstances are also taken into account) remains unclear. Consequently, as Bell and Gageler JJ noted at [119]: Until that question is squarely raised in and determined by this Court, the question remains for other Australian courts to determine on the basis that Codelfa Construction Pty Ltd v State Rail Authority (NSW) remains binding authority.

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7.2 REPRESENTATION VERSUS TERM OF THE CONTRACT General

[7.220] As already seen, it is likely that, during negotiations, both parties will do or say things that are intended to influence the other party’s decision about whether to contract. Those things can be in written or spoken form (or may even be in both), but it does not necessarily follow that they will all become part of the resulting contractual obligation. Some (called “mere representations” or “non-contractual representations”) have no contractual significance at all and, unless they are materially misleading (giving rise to an actionable misrepresentation – see Chapter 8), they confer no rights on the party to whom they are addressed. The reasoning behind this rule is that if the parties had intended those statements to be binding, they could have made them binding by a clear stipulation to that effect. Determining whether something said in the course of negotiations is or has become a term of the contract is not always easy and it always depends on the question of contractual intention.

Contractual intention as the test

[7.230] Whether something said or done in the course of negotiations is or has become a term of the contract depends on whether the parties intended it to be or to become a term. The test of intention is objective: that is, would a reasonable person in the position of the parties have understood from the parties’ words and behaviour that that thing (usually a statement) would become an enforceable obligation on acceptance? See Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 61–2 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179. See also: Pacific Carriers Ltd v BNP Paribus (2004) 218 CLR 451 [7.240] Facts: NEAT sold a cargo of legumes to Royal Trading, shipping it on a

vessel operated by Pacific Carriers. When the vessel arrived in India, Royal Trading could not produce the bills of lading (the documents of title to the goods) so Pacific Carriers refused to deliver them. To persuade it to do so, NEAT then arranged for two letters of indemnity which its bank, BNP Paribus, co-signed. Relying on those letters Pacific Carriers allowed unloading to commence. It subsequently suffered loss because it allowed the cargo to be delivered without the bills of lading and, because NEAT was then insolvent, it sued BNP Paribus as a “joint indemnifier”. The bank argued that it had signed the documents merely to verify NEAT’s signature and that it had never intended to assume liability.

Held: BNP Paribus was liable. The meaning of the documents had to be determined objectively, looking not only at the letters but at all of the surrounding

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Chapter 7 Contents of a contract [7.250] cont. facts and circumstances. Here, even though BNP’s officer may have thought that she was merely verifying NEAT’s signature on the letters, that limitation had never been communicated either to NEAT or, more importantly, to Pacific Carriers. Nor would it have been obvious to a reasonable person in Pacific Carrier’s position, especially as it had already rejected one letter of indemnity signed by another bank because that other bank had expressly disclaimed any liability and had signed merely to confirm the purchaser’s signature. As the court put it (at [22] and [25]): The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. … [Here] the commercial purpose was plain. Pacific was being requested by NEAT to take a risk by delivering cargo to receivers who could not produce the appropriate bills of lading. Pacific informed NEAT, and NEAT informed BNP, that Pacific would not agree to take that risk unless NEAT’s bank also signed the document. … A reasonable reader in the position of Pacific … would have understood that the bank was undertaking liability as an indemnifying party to support the liability undertaken by NEAT.

[7.250] The decision in Pacific Carriers Ltd v BNP Paribus (2004) 218 CLR 451 is also a good illustration of the courts’ general view that commercial contracts should be given a businesslike interpretation – and that the language the parties used, the circumstances in which the contract arose and the commercial purpose or objects it was intended to achieve should all be taken into account when determining what the parties intended their agreement to mean. See also IATA v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at [47] and [52]; and Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25 – where the High Court noted (at [35]): The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. … it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating” (quoting from Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 350). … [U]nless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result” (quoting from Re Golden Key Ltd [2009] EWCA Civ 636 [28]). A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience” (quoting from Zhu v Treasurer (NSW) (2004) 218 CLR 530 [82]).

When making the required objective determination, the parties’ contractual intention will sometimes be manifestly obvious; on other occasions it will not. To provide for 123

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those other occasions, the courts have developed a number of “subrules” to assist in determining that intention. Those subrules are: 1.

How close in time to the completed contract was the statement made?

2.

Was the statement followed by a reduction of the terms to writing and, if so, was the statement included?

3.

Did one party have special knowledge or skill on which the other was entitled to rely?

4.

How important was the statement in the minds of the parties?

Time

[7.260] The time between making the statement and entering into the contract can be relevant when determining contractual intention. If the statement is only made in the course of preliminary negotiations, and some time then expires before any final agreement is reached, the statement is less likely to be contractually relevant (that is, it is less likely to be a term). In such instances it is more likely to be a “mere representation” only – intended to induce the contract but not to become a term of it. For an illustration of the principle, see: Routledge v McKay [1954] 1 All ER 855 [7.270] Facts: In the course of negotiating the sale of his motorcycle, the defendant told the plaintiff that it was a 1942 model. Seven days later, the parties entered into a written contract of sale. It made no mention of the year of manufacture. The plaintiff later discovered that the motorcycle was a 1930 model. He sued for damages.

Held: He failed. The interval between the negotiations and the final agreement, coupled with the failure to include the motorcycle’s age in the written contract, indicated that the parties had not intended the statement to be anything but a mere representation – made to induce the contract but not intended to have any contractual effect. Accordingly, it had not become a term and there was no breach.

[7.280] On the other hand, if a statement is made immediately before a formal contract is finalised (as, for example, in Van den Esschert v Chappell: [7.70] above, where the statement about the white ants was made immediately before the buyer signed the written contract), there is greater scope for the courts to find that, objectively determined, the parties must have intended the statement to be contractually binding.

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Reduction into writing

[7.290] If a statement made during negotiations is followed by a written document that incorporates it, it is clear that the parties intended that what was said was to be part of the contractual obligation. However, if the written document does not include it, the obvious inference is that it was not intended to form part of the contractual obligation. This will be especially so if, as in Nemeth v Bayswater Road Pty Ltd ([7.90] above), the written document is not simply a standard pre-printed form with the blanks filled in, but something that has been purpose-written for the occasion (because such documents are more likely to be complete records of the parties’ entire agreement). It will be even more so if, as again in Nemeth, the written contract expressly includes an “entire agreement clause”. In such cases the statement will not normally be regarded as a term. Therefore, if it proves to be false, the plaintiff will not be able to sue for breach of contract. The only possible recourse in such situations is via an action for misrepresentation (see Chapter 12).

Reliance on special knowledge or skill

[7.300] Where one party has a particular knowledge or skill on which the other relies, a statement, supposedly made in exercise of that knowledge or skill, may become a term of the resulting contract. If the degrees of knowledge are equal or if the person to whom the statement is made has the greater knowledge, the statement will probably be regarded as non-contractual (that is, as a mere representation and not as a term). For an illustration of both possibilities, see Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 and Oscar Chess Ltd v Williams [1957] 1 All ER 325, both outlined below: Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 [7.310] Facts: In the course of negotiating the sale of a Bentley motor car, the

defendant told Dick Bentley that a new engine and gearbox had been fitted and that, since then, it had only been driven 20,000 miles. That was not, in fact, true, but the defendant believed that it was. The car had actually travelled 100,000 miles. When Dick Bentley discovered the truth, he sued.

Held: The misleading statement had been incorporated into the contract as a term and Bentley was entitled to damages. The person who made the statement (the dealer) had had special knowledge and skill and the statement was made in such a way that both parties should have realised that the buyer would rely on it. The dealer “stated a fact that should be within his own knowledge”. The court also took into account the “likely importance of the statement in the minds of the parties” in deciding that it was a term. As Salmon LJ said (at 629): Was what Smith said intended and understood as a legally binding promise? If so, it was a warranty, and as such may be part of the contract of sale or collateral to it. In effect, Smith said: “If you will enter into a contract

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[7.310] Corporations and Contract Law cont. to buy this motor car from me for £1850, I undertake that you will be getting a motor car which has done no more than twenty thousand miles since it was fitted with a new engine and a new gearbox.” I have no doubt at all that what was said by Smith was so understood and was intended to be so understood by Mr Bentley.

Oscar Chess Ltd v Williams [1957] 1 All ER 325 [7.320] Facts: Williams offered to buy a new Hillman Minx from the plaintiff car

dealers and offered a second-hand Morris in part exchange. The trade-in value of the Morris depended on its age and, according to the registration book, it was manufactured in 1948. Williams confirmed this in good faith and the plaintiffs, believing him, allowed a trade-in of £290. Eight months later they found that the Morris was a 1939 model and that the trade-in should have been only £175. It appeared that the registration book had been altered by an owner before Williams. The plaintiffs sued for the £115 difference. Held: The defendant’s statement was a mere representation and not a term of the contract. While there was little or no time lapse between the defendant’s statement and the oral agreement (and there was no writing to confuse the issue), the critical point was special knowledge and skill. Williams, the maker of the statement, had not possessed any special knowledge and skill; if anyone, it was the dealers who could (and should) have discovered the car’s true age. They were not justified in relying on Williams’ “expertise”. Therefore, the statement had not become a term and they were not entitled to recover.

Importance in the minds of the parties

[7.330] In Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623, Bentley succeeded partially because his repeated requests for assurance as to the roadworthiness of the vehicle indicated that roadworthiness was a critical factor in his decision. That should have been apparent to the other party and clearly, on that basis, the salesman’s statements had to be regarded as contractual. The importance of the statements in the minds of the parties was, therefore, a factor in determining whether the statement had become a term of the contract. Similar reasoning can be found in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 where oral statements made in a restaurant by the proposed distributor of United States Surgical Corporation’s products in Australia, to the effect that he would use his best efforts to distribute those products and would not deal in any competing products, were held to be terms even though they were made about a month before the parties reached final agreement and were not formally incorporated into that agreement. In the circumstances it should have been clear to everyone that those assurances had been of critical importance to United States Surgical’s decision to contract.

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This subrule is also of particular relevance if the representee makes it known that a particular fact is of great importance and if the representor then asserts that the fact is true. In such cases, the statement will almost invariably be treated as a term. See, for example: Bannerman v White (1861) 10 CB (NS) 844; 142 ER 685 [7.340] Facts: In the course of negotiating the purchase of a quantity of hops,

the buyer asked if they had been treated with sulphur. He added that if they had been, he would not even bother to ask the price. The seller informed him that sulphur had not been used, the buyer bought them, but on delivery found that sulphur had been used. He repudiated the contract. The seller sued for the price.

Held: The seller’s untrue assurance that sulphur had not been used had become a term of the contract. The facts showed a clear intention that the contract would be null and void if the stipulation were untrue. Consequently, the buyer’s repudiation was justified and he was not bound to pay the price.

[7.350] However, if the person making the statement clearly indicates that he or she does not warrant the accuracy of the statement – or says that the representee should have the statement checked independently – the statement is unlikely to be a term. See, for instance: Ecay v Godfrey (1947) 80 Ll L R 286 [7.360] Facts: The seller of a boat stated that it was sound, but advised the

buyer to have it surveyed. The buyer did not have it surveyed and the boat was not sound. The buyer sued for breach of the alleged term. Held: He failed. From the words used it was clear that neither party had intended the stipulation to be binding. It was a mere expression of opinion, which the buyer could have had, and should have had, checked.

[7.370] On the other hand, if what is said is said in such a way that the other party would be dissuaded from checking it, the natural inference is that both parties intended that it could be relied on. In such cases the statement will probably be a term. See, for instance: Schawel v Reade [1913] 2 IR 81 [7.380] Facts: The plaintiff wanted to buy a horse for stud purposes. He went to

the defendant’s stables and, as he was examining a particular horse, the defendant said to him: “You need not look for anything; the horse is perfectly sound. If there was anything the matter with the horse, I would tell you.” Relying on that statement, the plaintiff purchased the horse. It proved to be totally unfit for stud purposes and the plaintiff sued.

Held: He won. The seller’s statement was intended to be, and had become, a term of the contract. It was said in such a way that a reasonable person would believe it to be accurate and would be dissuaded from making any independent check.

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7.3 AN ALTERNATIVE – COLLATERAL CONTRACTS Defining a collateral contract

[7.390] So far we have seen that statements made in the course of negotiations can become terms of the contract (and be contractually enforceable) or may be “mere representations”. If a statement is a mere representation, it is not incorporated into the contract, it confers no contractual rights and, if it proves to be incorrect, there is no breach of contract. In between these two extremes lie those statements that are clearly intended to have some contractual significance but which, for some reason or other, have not been included as terms of the contract. A strict application of the parol evidence rule can occasionally give this effect. In appropriate cases, the courts’ answer to the problem is to treat such statements as collateral contracts or, as they are sometimes misleadingly called, collateral warranties. What this means is that the courts recognise that the statement is not a term of the main contract but, equally, that it was seriously made and that without it the main contract would probably not have come into being. In such cases, the promise is collateral to (or “related to” or “in addition to”) the main contract and, if the necessary pre-conditions are fulfilled, it may be enforceable as a contract in its own right. The consideration for this related or collateral contract, if it exists, is the entering into of the main contract by the person to whom the statement was made. Lord Moulton described the concept very simply in Heilbut Symons & Co v Buckleton [1913] AC 30, saying (at 47): It is evident, both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. “If you will make such and such a contract I will give you one hundred pounds”, is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence.

Two requirements must be fulfilled to establish the existence of a valid and binding collateral contract: 1.

The representor must have intended the promise to be legally binding. (This merely fulfils the general requirement for legal intention to establish a contract in any case.)

2.

The representee must have entered into the main contract on the basis of the statement and in reliance on it. (Without that, the entering into of the main contract would not be good consideration.)

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If these requirements are met, the courts may hold that a collateral contract has come into existence and may enforce the promise, not as part of the main contract but as the substance of a quite separate (but related) collateral contract. See, for example: De Lassalle v Guildford [1901] 2 KB 215 [7.400] Facts: The parties had negotiated the lease of a house. The terms were

finally agreed but the tenant refused to conclude the deal unless the landlord assured him that the drains were in good order. The landlord gave the assurance, the drains were not in good order, and the tenant sued. The landlord argued that the assurance was not a term of the contract because it had not been written into the lease. Therefore, he argued, it was not capable of breach and he could not be liable. Held: The tenant won. The assurance constituted a separate collateral contract, the consideration for which was the tenant entering into the main lease (that is, he entered into the main lease only because the promise was made). This separate collateral contract was binding, the landlord was in breach and he was liable in damages.

Proving the existence of a collateral contract

[7.410] The courts are generally reluctant to find that a collateral contract exists, mainly because of possible inconsistency with the parties’ presumed intention, as evidenced by their written contract: see [7.220] above (though as Nettle JA noted in McMahon v National Foods (2009) 25 VR 251 at 273, there is no principle of law “that, if the parties truly intended the alleged collateral promise to be binding, they would have set it out in their written agreement”). There are also associated problems with the operation of the parol evidence rule. Consequently, as Lord Moulton held in Heilbut Symons & Co v Buckleton [1913] AC 30 at 47, “collateral contracts must from their very nature be rare … they must be proved strictly”. This has two consequences. First, the party alleging that a collateral contract exists must prove it. As Lord Moulton indicated, that can often be difficult, especially if the promise in question is one that you would naturally expect to find in the main contract. In such cases, the fact that it is not there might reasonably lead to a conclusion that the parties did not intend it to be a part of their bargain. On the other hand, if the alleged collateral contract deals with something that you would not naturally expect to find in the main contract, it may be easier to show that it should be enforced, even as a separate collateral contract if that is what is necessary. So, for example, in Sheppard v Municipality of Ryde (1952) 85 CLR 1, the defendant council distributed a pamphlet to potential buyers of its proposed housing estate, representing that certain areas would be reserved as parks. That statement was held to be binding as a separate collateral contract even though it was not incorporated into the individual sale contracts. As Dixon, McTiernan, Fullagar and Kitto JJ said (at 13): 129

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Doubtless the main contract might have included a clause by which the council undertook not to depart from the housing scheme. But it seems not to be unnatural that the parties should treat the [main] contract as devoted to the purchase of the lot … It is because of this that the assurance [about the parks], when it is read in the light of the pamphlet, obtains its effect as a collateral promise.

Secondly, the courts will not find (or enforce) a collateral contract unless all of the essential elements of a valid contract are present. There must be agreement, consideration and, in particular, an intention to be legally bound.

Agreement

[7.420] To establish agreement, the plaintiff must show that a firm promise has been made and that the promise has been accepted in its terms. The critical point is that the statement must have been promissory and not merely representational. Therefore, for example, in Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 90 ALJR 770, the Court rejected the respondent lessees’ claim that, because they had been assured that they would be “looked after at renewal time”, a collateral contract had arisen, entitling them to a five-year renewal of their leases. As French CJ, Kiefel and Bell JJ noted (at [23] and [28]) that statement was “no more than vaguely encouraging” and “did not have the quality of a contractual promise of any kind”. Similarly, a mere statement of opinion does not constitute a promise and therefore cannot form the basis of an agreement. For a clear illustration of the distinction, see: JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 [7.430] Facts: Blakney entered into a contract to buy a motor cruiser from Savage. During negotiations, Blakney inquired about motors and Savage’s written reply set out details of three engines that it believed would satisfy Blakney’s requirements. The relevant part of the letter read: We submit the following … (b) single 4/53 Series GM diesel estimated speed 15mph … Installation (b) is by far the best value for money … It is our considered opinion that … (b) would give entire satisfaction.

Blakney replied: “I prefer, upon your advice, the GM 4/53 … I feel that the speed of GM will be useful at times.” The resulting contract contained an itemised specification and quotation, but contained no reference to speed. The boat, when delivered, could not attain 15 miles per hour. Blakney sued for breach of term or, alternatively, for breach of collateral contract. Held: He failed. Only statements made as firm promises can give rise to collateral contracts. No firm promise had been given here and, accordingly, no collateral contract had arisen. As the court said (at 442–43): A collateral warranty can be established … [only if] … the statement so relied on was promissory and not merely representational … He [Blakney] could have required attainment of the speed to be inserted in the specification as a condition of the contract; or he could have sought from the appellant a promise … that the boat would attain the speed as a prerequisite to his ordering the boat; or he could be content to form his own

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Chapter 7 Contents of a contract [7.460] cont. judgment as to the suitable power unit for the boat relying on the opinion of the appellant … Only the second course would give rise to a collateral warranty. The only conclusion open … was that the respondent took the third course … As he said: “I prefer, upon your advice, the GM 4/53”. That the statement actually made by the appellant was intended to have some commercial significance upon a matter of importance to the respondent can be conceded; that the respondent was intended to act upon it, and that he did act upon it, is clearly made out. But those facts do not warrant the conclusion that the statement was itself promissory.

Consideration

[7.440] Like all contracts, collateral contracts must be supported by consideration. The consideration for a collateral contract is entering into the main contract (that is, “if you promise me this, I will enter into the main contract with you”). This satisfies the general requirement that something of value must flow from the promisee to the promisor in exchange for the promisor’s promise. However, it is possible to have “three party” collateral contracts. These occur where A makes a promise to B and the consideration is B entering into a contract with C. In such cases, the promise between A and B is still enforceable because, by contracting with C, B has suffered detriment (by doing something that he or she was not previously obliged to do) and has done it at A’s request. See, for example, [6.90]–[6.100] above and: Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 [7.450] Facts: The plaintiff owned Shanklin Pier and had engaged painting

contractors to paint it. Detel induced the plaintiff to stipulate that its paint be used – by promising that it would last 7–10 years. The contractors purchased and used Detel’s paint, but it was unsatisfactory and only lasted about three months. The plaintiff sued Detel for breach of the alleged collateral contract.

Held: It succeeded. Detel’s assurance of suitability was a collateral contract. Shanklin Pier provided consideration by entering into the painting contract stipulating that Detel’s paint be used. As McNair J put it (at 856): I see no reason why there may not be an enforceable warranty between A and B supported by the consideration that B should cause C to enter into a contract with A or that B should do some act for the benefit of A.

[7.460] An example of a situation in which the consideration was not B causing C to enter into a contract with A but B doing some act for the benefit of A can be found in:

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Charnock v Liverpool Corp [1968] 1 WLR 1498 [7.470] Facts: The plaintiff’s car was damaged in a collision. He took it to a

garage and his insurance company authorised repairs as per the repairer’s estimate. The repairs should have been completed in five weeks; in fact, they took eight weeks. The plaintiff sued the garage for £53, the cost of hiring another car for the additional three weeks. The garage argued that there was only one contract, between them and the insurers, and that the plaintiff had no grounds for his action. Held: There was an enforceable collateral contract between the garage and Charnock, the substance of which was that “in consideration of the car owner leaving his car with the garage for repair the garage would carry out the repairs with reasonable expedition and care” (per Salmon LJ at 1505). The garage was in breach of that collateral contract and was thus liable in damages.

Intention

[7.480] As with all contracts, a promise will not be enforceable unless the parties intended it to be enforceable: see, in the context of collateral contracts, Hospital Products Ltd v United States Surgical Corp 156 CLR 41 at 61. As was also noted in that case (at 61–62) intention is determined objectively – by looking at all the facts and circumstances surrounding the promise. If it is clear that the parties intended the promise to be binding, it will be binding, and if it is not incorporated into the main contract, it can be a collateral contract in its own right. See, for example: J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 [7.490]

Facts: The plaintiff imported machines from Italy through the defendant forwarding agents. The defendant’s standard form contract had an exclusion clause that protected it from loss or damage to the goods unless caused by its wilful neglect. The machines (which were subject to rust) had always been shipped in crates or trailers below deck. The defendant wanted to ship them in containers and, to overcome the plaintiff’s fears about rust, the defendant orally promised that the containers would be shipped below deck. The plaintiff then agreed to the new terms, but nothing about below deck shipment was written into the contract. A container was shipped on deck and it was washed overboard during a storm. The plaintiff sued. The defendant relied on its exclusion clause. Held: The plaintiff won. The defendant’s oral promise about below deck shipment was a “collateral contract” which was separately enforceable. The parties had intended to be bound by the promise and therefore were bound. As Lord Denning said (at 1081): [The defendant] made the promise in order to induce [the plaintiff] to agree to the goods being carried in containers. On the faith of it, [the plaintiff] accepted the quotations and gave orders for transport. In those

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Chapter 7 Contents of a contract [7.510] cont. circumstances the promise was binding. There was a breach of that promise and the forwarding agents are liable.

Roskill LJ also noted (at 1083) that:

The defendants gave such a promise which to my mind against this background plainly amounted to an enforceable contractual promise. In those circumstances it seems to me that the contract was this: “If we continue to give you our business, you will ensure that those goods in containers are shipped under deck” … there was a breach of that contract by the defendants when this container was shipped on deck.

The promise must be consistent with the main contract

[7.500] In Australia, an alleged collateral contract cannot be inconsistent with the terms of the main contract, at least where the two agreements are between the same parties. That is, the alleged collateral contract cannot vary or contradict the terms of the main contract in any way. Dixon CJ explained the relevant principle in Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507, 517 saying: A collateral agreement made in consideration of a main agreement cannot effectively subsist unless it is consistent with the main agreement. Once an agreement is made in writing it is treated, unless the parties are shown otherwise to intend, as the full expression of their obligations. If it is established that the writing was intended to contain only part of a fuller agreement it may be otherwise.

That limitation can even extend to situations where the main contract contains an “entire agreement” clause (see [7.40] above) because the effect of such clauses is, as Lightman J put it in Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] Lloyd’s Rep 611 at 613, “to denude what would otherwise constitute a collateral warranty of legal effect”. That is, if the parties clearly and expressly state that the main contract contains their “entire agreement” the courts should not incorporate (or enforce) anything else – either as part of that agreement or as part of a separate collateral contract. However, if an “entire agreement” clause is to have that effect it must be clear that that is what was intended – and that will always depend on what a reasonable person, knowing all of the background to the parties’ agreement, would believe. See, McMahon v National Foods (2009) 25 VR 251 at 272–73 per Nettle JA. The reason for the “consistency” requirement is obvious: the two contracts coexist and are equally enforceable. If they are inconsistent, there would, of necessity, be a breach of one and such a situation would be ludicrous. See the High Court’s hallmark judgment in: Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 [7.510]

Facts: Hoyt’s agreed to sublease premises from Spencer on terms that (inter alia) allowed Spencer to terminate the sublease at any time by giving four weeks’ notice. Hoyt’s alleged that it had only signed the agreement because

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[7.510] Corporations and Contract Law cont. Spencer had also verbally promised not to exercise that right unless he was required to do so by his own head lessors. Spencer terminated the lease without being required to do so and Hoyt’s sued on the alleged collateral contract.

Held: Hoyt’s action failed. The “promise” in the alleged collateral contract and the express words of the sublease were inconsistent and they could not stand together. Consequently, the “promise” could not be enforced. As Knox CJ put it (at 139): A distinct collateral agreement … is valid and enforceable … provided the two may consistently stand together so that the provisions of the main agreement remain in full force and effect notwithstanding the collateral agreement.

[7.520] Despite some contrary overseas authority (in the United Kingdom, collateral contracts not to rely on or not to enforce some provision in the main contract have been upheld: see City & Westminster Properties (1934) Ltd v Mudd [1959] Ch 129), the High Court has consistently maintained its strict line. For example, in Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, an insurer represented to a client that he would be entitled to benefits under the “total disability” clause in its policy if he could no longer pursue his occupation as a builder. In fact, the policy only covered him if he was disabled from following any occupation. The High Court held that, because the verbal promise was inconsistent with the policy’s express terms, it could not be enforced. Fortunately, the apparent unfairness of such decisions is probably no longer as serious as perhaps it once was. In appropriate cases plaintiffs such as Hoyt’s and Gates could now use promissory estoppel to stop the other party denying that their promises (not to insist on their strict legal rights under the main contract) are binding. In that way it may be possible – at least indirectly – to enforce those “collateral” promises. For example, in Wright v Hamilton Island Enterprises Ltd [2003] Q Conv R 54-588, promissory estoppel was used to prevent a licensor resiling from an oral promise to allow the licensees to extend their licences for as long as they wanted. This was even though that promise could not be enforced as a separate collateral contract because it was inconsistent with a term of the main agreement which allowed the licences to be cancelled after their initial term had expired.

The effect of breach of a collateral contract

[7.530] Breach of a collateral contract only entitles the innocent party to damages. Specific performance of the main contract cannot be awarded, nor may the innocent party terminate the main contract (for the simple reason that it has not been breached). The measure of damages, however, will usually be an amount equivalent to the diminished value of the main contract. 134

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The effect of the Competition and Consumer Act 2010 (Cth)

[7.540] As already seen ([7.500]–[7.520] above), a collateral contract must not be inconsistent with the terms of the main contract. If it is, it will not be enforced. However, in appropriate circumstances the Australian Consumer Law (Sch 2 to the Competition and Consumer Act 2010 (Cth)) may provide an alternative means of obtaining relief. Section 18 prohibits parties from engaging in misleading or deceptive conduct so, if a contract is induced by a false promise, an action may be available under that section even though the promise is inconsistent with a term of the main contract. See for example: Dibble v Aidan Nominees Pty Ltd [1986] ATPR 40-693 [7.550] Facts: The Dibbles entered into a five-year lease of a food stall in a food

market following representations that they would have the exclusive right to sell fish and chips there (both together and as separate items), and that an established stallholder would cease selling chips as soon as they commenced business. In fact, the lease did not confer those rights and, instead, gave Aidan Nominees the right to license others to sell (inter alia) chips. The Dibbles signed the document after a superficial reading and commenced business. The other stallholder did not cease selling chips and, after three days, the Dibbles ceased trading. They did not sue for breach of a collateral contract (the inconsistency between the promise and the express term of the main contract would have meant that any such action would not have succeeded) but they did sue under the misleading or deceptive conduct provision that was the then equivalent of s 18 of the Australian Consumer Law. Held: They succeeded. Even though they had been somewhat careless in signing the lease, Aidan Nominees Pty Ltd had engaged in misleading or deceptive conduct under the Act. Consequently, the Dibbles were entitled to damages under the then equivalent of s 236 of the Australian Consumer Law and an order declaring the lease void under the then equivalent of s 243.

[7.560] Section 18 of the Australian Consumer Law is dealt with in more detail at [12.10] below.

7.4 THE CLASSIFICATION OF TERMS General

[7.570] Assuming that a particular statement has become a term of the contract (that is, part of the contractual obligation) – either expressly or by implication – the next question is: “What sort of term is it?” Some terms are clearly critical to the operation of the contract such that without some assurance of strict performance, the parties would probably not have entered into the contract in the first place. If there is a breach of such a term, the consequences are serious. 135

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Other terms are merely ancillary to the contract’s main purpose. They affect the contractual obligation but they do not go to the very heart of it. If there is a breach, the party not at fault will get something less than he or she bargained for but will not get something substantially less. For these reasons, terms are classified, generally, as either conditions or warranties on the basis of their essentiality. The concept of essentiality was well put by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641–42 when he said: The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may, in general, treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance on a substantial performance of the promise, any substantial breach will ordinarily justify a discharge.

That test was subsequently approved and applied by the High Court in Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.

Conditions

[7.580] Conditions are major terms of the contract, breaches of which render performance of the contract something substantially different from what was agreed. If a condition is breached, the innocent party can terminate the contract (at his or her election) and can also sue for damages. The entitlement to terminate stems from the fact that, because conditions are critical terms, any breach of a condition renders the contract illusory. Consequently, the innocent party must be able to bring the contract to an end to escape further obligation. For example, see: Poussard v Spiers and Pond (1876) 1 QBD 410 [7.590] Facts: Spiers and Pond engaged Poussard to play the principal part in a

new opera. It was scheduled to open on 28 November, and Poussard attended rehearsals until 23 November, when she became ill. On 25 November, Spiers and Pond engaged a replacement to be ready if Poussard could not sing. On 4 December Poussard, having recovered, offered to sing but was refused. She sued for breach of contract.

Held: She failed. Being there to sing was the essence of the contract; it went to the very root of the agreement and, by not appearing, her “performance” became substantially different from what had been agreed. Her promise to perform from the first night was a condition and its breach entitled the producers to repudiate the contract.

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Warranties

[7.600] A warranty is a minor term of the contract, a breach of which renders the contract different but not substantially different. In general, a breach of warranty can be compensated for by damages and this is the only remedy available for such a breach. The reason is that if a minor term is breached, the contract may still be performed in substance and damages will compensate the innocent party for any loss or inconvenience. See, for instance: Bettini v Gye (1876) 1 QBD 183 [7.610] Facts: Gye contracted for the exclusive use of Bettini’s services as a

singer for three months. Bettini undertook (inter alia) that he would be in London for rehearsals at least six days before the commencement of his engagement. He arrived only two days before it commenced and Gye refused to proceed with the contract. Bettini sued for breach.

Held: Having regard to the length of the contract and the nature of the performances to be given, the rehearsal clause was not vital to the agreement. It was not a condition, merely a warranty. Accordingly, Bettini’s breach did not entitle Gye to treat the contract as at an end and Bettini was entitled to damages for wrongful repudiation. As Blackburn J said (at 188): [A condition is] a stipulation [which] goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract a thing different in substance from what the defendant has stipulated for.

Intermediate (or innominate) terms

[7.620] The division of all terms into conditions and warranties offers a very simplistic view of the relative importance of the various terms. It presumes that all terms can be divided into those that are “essential” and those that are “non-essential” and that the difference in their importance will always be clear-cut and obvious. That is not always the case, for there may well be terms that are capable of both substantial and minor breach. If such terms are classified as conditions, then even a minor breach would entitle the innocent party to terminate the contract; if they are classified as warranties, then even a major breach could not result in the innocent party being able to escape his or her future obligations under the agreement. Clearly, the simplistic classification of such terms as either conditions or warranties will not suffice. For this reason, a third class of terms has been recognised. They are called intermediate (or “innominate”) terms. An intermediate term is not, of its nature, either a condition or a warranty. It is a term that is capable of being breached in both minor and major ways. The remedies available for breach of an intermediate term do not, therefore, depend on a classification of the term but rather on the effect of the particular breach complained of. That is, a major breach of the term will entitle the

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innocent party to terminate the contract and/or seek damages; a minor breach will only permit an action for damages. The hallmark case in the area is: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 [7.630] Facts: The plaintiffs chartered the defendants a ship for 24 months. The

contract required them to provide a ship that was “in every way fitted for ordinary cargo service”. Despite this, the engine-room staff were incompetent and the ship’s machinery was ancient. Stemming largely from these causes, 20 weeks’ sailing was lost due to engine trouble. The defendants repudiated the charter. The plaintiffs sued for breach of contract and claimed damages for wrongful repudiation. Held: Although the shipowners were clearly in breach of their obligation to provide a seaworthy vessel, seaworthiness was not a condition of the charterparty – so breach did not automatically entitle the charterer to repudiate. Further, the delays caused by the breakdowns and repairs, taken in the context of the overall period of the charter, were not so great as to frustrate the commercial purpose of the charterparty. Accordingly, the defendants should not have repudiated; they should have sought damages to compensate them for the lost time. The plaintiffs were entitled to damages for wrongful repudiation. The critical part of the decision was, however, that the recognition of a simplistic division of all terms into either conditions or warranties did not always reflect reality. As Diplock LJ said (at 71–2): the problem in this case is, in my view, neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a “condition” or a “warranty”. It is like so many other contractual terms an undertaking one breach of which may give rise to an event which relieves the charterer of further performance of his undertakings if he so elects and another breach of which may not give rise to such an event but entitle him only to monetary compensation in the form of damages … What the judge had to do in the present case … was to look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charterparty and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charterparty that the charterers should obtain.

A more clear-cut illustration of the principle’s application can be found in: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235

[7.640] Facts: Schuler, a manufacturer of presses, agreed to give Wickman sole selling rights. The contract provided: “it shall be [a] condition of this agreement that … Wickman shall send its representatives to visit [certain UK motor manufacturers] at least once in every week”. Either party could terminate the contract if the other committed a material breach and failed to remedy it within 60 days of notice to do so. During the first eight months, Wickman committed

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Chapter 7 Contents of a contract [7.660] cont. certain material breaches which Schuler waived. In the following six months, Wickman committed certain minor breaches and Schuler attempted to repudiate.

Held: The repudiation was wrongful. The continuing visit obligation was not a condition in the traditional sense, so that a single breach, no matter how trivial or how long ago, would entitle the innocent party to terminate the whole contract. As Lord Simon of Glaisdale said (at 264): it has now been made explicit that there lies intermediate between conditions and warranties a large “innominate” class of contractual terms (any breach of which does not give rise to a right in the other party to terminate the contract, but only a material breach, immaterial breaches merely giving rise, like breaches of warranty, to a right to claim damages).

[7.650] In Australia, the High Court referred to the concept of intermediate terms in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 with evident approval saying (at 250) that “an intermediate or innominate term … is capable of operating, according to the gravity of the breach, as either a condition or a warranty … [It] brings a greater flexibility to the law of contract”. It also adopted and applied the concept as the basis of its decision in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115.

Stipulation by the parties is not final

[7.660] The parties can, of course, determine which terms, if breached, will allow them to bring the contract to an end and which will not. As the Supreme Court of the Australian Capital Territory noted in O’Neall v Barra Rosa Pty Ltd (1989) 96 FLR 436, they can, if they wish, even elevate a relatively unimportant term (breach of which would not normally give them a right to terminate the contract) to make it one of supreme importance. However, if they want to do that, they must do it, and express it, clearly and without ambiguity. Merely using the word “condition” when they describe a term does not necessarily mean that it will be construed as a condition in the legal sense. In Schuler’s case, Edmund Davies LJ in the Court of Appeal (see Wickman Machine Tool Sales Ltd v L Schuler AG [1972] 1 WLR 840) specifically referred to the non-lawyer’s practice of referring to all terms as conditions. He said (at 855): Trouble arises from the fact that in some contracts the word “condition” is used simply in the sense of indicating that certain of its provisions are contractual terms, and have no greater or less significance than other terms not so labelled.

Accordingly, terms labelled as conditions must be closely looked at to determine whether they are really conditions or not. In an Australian context, this view was approved by the Privy Council in ANZ Banking Group Ltd v Beneficial Finance Corp [1983] 1 NSWLR 199 at 204, where Lord Diplock said: The use of the word “conditional” … is of itself inconclusive: “condition” is used in contracts in a variety of senses and does not necessarily mean only a term of a contract 139

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any breach of which, however minor, by one party entitles the other party to treat it as a wrongful repudiation of the contract and to elect to accept it as putting an end to all primary obligations of both parties under the contract that have not yet been performed.

Conditions precedent and subsequent

[7.670] The word “condition”, as well as being used to denote a particular type of term, can be used in contexts where it does not specifically mean an essential term of the contract. The two major instances in which it is so used are in references to what are called “conditions precedent” and “conditions subsequent”. A contract is said to be subject to a condition precedent if it is not to be binding (in the sense that complete performance cannot be demanded) unless or until a specified event occurs. A contract will be subject to a condition subsequent if its terms provide that it will terminate on the occurrence of a named event. Where the condition is precedent, the agreement is not fully binding until the event occurs; where the condition is subsequent, there is a binding agreement until the event occurs.

7.5 IMPLIED TERMS Defining implied terms

[7.680] A contract’s terms may be express (that is, expressly included in it) or implied (that is, not expressly stated but included nevertheless – usually because the parties clearly intended them to apply). In general, the courts are reluctant to imply terms into a contract. They believe, quite rightly, that it is not their task to make the contract for the parties, only to interpret what the parties have actually agreed. That is particularly so with commercial agreements, which are often the product of extensive negotiations involving detailed legal advice: see, for example, Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 346 and Forty Two International Pty Ltd v Barnes (2014) 97 ACSR 450 at [409]. Occasionally, however, it is obvious that certain terms were intended by both parties but, through inadvertence or bad drafting, were not included in the formal agreement. In those situations, the courts may find that the terms should be given effect, through implication, to implement what the parties intended. Terms can be implied into a contract in basically three ways: (a)

by trade usage or custom (terms implied by custom);

(b)

by law (terms implied in law); and

(c)

by the courts, in cases other than (a) and (b), because of the presumed intention of the parties. That is, where the parties obviously intended the unspoken term to be binding (terms implied in fact).

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Terms implied by custom

[7.690] One situation where the courts will imply terms is where there is an established practice or custom in a particular trade, industry, market, locale or workplace, or between members of an identified group or, even more restrictively, just between the parties to a particular contract (as might be the case where such a term has arisen through a prior course of dealing: see Henry Kendall & Sons v William Lillico & Sons Ltd at [7.440] below and Hawkins v Clayton (1988) 164 CLR 539, 573), under which agreements are carried into effect in a certain way. In such cases, if the practice or custom clearly forms the background against which the parties make their contracts, it will, by implication, become part of those contracts. As an implied term, it will then be enforced in precisely the same way as the agreement’s express terms. Whether a particular practice or custom is such that it justifies being implied into a contract is, in all cases, a question of fact. One example of a term being implied through custom or usage has already been seen. In Hutton v Warren ([7.110] above), a tenant being put out of possession was able to establish a right, given by local custom, that he be paid a reasonable allowance for seed and labour expended on the land. This was so even though the lease contained no express term to that effect. The High Court discussed the situations in which trade usage or custom can be used to justify implying a term into a contract in Con-stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226. In a unanimous decision the court held (at 236) that the following propositions apply: 1.

Whether there is a custom or usage that justifies implying a term into a contract is always a question of fact.

2.

There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in the circumstances can be reasonably presumed to have imported that term into their contract. Jessel MR had previously explained the operation of this requirement in Nelson v Dahl (1879) 12 Ch D 568 at 575, saying: [The custom] must be so notorious that everybody in the trade enters into a contract with the usage as an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself.

That is not to say that the custom must be universally accepted – it just has to be “well known and acquiesced in”. As the High Court noted, if “universal acceptance” was required, terms could never be implied; one party would just have to say “I never accepted that usage” and the requirement would be defeated. 3.

A term will not be implied if it is contrary to the express terms of the agreement. How this limitation operates was well illustrated in:

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Summers v Commonwealth (1918) 25 CLR 144 [7.700] Facts: Summers contracted to supply the Commonwealth with marble

for Australia House. The contract provided that each block should be of a specified size. Summers delivered blocks larger than that size and they were rejected. He sued for the price and gave evidence of a trade usage which, he said, allowed him to deliver blocks large enough to produce blocks of the specified size. Held: He failed. In rejecting Summers’ claim, Isaacs J pointed out that it was quite clear that no implication based on trade usage can ever be made “where there is a written clause which is inconsistent with it”.

4.

A person can be bound by a custom of which he or she is totally unaware, if the custom is “so notorious” that he or she should have been aware of it. As the court put it (at 238), “sufficient notoriety [is] both a necessary and sufficient condition for knowledge of a custom to be attributed to a person who [is] in fact unaware of it”.

[7.710] A fifth proposition can probably be added for completeness – terms will not be implied if the custom or trade usage on which they depend offends against any statutory provision.

Terms implied at law

[7.720] Terms can be implied under both the general law and statute. Under the general law, terms will be implied into various types of contract – just because they have always been implied into those contracts. This is because, as French CJ, Bell and Keane JJ explained it in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 at [28], ‘some implications in law derive from the implication of terms in specific contracts of particular descriptions, which become “so much a part of the common understanding as to be imported into all transactions of the particular description”’ (citing Breen v Williams (1996) 186 CLR 71 at 103). So, for example, in master and servant contracts there are implied duties of fidelity and good faith imposed on servants and an implied duty to provide work imposed on employers, in shipping contracts there is an implied warranty of seaworthiness on the part of the owner, in contracts of bailment there are implied duties to take care of the goods, to retain possession of them, not to make unauthorised use of them and to return them in due course imposed on the bailee, and in banking contracts there is an implied duty of confidentiality imposed on the bank. The courts have even accepted that there is an implied “duty to co-operate” in all contracts, requiring both parties “to do all such things as are necessary … to enable the other party to have the benefit of the contract”: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607. Statute can also (and, increasingly, does) imply terms into contracts and, when it does, it overrides the common law. Therefore, even though the common law generally allows parties to determine the terms of their contracts, statute can imply terms to 142

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which they have not freely agreed. Clear examples include those provisions in the Sale of Goods Acts and the Competition and Consumer Act 2010 (Cth), which automatically give consumers rights relating to the acceptable quality (or “merchantability”) and fitness for purpose of any goods (and, in the case of the Competition and Consumer Act 2010 (Cth), services) that they acquire. Further examples can be found in a wide range of other statutes.

Terms implied in fact (terms implied by the court)

[7.730] In addition to the situations discussed above, courts have an inherent power to imply terms into a contract where it is obvious that the parties intended them to be included but, for one reason or another, failed to include them in their express agreement. This is not a power that they exercise lightly and, as Mason J noted in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 346, “courts are slow to imply a term”. The obvious reason is that they are effectively being asked to say that the parties, whose agreement might otherwise appear to be complete, “accidentally” left something out, that they had intended to include. Then there is also the associated problem of determining, with the appropriate degree of certainty, exactly what the parties would have agreed to if they had actually considered the matter. Therefore, when a court is asked to imply a term into a contract, it must ascertain, as objectively as possible, the parties’ presumed intention when they agreed. The early test used to determine this was what came to be called the “officious bystander” test. McKinnon LJ put it succinctly in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at 227: Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an offıcious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common “Oh, of course!”

An early example of a term being implied into the contract on this basis can be found in: “The Moorcock” (1889) 14 PD 64

[7.740] Facts: The plaintiff contracted to use the defendant wharfingers’ jetty to discharge and load his ship. Both parties knew that it could ground at low tide and the defendants had not guaranteed the safety of the anchorage during that period. While unloading at low tide the ship came to rest on a ridge of hard ground beneath the mud and sustained damage. The plaintiff sued. Held: He succeeded. For “business efficacy”, the court implied a term into the contract (in the nature of a promise by the defendant) that the river bottom was safe for the plaintiff’s ship, at least so far as reasonable care could provide. As Bowen LJ said (at 68):

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[7.740] Corporations and Contract Law cont. In business transactions what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended by both parties.

[7.750] That principle is now firmly entrenched in the common law, but it has its limits. The court must be convinced that the term sought to be implied is one that both parties, in all probability, contemplated at the time of contracting. Terms will not be implied just because they might remove some uncertainty, or, in the view of one of the parties, make the bargain more effective. Nor will they be implied if one or other of the parties would not have agreed to them when contracting. See, for instance, two appeals on similar facts that the High Court heard concurrently: Scanlan’s New Neon Ltd v Tooheys Ltd; Caldwell v Neon Electric Signs Ltd (1943) 67 CLR 169 [7.760] Facts: The plaintiffs manufactured and installed neon advertising signs.

They agreed to install signs on the defendants’ premises and the defendants agreed to pay rent for a specified term of years. Before that term elapsed, legislation made it illegal to illuminate exterior advertising signs because of the war with Japan. The defendants fell into arrears, the plaintiffs sued and the defendants pleaded that the contracts contained an implied condition that they were to be discharged if the signs could not be illuminated.

Held: That argument was unanimously rejected. It was highly unlikely that both parties would have agreed to the inclusion of such a clause if the question had been raised during negotiations. Accordingly, it was not proper to include it as an implied term. As Latham CJ said (at 197): [I]t appears to me, a company whose business it is to provide neon signs would be most unwilling and unlikely to agree to any contract which deprived it of all rent if illumination were limited or prohibited. Doubtless hirers of such signs would be very willing to agree to such a contract, but there is no reason to believe that any person or company whose business it was to supply such signs would have agreed, in effect, to commit commercial suicide if the use of the signs were limited or even prohibited.

[7.770] The current Australian position was laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. It has been confirmed by a number of High Court decisions since: see, for example, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Hawkins v Clayton (1988) 164 CLR 539; and IATA v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 272, among others. 144

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The accepted position is that before the courts will imply a term into a contract, five conditions must be satisfied. Those conditions (which are “cumulative” – in the sense that they must all be satisfied – but which may overlap: see BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283) are: (a)

the term must be reasonable and equitable (which means that, as in Scanlan’s New Neon Ltd v Tooheys Ltd; Caldwell v Neon Electric Signs Ltd (1943) 67 CLR 169 – see above – it must be fair to both parties and must not impose an unnecessary burden or detriment on either of them; terms that would operate in a “partisan fashion” will not be implied: see Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442);

(b)

it must be necessary to give the contract business efficacy (which means that, as in The Moorcock (1889) 14 PD 64 – see above – the term must be necessary to make the contract effective and workable in the context of the parties’ presumed intention, as determined by looking at both the express terms and all of the surrounding circumstances. Therefore, a term will not be implied if the contract is effective without it. See for example, Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd (2013) 296 ALR 465 where the court refused to imply a term into the contract that the parties should “have a right to access information, records and data relating to the Joint Venture” because it was “not necessary to give business efficacy to the JVA. … There is no need for Alliance to have access to the documents … Its rights and responsibilities under the agreement continue independent of whether it has access to documents”);

(c)

it must be so obvious that it goes without saying (which really just restates the “officious bystander” test in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206. Therefore, the relevant question is: “would the parties have readily agreed on the proposed term if it had been suggested to them in the course of their negotiations?”);

(d)

it must be capable of clear expression (which means two things – first, it must be clear exactly what term the parties would have agreed upon if they had thought about it during their negotiations and, second, the proposed term must be one that is capable of being “formulated with a sufficient degree of precision”: see Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 and Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 62); and

(e)

it must not contradict any express term of the contract (because, if it did, it would contradict the parties’ clearly expressed intention. The same limitation also applies if the proposed term would merely deal with something that is already adequately dealt with in the contract anyway). There is, however, one limitation to this fifth condition. If the express terms of the contract include an “entire agreement clause” – see [7.40] – that clause will not prevent terms being implied if they are needed to give the contract business efficacy, unless 145

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the “entire agreement clause” specifically extends to and includes implied terms: see Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 and Barnes v Forty Two International Pty Ltd (2014) 316 ALR 408; [2014] FCAFC 152 at [148].

7.6 THE NOTICE REQUIRED The effect of signature

[7.780] Documents that require signature are generally contractual in nature and the courts will not normally assist people who sign documents without reading them to avoid the consequences of what is essentially their own stupidity. The courts’ general attitude is that “if you sign a document, you are deemed to have read, understood and agreed to its contents”. See, for instance: L’Estrange v F Graucob Ltd [1934] 2 KB 394 [7.790] Facts: The plaintiff purchased a cigarette vending machine from the

defendant on terms contained in a document described as a “sales agreement”. The agreement included the following clause: “This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement or warranty statutory or otherwise not stated herein is hereby excluded.” The clause was in “legible, but regrettably small print”. Mrs L’Estrange signed the agreement without reading it. The vending machine did not work and she sued F Graucob Ltd, alleging breach of a statutorily implied condition of fitness for purpose.

Held: She failed. There was no implied condition of fitness for purpose and, consequently, the defendants were not in breach of the contract. Mrs L’Estrange’s argument that, as she had not read the clause excluding statutorily implied terms she could not be bound by it, failed. The court held that once a document is signed, the signer is deemed to have read, understood and agreed to its terms. Therefore, Mrs L’Estrange could not deny the existence or effect of the clause restricting the terms of the contract to those included in the document. As Scrutton LJ said (at 403): When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.

[7.800] That principle was also more recently applied to the same effect in Australia in two High Court appeals. In one, Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, the Full Court expressly adopted and applied Lord Scrutton’s reasoning in almost identical terms, saying (at 483): Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not

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bound by the agreement recorded in it … Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified

(As to these two possible options, see [7.880]–[7.910].) In the other case, the circumstances were such that the plaintiff appeared to have even less excuse than in L’Estrange v F Graucob Ltd [1934] 2 KB 394 for not reading the document before signing it. See: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [7.810] Facts: During negotiations for the carriage and storage of goods, the

respondent’s agent was asked to sign an “Application for Credit”. Immediately above the space for his signature were the words: “Please read ‘Conditions of Carriage’ (Overleaf) prior to signing.” Those conditions contained an exemption clause that excluded the appellant’s liability for any loss, damage or injury to those goods. The respondent’s agent signed the document without reading it and the respondent later argued that the conditions had, therefore, not become part of the contract. Held: They had become part of the contract and the respondent was bound by them. As the court noted (at 180–81): to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation … that the person who signs either has read and approved the contents … or is willing to take the chance of being bound by those contents … whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it (emphasis added).

Exceptions to the rule

[7.820] There are three major exceptions to the rule governing the effect of signature. They are: (a)

if the document appears to have no contractual effect;

(b)

if the contents of the document or their effect are misrepresented; and

(c)

pleas of “non est factum”.

Apparently non-contractual documents

[7.830] If the document containing the exemption clause is apparently noncontractual, it does not matter greatly whether it is signed or not. If a reasonable person would not expect to find an exemption clause in the document and if any signature was merely intended as, for example, an acknowledgment of receipt, the fact of signature will not make the signatory subject to the clause. See, for example:

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DJ Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 [7.840] Facts: Wright contracted to carry a heavy and valuable piece of

machinery from Doncaster to Clayton for Hill. The machinery was damaged and Hill sued. The contract of carriage had been orally made by telephone between two of their employees. Upon delivery of the machinery to Clayton, Wright’s employee had given two documents to Hill’s employee for signature and they were signed. One of these documents, which appeared to be a receipt for delivery of the goods, contained a clause excluding Wright’s liability for any loss of or damage to goods carried. Wright sought to rely on that clause to escape liability. Held: Wright was liable. It could not rely on the exclusion clause, as it had not been brought to Hill’s notice. The fact of signature by Hill’s employee was immaterial as the signature had not been intended to operate as the acceptance of a contractual term. As Winneke CJ said (at 753): The contract was made orally, the appellant performed its part of the contract by delivering the goods, and it was only at that stage that the form was presented to the respondent for signature. In these circumstances … we can see no justification for holding that … the form became a contractual document … the respondent … regarded it … as nothing more than an acknowledgment by it of delivery of the goods.

The same reasoning can be seen in: Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] 4 VR 661 [7.850] Facts: Iliadis was injured while attending a radio station promotional

function at the appellant’s go-kart track. Before entering he had signed an entry form which he believed licensed him to drive a faster vehicle and which he thought the appellants would use for advertising and marketing purposes (the form was headed “To Help with our Advertising”). He did not read the form before signing it. It contained an exemption clause absolving the appellants from responsibility for (inter alia) any personal injury. Iliadis was injured and sued. The appellants pleaded the exemption clause.

Held: They failed. The exemption clause was not effective because (inter alia) they had not done what was reasonable in the circumstances to bring it to Iliadis’ notice. In particular, there was no evidence that the document in which it was written was intended to be seen as anything other than a registration and licensing form.

Misrepresentation

[7.860] If a person who wants to escape liability by relying on an exemption clause (or his or her servant or agent) misrepresents the clause or its effect, the clause’s full protection will be lost and its effect will be restricted to what it was misrepresented to be. See, for example:

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Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 [7.870] Facts: The plaintiff took a white satin wedding dress trimmed with

beads and sequins to the defendant’s shop for cleaning. The shop assistant gave her a docket headed “receipt” and asked her to sign it. Mrs Curtis asked why her signature was required and the assistant replied that it exempted the defendants from certain specified risks and, in the present instance, from the risk of damage to the beads and sequins on the dress. Mrs Curtis signed the document. In fact, it contained a clause “that the company is not liable for any damage, however arising”. When the dress was returned, it was stained. When Mrs Curtis sued, the defendants relied on the clause to deny liability.

Held: Their defence failed. A clause is not effective if the proferens or anyone acting on the proferens’ behalf misrepresents its effect, however innocently. Here, the clause had been misrepresented as only affecting beads and sequins and that, therefore, was its limit. It did not extend to exclude liability for stains. As Denning LJ said (at 810): In my opinion when the signature to a condition, purporting to exempt a person from his common law liabilities, is obtained by an innocent misrepresentation, the party who has made that misrepresentation is disentitled to rely on the exemption.

Non est factum

[7.880] In certain rare circumstances, a person may be able to escape the effect of signature through a plea of “non est factum” (this is not my deed). The plea of non est factum appeared towards the end of the 16th century. It applied when a deed was “read over” to a person who could not read and the “reading” did not correctly state what was in the writing. In such instances, he or she was not bound by the deed. It was not merely voidable because of the reader’s fraud, it was altogether void. Consequently, even if the subject matter came into the hands of an innocent third party, that innocent third party could acquire no rights. Later the plea was extended to written documents not under seal and, in certain circumstances, was made available to persons who could have, but did not, read the document before signing it. Two things must be proved before a plea of non est factum can succeed: (a)

that the document signed was radically different in character or effect from what the signer thought he or she was signing; and

(b)

that the signer was not careless in signing without checking the contents.

The requirement that the document signed be radically different from what the signatory thought he or she was signing is strictly enforced. If a signatory appreciates the nature of the document and is mistaken only as to its contents or legal effect, non est factum will not assist. See, for example:

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Gallie v Lee [1969] 2 Ch 17; affirmed Saunders (Executrix of the Estate of Gallie, deceased) v Anglia Building Society [1971] AC 1004 [7.890] Facts: Mrs Gallie owned a house on long leasehold. She had made a

will leaving it to her nephew, Wally Parkin, and had handed over the deeds to him. Parkin and a friend, Lee, visited Mrs Gallie and asked her to sign a document that she believed was an assignment of the leasehold by gift from herself to Parkin. In fact, it was an assignment from Mrs Gallie to Lee. Lee mortgaged the house to a building society to pay his own personal debts. When he defaulted under the mortgage, the building society sought possession of the house. Mrs Gallie sued for a declaration that the assignment was void, arguing non est factum.

Held: Her argument failed. The plea of non est factum could not assist because there was no radical or fundamental difference between what she had actually signed and what she believed she had signed. Both were transfers and the sole difference was the beneficiary of the assignment.

The High Court subsequently approved and applied the reasoning in Gallie v Lee in: Petelin v Cullen (1975) 132 CLR 355 [7.900] Facts: Petelin could neither read nor write English. He gave Cullen an

option to purchase his property in exchange for a payment of $50. The option had to be exercised within six months. At the end of that time, it had not been exercised and it lapsed. Petelin then received a cheque for a further $50 and was asked to sign what Cullen said was a receipt for the second payment. It was, in fact, an extension of the option and Cullen purportedly exercised it during the extended period. Petelin refused to transfer the property. Cullen sued for specific performance. Petelin pleaded non est factum.

Held: Specific performance was refused. The document Petelin signed was radically different from what he thought it was. Therefore, a plea of non est factum was open to defeat Cullen’s action.

[7.910] In Petelin v Cullen (1975) 132 CLR 355, the High Court, while approving Gallie v Lee [1969] 2 Ch 17, laid down three conditions which it said had to be fulfilled before a plea of non est factum could be successful. The three conditions were: (a)

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the claimant has to belong to a class of persons who have to rely on others for advice as to what they are signing because of an inability to read resulting from either blindness or illiteracy, or because, through no fault of their own, they are unable to have any understanding of the particular document (as might be the case if, as in PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643, the claimant’s mental capacity is such that he or she has no real understanding of what he or she is signing and, therefore, cannot sign with the requisite intent);

Chapter 7 Contents of a contract [7.920]

(b)

the claimant has to show that the document was signed in the belief that it was radically different from what it was in fact; and

(c)

at least as against innocent third parties, the failure to read and understand the document must not have been due to carelessness on the claimant’s part (however, if no third party is involved, a rogue who fraudulently procures someone’s signature will not be allowed to benefit from that wrongful act simply because the claimant was careless in signing – the signature will be disregarded and the contract, at least to the extent that it benefits the rogue, will not be enforced).

Therefore, it is clear from both Gallie v Lee and Petelin v Cullen that a failure to understand the import of a document, by itself, is not sufficient to establish non est factum. It must be coupled with an inability to understand and good reason for not seeking independent advice before signing. In this context, a defendant will have been careless in signing unless he or she took reasonable precautions to ascertain the true character of the document before signing it. What those reasonable precautions are will differ from case to case and much will depend on whether the defendant was justified in believing what he or she was told. In Petelin v Cullen, for instance, Petelin was held not to have been careless in signing the “receipt” because, when he was paid the first $50, Cullen had told him he would receive a second $50 six months later. When he received the second payment, he quite reasonably believed that it was part of the payment for the initial option. In those circumstances, being asked to sign a “receipt” was not something that should have aroused a reasonable person’s suspicions. However, when deciding whether a defendant was negligent in signing something he or she did not understand, the test is not whether a reasonable person would have signed it; it is whether it was negligent for a person in the position of the signer to have signed it. Therefore, in Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42, where Ford had a congenital intellectual disability and was illiterate, the defence of non est factum was upheld. His son had manipulated him into signing loan documents for the purchase of a cleaning business which the son would run but which would be in the father’s name. It was clear that Ford had not known what he was signing and that “his mind did not go with his pen” but, because of the manipulation by his son, it was held that he had not failed to take the precautions that a person in his position and with his attributes would have taken. He had not been careless.

The effect of a prior course of dealing

[7.920] Where there has been a prior course of dealing between the parties, an exemption clause may be implied into the contract if: (a)

the person against whom the clause is to be used was or should have been aware of its existence from the prior course of dealing; and

(b)

he or she was or should have been aware that the proferens only ever contracted on the basis that the clause would be included. 151

[7.920] Corporations and Contract Law

A clear example of this principle can be seen in Balmain New Ferry Co v Robertson (1906) 4 CLR 379. A further example is in Olley v Marlborough Court [1949] 1 KB 532, where the court adverted to the possibility that the decision may well have been different had the Olleys been regular guests at the hotel. In such a case they would, presumably, have been acquainted with the hotel and its rules and would have had sufficient opportunity to see and appreciate the significance of the notice before making each fresh contract for accommodation. That being the case, they should have been aware that the notice existed and that the hotelier intended to deal only on the basis that it governed each dealing. That would have been sufficient to imply the notice into each new contract. [7.930] Care should be taken, however. The mere fact that there has been a prior course of dealing is not conclusive evidence that the exemption clause has been incorporated into the present contract. The court will still require proof of two things: (a)

that the proferens had done what was reasonably sufficient to bring the clause to the attention of the other party in the first place so that he or she was, or should have been, aware both of the clause and of the fact that the proferens only ever contracted on the basis of the exclusion; and

(b)

that the clause was actually intended to be part of the present contract.

The first of these provisos does no more than restate the basic requirement of notice: unless the clause has been actually or constructively brought to the notice of the other party at some time in the course of their mutual dealings so he or she is, or should be, aware of it, the proferens cannot rely on it. For example, in DJ Hill & Co Pty Ltd v Walter H Wright Pty Ltd ([7.840] above), it was found that although the carrier had performed work for Hill & Co for some eight months before the incident giving rise to the action (each transaction being accompanied by a signed “receipt” containing an exemption clause), the exemption clause had never been brought to the company’s attention. Accordingly, the carrier could not rely on it to exempt liability. As Winneke CJ said (at 753): On the occasion of the first dealing … it is clear that the contract was oral … On that occasion the form, in our opinion, was plainly not a contractual document between the parties … On each subsequent occasion the dealing between the appellant and the respondent followed precisely the same course as on the first occasion … In these circumstances … we can see no justification for holding that any of the subsequent contracts was in any different position from the first … There was, we think, no evidence of any course of prior dealing in which the parties mutually regarded the terms and conditions indorsed on the back of the form as part of the contract between them.

The Federal Court used precisely the same reasoning in Pondcil Pty Ltd v Tropical Reef Shipyard Pty Ltd [1994] ATPR (Digest) 46-134 to hold that an exemption clause printed on a series of job cards (which the parties used to record how much work had been done on the appellant’s boat) was not a term of their contract. It was not a term because the cards were not “obviously contractual” documents and the clause had never been actually drawn to the appellant’s attention. The fact that the parties had dealt with one another on four previous occasions was irrelevant. The contracts had 152

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always been arranged orally, either by telephone or by talking to someone at the shipyard, and the shipyard had never actually brought the clause’s existence or contents to Pondcil’s attention. Consequently, there were no grounds on which it could reasonably be assumed that Pondcil had known (or should have known) that its dealings were intended to be subject to the clause. Therefore, they were not subject to it. The same reasoning can also be found in La Rosa v Nudrill Pty Ltd [2013] WASCA 18 where the court held that an exemption clause that had only ever appeared on the reverse side of invoices issued for previous contracts had never either actually or constructively come to the respondent’s attention. Therefore, it had not been incorporated into the present contract through the parties’ prior course of dealing and, consequently, did not exclude the appellant’s liability for the damage the respondent’s drilling rig sustained when it fell off his low-loader. The second proviso – that the clause was actually intended to be part of the present contract – merely acknowledges that no clause will be incorporated into a contract unless it is clear that the parties intended it to be incorporated. The mere fact that there has been a prior course of dealing and that during that prior course of dealing an exemption clause applied, does not necessarily indicate that the exemption clause was intended to apply to the present dealing. That must be proven and the onus of proof is on the proferens. Discharging that onus might be difficult if there were insufficient prior dealings to support an allegation that the plaintiff “should have known” about the exemption (for example, three or four dealings over a five-year period was held to be insufficient for that purpose in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71), or if the course of dealing does not establish a consistent practice of requiring the exemption. See, for example: McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125

[7.940] Facts: McCutcheon asked his brother-in-law to have his car shipped from Islay to the Scottish mainland. Both men had previously consigned goods with the respondents. McCutcheon had always been asked to sign a “risk note”, while his brother-in-law had sometimes been asked to sign one. On this occasion a “risk note” was, mistakenly, not required. The respondent’s vessel sank and McCutcheon’s car was lost. He sued. The respondents denied liability – arguing that an exemption clause on the risk note had been impliedly incorporated into the contract via the prior course of dealing. Held: They were liable. There was no evidence to show that the parties had intended that the terms of the risk note would be incorporated into this contract – or that any reasonable person would assume that to have been the case. As Lord Reid said (at 128): I do not think that either party was reasonably bound or entitled to conclude from the attitude of the other, as known to him, that these conditions were

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[7.940] Corporations and Contract Law cont. intended … to be part of this contract.

[7.950] On the other hand, if the prior course of dealing clearly establishes an intention to deal only if a particular exemption forms part of the arrangement, the courts are relatively willing to imply that exemption into any contract from which it has been inadvertently omitted. In such cases it is immaterial that the omitted clause may never have actually come to the other party’s attention through the prior course of dealing – prior constructive notice of the clause will suffice. See, for example: Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 [7.960] Facts: SAPPA, a poultry producers’ association, bought contaminated

poultry food from Lillico under an oral contract evidenced by a later “sold note”. The sold note expressly provided that “the buyer takes the responsibility of any latent defects”. Lillico argued that, even though its sold note was submitted too late to form part of the contract, the exemption clause it contained could be incorporated into the agreement through the parties’ prior course of dealing. They had had three or four dealings a month for the previous three years and, in each case, there had been an oral contract followed immediately by a written sold note. The sold notes had all contained the standard exemption clause.

Held: Even though SAPPA had never actually read any of the sold notes, it knew that the clauses were there and it also knew that Lillico always dealt on the basis that they applied to the transaction. That being the case, the court held (at 105) that “SAPPA, by continuing to conduct their business … on the basis of the sold notes … and by not objecting to the condition, must be taken to have assented to the incorporation of these terms in the contract”. The exemption clause formed part of the agreement.

[7.970] Exactly the same reasoning can be found in Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd’s Rep 427 and in Chattis Nominees v Norman Ross Homeworks (1992) 28 NSWLR 338 (especially 343–44). In both cases, the parties had continued dealing with the proferens without objecting to clauses that they knew existed and which they also knew were intended to govern those dealings (even if they had not actually read them). Consequently, the exemptions formed part of the contracts and the parties were bound by them.

7.7 LIMITING THE SCOPE OF EXEMPTION CLAUSES The courts’ general attitude

[7.980] Even where the notice requirements have been completely satisfied and it is clear that the exemption clause has been incorporated into the contract as a term, the courts will still examine the clause carefully to determine (and, possibly, restrict) its

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effect. The approach that the courts take was set out in the High Court’s judgment in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 where the Court said (at 510): … the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in the case of ambiguity.

Interpreting exemption clauses in this way effectively means that they will be given their “natural and ordinary meaning” but that, if their scope can be restricted in any way, the courts will do so, and the benefit of any bad drafting will be given to the party against whom the clause is being used.

Exemption clauses are strictly construed

[7.990] The terminology used in an exemption clause is extremely important. If a clause can be read down to limit its operation to particular breaches or types of breaches, the court will read it down that way. See, for example: Wallis, Son and Wells v Pratt and Haynes [1911] AC 394 [7.1000] Facts: The defendants sold the plaintiffs what they described as

“common English sainfoin” seed. The contract expressly stated that “the seller gives no warranty express or implied as to growth, description or any other matter”. The seed turned out to be “giant sainfoin”. Giant sainfoin is a different and inferior seed and the plaintiffs, debarred from repudiating the contract under the Sale of Goods Act 1893 (UK), sued for damages. The defendants relied on the term excluding any “warranty” to avoid liability.

Held: The defence failed. Under the Sale of Goods Act 1893 there was an implied condition that the seed would correspond with its description as “common English sainfoin” and that condition could not be ousted by a clause excluding “warranties”. Warranties were excluded but conditions, being

terms of a higher status, were not. Accordingly, the clause did not cover the breach and the defendants were liable. [7.1010] Similar reasoning can be seen in Insight Vacations Pty Ltd v Young (2011) 243 CLR 149 where the exemption clause read: Where the passenger occupies a motorcoach seat fitted with a safety belt, neither the operators nor their agents or cooperating organizations will be liable for any injury, illness or death or for any damages or claims whatsoever arising from any accident or incident, if the safety belt is not being worn at the time of such accident or incident.

Mrs Young was injured when the coach on which she was travelling braked suddenly and she fell backwards. At the time she was out of her seat getting something from a bag on the overhead luggage shelf. The High Court held that the exemption clause did not apply – because, when the incident occurred, she had not been “occupying a seat”.

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The contra proferentem rule

[7.1020] The contra proferentem rule states that any ambiguities in the clause will be construed against the person relying on it. The full rule can be found in the Latin phrase “verba chartarum fortius accipiuntur contra proferentem” (the words of a

written document are more forcefully construed against the person inserting them). The rule itself only applies when the clause is ambiguous or where other rules of English language construction are insufficient to resolve any conflict in meaning. See, for example: Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 [7.1030] Facts: Alex Kay was a car-hire company. Its insurance policy with

Hartford Fire Insurance Co contained a clause exempting Hartford from any liability for loss or damage arising from “any breach of contract, agreement or obligation”. Alex Kay hired a Holden to a Mr Houmatsio, who then vanished without trace. It claimed under the policy, but Hartford refused to pay. The refusal turned on the meaning of the words “any breach of contract, agreement or obligation”. Hartford’s reasoning was that the loss was caused by Houmatsio’s breach of contract and, thus, liability was excluded by the clause. Kay’s argument was that the clause was not designed or intended to cover breaches by third parties and that Houmatsio’s breach of contract did not affect Hartford’s liability.

Held: The words used in the clause were ambiguous and were capable of at least three meanings: (a)

any breach by the plaintiff of a contract made with the hirer; any breach

(b)

of the contract of hiring by the hirer; or

(c)

any breach of contract whatsoever.

Sholl J held that the first of these meanings had to be adopted because it was the one least favourable to Hartford. All ambiguities are construed against the person who inserts the clause and, as the clause had been inserted by Hartford, the meaning least helpful to it was the one to be preferred.

[7.1040] In the United Kingdom, the House of Lords has held (see [7.1150] below) that the contra proferentem rule is not to be applied as strictly to limitation clauses as it is to exclusion clauses. This acknowledges that those who do not seek to escape all liability for their wrongful acts should not be treated as harshly as those who seek complete exemption. That reasoning has, quite specifically (and for good reason), not been followed in Australia, with the result that both exclusion and limitation clauses here are construed and treated in exactly the same way: see Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.

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7.8 DOES THE EXEMPTION CLAUSE EXCUSE THE BREACH? Fundamental breach – the underlying concept

[7.1050] In the 1950s the English courts developed the idea that each contract contained some central critical obligation without performance of which there could be no performance of the contract as a whole. This central critical obligation was called a “fundamental term” and breach of it was equivalent to non-performance of the contract. A similar notion, that of “fundamental breach”, was developed at about the same time. It was subsequently defined by Lord Diplock as “the failure by one party to perform a primary obligation [which] has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract”: see Photo Production Ltd v Securicor Ltd [1980] AC 827 at 849. While neither term was specifically mentioned, nor, for that matter, even thought of then, the principles underlying both fundamental term and fundamental breach were well illustrated by Lord Abinger CB in Chanter v Hopkins (1838) 4 M & W 399 ; 150 ER 1484 at 404 (M & W), 1487 (ER), where he said: [I]f a man offers to buy peas of another and he sends him beans, he does not perform his contract … the contract is to sell peas, and if he sends him anything else in their stead, it is a non-performance of it.

The result of finding that there has been either a breach of a fundamental term or a fundamental breach was that the party not in default could put an end to the contract (in the sense that obligations then outstanding no longer had to be performed by either party) and he or she could sue for damages for any loss suffered because of the other party’s non-performance. In essence, the party in fundamental breach was held to have repudiated his or her obligations under the contract (by not performing as required) and that permitted the innocent party to accept that repudiation and, thereby, bring the contract to an end. Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 [7.1060] Facts: Capalaba Park agreed to lease premises in a shopping centre it

was developing to Laurinda. Under the contract, it undertook to ensure that the executed lease was registered but, despite repeated requests from Laurinda, it failed to do so. Finally, Laurinda wrote requiring it “to complete registration within fourteen days”. The registration was not completed and Laurinda terminated the lease.

Held: Capalaba Park’s failure to register the lease was such a fundamental breach of its obligations as to constitute a repudiation of the contract. Laurinda had therefore been entitled to treat the lease as at an end.

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[7.1070] The consequences, therefore, were exactly the same as those that would attend any breach of condition and, to that extent, there was no problem whatsoever with either of the new concepts. Where problems did arise was in the proposed extension of those consequences in cases where the contract was governed by an exemption clause.

Fundamental breach and exemption clauses

[7.1080] The argument the English courts advanced was basically this: a party who acts in fundamental breach is not acting as required or even as allowed by the contract. Therefore, nothing he or she does can be within the contract. Therefore, the defaulter’s actions cannot be governed by the contract’s provisions. As those provisions include any exemption clause, ipso facto, those actions cannot be protected by the exemption clause. The net effect of this reasoning was that, in the United Kingdom at least, exemption clauses were held to be incapable of protecting a party in fundamental breach.

The problem with this view of fundamental breach

[7.1090] The problem with this view of fundamental breach was that it totally ignored the general principle of freedom of contract. If a party freely contracts out of any of the rights that would normally apply to the contract, the courts will generally not interfere unless some mitigating circumstance, such as mistake, misrepresentation, duress, undue influence, fraud or illegality, can be shown. That being the case, there appears to be no underlying policy reason to prevent a person contracting out of his or her rights where the other party is in fundamental breach – if he or she is silly enough to do it. Where a party is silly enough, what remains (and what cannot be contracted away) is the general principle already seen, that exemption clauses will be strictly construed. What this means, in this context, is that the proferens has to convince the court that the clause was indeed intended to cover something as critical as fundamental breach. If the court is not convinced that it was expressly intended to have such a wide application, it will not interpret it in that way. In other words, whether a clause excuses a fundamental breach depends entirely on how it is construed. Finally, in 1980 the House of Lords accepted that there was no general rule that exemption clauses could not protect a party in fundamental breach. Instead, it was a matter of looking at the words of the clause on a case by case basis and deciding whether, on their narrowest construction, they actually excluded liability for the breach that had occurred. The case was:

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Photo Production Ltd v Securicor Ltd [1980] AC 827 [7.1100] Facts: Photo Production hired Securicor to protect its factory. The

contract provided that Securicor was not liable “for any injurious act or default by any employee of [Securicor] unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of [Securicor] as his employer”. Another clause exempted Securicor from liability for damage by fire. A Securicor guard, Musgrove, lit a small fire inside the factory. It rapidly got out of control and the factory and its stock were completely destroyed. Photo Production Ltd sued, relying on Musgrove’s “fundamental breach” to negate the exemption clauses. Held: There was no principle of law that a fundamental breach automatically nullifies the effect of an exemption clause. The court has to construe and apply each exemption clause in the light of the breach or breaches complained of. Here, the clauses were clear and unambiguous. They were intended to limit Securicor’s liability in certain defined instances, including some that might be regarded as constituting fundamental breach. Therefore, while the breaches Musgrove committed might, quite possibly, have been fundamental breaches, that did not matter – they were specifically covered by the exemption clauses. Securicor was not liable.

The Australian position

[7.1110] The Australian courts never adopted the English view of fundamental breach. Instead, they preferred to follow the line, eventually adopted by the House of Lords, that it was all a question of construction. The two major High Court decisions in the area were City of Sydney Council v West (1965) 114 CLR 481 and TNT Ltd v May and Baker Ltd (1966) 115 CLR 353. In the first of these, Windeyer J (at 503) put the court’s attitude succinctly, saying: Much depends in every case upon the precise meaning of the words that the parties used read in their context and circumstances; for the question, as I see it, is one of interpretation. It is not for a court to say that persons may not contract out of [their] obligations … or put new limits on their power to do so. The question for a court is only whether they have done so. The answer to that question, in a case such as this, depends upon the ascertainment of two matters: whether the writing on the ticket in fact formed part of the contract: if so, what is its meaning.

TNT Ltd v May and Baker Ltd was decided on similar reasoning, Windeyer J noting (at 376) that: there is no doctrine that every exemption clause, however widely expressed, is nullified by a “fundamental breach” … a question such as we have in this case [concerning the operation of an exemption clause] is to be resolved by construing the language that the parties used, read in its context and with any necessary implications based upon their presumed intention. It is not to be resolved by putting exemption clauses into a position of peculiar vulnerability.

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The current view – it is all a question of construction

[7.1120] The High Court has since consistently maintained the view that what is important is whether, properly construed, the exemption clause is wide enough to cover the breach complained of. If its words are wide enough to exempt liability for fundamental breach, it will exempt liability for fundamental breach; if they are not, it cannot. See, for example: Nissho Iwai Australia Ltd v Malaysian International Shipping Corp, Berhad (1989) 167 CLR 219 [7.1130] Facts: A container of prawns was stolen shortly after it had been discharged from the defendant company’s ship. Consequently, because the goods could not be delivered, there was a breach of the fundamental underlying obligation of the contract of carriage – “delivery” of the goods did not occur. The bill of lading (the contract) contained a number of exclusion clauses that excluded liability for “any loss or damage to … goods … due to any occurrence … after such goods have been delivered or made available … at the place of delivery”. The plaintiffs argued that this clause could not excuse the defendant’s liability for total non-delivery (for breach of the fundamental obligation) because, if that were the case, it would defeat the whole object of the contract.

Held: Provided the clause was wide enough, on its narrowest construction, to exclude liability for non-performance of fundamental obligations – even to exclude liability for events defeating the main purpose of the contract – it could do so. An exemption clause could even be inserted simply to exclude liability for such breaches. In such cases, it would clearly have that effect because that was what the parties (presumably) wanted. As the court said (at 227): In determining whether an exemption clause should be construed so as to apply to an event which has defeated the main object of the contract, much must depend upon the nature of the events which the clause identifies as giving rise to the exemption from liability. If the happening of a stipulated event will always result in the defeat of the main object of the contract there will be no scope for holding that … the exemption clause is not applicable to that event. But even in cases where the occurrence … will not always defeat the main object of the contract the nature of those events may nevertheless give rise to the inference that the clause was intended to apply to those events even when they occur in circumstances which defeat the main object of the contract.

[7.1140] Consequently, if a party is faced with an exemption clause, all that he or she can do is to look at its construction and try to determine whether, on a proper interpretation (the narrow reading that the courts will give it), it is wide enough to cover the breach complained of. If it is, the proferens will be able to escape liability for even a fundamental breach. If it is not, the proferens will be liable notwithstanding the existence of the clause. As a postscript, it is worth noting that some jurisdictions have now enacted legislation that allows courts to “rewrite” unjust contracts. In appropriate cases, 160

Chapter 7 Contents of a contract [7.1150]

especially where an exemption clause could deny a plaintiff compensation for a breach that has resulted in loss of all or a substantial part of the benefit of the contract, the legislation allows courts to read the clause down and thereby grant some relief. In Australia the Contracts Review Act 1980 (NSW) and Part 2-3 of Ch 2 of the Australian Consumer Law can have that effect.

7.9 EXCLUDING VERSUS LIMITING TERMS Is there a distinction?

[7.1150] In the United Kingdom there was some suggestion that the courts should treat excluding and limiting clauses differently because one (the limiting clause) merely limits the recourse that might be available to a plaintiff, while the other (the exclusion clause) tries to deny rights to remedy completely. On this basis, it has been argued that courts should not treat limiting clauses as harshly as they do exclusion clauses. In Australia the High Court has expressly rejected that view.

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CHAPTER 8

Misrepresentation 8.1 The concept of misrepresentation ........................................................... [8.10] Contractual terms and actionable misrepresentations ............................. [8.10] Non-contractual representations and puff ................................................ [8.20] 8.2 The elements of an actionable misrepresentation .................................. [8.50] 8.3 A false statement ..................................................................................... [8.60] Silence does not constitute misrepresentation ........................................ [8.60] The five general law exceptions to the silence rule ................................ [8.70] Silence and the Competition and Consumer Act 2010 (Cth) ................ [8.190] Disclaimers and the Competition and Consumer Act 2010 (Cth) ......... [8.200] 8.4 Statements of fact .................................................................................. [8.230] Only statements of fact can constitute a misrepresentation ................. [8.230] Statements of opinion ............................................................................. [8.240] Exceptions to the rule ............................................................................. [8.260] Statements of intention ........................................................................... [8.280] Statements of law ................................................................................... [8.310] 8.5 Addressed to the party misled .............................................................. [8.320] Only intended representees may sue .................................................... [8.320] Communication need not be direct ........................................................ [8.340] 8.6 Intended to induce the contract ............................................................ [8.370] Inducement generally .............................................................................. [8.370] Non-inducing statements ......................................................................... [8.380] The representation need not be the sole inducement .......................... [8.500] 8.7 Categories of misrepresentation ............................................................ [8.510] The three categories ............................................................................... [8.510] Fraudulent misrepresentation .................................................................. [8.520] Remedies for fraudulent misrepresentation ............................................ [8.550] 163

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Where the fraudulent misrepresentation has also become a term ....... [8.600] Negligent misrepresentation .................................................................... [8.610] Remedies for negligent misrepresentation ............................................. [8.620] Innocent misrepresentation ..................................................................... [8.630] Remedies for innocent misrepresentation .............................................. [8.640] 8.8 Limitations on rescission ........................................................................ [8.650] A principally equitable remedy ................................................................ [8.650] Restitution should be possible ................................................................ [8.660] Effect of affirmation ................................................................................. [8.670] Lapse of time .......................................................................................... [8.680] Third party involvement ........................................................................... [8.720] Executed contracts .................................................................................. [8.730] 8.9 The effect of legislation ......................................................................... [8.740] 8.10 Commonwealth legislation ................................................................... [8.750] The Competition and Consumer Act 2010 (Cth) ................................... [8.750] Section 18 of the Australian Consumer Law ......................................... [8.760] The elements of section 18 .................................................................... [8.770] The section must apply to the party involved ....................................... [8.780] Must engage in conduct “in trade or commerce” .................................. [8.790] The conduct must be “misleading or deceptive” ................................... [8.820] The intended audience ........................................................................... [8.830] The conduct must have been capable of causing the error ................. [8.840] Evidence that someone has been misled is not necessary ................. [8.880] The conduct must have actually caused the error ................................ [8.890] Remedies for misleading or deceptive conduct ..................................... [8.910] 8.11 The South Australian and Australian Capital Territory provisions ...... [8.920]

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Extracts from Graw, An Introduction to the Law of Contract, Ch 12.

8.1 THE CONCEPT OF MISREPRESENTATION Contractual terms and actionable misrepresentations

[8.10] Many things may be said in the negotiations leading up to a contract. Some will become terms of the contract and some might become collateral contracts in their own right (see Chapter 9). In either case, if the statements turn out to be untrue, the untruth will constitute a breach of contract and the party who suffers will have a cause of action. However, not everything will become either a term of the main contract or a separate collateral contract. Statements made during negotiations but not becoming terms of any contract are called “mere representations”. If a mere representation turns out to be untrue, that untruth is not a breach of contract. Thus, the term “mere” simply means that the untrue statement does not give rise to an action in contract. If, however, the “mere representation” satisfies the tests for an actionable misrepresentation, a number of other quite independent remedies become open. For that reason, it has been suggested that the term “mere representation” should more correctly be replaced with the term “non-contractual representation”. How such non-contractual representations give rise to a cause of action, the causes of action open and the remedies then available are dealt with in this chapter

Non-contractual representations and puff

[8.20] Puff can best be described as a statement in glowing terms made by a trader in praise of his or her own wares (see [3.210] above). Such “mere flourishing descriptions”, as they were described in Dimmock v Hallett (1866) LR 2 Ch App 21, have never been held to give rise to legal rights if or when they proved to be inaccurate. That was simply because purchasers should expect traders to describe their wares in glowing terms and should regard sceptically anything that is not clearly intended as a positive statement of fact. The matter was dealt with by the Latin maxim “simplex commendatio non obligat” (a simple commendation of itself does not give

rise to any obligation). See, for example: Dimmock v Hallett (1866) LR 2 Ch App 21 [8.30]

Facts: Hallett successfully bid for a property being sold at auction. He later discovered that it was not as it had been described in the particulars of sale and he sued to escape the contract on the grounds of misrepresentation. One of his arguments was that the land had been described as “very fertile and improvable” when, in fact, much of it was not. Held: He could not rescind the contract on the basis of that misdescription alone. It was clearly a “mere flourishing description”, which was not intended to

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[8.30] Corporations and Contract Law cont. be taken and which should not have been taken as a positive representation of fact. (See also, Mitchell v Valherie (2005) 93 SASR 76: [3.220] above).

[8.40] However, there is a fine dividing line between general praise on one hand and a representation of fact on the other – a distinction that can often only be made by looking at the statement in the context, and taking into account all of the circumstances in which it was made (including the respective experience and knowledge of both the representor and the representee). Taking all those matters into account, if a statement is a distinct representation of fact its falsity will allow an action for misrepresentation. So, for example, in Smith v Land & House Property Corp (1884) 28 Ch D 7, a statement that “the whole property is let to Mr Frederick Fleck (a most desirable tenant)” when he was in fact bankrupt and behind in the payment of his rent was held to be more than mere puff. It was made by a person who should have known the truth and it had been made in such a way that any reasonable person would take it as fact. Consequently, because it was untrue, the innocent party could rescind the resulting contract.

8.2 THE ELEMENTS OF AN ACTIONABLE MISREPRESENTATION [8.50]

A party alleging misrepresentation must normally prove four things:

(a)

that a false statement was made;

(b)

that that statement was one of fact;

(c)

that it was addressed to the party misled (before or at the time the contract was made); and

(d)

that it was intended to induce and did actually induce the contract.

8.3 A FALSE STATEMENT Silence does not constitute misrepresentation

[8.60] In normal circumstances, there must be some positive statement or conduct on the part of the representor before the false representation will amount to an operative misrepresentation. This may be stated more succinctly as “mere silence does not generally constitute a misrepresentation”. In sale of goods contracts, this principle is summed up in the maxim “caveat emptor” (let the buyer beware). Essentially, that maxim means that the seller is

under no duty to disclose defects in the items being sold. The buyer must take care to discover them before he or she buys. A seller who chooses to stay silent is perfectly entitled to do so. The same reasoning applies to contracts generally, 166

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because parties are not normally under any positive duty of good faith or fair dealing – at least at common law: see W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 where, quoting from Cockburn CJ’s judgment in Smith v Hughes (1871) LR 6 QB 597, 604, both Griffiths CJ (at 577) and Isaacs J (at 584) stated the rule as follows: The general rule, both of law and equity, in respect to concealment, is that mere silence with regard to a material fact, which there is no legal obligation to divulge, will not avoid a contract, although it operates as an injury to the party from whom it is concealed.

However, as their Honours noted, there can be situations where there is a “legal obligation to divulge” – resulting in exceptions to the general rule. Invariably, those exceptions arise when it would be unfair (read “inequitable” or “unconscientious”) to allow a party to rely on silence (read “non-disclosure”) to escape liability for what is, in effect, a misrepresentation of material fact. As Black CJ put it in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, 32: there is in truth no such thing as “mere silence” because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.

The five general law exceptions to the silence rule

[8.70] In each of the following five cases, silence or non-disclosure by one party during negotiations can amount to an actionable misrepresentation for which the other party can seek some form of relief.

Distortion of a positive representation

[8.80] The failure to make full disclosure may operate as a distortion of some positive representation (made either by words or by conduct). That is, the positive representation then becomes only a half-truth. See, for example: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 [8.90]

Facts: After Eurolynx had arranged a “strong tenant” who would sign a six-year lease at an annual rental of $156,000 (something that Krakowski had insisted on), Krakowski agreed to buy Eurolynx’s shop premises (the rent was about 25% above fair market rates). Eurolynx did not disclose to Krakowski that it had entered into a collateral agreement with the tenant, giving him three months rent-free and $156,000 “for the fitting out and stocking of the premises”. All this was to be secretly paid for by Eurolynx, to make sure that the lease (and, therefore, the sale) went through. Shortly after Krakowski took over the premises, the tenant defaulted in paying the rent and vacated. Krakowski then found out about the collateral agreement, wrote to Eurolynx rescinding the contract “by reason of … misrepresentations with respect to the terms of the lease” and demanding refund of the purchase price.

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cont. Held: Eurolynx’s failure to fully disclose all aspects of its leasing arrangement with the tenant (its “half-truth”) constituted fraudulent and misleading conduct, which was sufficient for Krakowski to rescind the contract and recover the purchase price.

Subsequent discovery that the statement was false

[8.100] The representor may subsequently discover that the statement he or she made to induce the contract was false. While the caveat emptor rule generally allows a party to remain silent, even about facts that would be important to the other party, anyone who does make a statement that he or she believes to be true but which is then discovered to be false is under a positive duty to correct that erroneous statement. See, for example: Lockhart v Osman [1981] VR 57 [8.110] Facts: The defendant’s agent advertised cattle which were to be

auctioned as “in excellent condition” and “well suited for breeding purposes”. In fact, as he later became aware, the cattle had been exposed to brucellosis, a highly contagious disease that affected their reproductive capabilities.

Held: His failure to warn potential purchasers that the advertised description could be false, or to correct that description, was an actionable misrepresentation. He was under a positive duty to correct the possibly erroneous impression that his previous advertisement would have created in the minds of bidders and, as he had not done so, the contracts could be set aside.

The statement becomes untrue

[8.120] A previously made statement may become untrue because of a change in circumstances. The difference between this exception and situations where the representor subsequently discovers that his or her statement was, in fact, false is that in this instance the original statement was true when it was made; it only became false as the result of subsequent circumstances. The same principle applies to both exceptions, however: a representor who engenders a misapprehension must take positive steps to correct it. See, for example: With v O’Flanagan [1936] 1 Ch 575

[8.130] Facts: The plaintiffs contracted to purchase Dr O’Flanagan’s medical practice. He told them that it produced an income of approximately £2000 per year – and at that time it did. However, in the four months between making that statement and signing the contract, the practice became virtually worthless. (O’Flanagan became ill and left it in the hands of a number of locum tenentes.) When they discovered the truth, the plaintiffs sought rescission and repayment of

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Chapter 8 Misrepresentation [8.160] cont. the purchase money – arguing that the contract had been induced by misrepresentation. O’Flanagan’s estate argued that there was no misrepresentation because the statement was true when he made it.

Held: The plaintiffs were entitled to rescind and to recover the purchase price. When a representation is made to induce a contract, it is not sufficient that the statement be true only at the time that it is made. If circumstances change prior to the contract being executed, the representor has to advise the representee of those changes.

Parties in a fiduciary relationship

[8.140] Where a statement is made by a party in a fiduciary relationship, he or she has a positive duty to disclose all material facts of which he or she is aware – whether asked about them or not. A fiduciary relationship is one in which one party reposes trust and confidence in the other as a direct consequence of the relationship. That other is then legally bound to act for the benefit of the former. Examples of such relationships include those between partners, trustees and beneficiaries, and agents and their principals. In such relationships, the fiduciary is trusted and the law takes a very grim view of any attempt to abuse that trust. Therefore, when a contract arises between parties in a fiduciary relationship, the fiduciary is required to disclose all facts of which he or she is aware that are material to the dealing – even if those facts were not the subject of specific queries. This is to ensure that the other party can make a fully informed decision about whether to contract on the terms that the fiduciary is offering. See, for example: Hill v Rose [1990] VR 129 [8.150] Facts: The defendants induced the plaintiff to pay $250,000 to buy a stake in their seafood business – failing to disclose that the business was then seriously insolvent, and that it was being conducted for the benefit of a family trust, of which they were beneficiaries. When the plaintiff discovered the truth he sued to recover his money.

Held: At the time they agreed, the parties were in a quasi-partnership relationship which was, therefore, fiduciary. The defendants were therefore under a positive duty to disclose all material facts to the plaintiff. They had clearly breached that duty and their silence (their non-disclosure of those material facts) entitled the plaintiff to recover his money.

[8.160] See also Conlon v Simms [2006] 2 All ER 1024 where a prospective partner in a firm of solicitors was held to have had a positive duty to disclose anything that would affect his status as a solicitor or his ability to enter into the proposed partnership agreement. Consequently, his deliberate failure to disclose that he had 169

[8.160] Corporations and Contract Law

been involved in promoting and facilitating bogus transactions which, when they were discovered, resulted in him being struck off the roll of solicitors, was held to amount to a fraudulent misrepresentation. His fellow partners were therefore entitled to recover damages in the tort of deceit (see [8.550]–[8.590] below) for the losses they sustained as a result of that non-disclosure.

Contracts “uberrimae fidei”

[8.170] Contracts “uberrimae fidei” are those requiring “utmost good faith”. What this means is that the parties are again required to make full disclosure of all material facts known to them (those facts which might influence the other party’s decision whether to enter into the contract – or not), whether asked about those facts or not. The reason, generally, is that such contracts arise where one party is in a particularly strong position of knowledge, compared with the other. The rule merely prevents abuse of that position of knowledge for unfair gain. The major categories of contract falling under this heading are contracts of insurance and what might be described as “family arrangements”. In contracts of insurance, both parties are required to act in “utmost good faith”: see Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 31. This means that the insurer may be required “to act with due regard to the legitimate interests of an insured, as well as to its own interests”: CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1 at [15]. Conversely, the insured is required to disclose all facts that might be material to the risk insured against. If he or she fails to do so, the benefit of the insurance cover can be lost because of the non-disclosure. The law in this area has been partially amended by the Insurance Contracts Act 1984 (Cth) but the general principle still stands. It was succinctly stated by Lord Blackburn in Brownlie v Campbell (1880) 5 App Cas 925 at 954 in the following terms: [I]f you know any circumstances at all that may influence the underwriters’ opinion as to the risk he is incurring and consequently as to whether he will take it or what premium he will charge if he does take it, you will state what you know; and the concealment of a material circumstance known to you, whether you thought it material or not, avoids the policy.

With family arrangements, especially those for the settlement of family property, equity requires that each party make a full and complete disclosure of all material facts of which he or she is aware. Failure to do so renders the settlement voidable at the option of any family member deceived by the non-disclosure. See, for example: Gordon v Gordon (1821) 3 Swan 400; 36 ER 910 [8.180]

Facts: The parties were brothers who had agreed on a division of the family estate. The plaintiff believed that he had been born before his parents’ marriage and that he was, therefore, illegitimate. The younger brother knew that that was not the case and that his brother was their father’s rightful heir. He

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Chapter 8 Misrepresentation [8.190] cont. deliberately omitted to disclose that information. Nineteen years later, the elder brother discovered the truth and sued to have the settlement agreement set aside. Held: The agreement was set aside. The critical point was the fact that the younger brother had known the truth but had remained silent. His failure to make full disclosure where the law demanded it rendered the agreement voidable.

Silence and the Competition and Consumer Act 2010 (Cth)

[8.190] The Australian Consumer Law (Sch 2 to the Competition and Consumer Act 2010 (Cth)) prohibits parties from engaging in “conduct that is misleading or deceptive or is likely to mislead or deceive” – both generally (see s 18) and in particular situations (see ss 29, 30, 31, 33, 34 and 37). In appropriate cases, therefore, a plaintiff may be able to argue that the other party’s silence was, in its context, misleading or deceptive, that it constitutes a breach of the Act and that, therefore, one or more of the Act’s statutory remedies should be available – even though the conduct might not have amounted to misrepresentation under the general law. This will especially be the case where the plaintiff can show that he or she only contracted on the basis of a false impression positively engendered by the other party’s silence. Mere silence, by itself, though will not normally be enough – especially in commercial transactions where the parties are dealing at arm’s length and one has information that, if disclosed, could alter how the other will negotiate. In such cases, as Gleeson CJ noted in Lam v Ausintel Investments Australia Pty Ltd [1990] ATPR 50,866 at 50,880: This does not of itself impose any obligation on the first party to bring that information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonest or even sharp practice.

What is required before silence will constitute misleading or deceptive conduct is a deliberate or intentional withholding of information where there is a “duty” to disclose it. That “duty” is not a formal duty in a common law or equitable sense – it is just something that arises whenever there is a “reasonable expectation” that the information would be disclosed. As Samuels JA noted in Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 at 88: silence … may simply be the element in all the circumstances of a case which renders the conduct in question misleading or deceptive (emphasis added).

So, for example, in Lubidineuse v Bevanere Pty Ltd (1984) 3 FCR 1; 55 ALR 273, the purchaser of a business had been led to believe that a key employee would remain after the sale. The vendor’s failure to disclose that the employee had changed her mind and intended to leave to set up her own business in competition with the business being sold was held to constitute misleading or deceptive conduct. 171

[8.190] Corporations and Contract Law

Similarly, in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; 79 ALR 83, a restaurant owner was found to have engaged in misleading or deceptive conduct because he failed to tell a potential buyer that the seating he had seen during his inspection – and which he obviously thought had the required council and other approvals – was well in excess of the legal maximum. The same reasoning can be seen in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 where purchasers buying a home unit at Noosa “off the plan” were not told that the proposed access driveway did not form part of the common property. Even though that non-disclosure would not have given rise to an action under the general law (because it related to the quality of the property and did not affect title), it was held, in the circumstances, to constitute misleading or deceptive conduct and the contract was set aside. In all three cases, the reasoning and outcomes were almost identical to that which might have been expected under the “distortion of a positive representation” or “statement becomes untrue” exceptions discussed in [8.80]–[8.90] and [8.120]–[8.130] above. [8.195] In summary then, whether silence (or non-disclosure) constitutes misleading or deceptive conduct depends on a consideration of a number of general principles. They include (as French CJ and Kiefel J discussed them in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357): 1.

For conduct (including silence) to be misleading or deceptive it need not involve an express or implied representation; it need only lead, or be likely to lead, others into error (Miller v BMW at [15]).

2.

To determine whether silence or non-disclosure has misled or deceived (or is likely to mislead or deceive) “all relevant circumstances” must be considered (Miller v BMW at [18]).

3.

Those circumstances must give rise to a “reasonable expectation” that, if a relevant fact existed, it would be disclosed (Miller v BMW at [18]).

4.

Whether the circumstances do give rise to such a “reasonable expectation” is determined objectively (Miller v BMW at [18]).

5.

Whether an expectation is “reasonable” may differ – depending on whether the non-disclosure arose in dealings with members of the public, or in dealings between entities in commercial negotiations (Miller v BMW at [19]).

6.

In commercial dealings, whether silence (or non-disclosure) is misleading or deceptive will be determined by taking into account the circumstances and context within which the withholding of information took place. Relevant considerations could include the other party’s knowledge and, as in that case, the existence of common assumptions and practices (either established between the parties or prevailing in the particular profession, trade or industry in which they carry on business) (Miller v BMW at [20]).

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7.

Finally, as a general proposition, s 18 does not require a party in commercial negotiations with another party of equal bargaining power and competence to volunteer information to assist the other party’s decision-making, especially where that would simply allow the other party to avoid the consequences of carelessly disregarding its own interests (Miller v BMW at [22]).

In Miller v BMW, the Court found that, in a commercial dealing between an insurance broker and an experienced premium lender, the fact that the broker had not disclosed the non-cancellable nature of the policy was not misleading or deceptive conduct. Taking all the circumstances of the transaction into account, the financier could not have had a “reasonable expectation” that the broker would have alerted it to that particular aspect of the insurance. See also Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167 (especially at [209]) and Traderight (NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94 (especially at [191]–[192]. In the latter case Barrett JA (with whom Bathurst CJ and Beazley P agreed) also noted (at [193]) that: it is no answer to a claim of misleading or deceptive conduct by silence to say that the person misled should have made his or her own enquiries and that, had they done so, it would have revealed the true position.

The effect of the Competition and Consumer Act 2010 (Cth) is discussed in more detail at 8.10 below.

Disclaimers and the Competition and Consumer Act 2010 (Cth)

[8.200] What happens if a misrepresentation occurs in the course of negotiations but the formal contract then includes an express disclaimer to the effect that any such representations may not be accurate, should not be relied on and should be independently checked? In such cases, the operation of the parol evidence rule (see [7.20] above) combined, where appropriate, with the rules governing “entire agreement” clauses (see [7.40] above) and the effect of signature (see [7.780]–[7.810] above) would normally result in the clause prevailing over the misrepresentation, which would therefore not be actionable. That, however, is not what happens under the misleading or deceptive conduct provisions of the Competition and Consumer Act 2010 (Cth). A positive misrepresentation, even if it is subsequently disclaimed, can still be misleading or deceptive and, therefore, the party misled may still be entitled to one or more of the remedies provided for under the Act. See, for example: Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 [8.210]

Facts: In the course of negotiating a lease of its commercial premises in Sydney, Lezam’s agent represented to the prospective tenant, Seabridge, that the floor area was about 24,000 square feet. The agent also subsequently gave

173

[8.210] Corporations and Contract Law cont. Seabridge a two-page itemised lease schedule that, inter alia, confirmed that figure in writing. At the foot of each page, however, was a disclaimer in small but legible print stating that the details in the schedule “are believed to be correct but any intending tenant/purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to the correctness of each of them”. Some time after Seabridge entered into the lease a survey revealed that the floor area was about 12% less than the agent had represented. Seabridge sued for damages, arguing that the representation constituted misleading or deceptive conduct under the then equivalent of the Competition and Consumer Act 2010 (Cth), and that, as a result, it had paid more rent than it would have paid if it had known the truth. Lezam sought to rely on the disclaimer.

Held: The misrepresentation was misleading or deceptive conduct for the purposes of the Act and, in the circumstances, the fact that it was later qualified by a disclaimer did not alter that fact. The disclaimer could not be looked at in isolation. It had to be seen as part of the agent’s overall conduct and if that conduct, taken as a whole, was misleading or deceptive (or likely to mislead or deceive) – as it was here – Seabridge was entitled to the remedies provided for in the Act. As Burchett J said (at 557): [a] disclaimer or qualification will frequently have little or no effect on the impact of a misrepresentation. A man may tell a lie loudly, while murmuring the truth inaudibly, unconvincingly, or so blandly that it is unlikely to receive any hearing. Much the same may be true of a disclaimer which is inconspicuous or very general, or apparently very formal … If such a clause is to be effective, it must be by enabling the conduct as a whole … to be seen as not misleading (emphasis added).

[8.220] That case has been widely followed since and is authority for the proposition that disclaimers or exclusion clauses will generally not be an effective defence to claims of misleading or deceptive conduct under the Competition and Consumer Act 2010 (Cth) – especially because, as Burchett J also pointed out in Burg Design Pty Ltd v Wolki (1999) 162 ALR 639 at 649: In most cases, the written contract containing such a clause will only be presented to a party after the representation has already done its work of persuasion. If a party is thoroughly persuaded that a contract is favourable, the presence of a clause, particularly a printed clause which appears to be part of a legal form, suggesting there would be a defence to a claim which is not at all contemplated may not have a significant deterrent effect.

Therefore, if a disclaimer is to be effective it must be presented in such a way that the other party, as a matter of fact, is not misled or deceived by what the representor has done – when that is looked at as a whole. For example, in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 a real estate agent provided the prospective purchasers of a waterfront property with a brochure that included a survey diagram inaccurately showing that a swimming pool was entirely within the property. The 174

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brochure stated that the information in it had been obtained from other sources that the agent believed to be reliable but that its accuracy was not guaranteed and that interested persons should rely on their own inquiries. Taking all the circumstances into account, the agent’s overall conduct there was held not to be misleading or deceptive. As Gleeson CJ, Hayne and Heydon JJ explained (at 609): it would have been plain to a reasonable purchaser that the agent was not the source of the information which was said to be misleading. The agent did not purport to do anything more than pass on information supplied by another or others. It both expressly and implicitly disclaimed any belief in the truth or falsity of that information. It did no more than state a belief in the reliability of the sources.

That reasoning has also been expressly endorsed in Campbell v Backoffıce Investments Pty Ltd (2009) 238 CLR 304.

8.4 STATEMENTS OF FACT Only statements of fact can constitute a misrepresentation

[8.230] For a false statement to give rise to an action in misrepresentation, it must be a statement of existing or past fact. It cannot be: (a)

a statement of opinion; or

(b)

a statement of intention or a promise as to the future.

There is also a possible problem with false statements of law.

Statements of opinion

[8.240] Statements of opinion do not normally give rise to an action in misrepresentation, for the simple reason that no one should be held to a statement unless he or she warrants its truth. Where it is clear that what is given is merely an opinion, a prudent person is expected to inquire further. If he or she relies and acts on the statement without checking its accuracy, it is entirely at his or her own risk. See, for example: Bisset v Wilkinson [1927] AC 177 [8.250] Facts: While negotiating a contract for the sale of his farm, the owner

stated that it could carry 2000 sheep. Both parties were aware that the vendor had never run sheep on the property and that the figure given was a calculated estimate. When the purchaser discovered that the property could not carry that number of sheep, he sought to rescind the contract, alleging misrepresentation. Held: The statement was not a misrepresentation of actual capacity; it was merely an honest statement of opinion and that fact should have been readily apparent to the purchaser. Consequently, there had been no misrepresentation and the purchaser had no grounds to rescind.

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Exceptions to the rule

[8.260] There are four exceptions to the rule that statements of opinion will not normally give rise to an action in misrepresentation. They are: (a)

where the representor never held the opinion in the first place (that is, where he or she lied);

(b)

where, although the representor did hold the opinion, no reasonable person could have held it;

(c)

where, although the statement was clearly couched as an opinion, the representor implied that he or she knew facts that justified that opinion (see Smith v Land & House Property Corp: [8.40] above); and

(d)

where the facts were not equally known to the parties and an opinion was given by one who should have known the facts or who was in a far stronger position to ascertain those facts. See, for example:

Esso Petroleum v Mardon [1976] QB 801 [8.270] Facts: Esso developed a service station site and induced Mardon to

lease it by assuring him that it was likely to have a throughput of 200,000 gallons a year. Mardon thought the estimate was a little high but, because of Esso’s professed experience and expertise in estimating petrol sales, he accepted it. In fact, throughput never exceeded 78,000 gallons and, when Esso sued him for possession of the premises, moneys owed and mesne profits, Mardon counterclaimed for damages, alleging (inter alia) negligent misrepresentation. Esso argued that their forecast of throughput was merely a statement of opinion and that they could not be held liable if Mardon acted on it.

Held: Esso was liable. Because they had held themselves out as having special knowledge and expertise, they had a duty to ensure that what they said was accurate. In the circumstances, their statement was not simply a statement of opinion on which no reasonable person would have relied. As Lord Denning MR said (at 820): if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another – be it advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages.

Statements of intention

[8.280] As with statements of opinion, statements of intention and promises as to the future that are made to induce a contract do not normally give rise to an action in misrepresentation – even if the other party has relied on them and altered his or her position as a result of them: see Bill Acceptance Corporation Ltd v GWA Ltd (1983) 176

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78 FLR 171, 179. For a representee to sue successfully on a false promise as to the future, he or she must show that that promise has become part of the contractual obligation (that is, that it has become a term of the contract: see [7.220]–[7.230] above). The reason is simple: statements of intention and promises as to the future are neither true nor false at the moment that they are made. They are merely statements of what the representor intends to do. However, in certain circumstances, a statement of future intention can be regarded as a misrepresentation of existing fact. That will occur if, when the statement was made, the representor either did not intend or did not have the ability to put that intention into effect. In such cases, the statement of intention is a misrepresentation of fact because what is misrepresented is the representor’s state of mind at that time. He or she led the other party to believe that certain action was intended when that was not, in fact, the case. For example, see: Edgington v Fitzmaurice (1885) 29 Ch D 459 [8.290] Facts: The plaintiff was induced to subscribe for debentures by

statements in a prospectus issued by the defendants. The statements were to the effect that the money would be used to complete alterations to buildings the company occupied, to purchase horses and vans and to develop the company’s trade. In fact, the loan was to pay off existing liabilities. The plaintiff sued to recover his money.

Held: He succeeded. While the statement in the prospectus was one of “intention” (in that it purported to represent what the company would do with the money in the future), it was, in truth, a misrepresentation of fact because the directors had never intended to use the money in the specified manner. As Cotton LJ said (at 479–80): [i]t was argued that this was only the statement of an intention, and that the mere fact that an intention was not carried into effect could not make the defendants liable … I agree that it was a statement of intention, but it is nevertheless a statement of fact … [if] the objects of the issue of debentures were [not] those which were stated in the prospectus the defendants were stating a fact which was not true; and if they knew it was not true … they would be liable.

[8.300] The same principle was applied in Fitzwood v Unique Goal (2001) 188 ALR 566 where Finkelstein J noted (at 593) that: although the implicit statement or representation that induced the making of the … agreements was a statement or representation as to a future event (that the management fee would be paid), such a statement or representation implies a statement of the promisor’s present intention which, if untrue, can be treated as a misrepresentation.

See also Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 [48]–[50].

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Statements of law

[8.310] It has traditionally been thought that, just like statements of opinion and statements of future intention, mere misstatements of the law cannot give rise to an action in misrepresentation. That is, if one party misrepresents the true legal position by, for example, saying that council by-laws zone land for a particular purpose when they do not, the other party, who contracts believing that statement to be true, cannot seek relief for misrepresentation when he or she discovers that it was false. This view was based on the assumption that everyone should know the law or, as Mellish LJ put it in Beattie v Lord Ebury (1872) LR 7 Ch App 777, 803, “it [is] as much the business of the plaintiff as of [the defendants] to know what the law [is]”. However, it had the potential to be very unfair, especially when the statement being relied on was made in such a way that the representee was dissuaded from making inquiry of his or her own. For this reason the courts have traditionally treated a number of misrepresentations, which could be classed as misrepresentations of law, as misrepresentations of fact. Those that have been treated in this way have included: (a)

wilful misrepresentations of the law;

(b)

statements of mixed law and fact;

(c)

representations as to the nature or effect of private rights (as opposed to common law or statutorily given rights); and

(d)

statements of law where the representor knows or should suspect that the representee will rely on the representor’s superior knowledge of the law.

In other words, the courts have been prepared to find that a false statement of law can give rise to an action in misrepresentation if it was reasonable to expect that the person to whom it was made would rely on it when deciding whether to contract. Consequently, when determining whether a particular misstatement has become an actionable misrepresentation, the real question should probably be, not whether the misstatement was one of fact or of law, but whether, when all things are considered, it was reasonable for the representee to rely on what the representor said and whether the representee was deceived as a result of his or her reliance. This view is not really a major departure from the reasoning that the courts have used in the past. It is consistent with Lord Denning’s comments in Andre & Cie v Ets Michel Blanc & Fils [1979] 2 Lloyds LR 427, 430 that “the distinction between law and fact is very illusory” and it is probably more in line with what may now be expected from the High Court, given its expressed preference, in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, to do away with the traditional distinction between payments made under mistakes of fact and payments made under mistakes of law.

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8.5 ADDRESSED TO THE PARTY MISLED Only intended representees may sue

[8.320] To succeed in an action for misrepresentation, a plaintiff must not only show that he or she acted on a false statement but also that he or she was its intended recipient. Those who hear and act on false information can be: (a)

those to whom it was communicated directly;

(b)

those to whom it was communicated indirectly; and

(c)

those who otherwise became aware of it.

Only those in categories (a) and (b) can claim to be “representees”. Therefore, only they can sue for misrepresentation if what they are told proves to be false. For example, see: Peek v Gurney (1873) LR 6 HL 377 [8.330] Facts: When Overend and Gurney Co Ltd was incorporated, the

directors issued a prospectus containing false and misleading information. It was intended to induce members of the public to apply for shares. The plaintiff did not apply for shares then, but he did buy them on the open market three to five months later. Shortly thereafter, the company was wound up and the plaintiff lost approximately £100,000. He sued the directors of the company for indemnity – alleging that he had been induced to purchase shares by the misrepresentations contained in the prospectus. Held: His action failed. The prospectus had only been aimed at those who might subscribe for shares and not at those who might subsequently buy them on the open market. As the plaintiff fell into the latter category, he was not within the class of persons to whom the representation was directed and thus had no action. As Lord Chelmsford said (at 399–400): It appears to me that there must be something to connect the directors making the misrepresentation with the party complaining that he has been deceived and injured by it … [so that] … the parties in one way or another are brought into direct communication … the purchaser of shares in the market on the faith of a prospectus which he has not received from those who are answerable for it cannot by action on it so connect himself with them as to render them liable to him for the misrepresentation contained in it, as if it had been addressed personally to himself.

Communication need not be direct

[8.340] A plaintiff wanting to take action on an alleged misrepresentation need not show that he or she received the representation direct. All that must be shown is that the representation was made to someone with the intention that it would be passed on to and be acted on by him or her as a representee. See, for example:

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[8.340] Corporations and Contract Law

Commercial Banking Co (Sydney) Ltd v RH Brown & Co (1972) 126 CLR 337 [8.350] Facts: The respondent wool growers had sold wool to a dealer. Before

delivery, they asked their bank to make inquiries about the dealer’s financial standing. Their bank made inquiries of the dealer’s bank (the appellant) and was assured that the dealer “would be safe for its trade engagements generally”. Relying on this assurance – which the appellant bank knew to be untrue – the respondents allowed the dealer to take their wool on credit. When the dealer defaulted in payment, the wool growers sued the appellant bank.

Held: The wool growers were entitled to recover. The appellant bank had known that the report was intended for a customer of the inquiring bank and that it would be passed on to and acted on by that customer. The fact that the report was not made direct to the customer was irrelevant.

[8.360] See also, Milner v Delita Pty Ltd (1985) 61 ALR 557 at 573–74 where Lockhart J explained that the basis of liability in such circumstances is found in the representor’s implied intention that the representation would be passed on to others.

8.6 INTENDED TO INDUCE THE CONTRACT Inducement generally

[8.370] To succeed in an action for misrepresentation, the representee must show that the offending statement was both intended to induce and successful in inducing the contract. This is because misrepresentation is wholly aimed at relieving parties of obligations entered into because of some material misstatement that induced the contract. Unless the statement was intended to have that effect, and unless the representee was actually misled, there is little justification for providing any relief.

Non-inducing statements

[8.380] In each of the following four situations, the untrue representation does not give rise to an action in misrepresentation – because it did not induce the contract.

Where the representee is not aware of the representation

[8.390] This exception merely acknowledges that no one can be induced to contract by a representation of which he or she was not aware. See, for example: Re Northumberland and Durham District Banking Co; Ex parte Bigge (1858) 28 LJ (Ch) 50 [8.400]

Facts: Bigge, a shareholder, sought rescission of the contract under which he had acquired his shares – alleging that he had been induced to purchase them by misrepresentations as to the company’s financial state.

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cont. Held: He failed. Although there had been a number of false reports about the company’s financial health before he applied for the shares, he could not show that he had ever read or become aware of them – or, more importantly, that he had been influenced by them when making his decision to buy.

Where the representee knows the representation to be false

[8.410] A representee who knows that a representation is false cannot argue that he or she was induced to contract by its falsity. No reasonable person acts on a representation that he or she knows to be untrue. However, the representee must actually know that the statement is false. If he or she merely had the means of discovering the falsity but did not take the opportunity to do so, an action may still succeed if there was actual reliance on the representation. See, for instance: Redgrave v Hurd (1881) 20 Ch D 1 [8.420] Facts: Hurd was induced to purchase part of Redgrave’s legal practice

by Redgrave grossly overstating its earnings. Hurd had been given an opportunity to examine the accounts and, had he done so, he would have discovered the truth. Instead, he relied on the appellant’s statements and, when he discovered they were untrue, he sought to rescind the contract.

Held: He succeeded. He had been misled by Redgrave’s representation and, having thus been induced to enter into the contract, he was entitled to avoid it.

Where the representee does not act on the representation

[8.430] When a representee does not act on a representation, the representation clearly does not induce the contract. Consequently, there can be no action in misrepresentation. This can occur in two ways: first, if the representee does not rely on the representation but on some independent investigation, assessment or opinion. See, for example: Attwood v Small (1838) 6 Cl & Fin 232; 7 ER 684 [8.440]

Facts: The respondents contracted to buy a mine, the earnings and capabilities of which had been exaggerated by the vendor during the negotiations. Not satisfied with the vendor’s claims, the respondents engaged their own agents to examine the property and the vendor’s accounts. The agents reported that the vendor’s statements were substantially correct and the sale was then completed. Six months later, the purchasers discovered that the statements were untrue. They tried to rescind.

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cont. Held: They failed. The purchasers had not relied on the vendor’s statements but on their own independent investigations. Therefore, the statements were not operative misrepresentations because they had not induced the contract.

[8.450] The second way in which the right to sue can be lost is if one party makes an inaccurate claim but then corrects it before final agreement is reached. In such cases the resulting contract will not have been induced by the earlier misrepresentation. See, for example: Holmes v Jones (1907) 4 CLR 1692 [8.460] Facts: While negotiating the sale of a pastoral property, the defendants

innocently misrepresented the number of stock on it. They later informed the plaintiff’s agent of the true position (and he verified it). Agreement and sale followed. The plaintiffs subsequently sought to have the contract set aside because of the defendants’ “misrepresentation”.

Held: Because the defendants had corrected their earlier misstatement, the contract had not been induced by their “misrepresentation”. Therefore, it could not be set aside.

Where the representation is not material to the contract

[8.470] To avoid a contract for misrepresentation, the plaintiff must show that the misrepresentation was material – that is, that it played some part (although not necessarily a major part) in inducing the contract; that it was at least one of the reasons he or she entered into the contract. Therefore, if a plaintiff cannot show that the misrepresentation influenced his or her decision in some way (that is, that it was material to that decision), the contract cannot be rescinded for misrepresentation. However, to be material, the statement need not relate directly to the contract’s subject matter; it need only be an inducement to the final contract. See, for instance: Nicholas v Thompson [1924] VLR 554 [8.480]

Facts: The plaintiffs contracted to purchase the defendant’s interest in a new film process. During the negotiations, the defendant represented that he had been offered a large sum of money for it but had refused to sell. That was untrue. When the plaintiffs discovered the truth, they sought to rescind the contracts and to recover their money. Thompson argued that his statements “were not and could not be regarded in law as material”. Held: The statements were material. They had played a part in inducing the contract and the plaintiffs were therefore entitled to recover their money. As McArthur J noted (at 577): A representation is material when its tendency or its natural and probable result is to induce the representee to act on the faith of it in the kind of way

182

Chapter 8 Misrepresentation [8.510] cont. in which he has proved to have in fact acted.

[8.490] Consequently, if the statement does actually induce a representee to act in a particular way, especially in cases of fraudulent misrepresentation, it will be material. It will generally not be material only if it can be shown that a reasonable person would not have acted on it because, for instance, it was patently false or an exaggeration (for example mere puff).

The representation need not be the sole inducement

[8.500] Provided the misrepresentation is one of the factors that induced the representee to contract, he or she can claim relief. For example, in Edgington v Fitzmaurice ([8.290] above), the plaintiff was induced to subscribe for debentures partly because of the misrepresentation as to the manner in which the money would be used, but also because of his own mistaken belief that debenture holders would have a charge on the company’s property. He admitted in evidence that he would not have lent the money but for that incorrect belief but, nevertheless, he was held to be entitled to rescind because of the directors’ misstatement of intended use. That statement had been an inducing factor. The net result is that, as McHugh J put it in Henville v Walker (2001) 206 CLR 459, 493 (citing with approval comments by Wilson and Brennan JJ in Gould v Vaggelas (1984) 157 CLR 215 at 236 and 250–51): There is a long-standing recognition of the possibility that two or more causes may jointly influence a person to undertake a course of conduct … a representation need not be the sole inducement in sustaining the loss. If “it plays some part even if only a minor part”, in contributing to the course of action taken … a causal connection will exist.

8.7 CATEGORIES OF MISREPRESENTATION The three categories [8.510]

There are three categories of misrepresentation:

(a)

fraudulent misrepresentation;

(b)

negligent misrepresentation; and

(c)

innocent misrepresentation.

The classification of a particular misrepresentation as either fraudulent, negligent or innocent will depend on the representor’s knowledge and intention when he or she made the untrue statement. The classification is important because each category of misrepresentation involves a different level of culpability, and the remedies available to an innocent party vary according to the category involved – though, in every case, the person misled may 183

[8.510] Corporations and Contract Law

rescind the resulting contract: see Redgrave v Hurd (1881) 20 Ch D 1, cited with approval in Fitzwood v Unique Goal (2001) 188 ALR 566 at 592. In all three cases the innocent party can also plead the misrepresentation as a defence if he or she is sued for not performing as agreed.

Fraudulent misrepresentation

[8.520] Fraudulent misrepresentation involves a deliberate untruth – a serious allegation that must be “clearly and distinctly pleaded and put” (see Permanent Trustee v FAI General (2003) 214 CLR 514 at 534). However, the concept of deliberateness is subjective. What this means is that the critical determinant of whether a statement is fraudulent is whether the representor had an honest belief in its truth at the time of making it. Accordingly, the idea of fraud is inextricably entwined with concepts of moral culpability. Lord Herschell defined the matter in far more precise terms, saying: “fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”. The case was: Derry v Peek (1889) 14 App Cas 337 [8.530] Facts: The defendants were the directors of a tramway company. They

issued a prospectus stating that the company was entitled to use steam and other mechanical power to run its trams. That statement was false. The company had applied for the necessary consents but they had not been forthcoming. Relying on the representation, Peek subscribed for shares. When the company was later wound up because the consents were never received, he sued the directors alleging fraud. They argued that they were not liable because they had honestly believed that getting the consents was a mere formality.

Held: The directors were not liable. Because they had honestly believed the statements were true, they were not guilty of fraud. The fact that they had had no reasonable grounds for their belief was not, in itself, fatal. Lack of reasonable grounds was merely an aid in determining whether the belief had been genuinely held.

[8.540] In other words, as the Privy Council put it in Akerhielm v De Mare [1959] AC 789 at 805: [T]he question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made.

That reasoning was later adopted by the High Court in Krakowski v Eurolynx Properties Ltd ([8.90] above), where Brennan, Deane, Gaudron and McHugh JJ held (at 578) that “to succeed in fraud, a representee must prove, inter alia, that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood” (emphasis added). 184

Chapter 8 Misrepresentation [8.560]

Consequently, a representor will not be liable for fraudulent misrepresentation provided he or she honestly believed in the truth of the statement. Carelessness, by itself, is not sufficient to constitute fraud; only gross carelessness, a reckless disregard for the truth of the statement, can be taken that far. That is not to say that the representor will escape liability altogether; one of the other forms of misrepresentation may be applicable on the facts.

Remedies for fraudulent misrepresentation

[8.550] Proof of fraudulent misrepresentation entitles the innocent party not only to rescind the contract but also to seek damages in the tort of deceit. Rescission – the common remedy for all forms of misrepresentation – is simply a disaffirmation or disavowal of a contract. It is an assertion by one party that, because of some vitiating factor – such as misrepresentation – no valid contract ever came into being in the first place and that, therefore, the parties should be restored to their previous positions. Rescission usually involves an act of disavowal rather than a formal court order. If courts do get involved it is usually, as the High Court described it in Alati v Kruger (1955) 94 CLR 216 at 224, “to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio and, if it is valid, to give effect to it and make appropriate consequential orders”. The remedy of rescission involves an election. That is, the innocent party need not avoid the contract, but may do so if he or she wishes. If rescission is elected, then all that the innocent party need normally do is to give notice to the other party that he or she does not intend to carry through with the contract. That notice, if it is justified, terminates the contract. The requirement that notification be communicated to the other party can be waived if communication is impossible. See, for example: Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 [8.560] Facts: Caldwell sold his car to a rogue, Norris, who paid him with a

cheque that was later dishonoured. Caldwell immediately informed the police and the automobile association and asked them to help him find his car. When found, the car had been bought by the appellant finance company. They refused to return it, on the basis that Caldwell had not properly terminated his contract with Norris – because he had not given him notice of rescission. Accordingly, they said, Norris had had good title, which he had validly passed to them. Held: That argument failed. In the circumstances, express notice was not required. Where one party prevents the other from communicating rescission by absconding, neither he nor those who acquire their title through him can insist on actual notification. In the circumstances, Caldwell had done all that was reasonable, his rescission was good and he was entitled to recover the car.

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[8.570] Corporations and Contract Law

[8.570] While notification of rescission is all that is normally required, the innocent party may apply to a court for a formal order of rescission. This usually occurs where the other party refuses to return property transferred under the contract or where the other party brings an action for specific performance. In such cases, an order of rescission can be sought to put beyond doubt the fact that the contract has come to an end. (See, again, the quote from Alati v Kruger (1955) 94 CLR 216 at 224 set out above.) Damages for fraudulent misrepresentation are recovered in the tort of “deceit”. Damages are generally not recoverable in contract, for the simple reason that the statement forming the fraudulent misrepresentation usually has not become a term of the contract. Because it has not become a term, it cannot be breached; because there is no breach, there can be no damages. The distinction is important because damages in tort and damages in contract are calculated on different bases. Damages in contract are awarded to put the plaintiff in the position that he or she would have occupied had there been no breach (that is, the position that would have been occupied had the contract been performed as agreed). Damages in tort, on the other hand, are awarded to compensate the plaintiff for actual damages flowing directly from the commission of the tort. Such damages will not include a component for “loss of the bargain”. Damages in tort, therefore, seek to return the plaintiff to the position occupied prior to the commission of the tort; damages in contract seek to place the plaintiff in the position that would have been occupied had the contract been performed. In practice, what this means is that a plaintiff can recover damages in deceit for: (a)

the difference between the real value of any property purchased and the price that was actually paid for it; and

(b)

any resulting “consequential losses”.

So, for example, under the first of those two heads the High Court held in Potts v Miller (1940) 64 CLR 282 that the plaintiff, who had been fraudulently induced to subscribe for shares in a company, was entitled to recover the difference between the amount he paid for them and their real value at allotment. Similarly, in Toteff v Antonas (1952) 87 CLR 647, it was held that the buyer of a business to whom the vendor had fraudulently misrepresented the takings could recover the difference between the purchase price (£2200) and the fair value of the business as a going concern (£900). With “consequential losses” it seems that there are no real limits to what can be recovered. All that is required is that the losses in question must have resulted directly from the fraud and not from some supervening cause (such as some unconnected act or omission by either the purchaser or a third party). Therefore, damages have been awarded for the cost of both improvements and repairs to property incurred in the period between buying it and discovering that there 186

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had been a misrepresentation (Sibley v Grosvenor (1916) 21 CLR 469 and Brown v Smitt (1924) 34 CLR 160), for trading losses that were incurred in running a business in that same intervening period (Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 and Downs v Chappell [1997] 1 WLR 426), for lost profits where a machine (which had been fraudulently misrepresented as fit for immediate use) was out of use being repaired (Hornal v Neuberger Products Ltd [1957] 1 QB 247), for losses on shares bought for an inflated price because of a fraudulent misrepresentation (Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254) and even for personal injuries where the plaintiff – who had purchased a car that had been misrepresented as having four new tyres – was injured when a tyre (which was not new) blew out and the car rolled (Nicholls v Taylor [1939] VLR 119). A plaintiff need not even make an actual “loss” before recovering damages – a “lost opportunity” will suffice. See, for example: Clef Aquitaine SARL v Laporte Ltd [2001] QB 488 [8.580] Facts: The plaintiffs entered into two long-term distribution agreements

with the defendants – agreeing to purchase, market and distribute their products in France. The arrangements were profitable, but the plaintiffs subsequently discovered that the prices they were paying were not the “lowest unit prices available to trade customers” – as the defendants had told them they were. They sued for the difference between what they had paid and what they would have paid but for the misrepresentation. Held: They won. Because of the misrepresentation, they had lost the opportunity to negotiate the same distribution agreements – but on more favourable terms. Therefore, they were entitled to the difference between the prices they had paid and the lower ones they would have paid but for the defendants’ deceit.

[8.590] In all of the above cases, however, the guiding principle has simply been that (as Gibbs CJ put it in Gould v Vaggelas (1984) 157 CLR 215, at 220–21: the plaintiff is to be put, so far as possible, in the position he would have been in if he had not acted on the fraudulent inducement.

Where the fraudulent misrepresentation has also become a term

[8.600] In certain circumstances, the statement forming the fraudulent misrepresentation may have also become a term of the contract. In such cases, there will be a clear breach of that term and the innocent party will be entitled to pursue all the remedies that are available for such a breach. However, he or she must make an election. An innocent party cannot sue for damages for breach of term and at the same time sue for rescission for misrepresentation. As Dixon CJ, Webb, Kitto and Taylor JJ said in Alati v Kruger (1955) 94 CLR 216 at 222: on the footing that the contract had been induced by fraudulent misrepresentation the respondent had a choice. He might sue for damages for breach of warranty, for the 187

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statement formed one of the terms of the contract and was not only a representation; but he could not do this and rescind for misrepresentation.

Negligent misrepresentation

[8.610] Negligent misrepresentation is of comparatively recent origin. Until the House of Lords recognised in 1964 that a negligent misstatement could give rise to a cause of action (see Hedley Byrne Ltd v Heller & Partners [1964] AC 465), only innocent and fraudulent misrepresentation were recognised as valid causes of action. Since 1964 the law relating to negligent misstatement has been refined, and the current Australian position is that laid down by the High Court in MLC Assurance Co v Evatt (1968) 122 CLR 556 and affirmed since (see, for example, L Shaddock & Associates v Council of the City of Parramatta (1981) 150 CLR 225 and San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340). That position is based on establishing the three elements of the tort of negligence. That is, that: (a)

the representor owed the representee a duty of care (in this case, to ensure that the representation was correct);

(b)

the representor breached that duty (by not taking the appropriate care); and

(c)

the representee suffered consequential loss or damage.

Therefore, if a person is held out as competent to give information or advice, if he or she realises or ought to realise that they are being trusted to give correct information or advice, and if it is reasonable in the circumstances for the other party to rely on that information or advice, the representor will be liable if, because of negligence, the information or advice given is incorrect – and the representee suffers loss or damage. While none of the cases referred to above were specifically in the area of contract, it is now accepted that a negligent misstatement can constitute a misrepresentation, quite separate and apart from either fraudulent or innocent misrepresentation.

Remedies for negligent misrepresentation

[8.620] As with fraudulent misrepresentation, an innocent party affected by a negligent misrepresentation can rescind the resulting contract and sue for damages in tort. Again, rescission involves an election and the representee may, but need not, elect to rescind. In some circumstances, the representee may find it more beneficial to affirm the contract, demand continued performance and be satisfied with an award of damages. If rescission is elected then, as with fraudulent misrepresentation, all that is normally required is that the representee must notify the representor of the election. The exception that applies to cases of fraudulent misrepresentation (that notice need not always be actually communicated – see Car & Universal Finance Co Ltd v Caldwell: [8.560] above) does not apply to cases of negligent misrepresentation for two reasons: 188

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(a)

there will be no “absconding rogue”; and

(b)

Caldwell’s case specifically pointed out that the exception did not apply where an innocent person disappears innocently.

Where damages are awarded, they are awarded in the tort of “negligence”. They are not awarded for breach of contract unless the negligent misrepresentation has been incorporated into the contract as a term. If it was, then, as was the case with fraudulent misrepresentation, the injured party must make an election. He or she can either sue for damages in contract or rescind the contract for misrepresentation. The remedies are not compatible and cannot be sought together.

Innocent misrepresentation

[8.630] An innocent misrepresentation occurs where a false representation induces the contract but the representor was neither fraudulent nor negligent in making it. It generally occurs where statements are made in the honest but mistaken belief that they are correct.

Remedies for innocent misrepresentation

[8.640] The common law provides no remedy for innocent misrepresentation – because there is no culpability. Unlike fraudulent and negligent misrepresentation, the representor has committed no tort and thus, unless the statement has also become a term, damages are not normally available (except, potentially, under statute: see ss 18 and 236 of the Australian Consumer Law (in Sch 2 to the Competition and Consumer Act 2010 (Cth)): 8.10 [8.750] below; s 7 of the Misrepresentation Act 1972 (SA); and ss 174 and 175 of the Civil Law (Wrongs) Act 2002 (ACT) (see 8.11 [8.920] below). However, the representee clearly does not receive what he or she bargained for and, accordingly, the remedy of rescission is still available. Again, rescission is not automatic and the representee must elect to rescind. Further, once he or she makes that election, it is final; the representee is bound by it and cannot reconsider. If rescission is elected, again, that decision must be communicated to the other party before it becomes effective. Where an innocent misrepresentation has also become a term of the contract, the situation is the same as with fraudulent and negligent misrepresentation. That is, the representee must choose either to exercise the normal contractual remedies for breach of term or to rescind for misrepresentation. The remedies cannot both be pursued.

8.8 LIMITATIONS ON RESCISSION A principally equitable remedy

[8.650] While rescission can be enforced both at common law and in equity, it is seen, principally, as an equitable remedy. This is because rescission at common law requires the parties to be completely and precisely restored to their previous positions 189

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(the “status quo ante”). In equity, the courts can make adjustments to do what is practically just between the parties – particularly if a simple handing back of property or repayment of money would not fully restore that status quo ante. However, as a principally equitable remedy, rescission is still subject to a number of constraints. One has already been seen – notice of rescission must generally be communicated to the representor before the rescission becomes effective. The others are outlined below.

Restitution should be possible

[8.660] The object of rescission is to put the parties back into the positions they occupied before the contract was made. Consequently, for rescission to apply, it must be possible to restore the parties to the same position they occupied before the contract (that is, “restitutio in integrum” must be possible). If the parties cannot be

restored, at least substantially, to their previous positions, rescission will not be ordered. Substantial alterations to the subject matter of the contract, material changes in the positions of the parties and commencement of winding up proceedings against the company that made the misrepresentation have all been circumstances that have debarred rescission. That is not to say that the right to rescind will always be lost just because the parties cannot be restored to precisely the same position they previously occupied. As noted above, that is the common law position but, in appropriate cases, equity will allow rescission where the status quo ante can only be substantially restored: see Alati v Kruger (1955) 94 CLR 216 at 223–24 and Krakowski v Eurolynx Properties Ltd at 586 ([8.90] above). In such circumstances, the courts can award compensation (or an indemnity) as a financial adjustment between the parties to restore the status quo ante as far as possible if it cannot be restored precisely. Financial adjustments are more readily awarded in cases of fraudulent and negligent misrepresentation than they are in cases of innocent misrepresentation.

Effect of affirmation

[8.670] As already seen, a party who is entitled to avoid a contract for misrepresentation has an election: to avoid or to affirm the contract. If he or she elects to affirm the contract and then makes that election known to the other party, it is final and the representee cannot later change his or her mind and seek rescission instead. Affirmation can occur through some positive statement to that effect or it can be implied – usually by the party acting in a manner inconsistent with an intention to rescind. Mere inaction, by itself, does not normally constitute affirmation but it can be, by implication, if the representee knows that he or she has a right to rescind but does nothing about it. In such cases the silence is taken to indicate affirmation. 190

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Lapse of time

[8.680] Likewise, lapse of time (by itself) will not normally deprive an innocent party of the right to rescind. There are two exceptions to this general statement: (a)

where the representee is aware of the right to rescind but does nothing; and

(b)

where an inordinate period of time elapses between an innocent misrepresentation being made and any attempt to rescind because of it. See, for instance:

Leaf v International Galleries [1950] 2 KB 86 [8.690] Facts: The plaintiff was induced to buy a painting that was represented

to him as being by John Constable. Five years later, he took the painting to Christies, intending to sell it, and discovered that it was not a Constable. He sought to rescind the contract and recover the purchase price.

Held: Rescission was refused because the plaintiff had not rescinded within a reasonable time. He had had ample opportunity to examine the painting after he had bought it, he had not done so and it was unfair, five years later, to allow him to rescind.

[8.700] What a “reasonable time” is in these circumstances depends not on a simple expiry of time but on whether the plaintiff was guilty of undue delay in exercising his or her rights once he or she became, or should have become, aware of the true state of affairs. See: Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381 [8.710] Facts: The plaintiff company bought a filly from the defendant, believing

it to be from a particular bloodline. Nine months later it discovered that it was from a different bloodline. One of the directors immediately rang the defendant’s manager and told him that the horse was no longer wanted. The defendant refused to take the animal back. The plaintiff sued.

Held: The contract had been validly rescinded. Even though nine months had elapsed since the initial purchase, the plaintiff had not been guilty of any undue delay. It had had no way of finding out the filly’s true lineage before it had actually done so and it had then taken immediate steps to rescind the contract.

Third party involvement

[8.720] If some third party acquires a right in the subject matter of the contract in good faith, for value and without notice of the defect, the party who was misled by the misrepresentation loses the right to rescind. This is merely an application of the principle that has already been seen – that where the contract is only voidable and not void, good title can be passed to a third party. If that occurs, the third party becomes the property’s true owner and, because restitution cannot occur without depriving the third party of his or her title, rescission will be refused.

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Executed contracts

[8.730] With innocent misrepresentation (although not with fraudulent or negligent misrepresentation) rescission may be refused if the contract that was thereby induced has since been executed (that is, completed by either conveyance of real property or formal assignment of a chattel). The “rule” giving this result is called the “rule in Seddon’s case” (after the decision in Seddon v North Eastern Salt Co [1905] 1 Ch 326) and it had its origins in Lord Campbell’s statement in Wilde v Gibson (1848) 1 HLC 605, 633; 9 ER 897 at 909: “Where the conveyance has been executed … a court of equity will set [it] aside only on the ground of actual fraud.” The reasoning underlying the rule appears to have been the “no fault, no sanction” concept adopted in Leaf v International Galleries ([8.690] above). That is, because the representor honestly believed in the truth of the representation and because the representee had, at least, some opportunity to check it before completion, it was felt that equity should not intervene once the dealing between the parties had been finalised. In essence, the rule allowed the loss to lie where it fell. However, the rule is no longer rigidly applied, at least in respect of executed contracts for the sale of goods. In Leaf v International Galleries, Denning LJ specifically commented that rescission could be available for “an innocent material misrepresentation … even after the contract has been executed”. In Australia, the same reasoning was applied in Leason Pty Ltd v Princes Farm Pty Ltd ([8.710] above), where Helsham CJ refused to accept that executed contracts can never be rescinded. He preferred instead that, as a principle, the only bars to relief should be (at 388), “affirmation of the contract … or some other conduct by the party seeking relief or some circumstances that would make it inequitable for the court to grant [rescission]”. He specifically held that the contract in that case – one involving an executed contract for the sale of a horse – could be rescinded for innocent misrepresentation. Unfortunately, Helsham CJ’s views in that case were at odds with a long line of previous Australian authorities – all of which supported the rule in Seddon’s case – and the case law since his decision has been inconsistent. In Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) 9 NSWLR 731, where the purchaser of an engineering business purported to rescind the contract after settlement on the grounds of innocent misrepresentation, the court held that it was bound by the previous line of authority and declined to follow Helsham’s lead. On the other hand, in Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374; 134 FLR 279, Young J simply held (at 380; 284) that “the Court should no longer apply the mistaken view of the law set out in Seddon’s case” – and declined to follow it. (There is also some – guarded – support for his view in Vitek v Taheri [2013] NSWSC 589 at [81].) Consequently, how future Australian courts will deal with the question is unclear. Perhaps the answer might be to retain the rule for contracts involving land and businesses (where the purchasers invariably have the opportunity to – and should – investigate the vendor’s title before settlement) but discard it for other contracts – 192

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where contracting and completion occur almost simultaneously and the purchasers have very little, if any, opportunity to carry out the investigations that they should carry out if they are to protect their interests adequately. Whatever the outcome, the rule no longer applies in South Australia or the Australian Capital Territory (where it has been completely abolished by s 6(1)(b) of the Misrepresentation Act 1972 (SA) and s 173(b)(ii) of the Civil Law (Wrongs) Act 2002 (ACT), respectively (see 8.11 below). It also no longer applies to sales of goods in New South Wales (Sale of Goods Act 1923 (NSW), s 4(2A)(b)) or to contracts for the supply of goods in Victoria (Australian Consumer Law and Fair Trading Act 2012 (Vic), s 24).

8.9 THE EFFECT OF LEGISLATION

[8.740] The Commonwealth, South Australia and the Australian Capital Territory all have specific legislation modifying the general law and extending the rights and remedies available to parties who have been misled. In particular, those Acts all permit recovery of damages whenever there has been misleading conduct – even where they would not have been recoverable under the general law. The Commonwealth provisions are set out in the Australian Consumer Law, which is contained in Sch 2 to the Competition and Consumer Act 2010 (Cth). Because of constitutional limitations on the Commonwealth’s legislative power, the Competition and Consumer Act 2010 (Cth) does not have universal application and, therefore, does not cover all consumer transactions or activities. (For Commonwealth legislation to be valid it must fall within one of the “heads of power” set out in the Commonwealth Constitution. As the Consitution confers no general trade practices or consumer protection power, the Commonwealth’s legislative authority in this area has to be found in one of its other specific powers – and that can restrict how widely the Act can apply. Accordingly, there can be transactions to which the Commonwealth Act simply does not apply – and that is where state and territory legislation needs to step in to “cover the gap”.) The States and Territories, all of which have a general power to enact consumer protection laws, have now all covered that gap by the simple expedient of passing legislation that adopts the Australian Consumer Law and applies it as a law of their own jurisdictions. That legislation, which is in almost identical terms in all jurisdictions, simply states: The Australian Consumer Law text, as in force from time to time – (a)

applies as a law of this jurisdiction; and

(b)

as so applying may be referred to as the Australian Consumer Law (name of jurisdiction); and

(c)

as so applying is a part of this Act.

See Fair Trading Act 1987 (NSW), s 28; Australian Consumer Law and Fair Trading Act 2012 (Vic), s 8; Fair Trading Act 1987 (SA), s 14; Fair Trading Act 1989 (Qld), 193

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s 16; Fair Trading Act 2010 (WA), s 19; Australian Consumer Law (Tasmania) Act 2010 (Tas), s 6; Fair Trading (Australian Consumer Law) Act 1992 (ACT), s 7; and Consumer Affairs and Fair Trading Act 1990 (NT), s 27.

8.10 COMMONWEALTH LEGISLATION The Competition and Consumer Act 2010 (Cth)

[8.750] As noted above, the principal Commonwealth legislation in this area of the law is the Australian Consumer Law, which is found in Sch 2 to the Competition and Consumer Act 2010 (Cth). Taken overall, it is concerned mainly with two things: (a)

protecting consumers against unconscionable conduct and unfair practices; and

(b)

providing a range of other consumer protections (including consumer guarantees, protection against unsolicited consumer agreements and provisions relating to the safety of consumer goods and product-related services).

Part IV of the main Act also contains a number of provisions that prevent (or, at least, regulate) anti-competitive behaviour in the form of restrictive trade practices. The Australian Consumer Law’s main consumer protection provisions are in Ch 2 (covering “misleading or deceptive conduct” generally, “unconscionable conduct” and “unfair contract terms”) and Ch 3, Div 1 of which (ss 29 – 38) deals with “unfair practices”. That Division prohibits (inter alia) “misleading or deceptive conduct” in particular instances when it occurs in connection with the promotion, supply or use of goods or services (see ss 29, 30, 31, 33, 34 and 37). It also includes a number of provisions that specifically prohibit other unfair practices – such as offering gifts and prizes without intending to supply them (s 32), bait advertising (s 35) and wrongly accepting payment (s 36). Other provisions, in Divs 2 to 5, prohibit pyramid schemes (ss 44 – 46), referral selling (s 49), multiple pricing (ss 47 – 48) and supplying unsolicited goods and services (ss 39 – 43).

Section 18 of the Australian Consumer Law

[8.760] Section 18 of the Australian Consumer Law prohibits “misleading or deceptive conduct” generally (though it does not apply to misleading or deceptive conduct in the provision of financial services: see s 131A of the Competition and Consumer Act 2010 (Cth). Misleading or deceptive conduct in the provision of financial services is instead prohibited by ss 12DA-12DC of the Australian Securities and Investments Commission Act 2001 (Cth)). Section 18(1) provides: “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive” (the words “or is likely to mislead or deceive” make it clear that it is not necessary to prove that the conduct in question has actually deceived or misled anyone: see, for example, Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at [112] per McHugh J). 194

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Section 18(2) reinforces this s 18(1) by providing that: “Nothing in Part 3-1 (which is about unfair practices) limits by implication subsection (1).” The prohibition in s 18 is, therefore, very wide, and it extends to all forms of misleading or deceptive conduct. That is, it is not restricted to conduct that would constitute misrepresentation at common law. So, for example, in appropriate cases silence can constitute misleading or deceptive conduct within the section (see [8.190] above). So too can disclaimers and exclusion clauses that purport to exclude liability for misrepresentation (see [8.200]–[8.220] above), as can misstatements of law and (in many cases) misstatements of either opinion or future intention. Further, to be an infringement of s 18, the conduct complained of need not have actually misled or deceived anyone – it is sufficient that it was “likely” to mislead or deceive.

The elements of section 18

[8.770] From s 18(1) of the Australian Consumer Law, three elements have to be established before an action under s 18 can succeed. They are: (a)

the section must apply to the party that engaged in the allegedly misleading or deceptive conduct;

(b)

the conduct complained of must have occurred “in trade or commerce”; and

(c)

it must be “misleading or deceptive” or “likely to mislead or deceive”.

The section must apply to the party involved

[8.780] On its face, the section is expressly stated to apply to “persons” and, therefore, appears to have a very broad application. However, as noted at 8.9 [8.740] above, the Commonwealth Parliament has no general constitutional power to pass laws with respect to trade practices or consumer protection. Therefore, authority for the legislation’s application had to be found somewhere else in the Constitution. The Commonwealth does have constitutional power to pass laws with respect to corporations – so all misleading or deceptive conduct by corporations can be validly covered by the Commonwealth provisions. In addition, there are a number of other “heads of power” that could also confer jurisdiction over particular transactions where corporations are not involved, and s 6 of the Competition and Consumer Act 2010 (Cth) ensures that the legislation does apply in those instances. Therefore, if misleading or deceptive conduct occurs in the course of interstate or overseas trade or commerce (the trade and commerce power), or in a transaction within or between territories (the territories power) or if it involves use of the post, or the telephone or a radio or television broadcast (the posts and telegraphs power), or if it is covered by some international treaty (the external affairs power), it does not matter that the misleading party is not a corporation; s 18 of the Australian Consumer Law will apply to it anyway. However, that still leaves a significant number of consumer transactions that would not be covered by the Commonwealth legislation (that is, all those involving suppliers 195

[8.780] Corporations and Contract Law

other than companies where the transaction does not trigger one of the other Commonwealth “heads of power”). Those transactions are, however, now covered under the relevant state or territory application laws (see 8.9 [8.740] above). The use of the word “person” therefore reflects the fact that s 18 does apply to everyone who engages in misleading or deceptive conduct because, even if the Commonwealth provision does not apply to them, the state or territory provision will. Consequently, the question of application is not now a significant issue. One way or another, the Australian Consumer Law will apply to all consumer transactions.

Must engage in conduct “in trade or commerce”

[8.790] “Engaging in conduct” is widely defined in s 4(2)(a) of the Competition and Consumer Act 2010 (Cth) to include “doing or refusing to do any act, including the making of, or the giving effect to a provision of, a contract or arrangement, the arriving at, or the giving effect to a provision of, an understanding or the requiring of the giving of, or the giving of, a covenant”. However, for the conduct to be affected by s 18 of the Australian Consumer Law, even under s 4(2)’s expanded definition, it must take place “in trade or commerce”. The High Court discussed what that means in: Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 [8.800] Facts: The respondent was a construction worker who was directed to

remove grates covering air-conditioning shafts. His foreman told him that each grate was secured by bolts and that it was safe to remove them in the manner directed. That statement was untrue. While he was removing one of the grates it gave way, he fell to the bottom of the shaft and was injured. He sued, alleging that the foreman’s conduct was misleading or deceptive under the then applicable equivalent of s 18 of the Australian Consumer Law.

Held: He failed. The court held that the section did not apply to all conduct in the course of a defendant’s business operations – only to conduct in the course of activities or transactions that have an essentially trading or commercial character. A direction by a foreman to an employee did not have that character. It was merely incidental to the carrying on of the company’s overall business – and that was not enough to attract the operation of the section. As the majority put it (at 604): the section was not intended to impose, by a side-wind, an overlay of Commonwealth law on every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it … has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character.

[8.810] Dealings that will fall outside the section will therefore include all purely private transactions (such as selling the family home or the family car privately) – because they do not occur in a business context and therefore do not have the required 196

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“trading or commercial character” (see, for example, O’Brien v Smolonogov (1983) 53 ALR 107 – a case involving a private sale of land – and Williams v Pisano (2015) 90 NSWLR 342, a case involving a sale of the appellants’ renovated home). Similarly, statements made about the supposed location of Noah’s Ark by a religious minister in lectures for which he received no fee were held not to have occurred “in trade or commerce” (see Plimer v Roberts (1997) 80 FCR 303). The Australian Yachting Federation was also held not to have acted “in trade or commerce” when it published its Olympics selection criteria (Forbes v Australian Yachting Federation Inc [1996] ATPR (Digest) 46-158) and in Toben v Mathieson [2013] NSWSC 1530 it was held that comments by a politician in the course of his profession could not amount to conduct in trade or commerce because they were not made in a commercial context. For the same reason, most activities of charitable, religious and community groups are not affected by s 18 of the Australian Consumer Law (see, for example, E v Australian Red Cross Society (1992) 31 FCR 299). Nor are the purely governmental or regulatory functions of public bodies and officials (see Competition and Consumer Act 2010 (Cth), s 2A(1); JS McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337, 355; Village Building Co Ltd v Canberra International Airport Pty Ltd (No 2) (2004) 208 ALR 98 at 121; and Markit Pty Ltd v Commissioner of Taxation [2007] 1 Qd R 253, 257–58). Those activities simply do not have the required “trading or commercial character”. What will fall within the section is anything that occurs in, or relates directly to, normal business activity – carried out by the person against whom the accusation of misleading or deceptive conduct has been made: see Director of Consumer Affairs Victoria v The Good Guys Discount Warehouses (Australia) Pty Ltd (2016) 245 FCR 529 at [212]. So, any conduct in the course of promoting, advertising, displaying, selling, distributing or delivering goods, services or land, as part of a business activity, will be potentially affected by s 18.

The conduct must be “misleading or deceptive”

[8.820] “Misleading or deceptive” in the context of s 18 of the Australian Consumer Law means simply that the conduct must be capable of leading someone into error: see Gibbs CJ in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd at 198 ([8.900] below). It does not matter whether the person whose conduct is being questioned intended to mislead or deceive. Nor does the conduct have to be culpable. Someone whose conduct misleads another can be liable, even though his or her conduct was not fraudulent, negligent or even reckless. Consequently, as is the case with misrepresentation under the general law, even honestly held beliefs, if incorrect, can mislead and, therefore, can result in liability under s 18. As Gibbs CJ noted in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (at 197): 197

[8.820] Corporations and Contract Law

the section is not confined to conduct that is intended to mislead or deceive. … There is nothing in the section that would confine it to conduct which was engaged in as a result of a failure to take reasonable care. A corporation which has acted honestly and reasonably may … nevertheless be rendered liable … if its conduct has in fact misled or deceived or is likely to mislead or deceive. The liability imposed by [s 18] … is thus quite unrelated to fault.

In each case, therefore, the courts must determine, objectively, whether the conduct being complained of “is misleading or deceptive or is likely to mislead or deceive” but, as Deane and Fitzgerald JJ noted in Taco Co v Taco Bell (1982) 42 ALR 177 at 202 (a case in which a Mexican fast food chain set up business using the same name as an established Australian rival), “conduct … cannot be categorised as misleading or deceptive unless it contains or conveys … a misrepresentation”. Going on to note that “whether or not conduct amounts to a misrepresentation is a question of fact to be decided by considering what is said and done against the

background of all surrounding circumstances”, their Honours then suggested that the following propositions afforded guidance in determining whether particular conduct breaches s 18: First … identify the relevant section (or sections) of the public … by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested … Second, once the relevant section of the public is established, the matter is to be considered by reference to all who come within it … Thirdly, evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential … Finally, it is necessary to enquire why proven misconception has arisen.

These four propositions acknowledge the four critical components of the “misleading or deceptive” aspect of s 18: (a)

whether particular conduct is misleading or deceptive can only be judged against the background of the audience to whom that conduct was directed;

(b)

the conduct must have been capable of leading members of that audience into error;

(c)

evidence that someone has actually been led into error is not necessary; and

(d)

it must be shown that the conduct actually caused the error (or would be “likely” to cause it).

The intended audience

[8.830] Whether particular conduct is likely to lead members of an intended audience into error depends very heavily on matters such as the age, knowledge, background and degree of sophistication of the intended audience. So, for example, a television advertisement that contained claims that small children might believe, but which adults would see as mere “puff”, might be misleading or deceptive if it was aired during children’s viewing time, but might not be if it was aired late at night (to amuse and entertain an adult audience). 198

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Therefore, the “class” of persons likely to be affected by the conduct must be identified – but, once it has been, the effect of the conduct has to be assessed by looking at its probable impact on all members of that class, including “the experienced as well as the inexperienced, and the gullible as well as the astute” (per Gibbs CJ in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd at 199: [8.900] below). The sole qualification is that, while the court will look at the “class” as a whole, it will only consider the likely impact on “ordinary and reasonable members” of that class – and it does that by assessing that likely impact on a “hypothetical individual who would have been a member of that ordinary or reasonable class” (see Campomar v Nike International at 86–87, [8.870] below). In other words, s 18 of the Australian Consumer Law will not protect those who fail to take reasonable care of their own interests.

The conduct must have been capable of causing the error

[8.840] Unless the conduct is capable of leading the intended audience into error it cannot breach s 18 of the Australian Consumer Law. It is not enough that it merely causes confusion or leaves the intended audience wondering. See, for example: McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455 [8.850] Facts: McDonald’s, a fast food retailer, sold hamburgers – including the

“Big Mac”. McWilliam’s, a wine producer, introduced a new two-litre wine bottle which it also advertised as the “Big Mac”. McDonald’s sued, alleging that McWilliam’s conduct was misleading or deceptive in that it gave an impression that there was a connection between the two companies and their products.

Held: They failed. While McWilliam’s conduct may have caused confusion about the possibility of some connection, that did not show that it was “misleading or deceptive”. On the facts, it was unlikely that those who saw McWilliam’s advertisements would be misled.

[8.860] On the other hand, if conduct is likely to mislead or deceive reasonable members of the intended audience, it will breach s 18 of the Australian Consumer Law and appropriate remedies can be ordered. See, for example: Campomar v Nike International (2000) 202 CLR 45 [8.870]

Facts: Campomar, a perfume and cosmetic manufacturer, started selling “NIKE SPORT FRAGRANCE” through pharmacies in Australia, placing its product alongside other “sport fragrances” manufactured by Nike International’s competitors. Nike, which manufactured and sold sporting goods – but not perfumes – sued, alleging that Campomar’s conduct was likely to mislead

199

[8.870] Corporations and Contract Law cont. members of the public into believing that its product was promoted or distributed by Nike International, or with its consent and approval.

Held: In the circumstances, and given Nike International’s established commercial reputation, the public were likely to be misled or deceived into believing that the “SPORT FRAGRANCE” was promoted or distributed by it. An injunction was granted.

Evidence that someone has been misled is not necessary

[8.880] While it is permissible to adduce evidence that someone has formed an erroneous impression, that does not conclusively establish that the conduct in question offended (or would offend) s 18 of the Australian Consumer Law. That individual may have acted unreasonably in response to the conduct (or the court may take the view, as it did with one witness in Campomar v Nike International (2000) 202 CLR 45, that that person’s reaction to the conduct complained of was “extreme or fanciful”, and should, therefore, be disregarded: see at 86). Alternatively, he or she may have been misled by something said or done by a third party for which the defendant was not responsible. In other words, in every case it is up to the court to determine, as objectively as it can, whether particular conduct was or was not misleading or deceptive – and in reaching that decision it can, but need not, consider particular instances of individuals being led into error.

The conduct must have actually caused the error

[8.890] To prove a breach of s 18 of the Australian Consumer Law, it is not sufficient to show merely that the plaintiff has been misled or deceived. If the defendant is to be held liable, he or she must have been responsible for that occurring. Otherwise, he or she should not be liable. See for example: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 [8.900]

Facts: Puxu manufactured and sold “Post and Rail” furniture which included its “Contour” range of lounges and chairs. Parkdale brought out a closely similar but cheaper product which was clearly labelled as part of its “Rawhide” range. Unfortunately, those labels could be cut off and there was evidence that some retailers had done just that – so they could misrepresent the chairs as the superior Puxu product. Puxu sued, alleging that Parkdale’s conduct breached the then equivalent of s 18 of the Australian Consumer Law. Held: Parkdale’s conduct did not breach the section. If an article is properly and clearly labelled, its close resemblance to a rival article will not mislead an ordinary reasonable member of the public – who might be expected to look for and

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Chapter 8 Misrepresentation [8.920] cont. examine the label. Parkdale was also held not liable for the removal of its labels after the chairs had left its control because, as Gibbs CJ noted (at 200): If the label is removed by some person for whose acts the defendant is not responsible, and in consequence the purchaser is misled, the misleading effect will have been produced, not by the conduct of the defendant, but by the conduct of the person who removed the label.

Remedies for misleading or deceptive conduct [8.910]

As Fox J noted in Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 348:

Section [18 of the Australian Consumer Law] … does not purport to create liability at all; … it establish[es] a norm of conduct, failure to observe which has consequences provided for elsewhere in the same statute, or under the general law.

Most of those consequences are contained in Ch 5 of the Australian Consumer Law (which deals with “Enforcement and Remedies”). Where a defendant has been guilty of misleading or deceptive conduct, the principal remedies in the Australian Consumer Law are injunctions under s 232 and damages under s 236. With misleading or deceptive conduct in a contractual setting, injunctions are of little practical use and a plaintiff will normally sue for damages and, perhaps, for one of the ancillary remedies provided for, through s 237(1)(b), in s 243. Section 243 provides a useful range of ancillary remedies, all of which are available on court order. They include orders declaring the contract, or any part of it, void, either ab initio or from some interim time, varying the contract, refusing enforcement, directing refunds or the return of property, requiring payment for any loss or damage, directing repair or replacement and requiring provision of services. All or any of these may be ordered if the court considers that they will either compensate the representee for loss or damage sustained or prevent or reduce any possible loss or damage: see s 237(2).

8.11 THE SOUTH AUSTRALIAN AND AUSTRALIAN CAPITAL TERRITORY PROVISIONS

[8.920] The Misrepresentation Act 1972 (SA) and the Civil Law (Wrongs) Act 2002 (ACT) both amend the common law by giving plaintiff representees greater rights than would otherwise be the case, although the importance of these Acts has been somewhat diminished by the adoption of the Australian Consumer Law as a law of those jurisdictions (see 8.9 above). Where they do continue to apply, they have basically four effects: 1.

They extend the right to rescind to cover situations that, arguably, are not covered by the common law. As a result, rescission is still possible even if: 201

[8.920] Corporations and Contract Law

(a)

the contract has been performed (the rule in Seddon’s case – [8.730] above – is statutorily overruled); or

(b)

the misrepresentation has become a term (overruling the “merger” doctrine – see [8.600] above).

2.

They provide a discretionary right to damages in lieu of rescission even for innocent misrepresentation.

3.

They limit the representor’s power to exclude liability under the legislation to those situations where such exclusion is reasonable.

4.

They provide a statutory defence of “honest and reasonable belief” so that the only way a defendant can escape liability is by proving that he or she honestly believed on reasonable grounds that the representation was true right up to the point of contracting.

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CHAPTER 9

Discharging a contract 9.1 How contracts may be discharged .......................................................... [9.10] 9.2 Discharge by performance ....................................................................... [9.20] The basis of discharge by performance .................................................. [9.20] Performance must be exact ...................................................................... [9.30] The potential for injustice .......................................................................... [9.40] Exceptions to the rule ............................................................................... [9.60] Severable contracts ................................................................................... [9.70] The de minimis rule .................................................................................. [9.80] Substantial performance ......................................................................... [9.100] Acceptance of partial performance ......................................................... [9.140] Obstruction of performance .................................................................... [9.150] 9.3 Discharge through frustration ................................................................ [9.160] The basis of the doctrine ........................................................................ [9.160] The theory underlying the doctrine ........................................................ [9.210] The limits of impossibility ........................................................................ [9.240] Absolute impossibility .............................................................................. [9.250] Radical difference .................................................................................... [9.270] Radical difference, delay and interruption .............................................. [9.290] Supervening illegality .............................................................................. [9.340] Futility ....................................................................................................... [9.390] Non-frustrating events ............................................................................. [9.430] The effect of frustration ........................................................................... [9.570] The effect of statute ................................................................................ [9.620]

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Extracts from Graw, An Introduction to the Law of Contract, Ch 15.

9.1 HOW CONTRACTS MAY BE DISCHARGED

[9.10] “Discharge” simply refers to the process whereby a valid and enforceable contract is brought to an end, thereby releasing the parties to it from all further obligation to perform. Contracts can be discharged in five ways: (a)

by performance;

(b)

by agreement between the parties;

(c)

through frustration;

(d)

through breach; and

(e)

by operation of law.

Unless one of these occurs, the contract remains on foot and its obligations can be enforced by either party. However, if the contract is brought to an end, the parties’ consequential rights, duties and liabilities depend on the type of termination involved. This chapter deals with the individual means of discharge and with those consequential rights, duties and liabilities.

9.2 DISCHARGE BY PERFORMANCE The basis of discharge by performance

[9.20] When parties enter into a contract it is because they want to achieve certain mutual end aims. One party wants (for instance) some service, while the other party is willing to perform that service but wants payment in exchange. When the service has been performed and payment has been made, there is nothing left to do – the parties’ mutual obligations, freely created under their contract, have been discharged and so, too, has the contract.

Performance must be exact

[9.30] While the above seems to flow quite logically from the nature of a contract, there is one important qualification – as a general rule, performance must be exact. That is, each party’s performance must be exactly what was required by the contract. If it is not exact, the party whose performance falls short of what was agreed will not be entitled to demand that the other party perform his or her part of the bargain. He or she will also be in breach (with all the consequences that that entails: see 7.4 above).

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The potential for injustice

[9.40] The requirement that performance be exact can generate unfair results, especially where the substandard performance is the result of something outside the control of the defaulting party – a situation demonstrated in: Cutter v Powell (1795) 6 TR 320; 101 ER 573 [9.50] Facts: Cutter signed on as second mate on a ship sailing from Jamaica.

The contract stipulated that he was to be paid 30 guineas “provided he proceeds, continues and does his duty … to the port of Liverpool”. Three quarters of the way through the voyage he died. His wife sued for a proportionate share of his wages on a quantum meruit Held: Her action failed. Cutter’s contract was “entire”, meaning that he had to serve out the full voyage before he became entitled to any part of the 30 guineas. As he had not completed the voyage, he had not performed as required and, consequently, was not entitled to any payment at all.

Exceptions to the rule

[9.60] Cases such as Cutter v Powell (1795) 6 TR 320; 101 ER 573 illustrate the problems that can arise. In practice, however, the rule that performance must be exact is subject to five exceptions, which reduce many of its harsher consequences. The exceptions are: (a)

severable contracts;

(b)

the de minimis rule;

(c)

substantial performance;

(d)

acceptance of partial performance; and

(e)

obstruction of performance.

Where one of these operates, performance that is less than exact can still discharge the obligations of the party in default and that party’s rights to the stipulated return performance will remain intact.

Severable contracts

[9.70] The contract in Cutter v Powell (1795) 6 TR 320; 101 ER 573 was what is called an “entire” contract – unless each party performs his or her obligations under it in full, the other party cannot be forced to do what he or she agreed to do in return. Such contracts must be distinguished from what are called “severable” or “divisible” contracts. Severable contracts are those that clearly indicate that some performance less than the whole contracted for may give the performing party some right to demand at least part of the agreed return performance. Typically, such contracts will provide that the reciprocal obligation becomes due from time to time as performance takes place. 205

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So, for example, if it had been agreed that Cutter would be paid a guinea per week instead of 30 guineas for the entire voyage he (or his widow) would have been entitled to recover that part of his wages that he had earned before he died. Other good examples can be found in instalment building contracts where (say) the first payment becomes due on laying the slab, the second on erection of the roof, the third on lock-up stage and the fourth on completion. Contracts for the sale of goods by instalment are also good examples. In both cases, if there is default part-way through, the builder or supplier need not lose all of his or her rights – the entitlement to payment for the stage already reached or for the deliveries already made will have accrued and may be sued for. The critical problem is determining whether a contract is severable (or divisible) or entire, and that is not always easy. As a general rule, however, it is presumed that contracts are not severable (or divisible). This presumption can be overturned if both parties intended, at the time of contracting, that their contract would be severable/divisible and that rights would arise under it as performance occurs (as would be the case in all the examples used above).

The de minimis rule

[9.80] Occasionally, a party can fall short of exact performance by an insignificant margin. In such cases the maxim “de minimis non curat lex” may be invoked to

ameliorate the otherwise harsh consequences of the general rule. The maxim translates as “the law does not concern itself with trifles”, and it allows courts to disregard trifling departures from a contractual obligation. Consequently, parties whose performance falls slightly short of perfection will not be affected by the shortfall. See, for example: Shipton, Anderson & Co v Weil Bros & Co [1912] 1 KB 574 [9.90] Facts: The parties entered into a contract for the sale and purchase of a

cargo of wheat. The vendors were to supply “4500 tons, 2% more or less” and could tender an additional 8% if they so wished – giving an allowable maximum of 4950 tons. The wheat delivered weighed 4950 tons 55 pounds and, although they were only charged for 4950 tons, the purchasers refused to accept it on the grounds that the vendor’s performance was not exact.

Held: The purchasers could not refuse delivery. The difference in weight was so trivial as to be insignificant when taken against the consignment as a whole. Consequently, the de minimis rule applied to override the vendor’s failure to render exact performance.

Substantial performance

[9.100] Where there has been substantial performance of the agreed obligation, although not enough to activate the de minimis rule, the defaulting party may still be permitted to retain and enforce all the rights conferred by the contract. The rights of 206

Chapter 9 Discharging a contract [9.120]

the innocent party, who is still getting substantially that which was agreed, are adequately protected through the mechanisms of counterclaim and set-off. Effectively, the substantial performer gets the right to enforce the contract and the innocent party gets damages as compensation for the fact that performance is not exact. To this extent, the doctrine of substantial performance gives a result similar to that which attaches to breaches of contract generally. If a breach is major (so that performance is radically different from that which was agreed), the innocent party may terminate the contract and be excused from all further liability, including all further liability for payment. If the breach is minor (so that performance is still essentially that which was agreed), the innocent party cannot terminate, must still perform and will only be entitled to damages for any actual losses flowing directly from the breach. How the doctrine of substantial performance operates was illustrated in: Hoenig v Isaacs [1952] 2 All ER 176 [9.110] Facts: The plaintiff was engaged to redecorate and furnish the

defendant’s flat for £750, to be paid “as the work proceeds, and balance on completion”. Only £400 was actually paid. The defendant refused to pay the balance on the grounds that the work had been poorly done and required rectification. When sued, he argued that the contract was entire, that it had not been performed as agreed and that, therefore, the plaintiff could not recover.

Held: While the work was partially defective, the plaintiff had substantially performed that which had been required of him and the defects were easily remediable. Accordingly, he was entitled to the contract price less a deduction of £55 18s 2d, being the cost of the necessary remedial work. Lord Denning explained his reasoning (at 180–81): When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction … which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price.

[9.120] That reasoning, denying a plaintiff the entire agreed price only where there has effectively been no substantial performance at all, reflects the basic principles underpinning the doctrine as Sankey J summarised them in H Dakin & Co Limited v Lee [1916] 1 KB 566, a case involving repairs to a house which the defendants argued had not been completed in accordance with the contract. He said (at 574): In my opinion the law applicable to cases of this sort is as follows. Where a builder has supplied work and labour for the erection or repair of a house under a lump sum 207

[9.120] Corporations and Contract Law

contract, but has departed from the terms of the contract, he is entitled to recover for his services, unless (1) the work that he has done has been of no benefit to the owner; (2) the work he has done is entirely different from the work which he has contracted to do; or (3) he has abandoned the work and left it unfinished.

Consequently, for example, the doctrine could not have applied in Cutter v Powell (1795) 6 TR 320; 101 ER 573 ([9.50] above) – because Cutter had simply not done what he had agreed to do (complete the voyage). That this was due to events beyond his control was immaterial. Had he, instead of failing to complete the voyage, merely failed in his duties as mate on one or two occasions, the doctrine may have applied. Such failures would not have affected his substantial performance of the contract and therefore would not have entitled the shipowner to refuse payment of his wages. The shipowner could have recovered any loss actually sustained via either a set-off or a counterclaim for damages. That restriction on the operation of the doctrine is illustrated in: Bolton v Mahadeva [1972] 1 WLR 1009 [9.130] Facts: Bolton agreed to install a central heating system in Mahadeva’s home for £560. When the work was complete, Mahadeva refused to pay because the system gave out offensive fumes and did not heat the house properly. Remedial work could be performed, but it would cost £174.50.

Held: Having regard to the object of the contract (the provision of a working central heating system), the character of the defects and the relative cost of the necessary remedial work, Bolton had not substantially performed what was required of him. The basic rule, that entire contracts must be exactly performed, continued to apply and he was not entitled to recover any part of the agreed price.

[9.135] What is clear from the cases is that whether there has been substantial performance is always a question of fact, which must be determined by looking at the particular circumstances of each case: see Zamperoni Decorators Pty Ltd v Lo Presti [1983] VR 338 at 342. Matters that will be relevant in making that determination will include what work needs to be done to bring the job to the contracted standard, how much that work will cost, what proportion of the overall price that cost would represent and, more importantly, how significant was the breach and “did the owner receive substantially the whole of the benefit which the contract was intended to provide”: see ACN 002 804 702 v McDonald [2009] NSWSC 610 at [110].

Acceptance of partial performance

[9.140] The rule that performance must be exact is really for the benefit of the party who is to receive the benefit of that performance. Consequently, should that party be prepared to accept something less than exact performance that should be permitted. And that is just what happens. Legally, the parties agree to abandon their original contract (and with it their mutual rights and obligations) and substitute for it a new agreement under which one party accepts partial performance in full satisfaction. In exchange, the other party usually agrees to accept a lesser reciprocal performance. 208

Chapter 9 Discharging a contract [9.170]

Most commonly, this involves agreement to accept payment of a lesser amount than would have been due had performance been full and exact. In this way both parties are satisfied; the partial performer need no longer meet the original obligation, the other party gets a performance which, although less than that originally contracted for, is still acceptable, and the lesser benefit received is reflected by a reduction in the reciprocal obligation. The major qualification to this exception is that any acceptance of partial performance must result from free and willing agreement. If the party allegedly accepting had had no option but to accept, the general rule will continue to apply and the inexact performance will not give rise to reciprocal rights. For instance, in Sumpter v Hedges [1898] 1 QB 673), by completing the work himself the defendant was not freely and willingly accepting the builder’s partial performance. He had really had no choice – the builder had abandoned the work when it was only half complete so the defendant either had to complete the work himself or leave two uncompleted, unusable and unsightly houses on his land. Consequently, when the builder sued for payment for the work he had completed before walking off the job, he failed.

Obstruction of performance [9.150]

Obstruction of performance can take one of two forms:

(a)

prevention of performance (for example by one party denying access to premises where the work is to take place, or to materials, plant or equipment that are to be used in carrying out the work); or

(b)

refusal of tender of performance (that is, one party refusing to accept the proffered performance of the other).

9.3 DISCHARGE THROUGH FRUSTRATION The basis of the doctrine

[9.160] The generally accepted starting point for any discussion of the doctrine of frustration is the case of: Paradine v Jane (1647) Aleyn 26; 82 ER 897 [9.170] Facts: Paradine had leased property to Jane for an agreed rental. During

the currency of the lease, Jane was deprived of the use of the land by the invasion of a German princeling, whose army dispossessed him. He stopped paying the rent. Paradine sued. Jane’s defence was that because he had been deprived of the use of the land, he was no longer liable. Held: Parties who voluntarily enter into a contract must perform all their obligations under that contract irrespective of what happens – that is, they are “absolutely liable”. Accordingly, Jane was liable for the rent.

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[9.180] Corporations and Contract Law

[9.180] This rule was justified on the basis that the parties can always provide for contingencies when they are negotiating their contract. Jane could have required a clause to the effect that if continued use of the land was prevented by events beyond his control there would be no further obligation to pay rent. He had chosen not to negotiate such a clause and he had to bear the consequences. This doctrine of absolute liability can have unfortunate results, and in 1863 the courts finally acknowledged that if performance becomes impossible without fault by either party, there should be an automatic mutual discharge. The case was: Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 [9.190] Facts: Caldwell hired a concert venue known as the Surrey Gardens and

Music Hall to Taylor. Before Taylor’s scheduled first performance took place, the hall burnt down. Taylor claimed damages for breach of the agreement.

Held: As destruction of the hall had occurred without fault of either party, both were excused from future performance. The contract was subject to an implied term that if performance became impossible because of some supervening event, without default by either party, both parties would be discharged from further obligation.

[9.200] This underlying idea of an automatic discharge on supervening impossibility has now been universally accepted and is known as the “doctrine of frustration”.

The theory underlying the doctrine

[9.210] The theoretical basis of the doctrine of frustration has been variously explained – the implied term theory exemplified by Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309 ([9.190] above) is one major underlying explanation; the other is what is known as the “change in the significance of the obligation” theory. It is somewhat more liberal in that it does not require that the supervening event render performance actually impossible – all that is required is that the possible means of performance (after the allegedly frustrating event) must be “radically different” from the means of performance that both parties contemplated when they entered into their contract. It centres on the maxim “non haec in foedera veni” – it was not this that I agreed to do – it is based on the parties’ presumed intentions at the time of contracting and it had its origins in: Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

[9.220] Facts: Davis Contractors had agreed to build 78 houses over an eight-month period for an all-up price of £92 425. Because of factors beyond its control (shortage of labour and materials), the work took 22 months and ran £17 651 over budget. Davis claimed that the contract had been frustrated by the unavailability of skilled labour and adequate materials and that, there being no remaining contractual stipulation as to the amount that they should be paid, they were entitled to recover on a quantum meruit for the work they had actually done.

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cont. Held: The contract had not been frustrated. Frustration only occurs when, without default by either party, a contractual obligation cannot be performed because the circumstances under which performance must take place have been so altered that the actual performance would be radically different from that which was envisaged by the contract. Here, performance had not been rendered “radically different” by the shortages. It had become more onerous for the builders, but the delay was a risk that they had voluntarily undertaken and they could not now complain. As Lord Radcliffe said (at 729): it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

[9.230] In Australia, the majority of the High Court in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 357 and 380, [9.280] below (while acknowledging the authority of the earlier decisions based on the “implied condition” theory), expressed a preference for Lord Ratcliffe’s “change in the significance of the obligation” theory instead, Aickin J noting (at 380) that it “has the advantage of being flexible and capable of application to a wide range of circumstances and lacks the degree of unreality involved in the implied term theory”. (See also Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 161–62.) Whatever the theoretical basis for frustration, its practical effect boils down to this – if performance becomes impossible, in the relevant sense, through no fault of the either party, their contractual obligations are automatically discharged at the point of frustration. Thereafter neither can demand further performance by the other. However, as Nettle J noted in oOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 at [70] (applying the “change in the significance of the obligation” theory): … a contract is not frustrated unless a supervening event: a)

confounds a mistaken common assumption that some particular thing or state of affairs essential to the performance of the contract will continue to exist or be available, neither party undertaking responsibility in that regard; and

b)

in so doing has the effect that, without default of either party, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

Those tests were adopted and applied by the majority in Regional Development Australia Murraylands and Riverland Inc v Smith (2015) 251 IR 317; [2015] SASCFC 160 at [102]

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[9.240] Corporations and Contract Law

The limits of impossibility

[9.240] The concept of “impossibility” is crucial to the doctrine of frustration – only if performance becomes “impossible” will the contract be frustrated. The question is: “how far are the courts prepared to extend the concept of impossibility?” There are at least four acceptable categories. They are: (a)

absolute impossibility;

(b)

radical difference;

(c)

supervening illegality; and

(d)

futility (frustration of the contract’s commonly understood underlying purpose).

Absolute impossibility

[9.250] Absolute impossibility refers to those situations where a supervening event makes future performance physically impossible. This can occur because the subject matter of the contract is destroyed, as in Taylor v Caldwell ([9.190] above) or because it is no longer available to the parties or, in contracts requiring personal service, if the person whose services are required becomes incapable of performing them. Death would obviously be a frustrating event in those cases, as would serious illness or incapacity. So, for example, in Simmons Ltd v Hay (1964) 81 WN (Pt 1) (NSW) 358, the defendant employee’s illness was held to have frustrated the contract of employment because it left him permanently incapacitated and unable to discharge his duties in the manner required. In fact, in such cases, any external interference with a party’s ability to act as a free agent (imprisonment, internment, conscription, etc) could result in frustration. See, for example: Morgan v Manser [1948] 1 KB 184 [9.260] Facts: In 1938 Manser appointed Morgan his theatrical manager for

10 years, giving him exclusive control over all engagements and agreeing to pay him a percentage of all his earnings. In 1940, Manser was called up and was not demobilised until 1946. After demobilisation he accepted various engagements not booked by Morgan and he refused to pay Morgan any part of the agreed percentage. Morgan sued. Manser argued that the original contract had been frustrated. Held: Morgan’s action failed. The original contract had been negotiated on the basis that Manser’s services would be freely available for 10 years. The interruption to the availability of those services occasioned by his conscription was such that the performance envisaged by the original contract could not be achieved. That contract was therefore frustrated.

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Radical difference

[9.270] Radical difference refers to those situations where performance has not become impossible in any absolute sense but the circumstances have changed such that performance can now only occur in a way that is radically different from how both parties intended it would occur when they entered into their contract. It was the concept applied in Davis Contractors Ltd v Fareham Urban District Council ([9.220] above) and it is also accepted in Australia. See, for example: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 [9.280] Facts: The parties entered into a contract under which Codelfa

Construction was to carry out excavations for the construction of the Eastern Suburbs railway line in Sydney, and to complete the work within 130 weeks. The parties were both aware that this would only be achievable if Codelfa was able to work three shifts a day, seven days a week. The work generated a great deal of noise, dust and vibration and, three months after it began, local residents obtained an injunction preventing Codelfa from working between 10 pm and 6 am. A compromise was subsequently reached whereby Codelfa agreed to work at reduced noise levels during those hours and not at all on Sundays. This resulted in additional costs and loss of profit. Codelfa claimed that it was entitled to a quantum meruit rather than the originally agreed price because the contract had been frustrated by the injunctions.

Held: The actual mode of performance forced on Codelfa as a result of the injunctions was radically different from what both parties had contemplated at the time of contracting – and Codelfa could no longer hope to complete the work within the agreed time. Accordingly, the contract had been frustrated and Codelfa’s claim for payment on a quantum meruit could succeed. As Mason J explained the underlying reasoning (at 379): a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available … and that common assumption proves to be mistaken.

Radical difference, delay and interruption

[9.290] As a general rule, mere delay in, or interruptions to, performance of a contract is not enough to render it “radically different” and, thereby, frustrate it. This is especially so if its main purpose can still be substantially achieved or if, as in Davis Contractors Ltd v Fareham Urban District Council ([9.220] above), the delay or interruption was within the commercial risks of the undertaking. See, for example:

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National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 [9.300] Facts: The defendants leased a warehouse from the plaintiffs for a

period of 10 years. Five years later the local council closed the only street giving access to it because a building opposite was in a dangerous condition. The interruption to the defendant’s use of the warehouse was initially estimated to be for “well over a year” and the road was, in fact, closed for some 20 months. When the plaintiffs sued for unpaid rent, the defendants argued that the lease had been frustrated by the road’s closure.

Held: In the circumstances, the lease had not been frustrated. Given that it was for 10 years, its purpose could still be substantially achieved. Consequently, the road closure did not make performance “radically different” because the lessee still got from the arrangement most of what it had contracted to get.

[9.310] On the other hand, if the delay or interruption is such that performance of the contract thereafter will be “radically different” from the performance that both parties originally contemplated, the delay or interruption can be a frustrating event. One example has already been seen – in Morgan v Manser ([9.260] above), where Manser’s 10-year management contract was frustrated by his indefinite call up into the army. The same reasoning can also be seen in: FC Shepherd & Co Ltd v Jerrom [1987] QB 301 [9.320] Facts: The appellants hired Jerrom as an apprentice plumber under a

four-year training agreement. Less than two years later, Jerrom was convicted of affray and conspiracy to assault and was sentenced to six months’ to two years’ Borstal training. On his release, the appellants refused to take him back. He sued for unfair dismissal.

Held: He had not been unfairly dismissed. Given the length of his sentence and the consequent significant interruption to the contract’s agreed four-year term, it had come to an end through frustration. The way in which it could be performed had become radically different from what both parties had contemplated because Jerrom could not be taught all the necessary skills in the time that would be left after his release.

[9.330] Whether a delay or interruption makes performance something “radically different” from what was agreed is something that must be determined when the delay or interruption occurs. The parties cannot be expected to wait until it has ceased before deciding whether alternative arrangements should be made (see Embiricos v Sydney Reid & Co [1914] 3 KB 45 at 54). This means, of course, that the question of frustration does not depend on the actual length of any delay or interruption, but on its anticipated duration and the relationship between that anticipated duration and the contract overall. So, for example, in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the anticipated interruption was for about 12 months, but the actual interruption ended up being some 20 months and, in FC Shepherd & Co Ltd v Jerrom [1987] QB 301, the 214

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anticipated interruption was for up to two years, but Jerrom was actually released after only a little over six months. In both cases, however, the question of whether the respective contracts had been frustrated was determined by looking at what the delay was likely to be when it first occurred and how that likely delay would affect the performance that both parties had contemplated when they contracted.

Supervening illegality

[9.340] A particular contract may be perfectly legal when it is entered into but may become unlawful because of some event arising thereafter. Such events would include declarations of war (which automatically make contracts involving trade with the enemy illegal) and passage of legislation making performance of the contract unlawful. In either case the intervening event frustrates the contract and discharges both parties from liability for future performance. Such illegality is not confined to illegality under Australian law – foreign legislation making performance impossible will also frustrate a contract. See, for example: C Czarnikow Ltd v Rolimpex [1979] AC 351 [9.350] Facts: Rolimpex, a Polish marketing authority, contracted to sell

Czarnikow 17,000 tonnes of beet sugar. Before delivery, the Polish government banned all sugar exports. Rolimpex informed Czarnikow that this action had frustrated the contract and that the obligation to deliver was at an end. Czarnikow disputed this and claimed damages for non-delivery.

Held: The contracts had been frustrated by government intervention beyond Rolimpex’s control. Rolimpex was therefore released from further liability to deliver and Czarnikow’s action failed.

[9.360] In order to frustrate a contract, government interference need not go as far as actually declaring the proposed performance illegal – any form of interference preventing performance (or making it “radically different”) will suffice. See, for example: Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 [9.370] Facts: In 1914, the defendants agreed to construct a reservoir and

complete it within six years. Two years later the Ministry of Munitions ordered them to cease work so their labour force and plant could be diverted to munitions production. Despite this, the Water Board contended that the reservoir contract was still on foot and that it had to be completed (with an appropriate time extension). The defendants claimed that the contract had been frustrated by the order and that further performance could not be demanded.

Held: The interruption was such that it would make performance, if and when resumed, radically different from that originally agreed. Accordingly, the contract had been frustrated by the Ministry’s order. A critical point in this decision was that the parties had contemplated final completion within six years of commencement. At the time of the hearing, construction had been delayed for

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[9.370] Corporations and Contract Law cont. two years and it did not appear likely to resume until after the war. Consequently, it was utterly impossible that the original intentions could be met. (See here again the potentially frustrating effect of delay discussed at [9.290]–[9.330] above.)

[9.380] The same reasoning can be seen in Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095, where the defendant agreed to give the plaintiff first refusal on any sale of his “milk business” (consisting of the dairy farming activity, the farm and equipment and the defendant’s milk quota). Following deregulation of the dairy industry, milk quotas were abolished. That action by the New South Wales government radically altered the obligation under the agreement and it was therefore held to have been frustrated.

Futility

[9.390] Futility covers those situations where performance, although still possible, would be futile because the contract’s mutually understood purpose can no longer be achieved. Futility as a category of impossibility (and, therefore, as a basis for a plea of frustration) was illustrated in: Krell v Henry [1903] 2 KB 740 [9.400] Facts: Krell agreed to hire a flat in Pall Mall to Henry for two days and

received a £25 deposit. Although not stated in the written agreement, it was clear that Henry required the flat to view Edward VII’s coronation procession. The King became ill, the coronation was postponed and Henry refused to pay the balance of the agreed rent. Krell sued.

Held: He failed. Both parties were aware that the object of the agreement was for Henry to view the procession. Strictly speaking, he could have occupied the rooms on the days agreed, but it would have been futile. The King’s illness made achievement of the mutually understood underlying purpose of the contract impossible and, consequently, discharged that contract on the grounds of frustration.

[9.410] However, to discharge the contract, the allegedly frustrating event must render achievement of the entire underlying purpose impossible – if part of the purpose can still be satisfied there is no frustration. See, for example: Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683

[9.420] Facts: Part of the celebrations planned for Edward VII’s cancelled coronation was a royal naval review. Hutton hired the plaintiff’s steamship “for the purpose of viewing the naval review and for a day’s cruise around the fleet”. When the coronation was cancelled, so too was the review, but the fleet, already in position, remained at anchor. Hutton refused to pay for the hire of the vessel; the company sued.

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cont. Held: The company was entitled to its money. The review had not been the sole basis of the contract; Hutton had also intended to use the vessel to cruise around the fleet. That was still possible. Performance was therefore not entirely futile and, consequently, cancellation of the review had not frustrated the contract.

Non-frustrating events

[9.430] Frustration only occurs where performance becomes impossible (within the various meanings of that word) without default by either party. Frustration, therefore, does have distinct limits. In particular, a plea of frustration will not succeed in the following circumstances:

Where performance has not become impossible

[9.440] Where performance has not become “impossible”, merely more onerous, inconvenient or expensive, a plea of frustration will not succeed. One application of this has already been seen: Davis Contractors v Fareham Urban District Council ([9.220] above). Another can be found in: Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 [9.450] Facts: Tsakiroglou contracted to sell Noblee Thorl 300 tons of Sudanese

groundnuts under a contract requiring them to bear the cost of freight between Port Sudan and Hamburg. The contract did not specify a route and there was no delivery date (so there was no specific, commonly agreed means of performance). The normal route would have been via the Suez Canal, but closure of the Canal by the Egyptian government made that impossible. The only alternative route, via the Cape of Good Hope, was more than twice as long and was far more expensive. The sellers refused to complete on the grounds that closure of the canal had frustrated the contract.

Held: The contract had not been frustrated. Although shipping the goods via the Cape involved greater expense and was a method of performance not originally contemplated by the seller, the change in the obligation was not so fundamental (or “radically different”) from that which had been agreed to justify allowing the seller to get out of the contract. Its duty was to ship the goods by such reasonable and practicable routes as were available and, unlike the situation in Codelfa Construction Pty Ltd v State Rail Authority of NSW ([9.280] above), there was no specifically agreed time limit set for performance. Accordingly, particularly as there was sufficient shipping available to carry the goods via the Cape, they were bound to perform.

Where specific provision has been made for the event

[9.460] A plea of frustration will also not succeed where the contract makes specific provision for what might otherwise have been a frustrating event. In such 217

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cases, occurrence of the foreseen event does not frustrate the contract – the event is dealt with in the manner provided for by the agreement. See, for instance: Claude Neon Ltd v Hardie [1970] Qd R 93 [9.470] Facts: Claude Neon hired a neon sign to Hardie. Their five-year contract

specified that if Hardie’s lease of the premises on which the sign was installed was “extinguished or transferred”, the remaining rent for the full period would immediately become due and payable. Two years later the premises were resumed and demolished. Claude Neon demanded the balance of the rent. Hardie argued that he was not liable because the resumption had frustrated the contract.

Held: The resumption had not frustrated the contract. Termination of Hardie’s interest was an event specifically provided for and, consequently, was to be dealt with in accordance with the agreement. Claude Neon was entitled to the rent.

[9.480] Similar reasoning can be found in PT Arutmin Indonesia v PT Thiess Contractors Indonesia [2013] QSC 332 where a contract for the provision of mining services by Thiess, which became illegal and, therefore, impossible to perform after a change in Indonesian law, was held not to have been frustrated by that change because the parties’ agreement had expressly provided for that possibility and for what was to happen if that change occurred.

Where the frustrating event should have been foreseen

[9.490] The plea will not succeed where the allegedly frustrating event should have been foreseen and provided for but for some reason was not – at least on those occasions when the event should have been foreseen and provided for by the party now seeking to plead frustration. See, for instance: Walton Harvey Ltd v Walker and Homfrays Ltd [1913] 1 Ch 274 [9.500] Facts: The defendants, knowing that there was some likelihood that their hotel would be compulsorily acquired and demolished, permitted the plaintiffs to erect an advertising sign on its roof. Part-way through the seven-year term of the contract, the building was resumed and the sign was removed. The plaintiffs sued for damages. The defendants argued that the resumption had frustrated the contract and excused them from further liability.

Held: The contract had not been frustrated. The defendants had been aware of the risk, had entered into the contract despite it, more importantly, had made no provision for it when they could (and should) have and, consequently, were not excused from liability when it eventuated.

[9.510] Similar reasoning can be found in Veremu Pty Ltd v Ezishop.Net Ltd (2003) 47 ACSR 681. In that case, the appellants agreed to inject capital into a company that was in financial difficulty. When the company later became insolvent, they refused to pay, arguing that the insolvency had frustrated the contract. They failed. When they agreed to invest they knew that the company was in trouble and that insolvency was 218

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possible – but they proceeded anyway making no express provision for what would happen if the company did become insolvent. Consequently, when it became insolvent, the situation in which they found themselves was not “radically different” from what they had expressly contemplated. Therefore, their agreement had not been frustrated. Whether the same principle will always apply where the “frustrating” event was foreseeable and, therefore, should have been foreseen and provided for – but was not – is less clear. In Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 ([9.530] below), for example, Lord Wright indicated (at 529) that, where the possibility of the alleged frustrating event occurring was “known to both parties when the contract was made”, it would be difficult to assert that they had entered into the contract on a common assumption that that event would not occur and that its later occurrence would therefore be a frustrating event. Similiarly, in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 ([9.280] above), obiter dictum by Mason J (at 359) and by Aickin J (at 381) tends to suggest that an event may not frustrate a contract unless it was neither foreseen nor reasonably foreseeable. However, these comments were not forcefully put and it is unlikely that their Honours intended to suggest that the foreseeability of a potentially frustrating event must always defeat a plea of frustration. In fact, the authorities seem to favour the view that frustration can operate in such cases, even though the parties could or should have contemplated the allegedly frustrating event, especially where what actually happened was more likely or more serious than was actually foreseen (or foreseeable). Obiter dicta supporting this view can be found in Tatem (WJ) Ltd v Gamboa [1939] 1 KB 132, 137–38 per Goddard J, and in Ocean Tramp Tankers Corp v V/O Sovfracht (“The Eugenia”) [1964] 2 QB 226 at 239 per Lord Denning MR. It was also specifically referred to by Nettle JA in oOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 (a case similar in many factual respects to Walton Harvey Ltd v Walker and Homfrays Ltd [1913] 1 Ch 274 ([9.500] above)), in that it involved the alleged frustration of a contract permitting advertising on a building when another building, partially obstructing the line of site from the adjacent roadway, was erected nearby. Nettle JA noted (at [73]-[74]) that: … it is important to be precise about the nature and degree of foresight. So far as foreseen events are concerned, the parties … may have foreseen an event but not foreseen the nature and extent of it. … In the case of foreseeable but unforeseen events, the nature and extent of foreseeability is critical. Since most events are foreseeable in one sense or another, the parties … will not normally be taken to have assumed the risk of an event occurring during the life of the contract unless the degree of foreseeability of that event is very substantial (emphasis added).

Despite this, however, his Honour (with whom the other members of the Court agreed) found that it was plainly foreseeable, when the parties had agreed, that the obstruction could occur. It was therefore difficult to argue that its non-occurrence was an assumption on which they had based their agreement and, accordingly, the fact that 219

[9.510] Corporations and Contract Law

the licensee had not sought a specific term providing for the consequences, if it did occur, indicated that it had assumed the risk that it might happen. Consequently, the contract had not been frustrated. Exactly the same reasoning was used in Regional Development Australia Murraylands and Riverland Inc v Smith (2015) 251 IR 317; [2015] SASCFC 160 to find that its CEO’s employment contract, which depended on government funding continuing over its full five-year agreed term (when it was “plainly foreseeable” at the time of agreeing that that was not guaranteed) had not been frustrated when funding ceased. By not including a clause, dealing with that possibility the appellant had “assumed the risk” of both the cuts and the probable consequences of those cuts. However, despite the outcomes in those cases it is clear from the principles that Nettle JA outlined (and which were accepted in Regional Development Australia Murraylands and Riverland Inc v Smith) that the mere fact that no express provision was made for the consequences of a foreseeable event does not necessarily mean that the parties intended that any loss would lie where it falls – it is equally consistent with inadvertence or an intention that the consequences would be dealt with under the general law if and when they happened. On that basis a plea of frustration may be justifiable, at least in some instances, even when the frustrating event could (and should) have been foreseen.

Where the frustrating event is self-induced

[9.520] Where the potentially frustrating event is the result of some conscious act or omission by the party pleading frustration, the contract will not be discharged and, if that party cannot perform, he or she will be liable for breach of contract. Self-induced frustration occurs, for example, where one party, faced with a choice of options, elects a course of action that makes performance of the contract impossible. That is what happened in: Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 [9.530] Facts: Ocean Trawlers chartered a trawler to Maritime National Fish.

The vessel could only be operated using an otter trawl and that had to be licensed. Maritime applied for licences for all five of its trawlers, was advised that only three licences would be granted and was asked to nominate three trawlers. The trawler chartered from Ocean Trawlers was not one of the three they nominated. When Ocean Trawlers demanded payment of the hire charge, Maritime responded that the government’s failure to issue a licence for the vessel had frustrated the contract and had discharged them from all further liability to pay. Ocean Trawlers sued.

Held: The failure to secure a licence was the direct result of Maritime’s conscious election. As a result, that failure had not frustrated the contract and Maritime was liable for the hire. As Lord Wright said (at 530): the principle of frustration … assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced

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Chapter 9 Discharging a contract [9.560] cont. frustration.

[9.540] That is not to say that, simply because the frustrating event was induced by one party, both are thereafter precluded from pleading frustration. The innocent party can still raise the plea to escape liability under the contract because, as far as he or she is concerned, the frustration was not “self-induced”. See, for example, FC Shepherd & Co Ltd v Jerrom ([9.320] above) where the contract was found to have been frustrated even though the frustrating event had been caused by one of the parties. In that case, Shepherd argued that Jerrom’s contract of apprenticeship had been frustrated by his imprisonment. Jerrom’s rather novel response was that, because his own criminal acts had caused the imprisonment, the frustration was “self-induced”. The court was quick to point out that he could not argue self-induced frustration because the employers (the ones pleading frustration of the contract) had not caused the frustrating event. Where self-induced frustration is pleaded, the onus of proving that it was self-induced rests with the party making that allegation. See, for example: Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 [9.550] Facts: Joseph Constantine chartered a ship to Imperial Smelting, which

intended to use it to carry a cargo of iron ore. Before the cargo could be loaded, the auxiliary boiler exploded, causing such damage to the vessel that the contract could not be performed. Imperial Smelting sued for damages. The appellants argued that the explosion had frustrated the charter party. Held: The explosion had clearly frustrated the commercial object of the voyage and that was all that the shipowners had to show. They did not also have to disprove any suggestion that the frustrating event, the explosion, was due to self-inducement through their negligence or default. It was up to Imperial Smelting to show, if it could, that the explosion was “self-induced”. It had not done so and, accordingly, the defence of frustration succeeded.

Where the contract is merely delayed or interrupted

[9.560] As already seen ([9.290]–[9.330] above), mere delay in, or interruption to, the performance of a contract is not normally enough to frustrate it unless the delay or interruption makes the possible means of performance “radically different” from the means that both parties contemplated when the contract was entered into. If the main purpose of the contract can still be achieved without making fundamental changes to the parties’ underlying obligations, delay or interruption will not frustrate the contract even if performance is thereby made more difficult or expensive. See again, National Carriers Ltd v Panalpina (Northern) Ltd ([9.300] above) and Tsakiroglou & Co Ltd v Noblee Thorl GmbH ([9.450] above).

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[9.570] Corporations and Contract Law

The effect of frustration

[9.570] When a contract is frustrated it is automatically discharged, at least as regards all future performance. That is, the whole contract automatically comes to an end at the point at which the frustrating event occurs and, thereafter, neither party can be held to performance. However, the contract only terminates from the point of frustration. Rights, duties and liabilities that accrued prior to that point remain on foot. This has two results: 1.

Payment for any work performed after the contract has been frustrated cannot be governed by it. Consequently, any recovery must be on a quantum meruit on the value of that work – not on the basis of what was agreed. That was the point of the pleas of frustration in both Davis Contractors v Fareham Urban District Council and Codelfa Construction v State Rail Authority of NSW ([9.220] and [9.280] above).

2.

Payments already made at the point of frustration cannot generally be recovered, and payments that have accrued due generally remain payable: see Chandler v Webster [1904] 1 KB 493. The same thinking was subsequently applied in Australia in:

In re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194 [9.580] Facts: Continental engaged Andersons to construct and erect machinery on its land between April and December 1914 – with provision for periodic progress payments. When war broke out on 4 August 1914, the company, which was controlled by alien enemies, was placed under a court-appointed “controller” for the duration of hostilities. That order remained in place until June 1918, when the company was ordered to be wound up. The contract was never completed and, although some progress payments were received, no machinery was ever delivered to or erected on Continental’s land. Andersons demanded compensation for non-fulfilment of the contract. The controller sought court direction as to whether such compensation was payable and whether Continental could either demand delivery of the machinery or recover the progress payments.

Held: The outbreak of war had frustrated the contract. Consequently, Andersons were not entitled to compensation for Continental’s failure to perform. Neither, however, was Continental entitled to delivery of the machinery (fulfilment of an obligation that had not accrued due at the point of frustration) or to return of the progress payments. Those payments had accrued due before the outbreak of war and were not affected by the frustration.

[9.590] This result can be very unfair, particularly if one party loses all benefit under the contract while remaining liable for payment. This possibility led the House of Lords to reconsider the rule in: Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 [9.600] Facts: Fairbairn contracted to supply Fibrosa (a Polish company) with a

number of textile machines to be delivered at Gdynia. The all-up price was £4800,

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Chapter 9 Discharging a contract [9.620] cont. of which £1000 was paid in advance. War broke out before delivery and Gdynia was occupied by the Germans. The contract was thus frustrated and Fibrosa sued to recover its £1000. Held: Fibrosa was entitled to the return of its money. The House of Lords ruled that where there has been a total failure of consideration, prepayments are recoverable in quasi-contract. There must, however, be a total failure of consideration. As Lord Atkin said (at 55): the man who pays money in advance on a contract which is frustrated and receives nothing for his payment is entitled to recover it back.

[9.610] While the point is yet to be definitively decided, it is highly probable that the High Court (and, therefore, other Australian courts) will follow Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 in preference to the decision in In re Continental C & G Rubber Co Pty Ltd (1919) 27 CLR 194. For example, in Baltic Shipping Co v Dillon (1993) 176 CLR 344, Mason CJ commented, obiter dictum (at 355 n 55), that the decision in Fibrosa’s case “correctly reflects the law in Australia and, to the extent that it is inconsistent, should be preferred to the decision of this Court in In re Continental C & G Rubber Co Pty Ltd”. Other members of the court also referred to the decision in Fibrosa’s case with apparent approval and that apparent approval can also be seen in Roxborough v Rothmans of Pall Mall (2001) 208 CLR 516, especially at 527–29 and 539. Therefore, when the point is formally and directly litigated in Australia, it is likely that Fibrosa’s case will be followed. That is especially so because the decision in In re Continental C & G Rubber Co Pty Ltd is also inconsistent with the modern law of restitution (see 16.11 (Graw)). Its continued relevance must, therefore, be regarded with suspicion on those grounds as well (the argument on which much of the reasoning in Roxborough v Rothmans of Pall Mall was based).

The effect of statute

[9.620] In some jurisdictions legislation has been passed to modify the strictness of the common law rule that, on frustration, losses lie where they fall. In Australia such legislation exists in Victoria (Pt 3.2 of the Australian Consumer Law and Fair Trading Act 2012 (Vic)), in New South Wales (Frustrated Contracts Act 1978 (NSW)) and in South Australia (Frustrated Contracts Act 1988 (SA)). The Victorian provisions permit recovery of moneys paid prior to frustration, even though there may not have been a total failure of consideration. They also provide for an apportionment of payments where that is necessary to achieve a fair result, and for the continued operation of any provisions of a contract which, on its true construction, were intended to survive frustration. The New South Wales Act goes somewhat further and provides for a more far-reaching adjustment of rights and liabilities on frustration. As well as provisions 223

[9.620] Corporations and Contract Law

equivalent to those found in the Victorian legislation, it contains provisions that allow for the discharge of unperformed obligations that should have been performed before frustration, for payment for obligations already performed but not paid for before frustration (effectively on a quantum meruit) and for apportionment of the cost of any wasted work (such as in Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32). The parties may either perform these adjustments themselves or, if they cannot reach agreement, the courts may do it for them. The South Australian Act provides that frustration of a contract discharges the parties to it from all remaining obligations under it, including those obligations that had accrued due before frustration but which had not actually been performed. However, it does expressly preserve: (a)

obligations which, according to the contract, were to survive frustration; and

(b)

rights to sue for damages for breach of contract where those rights arose before the contract was frustrated.

Where a contract is frustrated, s 7(1) of the Frustrated Contracts Act 1988 (SA) provides that “there will be an adjustment between the parties so that no party is unfairly advantaged or disadvantaged in consequence of the frustration”. That adjustment can take the form of a payment of money, a disposition, sale or realisation of property, creation of a charge, appointment of a receiver or anything else that the court deciding the matter feels is appropriate. The adjustment takes place whether or not there has been a total failure of consideration and it is aimed at ensuring that there is an “equalisation of the contractual return” that each party gets from the (now frustrated) contract.

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CHAPTER 10

Remedies

10.1 Remedies depend on the breach ........................................................ [10.10] The nature of the breach ........................................................................ [10.10] Treating the contract as discharged ....................................................... [10.20] Continuing with the contract ................................................................... [10.30] 10.2 Damages .............................................................................................. [10.40] The usual remedy ................................................................................... [10.40] The object of damages ........................................................................... [10.50] Actual, nominal and exemplary damages .............................................. [10.60] Principles underlying an award of damages ........................................ [10.110] 10.3 Damages may not be too remote ..................................................... [10.120] The underlying concept ......................................................................... [10.120] Natural consequences ........................................................................... [10.150] Contemplated consequences ................................................................ [10.190] 10.4 Damages are compensatory .............................................................. [10.200] The general rule .................................................................................... [10.200] Quantification problems are no bar to recovery .................................. [10.220] Damages are not usually recoverable for injured feelings .................. [10.270] Damages are not usually recoverable for discomfort, disappointment or distress ............................................................................. [10.300] 10.5 Damages must be mitigated .............................................................. [10.350] The duty to mitigate .............................................................................. [10.350] Limitations on the duty .......................................................................... [10.370] The onus of proof ................................................................................. [10.380] 10.6 Damages can be pre-agreed ............................................................. [10.390] Liquidated and unliquidated damages .................................................. [10.390] Debt, not damages ................................................................................ [10.400] 225

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10.7 Liquidated damages and penalties .................................................... [10.410] The difference ........................................................................................ [10.410] The effect of a penalty clause .............................................................. [10.420] Distinguishing between liquidated damages and penalties ................. [10.430] Getting around the Rule ....................................................................... [10.480] 10.8 Deposits .............................................................................................. [10.500] The dual nature of deposits ................................................................. [10.500] Relief against forfeiture ......................................................................... [10.510] 10.9 Specific performance ......................................................................... [10.540] The form of the remedy ........................................................................ [10.540] The nature of the remedy ..................................................................... [10.550] Not available where damages will suffice ............................................ [10.560] Not available where it would cause undue hardship .......................... [10.590] Must be mutually available ................................................................... [10.620] Not available to enforce contracts of personal service ....................... [10.650] Not available for contracts that would require constant superintendence ............................................................... [10.660] Not available where the contract is otherwise defective ..................... [10.700] Procedural aspects ................................................................................ [10.710]

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Chapter 10 Remedies [10.30]

Extracts from Graw, An Introduction to the Law of Contract, Ch 16.

10.1 REMEDIES DEPEND ON THE BREACH The nature of the breach

[10.10] This chapter deals with the remedies that are available to an innocent party on a breach of contract. It does not cover the recourse that might be available in situations that do not constitute breach (for example mistake, misrepresentation, duress, undue influence, unconscionability and illegality). The remedies for such “defects in the bargain” are dealt with in Chapters 11–14 (Graw). Breach occurs where a contract has come into being and one or other of the parties fails to perform all or some part of the obligations under it. As was seen in Chapter 7, each such failure constitutes a breach of term and each breach entitles the innocent party to some form of relief. If the breach is a breach of condition or a serious breach of an intermediate (or innominate) term, the innocent party may elect to treat the contract as discharged and can also sue for damages. If the breach is a breach of warranty or a minor breach of an intermediate term, the innocent party may only sue for damages.

Treating the contract as discharged

[10.20] Where the breach is one that entitles the innocent party to treat the contract as discharged, a number of consequences follow if that election is made: 1.

The contract comes to an end when the election is made and both parties are released from all remaining obligations under it (that is, no further performance is required).

2.

Because termination is not retrospective (that is, the contract is not void ab initio), obligations that have already accrued must be performed or, if not performed, must be compensated for in damages.

3.

The innocent party can sue for: (a) unliquidated damages generally – see 10.2 below; (b)

a quantum meruit for that part of the contract actually performed; or

(c)

money had and received (to recover money paid where there has been a total failure of consideration).

Continuing with the contract

[10.30] Where the innocent party cannot treat the contract as discharged, or where he or she had the option to do so but elected not to, there is still a right to damages. In such cases the contract remains on foot, both parties can still be required to perform and each remains liable in the event of future breach. The continuing contract, however, is not exactly the same as was originally agreed – at least one of the terms 227

[10.30] Corporations and Contract Law

has not been or is not being performed as originally intended. As a result, the innocent party, the party now getting less than was bargained for, should be entitled to compensation. That compensation sounds in damages.

10.2 DAMAGES The usual remedy

[10.40] At common law, breaches of contract are normally remedied by an award of damages – provided, of course, the plaintiff can show that the breach was at least a cause of his or her loss. Such awards are made on the basis that, in most cases, the breach complained of can be adequately compensated for by a payment of money. Where money is not an appropriate remedy, the common law is not really capable of providing a totally just solution and, in such cases, equity can step in with orders that are more specifically designed to ensure that justice is done. The equitable remedies are dealt with later in this chapter: see 10.9below.

The object of damages

[10.50] The object of an award of damages is to compensate actual loss, at least in so far as money can do so. In this respect, awards of damages in tort and in contract are similar. They differ, however, in the bases on which they are calculated. Damages in tort are awarded to place the aggrieved party in the position he or she would have occupied but for the tort complained of. In most cases, this means restoring that party to the position that he or she occupied previously. In contract, damages are awarded to place the aggrieved party in the position that he or she would have occupied had the contract been performed as agreed. Tortious damages are, therefore, calculated by looking at what the position was before the tort, while contractual damages are calculated by looking at what the position should have been after proper performance of the contract. As Baron Parke put it in Robinson v Harman (1848) 1 Ex 850, 855; 154 ER 363 at 365 (in words approved by the High Court in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80), [10.210] below): Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

Of course, as the High Court also noted in that case (at 82), the corollary of that principle is that “a plaintiff is not entitled by the award of damages on breach, to be placed in a superior position to that which he or she would have been in had the contract been performed”.

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Actual, nominal and exemplary damages

[10.60] The net result of the above view of contractual damages is that the innocent party is assured of recovering actual loss and the guilty party is guaranteed that he or she will not be liable for an amount over and above that actual loss. Exemplary damages (those awarded not to compensate loss but to punish and/or deter a wrongdoer who is guilty, usually in tort, of what Knox CJ described in Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71 at 77 as “conscious wrongdoing in contumelious disregard of another’s rights”) are, therefore, not normally available in contract – even if the breach being complained of was wilful or maliciously motivated. As Griffith CJ put it in Butler v Fairclough (1917) 23 CLR 78, 89 (in words approved and applied by the High Court in Gray v Motor Accident Commission (1998) 196 CLR 1 at 6): The motive or state of mind of a person who is guilty of a breach of contract is not relevant to the question of damages for the breach … A breach of contract … may be wilful, and even malicious and committed with the express intention of injuring the other party. But the measure of damages is not affected by any such considerations.

For an example of the principle being applied in practice see: Ruxley Electronics Ltd v Forsyth [1996] 1 AC 344 [10.70] Facts: The appellants contracted to construct a pool with a diving area 7

feet 6 inches deep. When the pool was finished it was suitable for diving but it was only 6 feet 9 inches deep. This had no adverse effect on the pool’s value, but the landowner sued for £21 560, the cost of completely rebuilding it in accordance with the original specifications.

Held: In the circumstances it was unreasonable to insist on complete reinstatement. The cost of the work involved was out of all proportion to the benefit that the owner would obtain, so the court awarded him £2500 damages for the resulting “loss of amenity”. As Lord Bridge of Harwich said (at 353): damages for breach of contract must reflect, as accurately as the circumstances allow, the loss which the claimant has sustained because he did not get what he bargained for. There is no question of punishing the contract breaker.

[10.80] It follows that although an innocent party can sue for any breach (the breach confers that right), substantial damages can only be recovered for substantial loss. Where there has been no or almost no consequential loss, or where there is no evidence of what the plaintiff’s loss actually was, all that can be recovered is what are called nominal damages. Nominal damages are (usually) small, token sums of money awarded to acknowledge the existence of a breach and to express the court’s general disapproval of that sort of behaviour. See, for example, Baume v Commonwealth (1906) 4 CLR 97, 116 and:

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Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 86

[10.90]

Facts: Luna Park contracted with Tramways Advertising for display advertising on Sydney trams “on the tracks at least eight hours per day throughout your [Luna Park’s] season”. When Tramways Advertising sued for outstanding charges Luna Park counterclaimed, alleging that it was entitled to terminate the contract because Tramways Advertising was in breach. It also sought damages. (The alleged breach was that, while the billboards had been displayed on average for eight hours per day, each board had not been.) Held: While Luna Park could treat the contract as terminated because of the breach, it had not shown what actual losses it had sustained because of it. Therefore, it could only recover nominal damages. It was awarded one shilling.

[10.100] The same principle can be seen in Woolworths Ltd v Olson (2004) 184 FLR 121 where, although it was clear that Olson had breached his contract of employment, there was no evidence that Woolworths had suffered any financial loss as a result. Consequently, the court could order no more than nominal damages (see, especially, at 204). See also, Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361 where, again, the breach was established but only nominal damages were awarded. Dillon LJ explained his reasoning (at 1368): The plaintiffs have suffered no damage. Therefore on basic principles, as damages are awarded to compensate loss, the damages must be merely nominal.

The danger for a plaintiff who only sues to “have his or her day in court” is that he or she may win the action, be awarded a nominal amount in damages but be deprived of costs on the grounds that the suit was frivolous or vexatious. If that happens, the “victory” may turn out to be quite expensive.

Principles underlying an award of damages

[10.110] Because contractual damages are compensatory, actual loss must be shown both to justify any award at all and to allow for calculation of an appropriate amount. To assist in determining whether and what loss the plaintiff has suffered (and its relationship to the breach), the common law developed a number of “rules”. When applied to any particular breach, these “rules” should indicate whether damages are warranted at all and, if so, in what amount. The major “rules” include: (a)

damages may not be too remote;

(b)

damages are only compensatory;

(c)

damages must be mitigated; and

(d)

damages may be pre-agreed by the parties.

Each of these “rules” is dealt with in more detail below.

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10.3 DAMAGES MAY NOT BE TOO REMOTE The underlying concept

[10.120] The concept underlying the principle of remoteness is that it is neither just nor practicable to hold a defendant liable in damages for every consequence of a breach of contract no matter how unusual or unexpected those consequences might be. Damages recoverable are limited to those that are not too remote. The principle was first enunciated in: Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 [10.130] Facts: The plaintiffs, mill owners in Gloucester, engaged the defendant

carrier to take a broken crankshaft to Greenwich to be used as a pattern for a new one. The carrier promised it would be there the next day. In breach of this contractual undertaking, the crankshaft was delayed in transit, the replacement was not delivered when it should have been and the mill was out of commission for longer than should have been the case. The mill owners claimed damages for loss of the profit that would have been earned if the replacement shaft had been available on time. Held: Their action failed. The carrier had only been told that the item he was to carry was a crankshaft from the mill and that the people engaging his services were the millers. He was not told that the mill would be inoperative until a new crankshaft was obtained and, as the millers might have had a spare, it was not reasonable to hold him responsible for the loss of profit. As Alderson B said (at 354; 151): Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

[10.140]

Therefore, in law, damages are only recoverable for those losses that:

(a)

arise naturally from the breach; or

(b)

are actually contemplated as a probable result of the breach. In all such cases, as Lord Reid put it in Koufos v C Czarnikow Ltd [1969] 1 AC 350, 385 in a passage that the High Court has quoted with approval (see, for instance, Wenham v Ella (1972) 127 CLR 454, 471; Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653, 667; Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, 92 and 99; and Baltic Shipping v Dillon (1993) 176 CLR 344, 365): The crucial question is whether, on the information available to the defendant when the contract was made, he should or the reasonable man in his position would, have realised that such loss was suffıciently likely to result from the 231

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breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

Natural consequences

[10.150] Loss or damage flowing as a “natural consequence” of the breach (or occurring in “the usual course of things”) is limited to that loss or damage which a reasonable person, without any special knowledge of the circumstances, might have expected would result from that breach. The concept is essentially one of “foreseeability”. The defendant will be liable for damage that could have been foreseen as a likely result of his or her breach but not for damage that could not have been so foreseen. The principle is illustrated in: Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 [10.160] Facts: The plaintiff laundry company contracted to buy a boiler to use

in its business. Delivery should have occurred in June, but did not actually occur until November. The plaintiff sued for the normal profits it would have earned had the boiler been delivered on time and for loss of the profits it should have made on some highly lucrative dyeing contracts it had negotiated thinking that the boiler would be available.

Held: It was entitled to recover the profits it would have made on the ordinary work but not on the dyeing contracts. Newman’s should have foreseen the likelihood that the former would be lost but could not have foreseen (as a serious possibility) that the latter would be – such work was outside what laundries did on a day-to-day basis and the loss was, thus, too remote.

[10.170] Foreseeability in the required sense does not relate to the actual damage caused, just to the type of damage. If damage of the type actually sustained could have been foreseen as a real possibility, then the damage that did occur will be a natural consequence of the breach and the defendant will be liable. See, for instance: H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 [10.180] Facts: The defendants contracted to supply and install a hopper to

store pig nuts for the plaintiffs’ pig herd. They were aware that the hopper had to be ventilated, but failed to ensure that the ventilator was open. That was neither reasonably detectable nor detected by the plaintiffs. The pig nuts became mouldy, the pigs developed a rare intestinal infection, E coli, and 254 of them died. The plaintiffs sued for their value. The defendants denied liability, arguing that it had not been foreseeable that the pigs would develop E coli and die.

Held: It had been foreseeable that the nuts would go mouldy and that the pigs might, therefore, become ill. That was damage of the “type” that had occurred and as damage of that “type” had been foreseeable, the defendants were liable for the actual consequences of their failure.

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Contemplated consequences

[10.190] If the damage is attributable to special circumstances that would not normally be expected (as was the case with the dyeing contracts in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528), a defendant will not be liable unless those special circumstances were brought to his or her attention at the time of contracting. Knowledge and an express or implied undertaking of the risk are the critical determinants. A defendant who knows of the special circumstances and who has expressly or impliedly accepted the risk will normally be liable (unless, of course, he or she has validly disclaimed that liability). It is not necessary that there be a formal term in the contract making the defendant responsible for any “abnormal” loss or damage; the mere fact of awareness that such loss or damage could occur and the express or implied undertaking will be enough to establish liability in the event of a breach. For an illustration of the principle, compare Diamond v Campbell-Jones [1961] Ch 22 with Cottrill v Steyning and Littlehampton Building Society [1966] 1 WLR 753. Both cases concerned contracts to sell land which, through the wrongful acts of the vendors, fell through. In the former case, the vendors knew that the buyer was a dealer in real estate but did not know that he intended to convert the premises himself before reselling them. They were held liable for the loss of profit the buyer would have made on resale, but not for the much larger profit he would have made through the conversion. In the latter case, the vendor not only knew that the purchaser intended to resell but that he intended to develop the property himself before resale. The vendor was held liable for loss of the total profit that would have arisen on the development. In all such cases, however, the plaintiff bears the onus of proving that the losses in question (from, for example, profitable re-sales) were within the parties’ common contemplation at the time of contracting – and he or she must prove that the re-sales were more than simply foreseeable options that were open at that point: see, for example, Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 at 655, 656 and 666.

10.4 DAMAGES ARE COMPENSATORY The general rule

[10.200] As already seen, the general rule is that only actual loss can be compensated for in damages and that, in assessing appropriate compensation, the court must attempt to place the injured party “in the same situation, with respect to

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damages, as if the contract had been performed”: Robinson v Harman (1848) 1 Ex 850, 855; 154 ER 363 at 365. The High Court considered what this means, in a practical sense, in: Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 [10.210]

Facts: The Commonwealth engaged Amann Aviation to provide aerial surveillance of Australia’s northern coastline. Amann spent considerable sums of money buying and modifying aircraft, employing staff and setting up facilities to perform the contract. That all took longer than it had expected and, when it was due to start the surveillance flights, it had not met all of the Commonwealth’s contractual specifications. The Commonwealth notified it that the contract was at an end. That notice was, in fact, invalid but Amann treated it as a wrongful repudiation and, on that basis, it terminated the contract and sued for damages. At first instance it was awarded $410,000, being the profit that it would have earned if the contract had been performed. It appealed, seeking, instead, reimbursement of the sums it had outlayed in getting ready to perform – including its pre-operational expenditure, the reduction in the value of its aircraft and termination payments to its employees. Those sums totalled $6.6 million. Held: Amann was entitled to the $6.6 million. The important part of the decision was, however, the way in which the High Court justified the award. Starting from the basic principle established in Robinson v Harman (1848) 1 Ex 850; 154 ER 363 – that an injured party is entitled to be placed in the same position that he or she would have been in if the contract had been performed – their Honours made, essentially, three points: (a)

in the normal course of events a plaintiff is entitled to receive, as damages, what he or she would have received if the contract had been performed. In most cases, this means the expenses that were actually incurred in performing the contract plus the expected profit (what are often referred to as “expectation damages”);

(b)

where the contract would not have generated a profit or, worse, where it would have resulted in a loss, the plaintiff can still only recover, as damages, what he or she would have earned if the contract had been performed. (That is, in practical terms, the plaintiff will normally receive only nominal damages and cannot “elect” to recover his or her outlays instead. As Mason CJ and Dawson J said (at 82), that would place the plaintiff “in a superior position to that which he or she would have been in had the contract been performed”. That would be completely inconsistent with the principle laid down in Robinson v Harman and would not be allowed.); and

(c)

only where it is impossible to predict what position the plaintiff would have been in if the contract had been completely performed will the principle in Robinson v Harman not be applied (and then only because it cannot be). In such cases the plaintiff can recover, instead, such expenditure as he or she reasonably incurred in reliance on the defendant’s promise (that is, what is often referred to as “reliance damages”) – on the basis that that money, spent in reliance on the other party’s promise, would not otherwise have been spent. As Mason CJ and Dawson J put it

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cont. (at 86), “reliance damages” are awarded because “the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed”. Here, for a number of reasons, Amann’s “post-contractual” position could not be accurately predicted and, therefore, it was entitled to recover its expenditure.

Quantification problems are no bar to recovery

[10.220] Although plaintiffs have to prove both that they have suffered some loss or damage and also the amount of that loss or damage before they can recover substantial – as opposed to nominal – damages, the courts do accept that, in some instances, the exact quantum of damages may be difficult to prove (especially where the loss or damage is of a prospective or speculative nature). This does not mean that the courts can simply “pluck a figure from the air”; they will still demand, as Bowen LJ put it in Ratcliffe v Evans [1892] 2 QB 524 at 532–33, “as much certainty and particularity … as is reasonable” (a principle which the High Court cited with approval in Placer v Thiess (2003) 196 ALR 257 at 266). However, this “as much as is reasonable” qualification means that, in appropriate cases the courts can still award damages – even if they have to “crystal ball” the amount they should award. Indeed, as Menzies J said in Jones v Schiffman (1971) 124 CLR 303 at 308, “assessment of damages … does sometimes, of necessity involve what is guess work rather than estimation”. What this means is that, where precise evidence of the plaintiff’s actual loss is not available, the court will often do its best with what evidence it does have. See, for instance: Chaplin v Hicks [1911] 2 KB 786 [10.230] Facts: Hicks was an actor and theatrical manager. He advertised a

beauty competition in which newspaper readers were to select 50 young ladies whom he would then interview to select a final 12 who would be provided with theatrical engagements. Chaplin was one of the 50 selected and was promised an interview. Through Hicks’ breach of contract, she was not given a reasonable opportunity to attend the interview and was not present when the final selection was made. She sued. Hicks argued that she could only be entitled to nominal damages as she had had less than a one in four chance of being selected anyway.

Held: She was awarded £100 damages. Although it was problematical whether she would have been selected, the possibility had to be considered and she was entitled to damages on that basis.

Similar reasoning can be found in:

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Howe v Teefy (1927) 27 SR (NSW) 301 [10.240] Facts: The plaintiff, a racehorse trainer, leased a horse from the

defendant for three years. Three months later, in breach of contract, she retook possession of the horse. The plaintiff sued for loss of the prize money that should have been earned and for loss of the profits he would have made from betting on the horse himself and from supplying stable information to other persons. The jury awarded him £250 damages. The defendant appealed on the grounds that the prospective income was too remote and that there was no evidence on which the jury could have assessed its value.

Held: The Full Court refused to set the award aside. It held that while the plaintiff’s loss was extremely difficult to quantify, he had clearly lost something and, as the jury had assessed that at £250, that award had to stand in the absence of better evidence of a lesser loss. (See also Sydney Constructions & Developments Pty Ltd v Reynolds Private Wealth Pty Ltd (2016) 311 FLR 217 at [48]–[50]).

[10.250] The principle that quantification problems are no bar to recovery does not apply where the problems only exist because the plaintiff has not produced evidence of his or her loss or damage. In such cases he or she can only recover nominal damages. The principle was succinctly explained by Brooking J in JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 at 241 where he said (emphasis added): A plaintiff cannot recover substantial … damages unless he proves both the fact and the amount of damage. … If he proves the fact of the loss but does not call the necessary evidence as to its amount he cannot be awarded substantial damages: he must put the tribunal in the position of being able to quantify in money the damage he has suffered.

The operation of the principle was well illustrated in both Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd ([10.90] above) and: Clark v Kirby-Smith [1964] Ch 506 [10.260] Facts: The defendant, a solicitor, negligently failed to negotiate a renewal of the lease of his clients’ business premises. They sued for damages for loss of the tenancy.

Held: While the plaintiffs had made out a case for breach of contract, they had not shown any evidence of the quantum of their loss (the value of the lost tenancy). Accordingly, they were only awarded nominal damages of £2.

Damages are not usually recoverable for injured feelings

[10.270] Injured feelings are not a species of loss or damage recognised by the law of contract. Accordingly, the damages awarded for breach of contract cannot generally include a compensation component for injured feelings or mental distress. This principle is merely an application of the general rule already referred to that damages in contract are designed to compensate not to punish. See, for example:

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Addis v Gramophone Co Ltd [1909] AC 488 [10.280] Facts: Addis was wrongfully dismissed from his employment with the defendant company. He sued for damages for wrongful dismissal and was awarded £340 for extra commission that had been due to him and £600 for general damages. The company appealed against the amount of the second award.

Held: As the plaintiff’s salary under his contract of employment had been £15 per week and as his employers had been entitled to dismiss him on six months’ notice, it was clear that the award of £600 was excessive. The House of Lords took the view that the jury must have included an amount to compensate him for the harsh and humiliating manner in which he had been dismissed. That was neither a relevant consideration nor was it compensable. The award was therefore reduced.

[10.290] The same principle applies in Australia, both at common law (see, for example, Burazin v Blacktown City Guardian (1996) 142 ALR 144, 147–51 and Aldersea v Public Transport Corporation (2001) 3 VR 499 at 516–18), and under the unfair dismissal provisions of the Fair Work Act 2009 (Cth), s 392(4) of which specifically precludes compensation for “shock, distress or humiliation, or other analogous hurt, caused to the person by the manner of the person’s dismissal”.

Damages are not usually recoverable for discomfort, disappointment or distress

[10.300] In the same way that damages are not normally awarded for injured feelings, nor are they usually awarded for mere inconvenience, annoyance, vexation, frustration, anxiety, distress or disappointment. The underlying principle was laid down by Pollock CB in Hamlin v Great Northern Railway Co (1856) 1 H & N 408; 156 ER 1261, where he said (at 411; 1262): [G]enerally in actions upon contracts … the plaintiff is entitled to recover whatever damages naturally result from the breach of contract, but not damages for the disappointment of mind occasioned by the breach of contract.

The philosophy underpinning this rule seems to be that the disappointment or distress, being no more than a mental reaction to the breach of contract and the financial and physical consequences that flow from it, is too remote to be recoverable (see Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145, [10.130] above). For an example of the principle in operation, see: Falko v James McEwan & Co Pty Ltd [1977] VR 447 [10.310]

Facts: The parties contracted for the supply and installation of an oil heater. After it had been installed McEwan & Co engaged an electrician to connect it. The electrician told Falko that a new power point was necessary, that it was an “extra” and that it would cost an additional $5. Falko refused to pay, the heater was not connected and he was forced to run a temporary lead from a power point in his kitchen. He sued for the cost of the electrical installation (now costing $11) and for compensation for inconvenience.

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cont. Held: He was entitled to the costs of installation but not to anything for mental distress or inconvenience. That was not compensable.

[10.320] To the extent that every breach of contract entails some element of annoyance, disappointment or distress, the rule seems reasonable but, in some cases, the whole essence of the contract is the contemplated enjoyment and, if this is clouded by the defendant’s breach of contract, a strict application of the rule may produce unfairness. In such cases – where the disappointment or distress is not merely a reaction to the breach and its resulting consequences but is itself the resulting damage – damages for annoyance, vexation, frustration, anxiety, distress and disappointment can be recovered. See, in particular the “holiday cases”, where the failure to deliver the promised arrangements deprived the plaintiffs of the anticipated relaxation and enjoyment that was the real substance of those contracts. In such cases the courts have readily awarded damages: see, for example, Stedman v Swan’s Tours (1951) 95 Sol Jo 727; Athens–MacDonald Travel Service Pty Ltd v Kazis [1970] SASR 264; Jarvis v Swans Tours [1973] QB 233; Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468; and Milner v Carnival plc [2010] 3 All ER 701. See also the High Court’s decision in: Baltic Shipping Co v Dillon (1993) 176 CLR 344 [10.330] Facts: Mrs Dillon was a passenger on the Mikhail Lermontov, a cruise

liner that sank off New Zealand on the tenth day of a planned 14-day cruise. She sued for (inter alia) damages for disappointment and distress and was awarded $5000. The shipping company appealed.

Held: The appeal failed. Because the sinking deprived Mrs Dillon of the enjoyment and relaxation that was the whole object of the cruise, she was entitled to the damages. Their Honours specifically approved the following passage from Bingham LJ’s judgment in Watts v Morrow [1991] 1 WLR 1421 at 1445: Where the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead. If the law did not cater for this exceptional category of case it would be defective.

[10.340] The rule then, as Mason CJ put it in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 365, is that “damages for disappointment and distress are not recoverable unless they proceed from physical inconvenience caused by the breach

or unless the contract is one the object of which is to provide enjoyment, relaxation or freedom from molestation” (emphasis added). The same principle also applies in any contract where the real object is the provision of peace of mind or freedom from distress or molestation. So, for example, in Heywood v Wellers [1976] QB 446 the plaintiff was awarded damages for vexation, 238

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anxiety and distress against a firm of solicitors she had retained to put an end to persistent pestering by a former boyfriend. The solicitors took actions that were both inappropriate and completely ineffective – and failed to obtain the injunction that was the sole purpose of their retainer. Similar reasoning was used in Hamilton Jones v David and Snape [2004] 1 All ER 657 where the defendant solicitors, whose negligence had allowed their client’s estranged husband to remove their children from the jurisdiction, were held liable in damages for her resulting mental distress. If damages are recoverable for disappointment and distress, they will “rarely be large because of the very nature of the loss being compensated” (per Winneke P in Bonchristiano v Lohmann [1998] 4 VR 82 at 95) – but the Australian courts seem to have a retained a greater discretion than their United Kingdom counterparts. In the United Kingdom, the view is that such damages should be “restrained” or “modest”: Perry v Sidney Phillips & Son [1982] 3 All ER 705 at 709; Watts v Morrow [1991] 1 WLR 1421 at 1442; Ruxley Electronics Ltd v Forsyth [1996] 1 AC 344 at 374 ([10.70] above); and Farley v Skinner [2002] 2 AC 732 at 751. In Australia, the view seems to be that, as Winneke P described it in Bonchristiano v Lohmann (at 95): a trial judge, once he has satisfied himself that damages are awardable under this head, should not be constrained from awarding damages which are fair and reasonable (emphasis added).

10.5 DAMAGES MUST BE MITIGATED The duty to mitigate

[10.350] The law imposes a “duty” on those claiming damages (but not on those suing for debt – which, unlike damages, is a fixed and determined amount) to take all reasonable steps to mitigate (minimise) their loss – or, at least, not to act unreasonably by failing (or refusing) to take such steps. This “duty” does not impose a positive obligation on the plaintiff to take those steps – it is simply an application of the fundamental principle that plaintiffs can only recover damages for losses that were caused by the defendant’s breach. If the losses (or any part of them) could have been avoided by the plaintiff taking reasonable steps to mitigate them, they will not have been caused by the defendants’ breach in the required sense. Consequently, they will not be recoverable. As the New South Wales Court of Appeal put it in Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235; [2000] NSWCA 313 at [187]: A plaintiff who acts unreasonably in failing to minimise his loss from the defendant’s breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less.

See also Standard Chartered Bank v Pakistan National Shipping Corporation (No 3) [1999] 1 Lloyd’s Rep 747 at 758 and Knott Investments Pty Ltd v Fulcher [2014] 1 Qd R 21 at [30]–[36]. 239

[10.350] Corporations and Contract Law

So, for example, in Darbishire v Warran [1963] 1 WLR 1067 (a torts case – but one that applied the same principle) it was held that the plaintiff could not recover the costs of repairing his damaged car – because they were more than twice the cost of buying a replacement car. By repairing instead of replacing it he had not acted reasonably as between himself and the defendant. Therefore he could only recover damages equal to the car’s replacement cost not the full cost of repairing it. However, all that the “duty” to mitigate requires is that the parties act reasonably. They are not required to put themselves out unduly, to accept any offer made in settlement or to accept any lesser substitute simply because such action would reduce the damages the other party might have to pay. They are entitled to and are expected to protect their own interests first and it is only where they can take steps that are not inconsistent with those interests that they must do so in order to mitigate. For an example of the way in which the principle is applied, see: Payzu Ltd v Saunders [1919] 2 KB 581 [10.360] Facts: The parties contracted for the sale and purchase of a quantity of

crêpe de chine by instalments, payment for each instalment being made within one month of delivery with provision for deduction of a 2.5% discount. The buyers failed to make punctual payment for the first instalment and the seller wrongfully treated this as a ground on which the contract could be repudiated. She offered, however, to continue deliveries at the contract price but on a cash basis. The buyers refused and bought elsewhere at a higher price. They later sued for the difference between the price they actually paid and the price that had been payable under the original arrangement.

Held: They were entitled to damages because of the seller’s wrongful repudiation but they should have mitigated their loss by accepting her offer to sell for cash at the original contract price. Consequently, the damages they recovered were limited to the loss they would have suffered had that offer been accepted (that is, effectively the amount of the discount forgone).

Limitations on the duty

[10.370] Plaintiffs are only required to act reasonably; they are not required to take undue steps, to expose themselves to risk or to spend money that they cannot afford simply to reduce the damages that the defendant may ultimately have to pay. As the court noted in Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9, “the plaintiff is not under any obligation to do anything other than in the ordinary course of business and the standard is not a high one, since the defendant is a wrongdoer. … It is clear that the plaintiff is not required to sacrifice or risk any of his property or rights in order to mitigate his loss”. This is particularly so where, as Gibbs CJ pointed out in Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 659, the plaintiff’s financial difficulties were largely brought about by the defendant’s wrongful acts or omissions. In that case the defendants sold the plaintiff a prime-mover, telling him that its engine had been fully 240

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reconditioned even though it had not been. The engine’s faults disrupted Burns’ business and he sued for damages. In considering Burns’ duty to mitigate, Gibbs CJ said (at 658–659): [O]ne course open to him … if he could have afforded to take it, was to have the engine reconditioned or to buy another to replace it. However, his impecuniosity prevented him from taking that course. The question arises whether it should be held that the appellant is debarred from claiming such part of the damages as is attributable to his failure to take the necessary steps in mitigation, when he was unable to take those steps because of his lack of means. That question must be answered in the negative … a plaintiff’s duty to mitigate his damage does not require him to do what is unreasonable and it would seem unjust to prevent a plaintiff from recovering in full damages caused by a breach of contract simply because he lacked the means to avert the consequences of the breach.

The onus of proof

[10.380] Whether a party claiming damages has forgone a reasonable opportunity to mitigate loss is a question of fact, depending on the circumstances of each case. In all cases, though, the onus of proving that such an opportunity was forgone rests with the defendant. That is, the person seeking damages need not show that all reasonable steps were taken; the other party must prove that they were not. The applicable principle was succinctly stated in Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235; [2000] NSWCA 313 at [187]: The plaintiff does not have to show that he has fulfilled his so-called duty, and the onus is on the defendant to show that he has not and the extent to which he has not. Since the defendant is a wrongdoer, in determining whether the plaintiff has acted reasonably a high standard of conduct will not be required, and the plaintiff will not be held to have acted unreasonably because the defendant can suggest other more beneficial conduct if it was reasonable for the plaintiff to do what he did.

As that passage demonstrates, it is not enough for the defendant to show merely that other, more acceptable steps were available – he or she must show positively that what the plaintiff did do was not reasonable. That principle can be seen in Banco de Portugal v Waterlow [1932] AC 452 at 506 where Lord Macmillan said: The law is satisfied if the party placed in a diffıcult situation by reason of the breach … has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.

See also Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 at [158] and Millington v Waste Wise Environmental Pty Ltd (2015) 295 FLR 301 at [64]–[65].

10.6 DAMAGES CAN BE PRE-AGREED Liquidated and unliquidated damages

[10.390] Damages are normally unliquidated. That is, they are not specified in detail in the contract but are calculated by a court in response to the actual loss or damage that the plaintiff suffers. Despite this, the parties can always agree, at the time 241

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of contracting, on the amount of damages that will be recoverable in the event of a breach. If they do, the damages so stipulated are called “liquidated damages”.

Debt, not damages

[10.400] If the contract does contain a “liquidated damages clause” and if the amount specified is a genuine pre-estimate of actual loss, the stipulated amount will be recoverable whether it equates to actual loss or not. There is a difference between an action for damages generally and an action to recover liquidated damages. Strictly speaking, an action to recover liquidated damages is not an action to recover damages at all; it is an action in debt. One party has agreed to pay the other party a certain sum on the occurrence of a certain event (some “non-performance” of the contract); that certain event has occurred, the sum is due and payable and can be sued for as a debt. For this reason, the concept of liquidated damages does not breach the compensation principle. The fact that the plaintiff may get more or less than the actual loss is immaterial because he or she is not suing for damages. For the same reason, questions of causation, remoteness, quantification and mitigation (see [10.350] above) do not arise either: see, for example, Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 at [165].

10.7 LIQUIDATED DAMAGES AND PENALTIES The difference

[10.410] As already seen, a liquidated damages clause is a genuine pre-estimate of the actual loss that is expected in the event of a breach of contract. Occasionally, what appears to be (and may even be called) a liquidated damages clause bears no relation whatsoever to probable loss. Such “penalty clauses” are not designed as pre-estimates of damage but as a means of terrorising the other party into performing the contract by making it too expensive either to commit a breach or to fail to perform some stipulation in it (which may, but need not, involve committing a breach: see Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205 at [78]).

The effect of a penalty clause

[10.420] The courts are happy to go along with liquidated damages clauses as a bona fide means of reducing unnecessary litigation but they will not uphold penalty clauses. Where a clause is a penalty, it is disregarded and the courts substitute their own determination of what amount of damages is appropriate: see AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 186 and 212 or, as the Full Court of the Federal Court put it in Paciocco v ANZ Banking Group Ltd (2014) 309 ALR 249 [48] (citing Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205 at [10]), “the party harmed by the breach … may enforce the … penalty to the extent of that party’s loss” 242

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(emphasis added). Usually, such action benefits the defendant (because the penalty clause invariably stipulates an amount greater than any possible loss) but, in extraordinary cases (where the actual loss exceeded all expectations – including the amount stipulated as a penalty), it could benefit a plaintiff. Because penalty clauses are effectively disregarded and the court’s own calculation of actual damages is substituted for them, normal considerations of causation, remoteness, quantification and mitigation re-emerge and affect the final award of damages in the usual way.

Distinguishing between liquidated damages and penalties

[10.430] The High Court defined the term “penalty” in Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205 at [10] as follows: In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation (emphasis added).

In other words, a provision will be a penalty if it is triggered by one party’s failure to comply with some other stipulation in the contract and if it then obliges that party to pay a sum of money (or to transfer property) which is extravagant and unconscionable in amount in comparison with the greatest loss that the other party could conceivably have sustained as a result of that failure. Therefore, the intent behind penalty clauses is not that the stipulated sum will be paid but that the presence of the clause will force the affected party to observe the primary stipulation – because the alternative is too draconian for that party to contemplate doing otherwise: see Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205 [9]–[10] and Paciocco v ANZ Banking Group Ltd (2016) 90 ALJR 835; 333 ALR 569 at [32], [118] and [259]. Whether a particular sum stipulated in a contract is liquidated damages or a penalty “is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of breach”: Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 86–7 per Lord Dunedin (cited with approval in Paciocco v ANZ Banking Group Ltd (2016) 90 ALJR 835; 333 ALR 569 at [31], [146] and [242]). Much will therefore depend on the parties’ objectively ascertained intention at the time they contracted – looked at in the light of all the surrounding circumstances at that time. See:

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Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 [10.440] Facts: Dunlop manufactured motor tyres and tubes. The defendants

agreed to sell its products and undertook not to sell at prices below certain specified minimums. The contract contained a clause stipulating that liquidated damages of £5 were payable in respect of every breach the defendants committed. Dunlop discovered that the defendants had sold tyres and tubes at below the recommended prices and sued, demanding £5 for each such breach. The defendants disputed their liability on the grounds that the clause was a penalty. Held: Dunlop was entitled to the amount claimed. The clause was not a penalty but a bona fide attempt to estimate likely loss flowing from the breach. As Lord Dunedin said (at 88): It is just … one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that figure is not extravagant there would seem no reason to suspect that it is not truly a bargain to assess damages, but … a penalty to be held in terrorem.

[10.450] The importance of the case lies in the guidelines Lord Dunedin laid down to assist in the “task of construction” to determine whether a particular stipulation is a penalty or merely liquidated damages. He said (at 87–8): (a)

It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach …

(b)

It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid …

(c)

There is a presumption (but no more) that it is penalty when “a single lump sum is made payable … on the occurrence of one or more or all of several events, some of which would occasion serious and others but trifling damages” …

(d)

It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties…

Those four principles have been applied and approved by the High Court and are equally effective and binding in Australia: see, for example O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; AMEV–UDC Finance Ltd v Austin (1986) 162 CLR 170; Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205; and Paciocco v ANZ Banking Group Ltd (2016) 90 ALJR 835; 333 ALR 569. 244

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Note, however (in relation to the second principle), that the mere fact that a greater sum is payable upon default does not necessarily mean that that provision is a penalty – it may still be a liquidated damages clause if it does no more than provide for the estimated additional costs or additional risk arising from the default. The courts are very loath to overturn any contractual provision to which the parties have freely agreed especially where the parties involved are “commercial organisations of apparently equal bargaining power” (Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd (2014) 45 VR 79 at [54] citing AMEV–UDC Finance Ltd v Austin (1986) 162 CLR 170, 193–4). Therefore, for a stipulated sum to be a penalty it must be “extravagant, exorbitant and unconscionable” or, as Mason and Wilson JJ described it in AMEV–UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190, “out of all proportion to [the] damage likely to be suffered as a result of breach”. If it is not, it will not be a penalty. See, for example: Paciocco v ANZ Banking Group Ltd (2016) 90 ALJR 835; 333 ALR 569 [10.460] Facts: The appellants claimed that late payment fees the respondent

bank charged on credit card accounts when the minimum monthly repayment was not made by the due date were excessive – and, therefore, unenforceable penalties.

Held: (by a 4:1 majority) The test the appellants had to satisfy was whether the fees were out of all proportion to any possible damage that the bank could suffer as a result of late payment (which could include damage to matters such as reputation, goodwill and shareholder interests – as well as direct monetary damage). That had not been demonstrated. The bank had a commercial interest in ensuring that payments were received in a timely manner – and that interest extended beyond mere reimbursement of the direct expenses associated with any late payment. Consequently, the fees it charged were not unenforceable penalties,

[10.470] The members of the Court gave different reasons for their decisions but they all applied Lord Dunedin’s reasoning in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd. The propositions on which they relied were subsequently summarised by McDougall J (with whom the other members of the New South Wales Court of Appeal agreed) in Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328 at [74] as follows: (1)

Lord Dunedin’s propositions were not “rules of law”, but “distillations of principle” …

(2)

The essence of a penalty is that it is a collateral stipulation, the (or a predominant) purpose of which is to punish the borrower for breach, and thus to compel performance …

(3)

One way of testing whether an impugned stipulation is penal – intended to punish – is to inquire whether the sum that it stipulates to be payable on breach … is extravagant or out of all proportion to, or unconscionable in comparison with, the maximum amount of damage that might be anticipated to flow from the breach … 245

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(4)

“Damage” in this sense is not limited to damages recoverable upon breach of contract, but may extend to damage, or losses, caused by the impairment of other legitimate commercial interests that were intended to be protected by the stipulation …

(5)

The analysis is to be made at the time, and taking into account the circumstances applicable, when the contract was made; not at the time of breach; the analysis is prospective, not retrospective …

(6)

Mere disproportion between the stipulated sum and the possible damage is not enough to indicate “penalty”; the disproportion must be such that it is unconscionable for the lender to rely on the stipulation …

McDougall J also noted that there were two other points to be derived from Paciocco; the onus of proving that a stipulation is a penalty rests with the person alleging it; and the “presumption” that Lord Dunedin identified in his third point is a “weak one”.

Getting around the Rule

[10.480] There are a number of ways of getting around the rule regarding penalties. For example, in Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205, the High Court expressly approved a distinction between a penalty and an agreement under which an additional fee was consensually payable for some additional entitlement or accommodation. It cited Metro-Goldwyn-Mayer v Greenham [1966] 2 NSWLR 717, where the parties had entered into a contract for the hiring of films for public showing under which the exhibitor had the right to show one screening only. If the exhibitor wanted to show additional screenings the fee for each was four times the fee for the original. It was held that that fee was not a penalty – merely a fee paid for the option to purchase the right to an additional screening. Therefore, if an additional payment is, in fact, for the provision of some additional service or accommodation (as in Metro-Goldwyn-Mayer) it may be enforceable. The High Court also noted, at [11], that the penalty doctrine cannot apply “if the prejudice or damage to the interests of the second party by the failure of the primary stipulation is insusceptible of evaluation and assessment in money terms”. It cited Waterside Workers’ Federation of Australia v Stewart (1919) 27 CLR 119, where a £500 bond, given by the appellant union on condition that it pay £50 if and so often as its members should go on strike, was held to be enforceable. As the High Court noted, “whilst refusal to work almost inevitably would cause loss to employers, ‘no one can ever tell how much loss is sustained by not doing business’ and … no relief was to be given against payment of the £50”. This qualification to the general principle does potentially leave the door open, in appropriate cases, for a party to argue that a challenged stipulation cannot be a penalty because it is not possible to quantify the actual monetary loss that it will suffer as a consequence of the other party’s non-performance. Finally, because a penalty involves an additional amount becoming payable if one party does not comply with a provision in the contract, a stipulation will not be a penalty unless there is an obligation to pay something additional on the 246

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non-compliance. That can be avoided by providing in the contract that a specific (and usually extortionate) amount is payable anyway but that it will be reduced if the stipulated performance occurs. This “No Penalty Rule” was laid down in Strode v Parker (1694) 2 Vern 316; 23 ER 804 and, while it has been criticised (mainly for elevating “form” over “substance”), it has been consistently applied since. See, for example: Kellas-Sharpe v PSAL Ltd [2012] 2 Qd R 233 [10.490] Facts: A bridging loan for the purchase of property was made on the

stipulation that a “standard rate” of interest would be charged (in this case 7.5% per month) with a further stipulation that “while the borrower is not in default … the Lender will accept interest at the concessional rate of 4.00% per month”. The borrower fell into default and sought to have the “standard rate” invalidated as a penalty.

Held: While noting that the distinction between the actual provision in this contract and an alternative provision under which interest would be payable at 4% but increasing to 7.5% on default seemed to contradict equity’s preference for “substance over form”, the court found that the rule that such provisions were not penalties was well established, had been affirmed by a number of intermediate courts of appeal in Australia and, while it had not been “affirmed after a deliberate examination of it by the High Court”, it had been “acknowledged more than once by members of that Court”. The clause was not a penalty. (However, in Stoyanova v Equity-One Mortgage Fund Ltd [2016] VSC 414, Riordan J allowed the applicants to proceed with their argument that a “higher interest rate” clause was a penalty because, even though he found that it “must fail at trial”, he also found that it could provide a basis for an appeal to give the High Court an opportunity to “reconsider the rule” (at [38])).

10.8 DEPOSITS The dual nature of deposits

[10.500] The rules governing liquidated damages and penalties raise an interesting problem with deposits. Deposits have a twofold aspect. They are a part-payment of the purchase price and they also act as a surety or guarantee of performance by the purchaser: see, for example, Howe v Smith (1884) 27 Ch D 89 at 101; NLS Pty Ltd v Hughes (1966) 120 CLR 583 at 589; and Brien v Dwyer (1978) 141 CLR 378 at 406. If the purchaser fails to perform, there is invariably some provision, either express or implied, that the deposit will be forfeited in full and that can be justified on the basis that the deposit represents both liquidated damages and a forfeitable surety. On occasion, though, especially where the deposit is a substantial proportion of the purchase price, this can lead to an unjust result. This is because, as Fry LJ noted in Howe v Smith (1884) 27 Ch D 89 at 101, “It is not merely a part payment, but is then

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also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract”. In other words, it can operate as a penalty.

Relief against forfeiture

[10.510] As a general rule, courts will not intervene and upset the forfeiture of a “true deposit” (that is, one which, customarily, does not exceed 10% of the contract price: see Stockloser v Johnson [1954] 1 QB 476 at 491). Where, however, the deposit (and therefore the sum forfeited) is extravagant or excessive, equity may intervene (on the basis that it is unconscionable for the seller to retain the money) and order that the whole deposit be returned to the purchaser. In such cases, the vendor is protected because the normal right to claim and, if necessary, to sue for damages appropriate to the breach is preserved. See, for example: Workers Trust Bank Ltd v Dojap Ltd [1993] AC 573 [10.520] Facts: The appellant bank sold property to Dojap under a contract requiring a 25% deposit (which Dojap duly paid). Dojap could not settle on the due date and the bank rescinded the contract and purported to forfeit the deposit. Dojap sued for relief from forfeiture.

Held: The action succeeded and the bank was ordered to return the entire 25% deposit. The Privy Council held that, to be forfeitable, a “deposit” has to operate, objectively, as “earnest money” and not as a penalty. Traditionally, forfeitable deposits have been limited to 10% unless the vendor can show special circumstances justifying a larger amount. Here, the bank had not shown any “special circumstances” and, therefore, the 25% was an unenforceable penalty that Dojap was entitled to recover. Any actual damage that the bank suffered could be recovered in the normal manner. Lord Browne-Wilkinson explained the court’s reasoning, saying (at 582): [S]ince the 25% deposit was not a true deposit by way of earnest, the provision for its forfeiture was a plain penalty … from which the court will give relief by ordering repayment of the sum so paid, less any damage actually proved to have been suffered as a result of non-completion.

[10.530] Other deposits equivalent to 30% (Saunders v Leonardi (1976) 1 BPR 9409), 40% (Smyth v Jessep [1956] VLR 230) and 50% (Codot Developments Ltd v Potter [1981] 1 NZLR 729) have all been regarded as excessive and have been treated as unenforceable penalties in their own circumstances. However, the percentage cannot be taken in isolation. Whether it is reasonable that a particular percentage deposit be forfeitable will depend on all the surrounding circumstances. For instance, in Coates v Sarich [1964] WAR 2, the forfeiture of a 30% deposit was upheld. The court took into account that the balance of the purchase price was payable over 15 years and that, in the interim, the purchaser was to have possession of the subject property. On similar facts (involving default in the purchase 248

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of a hotel where the balance of the purchase price was to be paid over eight years), the court in In re Hoobin [1957] VR 341 also refused to overturn the forfeiture of a deposit of just under 25%. The rule with forfeiture of deposits is that equity will relieve the buyer from forfeiture and order the seller to return it if two conditions are met: (a)

the forfeiture clause must be penal in nature (in the sense that the sum forfeited must be out of all proportion to the damage); and

(b)

it must be unconscionable for the seller to retain the money.

(See Stockloser v Johnson [1954] 1 QB 476 at 484 (per Somervell LJ) and 490 (per Denning LJ), as applied in Smyth v Jessep [1956] VLR 230 but see also Fiorelli Properties Pty Ltd v Professional Fencemakers Pty Ltd (2011) 34 VR 257 at [48]–[70].)

10.9 SPECIFIC PERFORMANCE The form of the remedy

[10.540] A decree of specific performance is a court order requiring a party to perform the obligations the contract imposes. Originally, specific performance was only used to force a party to execute a final instrument (for example a deed, conveyance or transfer) to give effect to an earlier agreement (that is, “to put the parties in the position relative to each other in which, by the preliminary agreement, they were intended to be placed”). Good examples could be found in contracts to buy and sell land. Even though the parties had signed formal contracts, the land could not be conveyed unless the vendor signed a transfer. If he or she refused to do so, the purchaser could seek an order for specific performance directing signature. By giving the order the court placed the parties in the position contemplated by their contract (that is, title could pass to the purchaser). Specific performance, as it is now understood, is not so limited. An order for specific performance can be given to require a party to perform any obligation that he or she undertook to perform but has failed or refused to carry out. Even a threatened refusal to perform a contract can, in appropriate cases, justify an order for specific performance (see, again, the quote from Turner v Bladin (1951) 82 CLR 463 at 472). A good example of when specific performance might be ordered is where the seller of unique goods refuses to deliver them. Because the buyer cannot go out and buy an identical substitute, specific performance might be ordered so the parties both end up as they originally intended.

The nature of the remedy

[10.550] Specific performance is an equitable remedy and, as such, is entirely in the discretion of the court. Therefore, it is not a remedy that can be sought as of right 249

[10.550] Corporations and Contract Law

and it will usually be awarded only when the common law provides no, or no adequate, remedy. Even then there are a number of severe limitations on its availability. They include the following.

Not available where damages will suffice

[10.560] Specific performance is not normally granted where common law damages would be an adequate remedy because, as Lord Selbourne put it in Wilson v Northampton & Banbury Junction Railway Company (1874) LR 9 Ch App 279 at 284, “[t]he Court gives specific performance instead of damages, only when it can by that means do more perfect and complete justice”. That limitation applies most commonly with sale of goods contracts. Although the Sale of Goods Acts specifically provide that specific performance may be sought as a remedy (Goods Act 1958 (Vic), s 58; Sale of Goods Act 1895 (SA), s 51; Sale of Goods Act 1896 (Qld), s 53; Sale of Goods Act 1895 (WA), s 51; Sale of Goods Act 1896 (Tas), s 56; and Sale of Goods Act 1954 (ACT), s 55; New South Wales and the Northern Territory have no equivalent provisions), breaches are normally compensated for in damages. That is because the buyer can usually use the damages to buy equivalent goods elsewhere. He or she therefore suffers no real deprivation by being denied specific performance. However, specific performance will be granted if the subject matter of the contract cannot be purchased elsewhere. That would be the case if the subject matter were rare (a Ming vase or, as in Dougan v Ley (1946) 71 CLR 142, a registered and licensed taxi cab) or even unique (the Mona Lisa) or if it has a special significance for the buyer. In such cases, common law damages are not an adequate remedy because they do not allow the innocent party to be placed in the position that he or she would have been in but for the breach (that is, in possession of the desired subject matter). Hence, an order for specific performance is justified. Similarly, specific performance might be appropriate where the defendant is insolvent or where the court is otherwise unable to force him or her to pay any damages that might be awarded. In such cases an award of damages would be pointless because it would not necessarily put the plaintiff in a position where he or she could buy replacement goods. One area where it is rare to find an order for specific performance is where the outstanding obligation is to pay money. Again, an order for damages equivalent to the amount unpaid will usually put the plaintiff in the position that he or she would have occupied but for the breach. However, in rare instances that may not be the case and, in those situations, specific performance may be an appropriate order. See, for example: Beswick v Beswick [1968] AC 58 [10.570] Facts: Peter Beswick was an elderly coal merchant. He contracted to

sell his business to his nephew John, who undertook to pay him £6 10s a week for as long as he lived and, if she survived him, to pay Peter’s widow £5 a week for the 250

Chapter 10 Remedies [10.600] cont. balance of her life. When Peter died, John paid the widow one instalment only and then refused to pay any more. The widow sued John for the unpaid arrears and for specific performance of future payments.

Held: Suing in her capacity as administrator of her husband’s estate, she succeeded in obtaining an order for specific performance. It was an appropriate remedy here because of the peculiar circumstances of the case. Because she had not been a party to the original contract, she could not sue in her personal capacity and was thus restricted to an action as administrator. In her capacity as administrator she (the estate) would have only been entitled to nominal damages because the estate did not suffer as the result of John’s default. In other words, this was a case where the plaintiff had a legitimate interest in having the contract performed but would not suffer personally (in her capacity as administrator) if it was not. To do justice, therefore, an order for specific performance, forcing John to honour his promise, was necessary.

[10.580] One area in which orders for specific performance are commonly found is in contracts for the sale and purchase of land. Because each parcel of land is unique, the law has always accepted that a buyer cannot be adequately compensated by damages if the vendor refuses to complete the sale. Specific performance is generally the only appropriate remedy. See, for example, Barwick CJ’s comments in both Loan Investment Corp of Australasia v Bonner [1970] NZLR 724 at 745 and Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 at 151. For similar reasons specific performance can also be ordered where the contract is one for the sale of a business: see Kennedy v Vercoe (1960) 105 CLR 521 at 528–29.

Not available where it would cause undue hardship

[10.590] Because specific performance is discretionary, it can be refused if its effect would be to cause unfairness or undue hardship to the defendant. In Denne v Light (1857) 8 De GM & G 774; 44 ER 588, for instance, specific performance of a contract for the sale and purchase of land was refused because the buyer was unable to enter on the subject land without getting a licence from the adjoining owners – there was no access road. The High Court applied the same principle in: Norton v Angus (1926) 38 CLR 523 [10.600] Facts: The parties contracted for the sale and purchase of two Crown leasehold properties. Under the Land Act 1910 (Qld) it was illegal for the defendant to accept a transfer of both and, if specific performance were ordered, he would have had to sell, give away or forfeit one of them.

Held: In the circumstances, and taking into account the possibility of forfeiture, an order for specific performance could not be justified. The defendant was ordered to pay damages instead.

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[10.610] However, as the High Court put it in Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438–39: Specific performance is not a remedy which should lightly be refused when the plaintiff has established the existence of a contract capable of specific performance which the defendant has refused to complete … It would be necessary for the defendant to prove that a hardship amounting to an injustice would be inflicted on him by holding him to his bargain and that it would not be reasonable to do so.

What this means is that hardship is a two-edged sword and, when the courts are faced with the plea, they have to balance the hardship that the defendant will suffer, if specific performance is ordered, against the hardship that the plaintiff will suffer if it is refused. Consequently, before specific performance will be refused on this ground the defendant normally has to prove some unconscionable bargain or some extenuating compassionate grounds. Mere financial difficulty by itself will not normally be enough: see Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 14,799 at 14,807–810.

Must be mutually available

[10.620] Specific performance will not generally be awarded unless the remedy is equally available to both parties. That is not an absolute rule but it is something that the courts should take into account when deciding whether to exercise their discretion: see, for example, Price v Strange [1978] 1 Ch 337 at 370. So, for instance, a minor will not normally succeed in an action for specific performance of a contract that is voidable by him or her – because specific performance cannot be awarded against minors in such cases. See, for example: Boyd v Ryan (1947) 48 SR (NSW) 163 [10.630] Facts: Boyd, a minor, contracted to buy land from Ryan, an adult. Ryan

wrongfully refused to complete and Boyd sued for specific performance.

Held: The order was refused. Because of his minority, Boyd could avoid the contract. Ryan, therefore, had no guarantee of performance and it would have been inequitable to allow Boyd to demand performance where performance could not have been demanded of him.

[10.640] There are three qualifications to the general rule regarding mutual availability of the remedy: 1.

The onus is on the defendant to prove that he or she would be denied the remedy if it was sought.

2.

The requirement for mutuality will be satisfied if it is available when the action seeking specific performance is commenced even if it was not available when the contract was entered into. (Therefore, specific performance might be available to a minor whose action was not commenced until after he or she had attained majority and had ratified the contract: see Kell v Harris (1915) 15 SR (NSW) 473.)

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3.

Mutuality is not required if the contract has already been executed by the plaintiff (that is, even though specific performance of the plaintiff’s obligations cannot be ordered, his or her performance has already occurred anyway).

Not available to enforce contracts of personal service

[10.650] Specific performance will not be ordered to enforce a contract of personal service. The rationale behind this rule is that it is an undue interference with personal liberty to require someone to serve a particular master. Further, the courts cannot be sure that the services rendered after the order would be performed as required by the contract and “equity does nothing in vain”. The converse also applies: at common law a master cannot be forced to continue employing someone he or she does not want as a servant (although this rule has been subject to some statutory interference). The rule extends to cover not only master and servant relationships but also partnerships, agency relationships, share-farming agreements, apprenticeships and other similar arrangements. Such agreements cannot be enforced by specific performance. The only limitation to this rule is that personal services of some kind must be involved. It is not enough that work is to be performed. For example, contracts requiring the supply of items to be produced have been specifically enforced: see Thomas Borthwick & Sons Ltd v South Otago Freezing Co Ltd [1978] 1 NZLR 538.

Not available for contracts that would require constant superintendence

[10.660] The old rule was that specific performance would not be ordered where the contract was one involving a continuing obligation. This was because constant court superintendence would be necessary to ensure that performance occurred in accordance with the order and the courts do not have the facilities to provide that level of supervision. Consequently, they would not grant the order. See, for example: JC Williamson Ltd v Lukey (1931) 45 CLR 282 [10.670] Facts: Williamson granted Lukey an exclusive right to sell sweets and confectionery in its theatre. It subsequently withdrew the concession and purported to grant it to a third party. Lukey sued, claiming specific performance of the agreement. Held: The order was refused on the grounds that actual performance could not be guaranteed. As Dixon J said (at 297–298): Specific performance … is a remedy to compel the execution in specie of a contract which requires some definite thing to be done before the transaction is complete and the parties rights are settled and defined in the manner intended. … [It] is inapplicable when the continued supervision of the Court is necessary in order to ensure the fulfilment of the contract. It is not a form of relief which can be granted if the contract involves the

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[10.670] Corporations and Contract Law cont. performance by one party of services to the other or requires their continual co-operation.

[10.680] That rule has more recently been reconsidered and the better view now is that a need for continuing supervision will not necessarily mean that specific performance will be refused. That is, it, too, is not an absolute rule but simply one of the matters that the courts should take into account when deciding whether to exercise their discretion – balancing the problems of enforcement against all other relevant considerations, including the hardship the plaintiff will suffer if the order is refused: see Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, especially at 12–13, referred to with approval in Australia in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1, especially at 46–47. In the Argyll Stores case, for example, Lord Hoffman drew a distinction between cases where the court might be asked to order specific performance of an activity, such as running a business over an extended period of time, and other cases where the order would simply require the defendant to achieve a result. He then went on to note (at 13) that the enforcement problem would arise to a much greater extent in the first category of cases. See also Netline Pty Ltd v QAV Pty Ltd [No 2] [2015] WASC 113 at [69]–[72]. [10.690] One instance where specific performance will not be ordered, however, is where the relationship between the parties has been damaged beyond repair and is no longer workable. In such cases an order for specific performance would simply be “a recipe for ongoing conflict and likely further court proceedings in the form of contempt applications”: Netline Pty Ltd v QAV Pty Ltd [No 2] [2015] WASC 113 at [105]. Accordingly, specific performance will generally be refused and damages will be ordered instead. Lord Hoffman explained why in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 saying, at 15–16: It is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. … This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways and the wounds of conflict can heal.

Not available where the contract is otherwise defective

[10.700] While the limitations dealt with above are the main constraints on a court’s willingness to order specific performance, the order will also be refused if the contract in question is defective in some particular or if the plaintiff is not entirely blame-free. Consequently, a contract will not normally be specifically enforced if it was induced by mistake, misrepresentation, illegality, sharp practice, duress, undue influence or unconscionability by the person seeking the order. 254

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However, even then, specific performance will not be refused simply because of misconduct unless that misconduct played a part in creating the rights for which specific performance is being sought. So, for example, in Coghlan v Pyoanee Pty Ltd [2003] 2 Qd R 636 at 642–643 the court held that, because the misconduct in question (wrongfully inducing the other party to sign an invalid variation agreement) did not have “a direct connection with the antecedent contract sought to be enforced”, specific performance of the terms of the earlier agreement could still be ordered. On the other hand, specific performance can be refused if the plaintiff has been guilty of default, or if he or she is not ready, willing and able to perform the reciprocal part of the bargain – preferably at the time of applying for the order but, certainly, no later than when the application is being heard. As Scholl J noted in Commonwealth Oil Refineries Ltd v Hollins [1956] VLR 169 at 180: In order to obtain specific performance of a contract, a plaintiff must ordinarily show that he is ready and willing to perform his part of the bargain. But if in the past he has not been ready and willing to do so, and the other party has nevertheless elected to keep the contract on foot, the plaintiff may put himself right, even at the trial, and apparently at any time up to judgment, subject only to the risk of being ordered to pay costs.

See also Mehmet v Benson (1965) 113 CLR 295 at 314–315 per Windeyer J; and Casper Corp Pty Ltd v Gorman [2011] QSC 3 at [30]–[34] per Fryberg J. The order may also be refused if there has been undue delay in seeking relief (that is, if the delay is such that granting an order for specific performance would unduly prejudice the defendant). This rule is not, however, absolute, and in appropriate cases the courts can order specific performance – despite the plaintiff’s default – especially if not doing so could produce manifest injustice. So, for example, in Fitzgerald v Masters (1956) 95 CLR 420 specific performance was granted notwithstanding a delay of 22 years in finalising the purchase of a half-share in a farm because over half the purchase price had been paid before the delay commenced, both parties were aware of the circumstances that had caused it, the vendor had acquiesced in it and his estate would not be prejudiced if the order was made.

Procedural aspects

[10.710] Two procedural aspects are also worthy of mention. First, if a plaintiff sues for specific performance, he or she can reconsider, can treat the contract as discharged and can sue for damages. See, for exampleThe Millstream Pty Ltd v Schultz [1980] 1 NSWLR 547. Second, once specific performance has been ordered the contract comes under the control of the court and it cannot be discharged, except by performance, unless the court’s leave is obtained first. Mason J explained why in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260: [R]escission after an order for specific performance requires the leave of the court or, more appropriately the vacation of the order. … [O]nce a plaintiff has obtained an order 255

[10.710] Corporations and Contract Law

for specific performance of a contract, he cannot be permitted to act inconsistently by rescinding it so long as the defendant is required by order of the court to complete the contract.

How the principle operates in practice was illustrated in: JAG Investments Pty Ltd v Strati [1981] 2 NSWLR 600 [10.720] Facts: Strati agreed to sell a parcel of land to JAG Investments Pty Ltd

– subject to local council approval of a plan of subdivision. JAG Investments subsequently sued for and was granted an order for specific performance. Strati then sought council approval of the subdivision. Problems ensued and Strati gave notice that the contract was terminated on the grounds that the subdivision had not been approved. JAG Investments sued.

Held: Strati was not entitled to terminate the contract in that way. Because the order for specific performance had brought its future performance under the court’s control, court approval was required to terminate it. As Hope JA said (at 603): the rights which a party has under a decree for specific performance (and both parties have such rights) cannot be taken from him by some extra-judicial act.

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PART 2

CORPORATIONS LAW 11

Registration and its effects

13

Constitution and replaceable rules

12 14 15 16 17 18 19 20

Types of companies

The company’s relations with outsiders Directors

Good faith and proper purpose

Conflicts of interest and disclosure Duties of care, skill and diligence

Directors of insolvent companies

Remedies and penalties for breach of duty

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CHAPTER 11

Registration and its effects Characteristics of a company ....................................................................... [11.05] Effects of registration ............................................................................... [11.15] Limited liability ......................................................................................... [11.20] Company as a separate legal entity ...................................................... [11.35] Piercing the veil of incorporation ............................................................ [11.70] Lifting the corporate veil of group companies ...................................... [11.150]

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[11.05] Corporations and Contract Law

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 2. Key points • Upon registration a company is regarded as a legal entity that is separate and distinct from its members/shareholders and directors. This is sometimes referred to as the “veil of incorporation”. Even a one-person company is regarded as a separate legal entity distinct from that person. • The fact that a company is a separate legal entity means that it may sue and be sued in its own name. Company property belongs to the company, not its shareholders. A company continues to exist until it is deregistered, even if its shareholders die. • Limited liability is an important characteristic of companies and their shareholders. Most companies are registered on the basis that the liability of shareholders is limited to the amount unpaid (if any) on the issue price of their shares. This encourages shareholder investment because the risk of the company’s insolvency is largely transferred from its shareholders to its creditors. • Occasionally, both the Corporations Act and case law lift the corporate veil to either disregard the fact that a company is a separate legal entity or remove the privilege of limited liability. • The procedure for setting up a company involves lodging an application for registration with ASIC. This application must contain prescribed information. The Corporations Act imposes a number of post-registration requirements, such as the establishment of registers, financial records and minute books, which must be carried out soon after a company is registered.

CHARACTERISTICS OF A COMPANY

[11.05] Companies are abstract, legal persons recognised by the law as legal persons with rights and liabilities separate from their members (also referred to as shareholders). This chapter discusses the legal implications that flow from this definition. Companies are used for a wide range of purposes and differ considerably in terms of size of business, number of shareholders, spread of shareholdings, nature of activities and value of assets held. Despite this diversity, the fundamental consequences of registration are the same for all registered companies. [11.10] A company comes into existence as a body corporate at the beginning of the day on which it is registered with the name specified in its certificate of registration: s 119. This means that after the application for registration has been lodged with ASIC and a certificate of registration has been issued, a new legal entity is created. This legal entity is separate from its members or shareholders. Thus, for example, the assets of the company are not the assets of its members or shareholders 260

Chapter 11 Registration and its effects [11.15]

and contracts entered into by the company will create rights and liabilities that vest in the company and not in its members or shareholders.

Effects of registration

[11.15] The powers and liabilities of a company are the direct consequence of its creation as a distinct legal entity. A company is distinguished from the shareholders it may have from time to time. The legal capacity and powers of a company include the capacity and powers of an individual and a body corporate: s 124. Powers of an individual applicable to companies include the power to acquire and dispose of property and the right to sue. Powers of a company as a body corporate are listed in s 124(1) and include the power to: • issue shares and debentures; • grant options over unissued shares; • distribute the company’s property among its members; • grant a security interest in uncalled capital; • grant a circulating security interest over the company’s property; and • do anything it is lawfully authorised to do. A body corporate is an incorporated legal entity created and recognised by the law. It is an artificial legal person as opposed to individuals, who are known as natural persons. “Body corporate” is a general term used to describe any artificial legal person. The various types of body corporate are discussed at [3.05] (Lipton). Under the Corporations Act a body corporate is regarded as one type of “corporation”: s 57A. A company registered under the Corporations Act is also a type of corporation. Because a company is a separate legal entity it follows that it may enforce its rights by suing and conversely it may incur liabilities and be sued by others. As a general rule, shareholders or members cannot sue on behalf of their company to enforce a right of the company. However, Pt 2F.1A (ss 236 – 242) permits a member or officer to seek leave of the court to bring legal proceedings on behalf of the company in circumstances where the company is unwilling to do so. Such proceedings are referred to as “statutory derivative actions” and are discussed at [17.285]–[17.300] (Lipton). The separate nature of a company is illustrated by the fact that a company may sue and be sued by its own members. This may be contrasted with the difficulties faced by unincorporated associations and their members seeking to enforce legal rights against each other. A further consequence of the fact that a company is a separate legal entity is that a company owns its property in its own right distinct from the property of its shareholders or members. This means that shareholders do not have a proprietary interest in the property of the company. This is illustrated by Macaura v Northern Assurance Co Ltd [1925] AC 619, discussed at [11.60]. Shareholders only own shares 261

[11.15] Corporations and Contract Law

in the company. The legal nature of shares is discussed at [8.10] (Lipton). A change in shareholders of a company has no effect on the company’s ownership of its assets. A company continues to exist until it is deregistered by ASIC: s 601AD(1). Its shareholders may come and go but this does not affect the continuing legal personality of the company. Even if all shareholders of a small company died, the company continues to survive. A deceased shareholder’s shares are transmitted to their personal representative, who will usually be the executor named in the deceased shareholder’s will. Historically, one of the effects of registration was that a company could enter into a contract only if there was a contractual document bearing the impression of the company’s seal. Section 126 now provides that the power of a company to make a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. This power may be exercised without the use of a common seal. The validity of the exercise of power by an individual to act on behalf of a company is determined by the law of agency and the assumptions in s 129. This is discussed at [14.235] (Lipton) onwards. Prior to 1998, all companies were required to have a common seal. It is now optional for companies to have a common seal: s 123(1). Consequently, a company may execute a document without using a common seal: s 127(1) and (3). If a company chooses to have a common seal, its name and Australian Company Number (ACN) or Australian Business Number (ABN) must be set out on the seal: s 123(1). If a company has an ABN issued for goods and services tax purposes, it may use its ABN in place of its ACN provided that the ABN includes its nine-digit ACN. It is a strict liability offence to use or authorise the use of a seal in non-compliance with these requirements: s 123(3).

Limited liability Reasons for limited liability

[11.20] Business enterprises with limited liability are a feature of developed legal systems around the world. Limited liability is one of the main advantages of the corporate form over other forms of business organisation. The existence of limited liability is necessary for the functioning of stock exchanges for the reasons set out below. Limited liability means that shareholders are not personally liable for their company’s debts. The extent of a shareholder’s liability depends on the type of company, as provided by s 112. These various types of companies are discussed at [15.10]–[15.25]. In any case, if a company has incurred obligations, it is primarily liable because its debts are separate from the debts of its shareholders. It is only when the company has insufficient assets to pay its debts that the issue of whether shareholders may be liable arises. 262

Chapter 11 Registration and its effects [11.25]

The liability of shareholders of a company limited by shares (the most common type of company) is limited to the amount, if any, unpaid on the issue price of their shares: s 516. Shareholders who own fully paid shares have no further liability to pay further amounts to the company. The effect of limited liability is that the risk of business failure is largely transferred from the company’s shareholders to its creditors. The arguments in favour of limited liability were stated by CASAC in para 1.52 of its Corporate Groups Final Report (May 2000): Limited liability achieves various economic goals: • facilitating enterprise. Limited liability facilitates investment and otherwise encourages economic activity by separating investment and management functions and shielding investors from any corporate loss in excess of their equity capital. This protection for investors reduces the costs of raising capital. Also, corporate controllers may be more willing to undertake entrepreneurial activity through their controlled companies, given that, as shareholders of those companies, they are shielded against unlimited liability for the debts of those companies • reducing monitoring. Limited liability decreases the need for shareholders to monitor the managers of companies in which they invest. The risk to those shareholders of a company’s failure is confined to the loss of the equity invested • promoting market efficiency. Limited liability promotes the liquidity and efficient operation of securities markets, as the wealth of each shareholder of a public company is irrelevant to the trading price of its shares. This allows shares to be freely traded, as their price is set by factors other than their owners’ wealth. The free transfer of shares may in turn promote efficient management, given that shares in a poorly managed company may trade at a discount, creating the climate for a takeover and the replacement of incumbent management. • encouraging equity diversity. Limited liability permits investors to acquire shares in a number of companies. This might not be possible for particular investors if the principle of unlimited liability applied and they could lose all or most of their personal wealth through failure of one company in which they held equity.

CASAC’s Corporate Groups Final Report is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

Limited liability and closely held companies

[11.25] The application of limited liability to closely held companies has been problematic in a number of types of situations. Tort creditors of corporate groups may be adversely affected where a parent company seeks to limit liability to a subsidiary which may be under-capitalised and so unable to fully meet its liabilities to tort creditors. This is discussed at [2.240]–[2.280] (Lipton). Limited liability also enables shareholders of closely held companies to avoid liability to creditors by putting the company into liquidation and then conducting the company’s business through a new company described as a “phoenix” company. This is discussed at [13.5.55]–[13.5.80] (Lipton). 263

[11.25] Corporations and Contract Law

The arguments in favour of limited liability have much less applicability in the case of closely held small companies and subsidiaries within corporate groups. These companies, usually registered as proprietary companies, have small numbers of shareholders who typically also function as, or nominate, the directors and managers. Within corporate groups, some of the benefits of limited liability, such as the reduction in monitoring costs, are irrelevant as it is usual for a controlling company to monitor its controlled companies. Further, the benefit of promoting an efficient market for shares through limited liability is not applicable as there is no market for the shares of unlisted group companies. It is also arguable that limited liability is more likely to encourage excessive risk-taking by parent companies, because the benefit of a business risk will accrue to the company while if the risk fails, the burden falls on creditors. In most cases, the main reason for incorporation of closely held companies is not to obtain the benefits of limited liability, but to minimise income tax. Tax considerations are the main purpose behind the common practice of incorporating a company to act as trustee of a discretionary trust to operate a family business. Typically, such companies are established with a small paid up capital, usually $2. These companies, often referred to as “$2 companies”, operate businesses and incur debts on behalf of the beneficiaries of the trusts but do not have any assets of their own. If trust assets are insufficient, trust creditors cannot look to the personal assets of the trustee’s shareholders. Trustee companies are discussed in [3.190]–[3.200] (Lipton).

Limited liability and contract creditors

[11.30] The impact of limited liability on creditors depends on the type of creditor. The risks in dealing with limited liability companies are often overcome by creditors such as banks and other financial institutions. Since such lenders usually have strong bargaining power they generally will not lend money to limited liability entities unless they receive adequate security for their loans. The security may take the form of a debenture granting the lender a security interest over company assets. It may also consist of a mortgage over the real estate or goods owned by the company. In the case of closely held companies, finance creditors commonly also insist on security in the form of personal guarantees from the directors and shareholders. As well as requiring security for loans, finance creditors often further protect themselves from the risk of business failure by insisting on the inclusion in loan agreements of terms that restrict the borrowing company’s dividend policy, investment decisions that alter the risk characteristics of the company’s earnings and the ability to raise further debt capital. Trade creditors supply goods or services to a company on credit. Such creditors rarely insist on security before they supply on credit to a company. For this reason they generally bear a large part of the risk of the debtor company’s insolvency. Trade creditors can reduce the risk of insolvency by charging a higher price for the goods or services supplied. In addition, trade creditors may take out insurance to protect 264

Chapter 11 Registration and its effects [11.35]

themselves from bad debts. Further, because trade creditors, as a general rule, are creditors of more than one company, they effectively diversify the risk that one of their customers may become insolvent. Accordingly, their overall risk is often minimised. The employees of a company are a special category of unsecured creditors adversely affected by limited liability. Unlike finance or trade creditors they rarely obtain security or diversify the risk of their employer’s insolvency. Further, most employees have little information about their employer’s financial condition. The Corporations Act to some extent recognises the difficulties that confront employees in the event of insolvency and seeks to provide some protection. Section 556 accords unpaid employee wages, holiday pay and long service leave preferential treatment in the event of the liquidation of their corporate employer: see [25.675] (Lipton). Part 5.8A also protects employees from agreements that have the purpose of defeating the recovery of their entitlements: see [25.625]–[26.635] (Lipton). These provisions are discussed in Chapter 25 (Lipton). ASIC has published an information paper, INFO 26 Dealing with businesses and companies: How to avoid being swindled, on its website that suggests steps that should be taken to reduce risk when dealing with limited liability companies. This paper is linked to the Understanding Company Law website at http:// www.uclaw.com.au/resources/.

Company as a separate legal entity

[11.35] The various reasons for the historical development of companies are discussed at [1.10]–[1.15] (Lipton). While the Corporations Act sets out the various characteristics described above, it is clear that the original companies legislation was drafted primarily to meet the needs of large-scale businesses with large numbers of investors. The attractiveness of incorporation for small partnerships and sole traders was not envisaged in the 1840s when the first companies legislation was introduced. However, the benefits of incorporation were soon recognised by smaller enterprises, whose controllers increasingly decided to form limited liability companies as the structure by which to carry on their businesses. It was not until the late 19th century, in the famous case Salomon v A Salomon & Co Ltd [1897] AC 22 that the full implications of the concept that a company is a separate legal entity were clarified — especially in relation to what were in reality one-person companies. This case established that as long as the necessary formalities of incorporation were satisfied, a new entity comes into existence that is separate and distinct from its directors and shareholders. This is so whether the company has a large number of shareholders or, as in Salomon’s case, is a company managed and controlled by one person.

265

[11.40] Corporations and Contract Law

Salomon v Salomon & Co Ltd Salomon v Salomon & Co Ltd [1897] AC 22 [11.40]

Salomon was a boot manufacturer who owned a large, successful business that he operated as a sole trader. Several of his sons worked in the business and he wished to give them each a share. For this reason he formed a company, which was duly incorporated under the applicable English Companies Act. The company was at all times intended to be what would now be a proprietary company. No invitation was made to the public to take up shares. The initial shareholders were Salomon, his wife and five of his children. Each of them took up one share. Salomon and his two eldest sons were appointed directors. The company purchased Salomon’s business for £39,000, which was an excessive price. The purchase price was paid as follows: 20,000 £1 fully paid shares and debentures worth £10,000 were issued to Salomon; £1,000 was paid in cash to Salomon and £8,000 went in discharge of the debts of the business. After these transactions were completed, Salomon held 20,001 of the 20,007 issued shares in his company. Further, there was evidence that the other shareholders held their six shares as nominees for Salomon, so that A Salomon & Co Ltd was in reality a “one-man” company.

Largely as a result of strikes in the industry, the company experienced financial difficulties. In an attempt to maintain the company Salomon advanced it further funds from his own resources. When this proved insufficient he borrowed £5,000 from a lender, Broderip, which was then on-lent to the company. As security for Broderip’s loan Salomon granted him a mortgage over his debentures and caused them to be reissued in Broderip’s name. Despite this infusion of funds the business continued to decline. The company defaulted on paying the interest due on the debentures and Broderip appointed a receiver to realise the security. Soon after, the company was compulsorily wound up due to its insolvency and a liquidator was appointed.

The liquidator found that the company’s realisable assets amounted to about £6,000. This was sufficient to repay Broderip’s claim of £5,000. The remaining £1,000 was claimed by Salomon as beneficial owner of the debentures. If these claims had been met, there would have been nothing left for payment of the unsecured creditors who were owed approximately £8,000.

The liquidator initially resisted Broderip’s demand for repayment of the £5,000 and by way of defence counterclaimed against Salomon seeking to have the sale of business contract rescinded and the debentures cancelled. The liquidator argued that Salomon, as promoter of his company, had breached his fiduciary duties by selling his business to it for an excessive price. He also maintained that the formation of the company was a fraud on its unsecured creditors. The case eventually was decided by the House of Lords: Salomon v A Salomon & Co Ltd [1897] AC 22. By the time the hearing commenced, the liquidator had met

266

Chapter 11 Registration and its effects [11.40] Salomon v Salomon & Co Ltd cont. Broderip’s claim, so the case against Salomon was the sole question to be determined. The House of Lords unanimously decided in Salomon’s favour and reversed the earlier decisions.

It held that, provided the formalities of incorporation were observed, it was not contrary to the intention of the Companies Act 1862 (UK) for a trader to gain limited liability and obtain priority as a debenture-holder over other creditors. A person may sell a business to a limited liability company of which the person is virtually the only shareholder and director. The company was a separate legal entity distinct from its shareholders and directors. It therefore followed that a one-person company could borrow money on a secured basis from its controlling shareholder, thereby enabling that person to rank ahead of the company’s other unsecured creditors. Lord Macnaghten stated: When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate “capable forthwith” to use the words of the enactment, “of exercising all the functions of an incorporated company”. Those are strong words. The company attains maturity on its birth. There is no period of minority … no interval of incapacity. I cannot understand how a body corporate thus made “capable” by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment. If the view of the learned judge were sound, it would follow that no common law partnership could register as a company limited by shares without remaining subject to unlimited liability.

The House of Lords maintained that the fact that A Salomon & Co Ltd was a “one-man” company made no difference. Upon incorporation a separate entity is created, even if all the company’s issued shares are beneficially owned by the same person. Lord Herschell explained the reasoning for this conclusion: How does it concern the creditor whether the capital of the company is owned by seven persons in equal share, with the right to an equal share of the profits, or whether it is almost entirely owned by one person, who practically takes the whole of the profits? The creditor has notice that he is dealing with a company the liability of the members of which is limited, and the register of shareholders informs him how the shares are held, and that they are substantially in the hands of one person, if this be the fact. The creditors in the present case gave credit to, and contracted with, a limited company …

Lord Halsbury LC was of the opinion that the conclusion that the business was Salomon’s business and that the company was his trustee or agent involved a logical contradiction:

267

[11.40] Corporations and Contract Law Salomon v Salomon & Co Ltd cont. Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not.

Application of Salomon’s case

[11.45] Salomon v A Salomon & Co Ltd [1897] AC 22 is significant because it was not until the House of Lords handed down its decision that a de facto one-person company was fully recognised as being a separate legal entity. The Corporations Act now allows the formation of public or proprietary companies with a single shareholder: s 114. The principle in Salomon’s case has been applied in many cases so that its operation has expanded to include many situations that the House of Lords judges would not have anticipated. This is particularly so in the case of corporate groups discussed at [2.80] (Lipton).

Lee v Lee’s Air Farming Ltd Lee v Lee’s Air Farming Ltd [1961] AC 12

[11.50]

Lee was a pilot who conducted an aerial top-dressing business. He formed a company to conduct the business. The capital of the company comprised 3,000 £1 shares, of which 2,999 were allotted to Lee. The remaining share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers’ compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aeroplane crashed while engaged in aerial topdressing. His widow made a claim for payment under the Workers’ Compensation Act 1922 (NZ). Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a “worker” within the meaning of that Act. “Worker” was defined under the Workers’ Compensation Act 1922 as a person “who has entered into or works under a contract of service … with an employer”. The Privy Council rejected this argument. It held that as the company was a separate legal entity distinct from its founder, Lee, it could enter into a contract of employment with him. Lord Morris explained the rationale of this principle: In their Lordships’ view, it is a logical consequence of the decision in Salomon v A Salomon & Co Ltd [1897] AC 22, that one person may function in dual capacities. There is no reason, therefore, to deny the possibility of a contractual relationship being created as between the deceased and the company. If this stage is reached, then their Lordships see no reason why the range of possible relationships should not include a contract for services, and if the deceased as agent for the respondent company, could negotiate a contract for services as between the company and himself there

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Chapter 11 Registration and its effects [11.65] Lee v Lee’s Air Farming Ltd cont. is no reason why a contract of service could not also be negotiated.

[11.55] The recognition of a company as a separate legal entity may, in some cases, work against the person responsible for the formation of the company.

Macaura v Northern Assurance Co Ltd Macaura v Northern Assurance Co Ltd [1925] AC 619 [11.60]

Macaura owned land on which stood timber. He sold the land and timber to a company he formed and received as consideration all the fully paid shares. The company carried on the business of felling and milling timber. A fire destroyed all the timber that had been felled. Macaura had earlier insured the timber against loss by fire in his own name. He had not transferred the insurance policy to the company. When Macaura made a claim his insurers refused to pay, arguing that he had no insurable interest in the timber. Only persons with a legal or equitable interest in property are regarded as having an insurable interest in it. The House of Lords agreed that the insurers were not liable. It was only Macaura’s company, as owner of the timber, which had the requisite insurable interest in it. Only the company, and not Macaura, could insure its property against loss or damage. Shareholders, the court held, have no legal or equitable interest in their company’s property. This is the case whether a company has only one or many shareholders.

Section 17 of the Insurance Contracts Act 1984 (Cth) dispenses with the common law requirement of “insurable interest” and may now overcome the decision in Macaura’s case. This provides that where an insured, under a general insurance contract, suffers a pecuniary or economic loss by reason of damage to or destruction of the insured property, the insurer is not relieved of liability just because the insured did not have a legal or equitable interest in the property.

This provision, however, raises the question whether a shareholder suffers a pecuniary or economic loss if the company’s property is damaged. Most probably a shareholder in Macaura’s position, holding all the shares in a company, would have a strong case for compensation by the insurer. The loss would arise by reason of the decline in the value of the shares as a consequence of the damage or destruction of the company’s property. It is less clear whether there would be a quantifiable loss for the purposes of s 17 in the case of an insured who is a minority shareholder in respect of damage to property of the company, particularly where the property represents a relatively small proportion of the company’s assets.

[11.65] One consequence arising from the conclusion that shareholders have no legal or equitable interest in company property is that it is theoretically possible for a shareholder to be found guilty of stealing company property. This is the case even in 269

[11.65] Corporations and Contract Law

one-person companies. In MacLeod v The Queen (2003) 214 CLR 230, the High Court held that a person who was the sole director and shareholder could be convicted under s 173 of the Crimes Act 1914 (Cth) of fraudulently applying property owned by the company for his own use. This type of situation usually arises where the company is insolvent or in financial difficulties and the conduct of the sole director and shareholder in reducing the value of the company’s assets is detrimental to creditors. According to the High Court: The self-interested “consent” of the shareholder, given in furtherance of a crime against the company, cannot be said to represent the consent of the company.

Piercing the veil of incorporation

[11.70] The recognition that a company is a separate legal entity distinct from its shareholders is often referred to as the “veil of incorporation” or “corporate veil”. This is because, once a company is formed, the courts usually do not look behind the “veil” to inquire why the company was formed or who really controls it. Further, when the separate entity concept is coupled with limited liability, the corporate veil ensures that shareholders are not personally liable to creditors for their company’s debts. In the case of a company limited by shares, their liability is limited to the amount, if any, unpaid on the nominal value of their shares: s 516. Ever since the House of Lords handed down its decision in Salomon v A Salomon & Co Ltd [1897] AC 22 it has been recognised that the application of the concepts of the company as a separate entity and limited liability can result in undesirable consequences arising from the misuse of companies as shams and façades for deliberately dishonest purposes. Piercing or lifting the corporate veil means that the separate legal personality of the company is disregarded in carefully defined circumstances. There are various statutory provisions that have the effect of piercing or looking behind the corporate veil. In addition, the courts have developed principles that enable the corporate veil to be pierced.

By statute Directors’ liability for insolvent trading

[11.75] In some circumstances, directors may become personally liable for debts incurred by their company. This liability arises where directors breach the duty contained in s 588G by failing to prevent the company incurring debts when there are reasonable grounds for suspecting that it is insolvent. This is known as “insolvent trading”. Directors who breach this duty are liable to pay as compensation an amount equal to the loss or damage suffered by unsecured creditors in relation to the debts so incurred because of the company’s insolvency: ss 588J, 588K and 588M. As a general rule, the compensation is payable to the company’s liquidator who distributes it to the company’s unsecured creditors. As well as a liability to pay compensation, 270

Chapter 11 Registration and its effects [11.85]

contravention of the s 588G duty may also result in the imposition of a civil penalty order pursuant to Pt 9.4B. Directors may also commit a criminal offence under s 588G(3) if their failure to prevent the company incurring the debt was dishonest. The liability for failing to prevent insolvent trading is further discussed at [19.10]–[19.170]. A director of a corporate trustee may be personally liable for the debts of the trustee where its right of indemnity as trustee was lost in specified circumstances: s 197(1). This is discussed at [3.200] (Lipton). Uncommercial transactions

[11.80] There are provisions in the Corporations Act that pierce the corporate veil for purposes of treating corporate insiders such as directors and other related entities of the company differently from others who have dealings with the company. The aim of these provisions is to ensure that such persons do not obtain preferential treatment from the company at the expense of the company’s external creditors. For example, s 588FB is specifically aimed at preventing insolvent companies from disposing of assets prior to liquidation through uncommercial transactions that result in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice. The company’s liquidator can set aside any uncommercial transaction entered into within two years of the commencement of winding up: s 588FE(3). If the recipient of an uncommercial transaction is a director or related entity of the company, the liquidator can avoid uncommercial transactions entered into within four years of the commencement of winding up. Uncommercial transactions are discussed further at [25.520] (Lipton). Security interests granted to officers

[11.85] Section 588FP also disregards the corporate veil in certain circumstances. It regards officers who lend money to their company secured by a security interest over its property differently from arm’s length creditors who are granted security interests by a company. Under s 588FP(1) a security interest granted by a company is void if the secured party is an officer, a former officer or a person associated with an officer or former officer and the secured party purports to take a step to enforce the security interest within six months after it is made without the leave (permission) of the court. Under s 588FP(3) a secured party is regarded as taking a step to enforce a security interest if the secured party • appoints a receiver or receiver and manager; • enters possession or assumes control of the company’s property for the purposes of enforcing the security interest; or • seizes the property for purposes of enforcing the security interest. The court may grant leave for the security interest to be enforced if it is satisfied that the company was solvent at the time the security interest was granted and it is just and 271

[11.85] Corporations and Contract Law

equitable for the court to do so: s 588FP(4). Security interests granted by a company are discussed at [11.65]–[11.250] (Lipton). Financial assistance

[11.90] In some situations the veil is pierced so as to render officers liable for civil penalties if they were involved in their company’s contraventions of the Corporations Act. Where a company provides financial assistance for the acquisition of its own shares in contravention of s 260A, any person involved in the contravention breaches the section and may be liable under the civil penalty provisions. The company is not guilty of an offence: s 260D. Financial assistance is discussed at [8.325]–[8.375] (Lipton). Taxation legislation

[11.95] There are also other statutes, particularly revenue legislation, which provide for lifting of the corporate veil. For example, the Income Tax Assessment Act 1997 (Cth) provides that directors may be liable to pay the company’s unremitted PAYG tax instalments and other similar liabilities. They will be liable if, after receiving notice, they have not caused the company to pay the group tax owing or initiated an insolvency administration. This is discussed at [19.45].

At common law

[11.100] In the absence of specific legislation, Australian courts, like their UK counterparts, have, as a general rule, been reluctant to disregard the principle in Salomon’s case and pierce the corporate veil. They have done so only in relatively rare situations to prevent the abuse of the corporate legal personality of a company where it is used as a façade or sham to evade the law or to frustrate its enforcement. Lord Sumption in the UK Supreme Court case Prest v Petrodel Resources Ltd [2013] UKSC 34 stated that a company could be used as a façade or sham in two types of situations: …the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.

Lord Sumption described this as the “evasion principle” which involved piercing the corporate veil and which he distinguished from the “concealment principle” which arises where a company is interposed so as to conceal the identities of the persons behind the company. In these cases the court is not disregarding the façade, but only looking behind the company to discover the facts that the corporate structure is concealing. Fraud

[11.105] The courts have lifted the corporate veil where a company is used as a vehicle for fraud.

272

Chapter 11 Registration and its effects [11.120]

Re Darby Re Darby [1911] 1 KB 95 [11.110]

Darby and Gyde formed a company of which they were sole directors and, together with five nominees, were the shareholders. The company purchased a licence to work a quarry and then floated another company, Welsh Slate Quarries Ltd, for the purpose of purchasing the licence at a substantial overvalue. The new company issued a prospectus and issued shares to the public. With the money thus obtained, Welsh Slate Quarries Ltd paid the company formed by Darby and Gyde for the licence. The profits were then divided between Darby and Gyde. Welsh Slate Quarries Ltd then failed and the liquidator claimed in the bankruptcy of Darby for the secret profit made by him. This claim was on the basis that Darby was in breach of his duty as a promoter of Welsh Slate Quarries Ltd. The duties of promoters are discussed in Chapter 6 (Lipton). It was argued that the profit was made by the company formed by Darby and Gyde and not by Darby himself. This argument was rejected and Darby was ordered to disgorge his profit because the company he set up was a “dummy company” formed for the purpose of enabling him to perpetrate a fraud. Thus the court looked behind the façade of the legal entity.

Avoidance of legal obligations

[11.115] The courts will also pierce the corporate veil if a company has been used as a sham so as to avoid a legal obligation under contract or statute.

Gilford Motor Co Ltd v Horne Gilford Motor Co Ltd v Horne [1933] Ch 935 [11.120]

Horne was appointed managing director of Gilford Motor Co Ltd for a term of six years. The service agreement provided that he was not to solicit or entice away from the company any of its customers during his appointment or after termination of his appointment. Some three years later, Horne resigned and started his own business in competition with the company. He then sent circulars to customers of the company seeking their business. Horne formed a company to conduct this business, the shareholders being his wife and an associate. Gilford Motor Co Ltd brought an action seeking to restrain Horne and the company he formed from soliciting their customers. The action was successful and an injunction was granted against both Horne and the company, even though the company was not a party to the contract with the plaintiff. Lord Hansworth MR considered that the company was a “mere cloak or sham” used as a device for enabling contractual obligations to be avoided.

273

[11.125] Corporations and Contract Law

Jones v Lipman Jones v Lipman [1962] 1 WLR 832 [11.125]

Lipman was a vendor of land who entered into a contract for the sale of the land to Jones. Lipman then sought to avoid the contract by forming a company in which he and a nominee were the only directors and shareholders and selling the land to the company at undervalue in order to defeat Jones’ right to seek an order for specific performance of the contract. It was held that the company formed by Lipman was a façade and Jones succeeded in obtaining an order for specific performance against both Lipman and the company because Lipman had absolute ownership and control of the company which was “a device and a sham”.

[11.130] Directors owe a duty not to prejudice the interests of their company’s creditors where the company is insolvent or in financial difficulties. Where directors seek to avoid legal obligations to creditors, they may breach their duties to the company: Jeffree v NCSC [1990] WAR 183. This is discussed at [13.5.10]–[13.5.95] (Lipton). The High Court in Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 held that even if a company was not formed for the purpose of avoiding a legal obligation, it may lift the corporate veil if the company was a mere puppet of its controller. Involvement in directors’ breach of duty

[11.135] The courts will also lift the corporate veil if a company knowingly participates in a director’s breach of fiduciary duties.

Green v Bestobell Industries Pty Ltd Green v Bestobell Industries Pty Ltd [1982] WAR 1 [11.140]

Green, the Victorian manager of Bestobell Industries, became aware that Bestobell was preparing a tender for certain construction works. Without Bestobell’s knowledge or consent, Green incorporated his own company, Clara Pty Ltd, and caused it to submit its own tender for the work. Clara’s tender was successful and it was awarded the contract. When Bestobell discovered this it brought proceedings against both Green and Clara.

The Supreme Court of Western Australia held that Green, in tendering for the same project, had breached his fiduciary duty to Bestobell by placing himself in a position where his duty to it conflicted with his own interests. Further, because Clara knowingly and for its own benefit participated in Green’s breach of duty, it was ordered to account to Bestobell Industries for the profit it derived.

274

Chapter 11 Registration and its effects [11.155]

Attributing mind and will of company

[11.145] In some circumstances it is necessary to determine the purpose or intention of a company. Where this is the case the courts will look behind the veil of incorporation and attribute the purpose or intention of individuals behind the company to the company itself. However, this attribution is only made in respect of the persons who are regarded as the “directing mind and will” of a company rather than as mere employees: Tesco Supermarkets Ltd v Nattrass [1972] AC 153. This is discussed at [14.10]–[14.85].

Lifting the corporate veil of group companies

[11.150] Frequently, the courts have been requested to look behind the corporate veil in respect of companies associated as a group where, to all outward appearances, they seem to operate as a single entity. The UK and Australian courts have been reluctant to depart from the separate entity principle where there is no legislation requiring them to do so. Slade LJ expressed this approach in the UK case Adams v Cape Industries plc [1990] 1 Ch 433: …the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities that would normally attach to separate legal entities.

However, in a number of situations the Corporations Act or other legislation and the courts look behind the corporate veil and treat a group of companies as a single economic entity.

Holding company’s liability for insolvent trading by subsidiary

[11.155] Where companies operate as a group, the Salomon principle of separate personality prevents creditors of an insolvent company from gaining access to the funds of the other companies in the group for payment of their debts. This may not be appropriate where the business activity of a subsidiary has been directed or controlled by the holding company. Sections 588V – 588X lift the corporate veil of subsidiary companies by making holding companies liable for the debts incurred by their insolvent subsidiaries. Under these provisions, if a holding company fails to prevent one of its subsidiaries from incurring a debt while there were reasonable grounds to suspect that the subsidiary was insolvent, the subsidiary’s liquidator may recover from the holding company amounts equal to the amount of loss or damage suffered by the subsidiary’s unsecured creditors. In order for the corporate veil to be lifted under these sections, the subsidiary must have incurred a debt prior to going into liquidation. A debt is incurred when a company “so acts to expose itself contractually to an obligation to make a 275

[11.155] Corporations and Contract Law

future payment of a sum of money as a debt”: Hawkins v Bank of China (1992) 26 NSWLR 562. A company also incurs a debt when a company exposes itself to an obligation to pay taxes: Powell v Fryer [2001] SASC 59. The term “incurs a debt” is discussed at [19.20] in the context of directors’ personal liability for insolvent trading.

Consolidated financial statements

[11.160] The financial statements, and in particular the entity-reporting requirements of the accounting standards, provide another instance where the Corporations Act disregards the corporate veil and treats all company members of a group as a single entity. This is for the purpose of providing more meaningful information to investors and the market. As discussed at [15.95] (Lipton), s 296 requires a company’s financial report to comply with accounting standards. Under AASB 10 Consolidated Financial Statements, a company that is a parent and is a reporting entity must prepare consolidated financial statements in which it consolidates its investments in its subsidiaries in accordance with the standard. In this respect the Corporations Act and the accounting standards do not treat each entity in a group as separate but recognise the reality that the entities in a group function as one economic entity.

Taxation consolidation

[11.165] Since 2003, corporate groups headed or controlled by an Australian company may elect to lodge a single consolidated tax return for the entire group. This enables intra-group transactions to be ignored and permits pooling of losses and franking credits. In the same way as consolidated financial statements, this taxation regime allows a parent company to lift the corporate veil and treat the corporate group as a single taxpayer.

The benefit of the group as a whole

[11.170] Because corporate groups are usually conducted as an integrated enterprise with inter-company loans and cross-guarantees, the fortunes of individual companies will be closely tied to the other companies in the group. If one company becomes insolvent, this may lead to the insolvency of some or all companies in the group. This commercial reality has implications for whether directors have breached their fiduciary duties where they act on the basis that the corporate group is a single entity.

276

Chapter 11 Registration and its effects [11.180]

Equiticorp Finance Ltd (in liq) v Bank of New Zealand Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 [11.175]

The New South Wales Court of Appeal agreed with the Walker v Wimborne principle (see [2.85] (Lipton)) that directors of associated companies owe separate duties to act in the best interests of each company. However, it recognised that in some circumstances a transaction that is entered into for the benefit of one or more companies in the group can have derivative benefits for other companies in the group. A bank loan to one company was repaid after funds were transferred from other companies in the group. Upon liquidation of the Equiticorp group, the liquidator of the transferring companies sought to recover the funds from the bank. It was claimed by the liquidator that the transfer of funds involved a breach of fiduciary duty by the directors to act in the best interests of those companies. The New South Wales Court of Appeal held that there was no breach of duty because, while the transaction benefited the group as a whole, it also indirectly benefited the transferring companies. Had the transactions not taken place, the companies would have lost the bank’s support for their own funding arrangements.

Pooling in liquidation

[11.180] Where companies within a group operate as a single commercial entity, it is often difficult for creditors to determine the actual legal entity they are dealing with. In Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109, the court thought that rigid legal distinctions between wholly owned subsidiaries and their holding company did not accord with commercial practice and created difficulties for creditors in insolvency situations. Rogers CJ believed it was desirable for Parliament to consider whether this distinction should be maintained in certain circumstances. He stated: As I see it, there is today a tension between the realities of commercial life and the applicable law in circumstances such as those in this case. In the everyday rush and bustle of commercial life in the last decade it was seldom that participants to transactions involving conglomerates with a large number of subsidiaries paused to consider which of the subsidiaries should become the contracting party. Regularly, liquidators of subsidiaries, or of the holding company, come to court to argue as to which of their charges bears the liability. As well creditors of failed companies encounter diffıculty when they have to select from amongst the moving targets the company with which they consider they concluded a contract. The result has been unproductive expenditure on legal costs, a reduction in the amount available to creditors, a windfall for some, and an unfair loss to others. Fairness or equity seems to have little role to play. 277

[11.180] Corporations and Contract Law

Amendments introduced in 2007 provide for a statutory pooling mechanism to address the concerns raised by Rogers CJ in the Quintex Australia Finance case. Where companies comprising a corporate group go into liquidation, they may be treated as a single entity so each company in the group is taken to be jointly and severally liable for each debt payable by and each claim against, the other companies in the group and each debt payable by a company to other companies in its group is extinguished. Pooling in a liquidation may arise by the consent of unsecured creditors, excluding creditors that are members of the group, or by order of the court. Pooling is discussed at [25.620] (Lipton).

Subsidiaries as agents or partners

[11.185] In some cases the court looks behind the corporate veil where it finds that a subsidiary has acted as an agent for its holding company. Such a finding enables a subsidiary’s assets to be regarded as being owned by its parent company or for a parent company to be held liable for the acts of its subsidiary. As a general rule, the principle in Salomon held that a company is not regarded as an agent or trustee of its shareholders and the courts have only been prepared to imply an agency relationship in few cases. The law is not settled as to when the circumstances exist to warrant the implication of agency. The agency exception is not a true instance of piercing the corporate veil. Even though the imposition of an agency relationship has the effect of piercing the corporate veil and regarding a parent company as the owner of a subsidiary’s assets or liable for its acts, it does not involve an exception to the separate legal entity principle in that the parent and subsidiary are still treated as separate legal entities. Rather, the subsidiary is regarded as acting as an agent for the parent company after the court has looked behind the corporate veil to ascertain the nature of the relationship between the parent company and its subsidiary. In the context of corporate groups, an agency relationship has arisen where a parent company has exercised such a degree of control over a subsidiary that the subsidiary was held to be an agent of the parent company and its acts deemed to be the acts of the parent company. The required degree of control that justifies a finding that a subsidiary was an agent for its parent company usually arises where the subsidiary lacks sufficient resources to act as an independent entity. The subsidiary in such cases has been described as the “alter ego” of the parent company.

278

Chapter 11 Registration and its effects [11.195]

Smith, Stone & Knight Ltd v Birmingham Corporation Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 [11.190]

The Birmingham Corporation, a local government authority, sought to compulsorily acquire some land owned by Smith, Stone & Knight Ltd. To all outward appearances the land was occupied by, and the business conducted on it was operated by, Birmingham Waste Co Ltd, a wholly owned subsidiary of Smith, Stone & Knight. The Birmingham Corporation refused a compensation claim for disturbance of business because the subsidiary’s tenancy of the land from its parent company was for less than a year and hence under the relevant legislation it was not entitled to compensation. Smith, Stone & Knight asserted that it in fact conducted the business on the land and was therefore entitled to compensation for the disturbance caused by the compulsory acquisition. It argued that the subsidiary conducted the business as agent for the holding company. This agency argument was upheld by the court because of the special circumstances that existed. Atkinson J was careful to point out that the existence of an agency relationship was not always present between holding and subsidiary companies. He held that the following six requirements must be established before the Salomon principle could be disregarded to support a finding that a subsidiary carried on a business as agent for its holding company: • • • • • •

the profits of the subsidiary must be treated as the profits of the holding company;

the persons conducting the business must be appointed by the holding company; the holding company must be the head and brain of the trading venture;

the holding company must govern the venture and decide what should be done and what capital should be embarked on it; the profits of the business must be made by the holding company’s skill and direction; and the holding company must be in effectual and constant control.

[11.195] The construction of an agency relationship was adopted by Lord Denning MR in Wallersteiner v Moir (No 2) [1975] QB 373. He described particular entities in that case as puppets of their controller. “He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures — for whose doings he should be, and is, responsible.” 279

[11.195] Corporations and Contract Law

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 was followed in Australia in Spreag v Paeson Pty Ltd (1990) 94 ALR 679 to hold a parent company liable for the misleading and deceptive statements made by its subsidiary and for breaches of implied terms of a contract by the subsidiary. After considering the six propositions formulated by Atkinson J in Smith, Stone & Knight, Sheppard J held that a subsidiary was carrying on business for its parent company and stood in the position of an agent acting for an undisclosed principal. As a result, the plaintiffs were able to recover from the parent company. A further consideration that led to these conclusions was that the subsidiary was undercapitalised and had no bank account or available funds. A creditor of the subsidiary therefore had no chance of successfully recovering money owed unless the parent company agreed to fund the liability. In Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467, the court indicated that it would be prepared to disregard the corporate veil if there was evidence that companies in a group operated in partnership. Young J did not indicate what evidence would be sufficient to indicate a partnership between a holding company and its subsidiary. It would seem from the conclusion in the case that more is required than the mere fact that the companies operated as a group under the control of the parent company.

Law reform proposals

[11.200] One of the issues considered in CASAC’s Corporate Groups Final Report (May 2000) was whether the regulation of corporate groups should be based on: • the separate entity approach, or • the single enterprise approach, or • a combination of these approaches. CASAC recommended that the Corporations Act should permit a wholly owned corporate group to opt to be a consolidated corporate group for all or some of the group companies. Companies in a consolidated corporate group would be regulated by single enterprise principles, such as: • the consolidated corporate group would be regarded as one legal structure; • directors of group companies could act in the overall consolidated group interest; • the parent company and each group company would be collectively liable for the contractual debts of all group companies; and • group companies could merge merely at the discretion of the holding company’s directors. CASAC’s Corporate Groups Final Report is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

280

CHAPTER 12

Types of companies Corporations and companies ....................................................................... [12.05] Classification according to liability of members .......................................... [12.10] Company limited by shares .................................................................... [12.15] Company limited by guarantee ............................................................... [12.20] Unlimited company .................................................................................. [12.25] No liability company ................................................................................ [12.30] Company limited both by shares and guarantee ................................... [12.35] Proprietary and public companies ............................................................... [12.40] Definitions ................................................................................................ [12.45] Public and proprietary companies compared ......................................... [12.50] Large and small proprietary companies ............................................... [12.100] Advantages of small proprietary companies ........................................ [12.105]

281

[12.05] Corporations and Contract Law

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 3. Key points • The Corporations Act classifies companies in several ways. Companies are classified according to the liability of members. A company limited by shares is the most common type of company. In such companies the liability of shareholders is limited to the amount, if any, unpaid on the issue price of their shares. Therefore, shareholders who own fully paid shares have no further liability. • Companies are also classified according to whether they are public or proprietary companies. The regulation of proprietary companies is generally less onerous than the regulation of public companies, particularly in relation to disclosure obligations. • A proprietary company must have no more than 50 shareholders and cannot issue shares or debentures in circumstances that would require disclosure to investors under the fundraising provisions of the Corporations Act. A company that does not comply with these prohibitions is classified as a public company. • Proprietary companies are divided into two sub-classifications: large proprietary companies and small proprietary companies. Whether a proprietary company is large or small depends on specified criteria such as its consolidated operating revenue, value of its consolidated gross assets and number of employees. • The Corporations Act imposes enhanced disclosure requirements on listed companies and other disclosing entities. A disclosing entity must prepare and lodge half-yearly financial reports as well as end-of-year financial reports. They are also subject to the continuous disclosure requirements. • A holding company – subsidiary relationship arises where the holding company controls over half the issued capital of the subsidiary or controls the composition of its board of directors. A holding company, its subsidiaries and subsidiaries of subsidiaries are all referred to as “related” companies.

CORPORATIONS AND COMPANIES

[12.05] In their general meanings the terms “body corporate” and “corporation” refer to entities recognised by the law as separate from their members and capable of acting in their own rights. The Corporations Act, however, defines these terms differently. A corporation is defined in s 57A to include: • a company; and • any body corporate (whether incorporated in this jurisdiction or elsewhere); and

282

Chapter 12 Types of companies [12.05]

• an unincorporated body that under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose. Excluded from the definition are: • an exempt public authority. These are public authorities, instrumentalities or agencies of the Crown; and • a corporation sole, for example the Public Trustee.

Figure 12.1: Types of bodies corporate

In Chapter 1 (Lipton), we noted that the oldest form of incorporated entity is a body corporate established by Royal Charter. The Royal College of Surgeons is an example of such a body. There are also numerous instances where corporations have been formed by special legislation. Monash University is one example of such an entity. There are also some types of legal entities that come into existence under specific legislation. Trade unions are legal entities recognised under industrial legislation. Bodies corporate or owners corporations established under strata titles or owners corporation legislation to manage common property are another instance of where a corporation is formed by special legislation. In this book we are concerned mainly with companies registered under the Corporations Act and its predecessors. According to ASIC registration statistics, there were 2,500,400 companies registered in Australia as at the end of June 2017. The number of registered companies in each State and Territory was: NSW 809,548

VIC 814,689

QLD 449,396

SA 117,268

WA 229,739

TAS 24,506

NT 12,247

ACT Total 43,007 2,500,400

The Corporations Act also recognises certain bodies, such as building societies, credit unions and incorporated associations, formed under specific State or Territory 283

[12.05] Corporations and Contract Law

legislation. These are referred to as “registrable Australian bodies” and must be registered under the Corporations Act if they do business outside their State or Territory of formation. The Corporations Act classifies companies in a variety of ways. The more significant classifications are according to: • the liability of members; • their public status, that is, whether they are public or proprietary companies; • the size of proprietary companies; • their relationship with other companies, that is, holding companies, subsidiary companies, related bodies corporate and members of economic entities; • whether or not they are disclosing entities; • the place of formation, that is, whether they are registered in Australia or are foreign companies; and • the type of business they conduct, such as mining companies, managed investment schemes and trustee companies.

CLASSIFICATION ACCORDING TO LIABILITY OF MEMBERS

[12.10] Selection of the type of company is made at the time of its formation. Among other matters, the application for registration of a new company must state the type of company that is proposed to be registered: s 117(2)(a). There are four types of companies that can be registered according to the extent of the liability of members: s 112(1). • companies limited by shares; • companies limited by guarantee; • unlimited companies with share capital; and • no liability companies.

Table 12.1: Types of company – s 112(1) Proprietary companies Public companies

284

Limited by shares Unlimited with share capital Limited by shares Limited by guarantee Unlimited with share capital No liability company

Chapter 12 Types of companies [12.15]

Company limited by shares

[12.15] This is by far the most common type of company. Companies limited by shares comprise approximately 99 per cent of all companies registered in Australia. Such companies have the ability to raise funds (referred to as equity or share capital) by issuing shares to investors. A company limited by shares is defined in s 9 as a company formed on the principle of having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them. Once shareholders’ details are entered on a company’s register they are regarded as members: s 231. The issue price for a share is determined by agreement between the company and the investor. Shares may be issued on the basis that the investor pays the entire issue price in one instalment. Such shares are referred to as “fully paid shares”. A shareholder who owns fully paid shares has no liability to contribute any further amounts to the company. Shares may also be issued on the basis that the shareholder pays only part of the issue price immediately. Such shares are referred to as “partly paid shares”. A shareholder who owns partly paid shares is liable to pay the balance of the issue price of their partly paid shares if the company, through its directors, makes a call. In the event of a liquidation s 515 requires members (referred to as “contributories”) to contribute to the company’s property an amount sufficient to pay the company’s debts and liabilities and the costs, charges and expenses of the winding up. However, a member need not contribute more than the amount, if any, unpaid on the shares in respect of which the member is liable as a member: s 516. In some situations a past member may also be liable to contribute to the company’s property on a winding up. They need not contribute if they were not members within one year of the commencement of winding up: s 521. Further, past members are only liable if the court is satisfied that the existing shareholders are unable to satisfy the contributions they are liable to make: s 522. In any event, past members will not be liable for any debt or liability of the company contracted after the past member ceased to be a member: s 520. Because the shareholders of a company limited by shares have limited liability, creditors of such a company do not have access to the personal property of the shareholders in order to satisfy their debts. Therefore, s 148(2) requires a limited company to have the word “limited” or its abbreviation “Ltd” as part of and at the end of its name. This is a notice to potential creditors that the liability of the shareholders is limited and debts of the company can only be satisfied from the assets of the company. The prudent creditor should ascertain whether the issued capital of the company is sufficiently large and the company holds sufficient assets to cover the debt. Some creditors may also seek a personal guarantee from the directors. Limited liability is discussed at [11.20]–[11.35]. 285

[12.20] Corporations and Contract Law

Company limited by guarantee

[12.20] A company limited by guarantee is a company whose members have their liability limited to the amounts that they have undertaken to contribute to the property of the company in the event of it being wound up: s 9. Such a company does not have a share capital so members do not contribute capital while the company is operating. Companies limited by guarantee still retain the advantages of being legal entities with the liability of their members limited to the amount of the guarantee. However, in the event of the company being wound up and its assets being insufficient to meet its liabilities, its members are liable to pay up to the amount specified as the members’ guarantees: s 517. The guaranteed amounts must be set out in the company’s application for registration: s 117(2)(m). The obvious limitation with this type of company is that it does not raise initial or working capital from its members. Accordingly, such companies are very rarely used for conducting businesses and are predominantly used as not-for-profit entities such as sports- and recreation-related organisations, charities and community service organisations, education-related institutions and religious organisations. An incorporated association formed under specific State legislation, such as the Associations Incorporation Reform Act 2012 (Vic) or the Associations Incorporation Act 2009 (NSW), is an alternative to a company limited by guarantee for a not-for-profit association. As in the case of a company limited by shares, the past members of a company limited by guarantee may also be liable if the assets of the company are insufficient to meet its debts and the present members are unable to meet the company’s liabilities. Past members’ liability to contribute arises only in respect of those persons who were members within the year prior to the commencement of winding up. They are not liable to contribute towards those company debts incurred after they ceased to be members. Because members of a company limited by guarantee have limited liability, the company name must generally include the word “limited” at the end of its name. A company is not required to have the word “Limited” at the end of its name if it is a registered charity as defined in s 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) and the company’s constitution (i) prohibits the company paying fees to its directors; and (ii) requires the directors to approve all other payments the company makes to directors: s 150(1). The s 150 requirements and prohibitions are discussed at [2.380] (Lipton). As companies limited by guarantee do not have a share capital they cannot be proprietary companies and so are public companies. Prior to 2010, all companies limited by guarantee had the financial reporting and audit requirements applicable to public companies even though the vast majority of companies limited by guarantee are relatively small. Amendments introduced in 2010 recognised that the usual small size of companies limited by guarantee meant that it was inappropriate for them to 286

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comply with the extensive financial reporting and auditing requirements generally applicable to public companies. Companies limited by guarantee are now subdivided into three categories according to the size of their annual revenue for purposes of their annual financial reporting obligations. Section 285A sets out in tabular form the annual financial reporting obligations of the three categories of companies limited by guarantee.

table 12.2: Annual financial reporting for companies limited by guarantee — s 285A Item 1

Nature of company Small company limited by guarantee.

Obligations No obligation to do any of the following unless required to do so under a member direction or ASIC direction: • prepare a financial report; • • •

2

3

Sections Sections 292, 301 and 316A

prepare a directors’ report; have financial report audited; notify members of reports.

Must prepare a financial report. Must prepare a directors’ report, although less detailed than that required of other companies. Need not have financial report audited unless a Commonwealth company, or a subsidiary of a Commonwealth company or Commonwealth authority. If the company does not have financial report audited, it must have financial report reviewed. Must give reports to any member who elects to receive them. Must prepare a financial report. Company limited by guarantee with Must prepare a directors’ report, annual revenue or, if although less detailed than that part of a consolidated required of other companies. entity, annual consolidated revenue Must have financial report of $1 million or more. audited. Must give reports to any member who elects to receive them.

Company limited by guarantee with annual revenue or, if part of a consolidated entity, annual consolidated revenue of less than $1 million.

Sections 292, 298, 300B, 301, 316A

Sections 292, 298, 300B, 301, 316A

According to s 45B, a company limited by guarantee is a small company limited by guarantee if • its annual revenue or, if part of a consolidated entity, the annual consolidated revenue for a particular financial year, is less than the threshold amount ($250,000); and • it is not a deductible gift recipient for income tax purposes at any time during the financial year; and • it is not a building society, credit society or credit union. 287

[12.20] Corporations and Contract Law

The 2010 amendments simplified the contents requirements of directors’ reports of companies limited by guarantee (small companies limited by guarantee are not required to prepare a directors’ report). Under s 300B the simplified directors’ report need only contain • a description of the short and long term objectives of the entity; • the entity’s strategy for achieving those objectives; • the entity’s principal activities during the year; • how those activities assisted the entity’s objectives; and • how the entity measures its performance, including any key performance indicators used by the entity. Section 254SA prohibits companies limited by guarantee from paying dividends to members.

Unlimited company

[12.25] An unlimited company is defined in s 9 as a company whose members have no limit placed on their liability to the company. This is the oldest type of company. Unlimited companies formed prior to July 1998 were able to register either with or without a share capital. Unlimited companies can now only be registered with a share capital. Members of unlimited companies are liable in a winding up for the debts of the company without limit if the company has insufficient assets to meet its debts. In this respect, an unlimited company is similar to a partnership. However, it has all the other characteristics of incorporation such as recognition as a separate legal entity. Because limited liability is one of the most important reasons for forming a company, unlimited companies are rare in the case of trading companies. In the past some accountancy and solicitors’ practices were conducted as unlimited companies because until recently professional rules prohibited their professional practices being conducted with limited liability, yet they still desired obtaining other advantages of incorporation.

No liability company

[12.30] Companies engaged in mining have always had a speculative character because of the nature of the industry. This has especially been the case in Australia. Victoria was the first Australian State to specially cater for such companies and introduced the no liability company in 1871. A public company may be registered as a no liability company or convert into one under s 162. To be registered, a no liability company must: • have a share capital; • state in its constitution that its sole objects are mining purposes; and 288

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• have no contractual right under its constitution to recover calls made on its shares from a member who fails to pay a call: s 112(2). A no liability company is prohibited from engaging in activities that are outside its mining purposes objective: s 112(3). Directors of a no liability company must not let a mine or claim or enter into a contract for working any land over which it has a claim unless this is approved by a special resolution of the company’s shareholders: s 112(4). A no liability company must have the words “No Liability” or the abbreviation “NL” at the end of its name: s 148(4). Only no liability companies are able to use these words in their name: s 156. A call on a share in a no liability company is not effective unless it is made payable more than 14 days after the call is made. Notice of details of the call must be given to shareholders at least seven days before the call is payable: s 254P(1) and (2). The acceptance of shares in a no liability company does not constitute a contract by the shareholder to pay calls or contribute to the debts and liabilities of the company: s 254M(2). A share in a no liability company is forfeited if a call is unpaid 14 days after it became payable: s 254Q(1). Forfeited shares must be offered for sale by advertised public auction within six weeks after the call becomes payable: s 254Q(2) and (3). The directors may fix a reserve price for the sale of forfeited shares of an amount no greater than the amount of the calls unpaid on the shares: s 254Q(7). If the reserve price is not reached at auction, the shares may be withdrawn from sale and held on trust for the company. The shares must then be disposed of in accordance with the company’s constitution or resolution. Unless specifically otherwise provided by resolution, the shares must be offered to shareholders before being disposed of in any other way: s 254Q(9). A shareholder whose shares have been forfeited may, at any time before the sale, redeem the shares by paying the calls due on the shares and a proportion of expenses incurred in the forfeiture on a pro rata basis: s 254R. Shares in a no liability company are issued on the basis that if the company is wound up, any surplus must be distributed among the shareholders in proportion to the number of shares held by them irrespective of the amounts paid up. Where a shareholder is in arrears in payment of a call, the right to participate in the distribution in respect of those shares is lost until the amount owing is paid: s 254B(2). In a winding up, shares issued for cash rank ahead of vendor and promoter shares issued for non-cash consideration: s 254B(3). The holders of vendor and promoter shares are not entitled to preference on winding up despite anything to the contrary in the company’s constitution or terms of the issue: s 254B(4). 289

[12.35] Corporations and Contract Law

Company limited both by shares and guarantee

[12.35] Since 1998 this type of company may no longer be registered. Very few companies of this type were previously formed but those registered before 1998 are able to remain. Their essential feature is that a member of such a company need not contribute more than the aggregate of the following: • any sums unpaid on any shares held by the member; and • the amount the member has undertaken to contribute to the company’s property if the company is wound up.

PROPRIETARY AND PUBLIC COMPANIES

[12.40] Companies vary greatly in size and objectives, from large companies listed on the ASX with many thousands of shareholders to small family companies carrying on a relatively small scale business. The Corporations Act recognises that there are different regulatory needs depending on the size and nature of a company. For this reason the Corporations Act draws a distinction between public and proprietary companies. More detailed obligations are imposed on public companies because disclosure and investor protection are important concerns of the legislation where a company is listed or is able to seek capital from the public. Proprietary companies usually have restrictions on who may become a shareholder and a relatively small number of shareholders and so are less heavily regulated by the Corporations Act.

Figure 12.2: Public and proprietary companies

Proprietary companies encompass a wide range of company organisations. Subsidiaries of public companies are often proprietary companies even though they may own very substantial assets. Some proprietary companies evolved from small family businesses to become very large companies but wish to restrict share ownership to a relatively small number of shareholders. Other proprietary companies evolved from sole traders or partnerships, perhaps for income tax reasons, and have 290

Chapter 12 Types of companies [12.50]

remained relatively small enterprises. The managerial and ownership functions continue very much as they did prior to the formation of the company. A distinction is made between large and small proprietary companies in recognition of the fact that many large proprietary companies are either subsidiaries of public companies, or operate large businesses with substantial numbers of employees. It is in the public interest to ensure that such businesses have greater public transparency of their financial operations. As a result, the disclosure obligations applicable to large proprietary companies are more detailed than in the case of small proprietary companies. The Small Business Guide contained in Pt 1.5 of the Corporations Act is written in plain English and summarises the main provisions of the legislation that are likely to be relevant to small companies. It is designed to help people who operate such companies to understand their rights and responsibilities.

Definitions

[12.45] The definitions of public and proprietary companies are mutually exclusive. All companies must be one or the other. A “public company” means a company other than a proprietary company: s 9. Under s 112(1) a proprietary company must be either a company limited by shares or an unlimited company with a share capital. Further, it must have no more than 50 non-employee shareholders: s 113(1). Joint holders of shares are counted as one person: s 113(2). Proprietary companies must not engage in any activity, such as issuing shares or debentures, that would require disclosure to investors under Ch 6D, except for an offer of its shares to existing shareholders or employees of the company or of its subsidiary: s 113(3). The Ch 6D disclosure requirements are discussed in Chapter 7 (Lipton).An act or transaction is not invalid merely because of a contravention of s 113(3): s 113(4). Contravention is an offence of strict liability with a maximum five-penalty unit fine: s 113(3A). In addition, ASIC may require a company that contravenes s 113 to convert to a public company: s 165. It is not necessarily size that is characteristic of proprietary companies, but the fact that they adhere to the restrictions and prohibitions of s 113. These ensure that members of the general public cannot be shareholders of proprietary companies.

Public and proprietary companies compared Function

[12.50] Proprietary companies vastly outnumber public companies and make up 99 per cent of all registered Australian companies. The reasons for the popularity of proprietary companies are readily apparent. They are particularly suited as the vehicle for carrying on a small to medium size business. 291

[12.50] Corporations and Contract Law

Such businesses are usually family run or tightly held and consequently there is no advantage in the ability to have large numbers of members or to raise capital through a prospectus issue. Public companies are more suited to large businesses that require many investors to participate in fundraising. The Corporations Act imposes greater disclosure obligations on public companies because they may raise money from large numbers of people. Family-run businesses are usually able to raise funds from their own internal sources or from lenders. Therefore, the inability of proprietary companies to raise funds via a disclosure document usually reflects the reality that they do not wish to do so. The advantage of proprietary companies is that they have fewer disclosure requirements and so are cheaper to maintain than public companies.

Membership

[12.55] Both public and proprietary companies must have at least one member: s 114. Section 113 specifies 50 as the maximum number of non-employee shareholders of a proprietary company. There is no such maximum in the case of public companies. Proprietary companies usually choose to have restrictions on the right to transfer shares. The proprietary company replaceable rule in s 1072G is an example of such a restriction. It gives directors the power to refuse to register a transfer of shares for any reason.

Name

[12.60] All companies whose members have limited liability, except no liability companies, must have the word “Limited” or the abbreviation “Ltd” as part of and at the end of their name. Proprietary companies must in addition have the word “proprietary” or the abbreviation “Pty” as part of their name inserted immediately before the word “limited”: s 148(2). An unlimited proprietary company need only have the word “proprietary” at the end of its name: s 148(3).

Replaceable rules and company constitution

[12.65] A company’s internal management may be governed by provisions of the Corporations Act that apply to the company as replaceable rules, by a constitution, or by a combination of both: s 134. Some of the provisions are replaceable rules for proprietary companies and mandatory rules for public companies. For example, s 249X gives a member the right to appoint a proxy. This is a replaceable rule for proprietary companies but a mandatory rule for public companies. Single director/shareholder proprietary companies do not require comprehensive, formal rules. Such companies are not governed by the replaceable rules: s 135(1). The 292

Chapter 12 Types of companies [12.80]

Corporations Act has several basic rules appropriate for single director/shareholder proprietary companies. These provide that a director may appoint another director by recording the decision and signing the record and may exercise all of the company’s powers and is responsible for the management of the company’s business: ss 198E and 201F. The replaceable rules and constitution are discussed in Chapter 13.

Directors

[12.70] Proprietary companies must have at least one director, while a public company must have at least three: s 201A. At least two of the directors of a public company, and one in the case of a proprietary company, must ordinarily reside in Australia. Directors of public companies must be individually appointed unless a general meeting of members unanimously agrees to appoint two or more directors by a single resolution: s 201E(1). Directors of a public company can only be removed by resolution of its members: ss 203D and 203E. The question of who can remove directors of a proprietary company is left to the company’s constitution (if any). The proprietary company replaceable rule in s 203C gives this power to the general meeting of shareholders. Chapter 2E prohibits public companies from giving financial benefits to directors or other related parties without prior member approval: s 208. Member approval is not required if the financial benefit falls within certain exceptions. This is discussed at [17.40]–[17.80]. Public company directors who have a material personal interest in a matter that is being considered at board meetings are not permitted to attend or to vote: s 195.

Secretary

[12.75] The Corporations Act does not require a proprietary company to have a secretary. If it chooses to appoint one or more secretaries, at least one must ordinarily reside in Australia: s 204A(1). A public company must have at least one secretary and at least one must ordinarily reside in Australia: s 204A(2). According to the August 2015 Consultation Paper, Facilitating Crowd-Sourced Equity Funding and Reducing Compliance Costs for Small Business, as at January 2015, there were almost 168,000 companies with a sole director and no company secretary.

Raising funds

[12.80] Proprietary companies are prohibited by s 113(3) from engaging in any activity that would require disclosure to investors under Ch 6D. This means that a proprietary company cannot raise funds by offering its shares or debentures to a large number of people. Public companies are not so prohibited. However, public 293

[12.80] Corporations and Contract Law

companies that wish to issue shares, debentures or other securities must comply with the fundraising provisions in Ch 6D. Unless one of the specific exceptions applies, a disclosure document must be prepared and lodged with ASIC. The fundraising provisions are discussed in Chapter 7 (Lipton). The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) enables unlisted public companies with less than $25 million in assets and annual turnover to raise up to $5 million in any 12-month period through crowd-sourced equity funding. In May 2017 the government released for public consultation the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) which proposes to extend the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) to eligible proprietary companies. The Act and the Bill are discussed at [7.210]–[7.220] (Lipton).

AGM

[12.85] A public company is required to hold an annual general meeting (AGM) at least once a year unless it has only one member: s 250N. The first AGM must be held within 18 months of incorporation: s 250N(1). The main purpose of the AGM is to give shareholders an opportunity to consider the company’s audited financial report. Proprietary companies do not have to hold an AGM unless this is required by their constitution. A proprietary company with more than one shareholder may pass a resolution without a general meeting being held if all the shareholders sign a document stating that they approve of the resolution set out in the document: s 249A. This is known as a “circulating resolution”. This procedure cannot be used to pass a resolution to remove an auditor. Shareholders’ meetings are discussed in Chapter 14 (Lipton).

Auditors

[12.90] Public companies and large proprietary companies must appoint an independent auditor to audit their financial reports. In some circumstances ASIC may relieve a large proprietary company from the requirement to appoint an auditor. This is discussed in Chapter 16 (Lipton). Small proprietary companies need only appoint an auditor if required to do so by either shareholders holding at least 5 per cent of the voting shares or by ASIC: see ss 293(3)(c) and 294. Auditors of public companies and large proprietary companies must satisfy the general requirement for auditor independence in ss 324CA – 324CD as well as the specific independence requirements in ss 324CE – 324CG. These requirements are discussed at [16.45]–[16.80] (Lipton). Only small proprietary companies may appoint officers as their auditor: s 324CH.

Registered office

[12.95] While all companies must have a registered office, proprietary companies are not obliged to keep it open to the public. Public companies must keep their 294

Chapter 12 Types of companies [12.100]

registered office open to the public during the opening hours specified in s 145. Public companies must also display their name and the words “registered office” prominently at their registered office: s 144.

Large and small proprietary companies

[12.100] When the distinction between public and proprietary companies was originally introduced in Victoria in 1896, proprietary companies were seen as entities suitable for closely held small business enterprises and so were exempted from the disclosure requirements that applied to public companies. It soon became apparent that many public companies were reluctant to make detailed disclosure of their financial positions. The aims of the original legislation were easily avoided when public companies conducted their businesses through proprietary company subsidiaries that they controlled. The only disclosure then required of the public company was an accounting entry showing dividends received from the subsidiary. To overcome such avoidance practices the legislation was altered in two ways. First, as discussed at [15.55] (Lipton), accounting standard AASB 10 Consolidated Financial Statements requires an entity that is a parent entity of a group that is a reporting entity to prepare consolidated financial statements in which it consolidates its investments in its subsidiaries. Secondly, proprietary companies are classified as either large or small proprietary companies. This distinction seeks to distinguish small, closely held companies conducting small scale business enterprises, from large proprietary companies which are often subsidiaries of public companies. As discussed at [12.105], small proprietary companies have numerous advantages over large proprietary companies in terms of disclosure requirements and recurring costs. The overwhelming majority of proprietary companies are small proprietary companies. The Explanatory Memorandum to the 2007 amendments which introduced the distinction between large and small proprietary companies noted that there were about 5,000 large proprietary companies that lodged annual reports with ASIC. Section 45A defines the terms “small proprietary company” and “large proprietary company”. A proprietary company that does not come within the definition of a small proprietary company is regarded as a large proprietary company. Under s 45A(2) a proprietary company is regarded as a “small proprietary company” for a financial year if it satisfies at least two of the following three criteria: • the consolidated operating revenue for the financial year of the company and the entities it controls is less than $25 million; • the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls is less than $12.5 million; and • the company and the entities it controls have fewer than 50 employees at the end of the financial year. 295

[12.100] Corporations and Contract Law

“Consolidated operating revenue” and the value of “consolidated gross assets” are calculated in accordance with applicable accounting standards: s 45A(6). In counting employees for purposes of the s 45A definition, part-time employees are taken into account as an appropriate fraction of a full-time equivalent: s 45A(5). The question whether a proprietary company “controls” an entity is decided in accordance with accounting standards such as AASB 10 Consolidated Financial Statements: s 45A(4).

Advantages of small proprietary companies

[12.105] The main advantages of small proprietary companies are that they are subject to fewer requirements in relation to preparation, lodgment and audit of financial reports. Public companies and large proprietary companies are required to prepare annual financial reports: s 292. They are also required to have their financial reports audited: s 301. Copies of the financial report, directors’ report and auditor’s report must be sent to members: s 314. In addition, the financial reports and directors’ reports must be lodged with ASIC: s 319. Every company must keep and maintain sufficient financial records to allow true and fair financial statements to be prepared: s 286. A small proprietary company is not required to prepare annual financial reports or appoint an auditor. This is a significant cost saving for small proprietary companies. The Explanatory Memorandum to the 2007 amendments estimated that, on average, it costs about $60,000 for a company to produce an audited annual report. Small proprietary companies need to prepare financial reports only if they are directed to do so by: • shareholders holding 5 per cent or more of the voting shares (s 293); or • ASIC: s 294. Written requests for financial reports by small proprietary company shareholders may be made at any time within 12 months after the end of the financial year concerned: s 293(2). Unless shareholders specify otherwise, the financial reports must be prepared in accordance with applicable accounting standards: s 293(3)(a). Shareholders of a small proprietary company may also request that the financial reports be audited: s 293(3)(c). The auditor of a small proprietary company is permitted to be employed as an officer of the company. This is not the case for auditors of public and large proprietary companies. Their auditors must satisfy the general requirement for auditor independence in ss 324CA – 324CD as well as the specific independence requirements in ss 324CE – 324CG. Even though the Corporations Act does not require small proprietary companies to prepare annual financial statements, they must still prepare profit and loss statements 296

Chapter 12 Types of companies [12.105]

for taxation purposes. In addition, banks and other financial institutions may insist on receiving financial reports before lending money to small proprietary companies.

297

CHAPTER 13

Constitution and replaceable rules Rules governing internal management ........................................................ [13.05] Replaceable rules ......................................................................................... [13.10] Table of replaceable rules ....................................................................... [13.15] One-person proprietary companies ........................................................ [13.20] Companies limited by guarantee ............................................................ [13.25] No liability companies ............................................................................. [13.30] Repeal of Tables A and B ...................................................................... [13.35] The company’s constitution .......................................................................... [13.40] Statutory requirements ............................................................................ [13.45] Contents of constitution .......................................................................... [13.50] Interpretation of constitution .................................................................... [13.55] Objects clause ......................................................................................... [13.60] Legal capacity and powers of a company .................................................. [13.65] Section 124 ............................................................................................. [13.70] Abolition of doctrine of ultra vires .......................................................... [13.75] Effect of constitution and replaceable rules ................................................ [13.80] Contractual effect .................................................................................... [13.80] Contract between company and members ............................................ [13.85] Contract between members .................................................................. [13.125] Contract between the company and its directors and secretary ........ [13.145] Alteration of constitution and replaceable rules ........................................ [13.175] Statutory requirements .......................................................................... [13.175] Limits on right to alter constitution ....................................................... [13.180]

299

[13.05] Corporations and Contract Law

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 4. Key points A company’s corporate governance or internal administration may be governed by replaceable rules contained in the Corporations Act or by a constitution or by a combination of both. A company has the legal capacity and powers of an individual and a body corporate. Acts of a company are not invalid merely because they are contrary to or beyond any objects stated in its constitution. According to s 140(1), a company’s constitution (if any) and any applicable replaceable rules have effect as a contract between: – the company and each member; and – the company and each director and secretary; and – a member and each other member. Subject to certain restrictions, a company’s constitution may be modified or repealed if its members pass a special resolution to that effect: s 136(2). A company may adopt by special resolution, constitutional provisions that displace or modify any or all applicable replaceable rules: s 135(2). There are several limits on the right of a company to alter its constitution. The courts have been particularly protective of members where an alteration is made for the purpose of expropriating or compulsorily acquiring a member’s shares. The Corporations Act allows certain compulsory acquisitions provided specified procedures are followed.

RULES GOVERNING INTERNAL MANAGEMENT

[13.05] Companies have considerable flexibility in deciding the rules that govern their internal administration. Typically, these rules deal with such matters as the powers of directors, meetings of directors and shareholders, rights of shareholders and the share transfer process. A company’s internal administration may be governed by replaceable rules contained in the Corporations Act or by a constitution or by a combination of both: s 134.

REPLACEABLE RULES

[13.10] The Corporations Act contains a set of rules, called “replaceable rules” that govern the internal administration and corporate governance of companies. The replaceable rules, located throughout the Corporations Act, apply to companies formed after July 1998 and those companies formed before that date which have repealed their constitutions: s 135(1)(a)(i) and (ii). As the name suggests, the rules are replaceable. A company may be formed with a constitution that replaces or modifies 300

Chapter 13 Constitution and replaceable rules [13.15]

any one or all of the replaceable rules: s 135(2). For example, in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 it was held that the replaceable rule contained in s 254U, which confers the usual discretion on directors to determine that a dividend is payable, did not apply as it had been replaced by a constitutional provision that made payment of a dividend to a particular shareholder mandatory. The replaceable rules do not apply to a company formed prior to 1998 which has retained its constitution. They apply to a pre-1998 company only if it has repealed its constitution and has not replaced it with another: s 135(1)(a)(ii). There is therefore no direct reference in the legislation to the position of a pre-1998 company which has repealed only part of its constitution. While it is not entirely clear, it would appear that in such a case the replaceable rules would not apply at all and the constitution of such a company would comprise the remaining provisions contained in its constitution (known as “articles of association” prior to 1998) and any gaps not so provided for are deemed to be governed by the provisions of the model articles of association in the former Table A which have not been displaced or excluded. The historical effect of Table A and its repeal are discussed at [13.35]. The heading of a section in the Corporations Act specifies whether that section is a replaceable rule. The headings of relevant replaceable rule sections also indicate the type of company to which a particular replaceable rule applies. Most replaceable rules apply to both public and proprietary companies. However, according to s 135, some replaceable rules apply only to proprietary companies. For example, the replaceable rule in s 194, which deals with proprietary company directors voting at board meetings on matters involving directors’ personal interests, is a proprietary company replaceable rule. Some sections are regarded as replaceable rules for proprietary companies but are mandatory rules for public companies as ordinary provisions of the Corporations Act. For example, s 249X, which deals with the appointment of proxies, is a replaceable rule for proprietary companies but mandatory for public companies. A mandatory rule applies despite anything to the contrary in the public company’s constitution. According to s 135(3), a failure to comply with applicable replaceable rules is not of itself a contravention of the Corporations Act. As a result, the provisions in the Corporations Act regarding criminal liability, civil liability and statutory injunctions do not apply to breaches of the replaceable rules. Consequently, a person affected by a contravention of a replaceable rule does not have standing to apply for a statutory injunction under s 1324 (see [17.305]–[17.325] (Lipton)) as this section only applies to contraventions of the Corporations Act. However an injunction may be sought on the basis of a breach of the statutory contract established by s 140: Smolarek v Liwszyc [2006] WASCA 50.

Table of replaceable rules

[13.15] Section 141 contains the following table which indicates the provisions of the Corporations Act that apply as replaceable rules. 301

[13.15] Corporations and Contract Law

Table 13.1: Provisions that apply as replaceable rules 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22A 23 24 25 26 27 28 29 30 31 32 33 33A 33B 34 35

302

OFFICERS AND EMPLOYEES Voting and completion of transactions directors of proprietary companies Powers of directors Negotiable instruments Managing director Company may appoint a director Directors may appoint other directors Appointment of managing directors Alternate directors Remuneration of directors Director may resign by giving written notice to company Removal by members proprietary company Termination of appointment of managing director Terms and conditions of office for secretaries INSPECTION OF BOOKS Company or directors may allow member to inspect books DIRECTORS’ MEETINGS Circulating resolutions of companies with more than 1 director Calling directors’ meetings Chairing directors’ meetings Quorum at directors’ meetings Passing of directors’ resolutions MEETINGS OF MEMBERS Calling of meetings of members by a director Notice to joint members When notice by post or fax is given When notice under paragraph 249J(3)(cb) is given Notice of adjourned meetings Quorum Chairing meetings of members Business at adjourned meetings Who can appoint a proxy [replaceable rule for proprietary companies only] Proxy vote valid even if member dies, revokes appointment etc How many votes a member has Jointly held shares Objections to right to vote How voting is carried out When and how polls must be taken SHARES Pre emption for existing shareholders on issue of shares in proprietary company Other provisions about paying dividends Dividend rights for shares in proprietary companies TRANSFER OF SHARES Transmission of shares on death

194 198A 198B 198C 201G 201H 201J 201K 202A 203A 203C 203F 204F 247D 248A 248C 248E 248F 248G 249C 249J(2) 249J(4) 249J(5) 249M 249T 249U 249W(2) 249X 250C(2) 250E 250F 250G 250J 250M 254D 254U 254W(2) 1072A

Chapter 13 Constitution and replaceable rules [13.30]

36 37 38 39

Transmission of shares on bankruptcy Transmission of shares on mental incapacity Registration of transfers Additional general discretion for directors of proprietary companies to refuse to register transfers

1072B 1072D 1072F 1072G

One-person proprietary companies

[13.20] A proprietary company with a single shareholder who is also the sole director does not need formal rules governing its internal administration. According to s 135(1), the replaceable rules do not apply to such companies. These companies also do not need a constitution. Instead of a constitution or replaceable rules, the Corporations Act has a number of basic rules that apply specifically to single director/shareholder proprietary companies. These include: • the business of the company is to be managed by or under the direction of the director who may also exercise all the powers of the company such as the power to issue shares, borrow money and issue debentures (s 198E(1)); • the director may execute a negotiable instrument (s 198E(2)); • the director may appoint another director by recording the appointment and signing the record (s 201F); and • the director is to be paid any remuneration for being a director that the company determines by resolution: s 202C. These rules apply only while the company is a single director/shareholder proprietary company. The replaceable rules become applicable as soon as the company issues shares to another person or appoints additional directors.

Companies limited by guarantee

[13.25] Many replaceable rules, such as those that deal with dividends or transfer and transmission of shares, are inappropriate for a company limited by guarantee. Consequently, the internal administration of these types of companies cannot be governed solely by the replaceable rules and such companies should have a constitution. While companies limited by guarantee ought to have a constitution, their internal rules may be governed by a combination of both the rules in their constitution as well as selected replaceable rules.

No liability companies

[13.30] The internal administration of a no liability company cannot be governed solely by the replaceable rules. Section 112(2) requires a no liability company to have a constitution that states that: • its sole objects are mining purposes; and 303

[13.30] Corporations and Contract Law

• the company has no contractual right to recover calls made on its shares from a shareholder who fails to pay them. While no liability companies must have a constitution, their internal rules may be governed by a combination of the rules in their constitution as well as selected replaceable rules.

Repeal of Tables A and B

[13.35] Prior to 1998, companies other than companies limited by guarantee were deemed to have adopted the regulations in Table A of Sch 1 of the pre-1998 legislation as their articles of association unless they were specifically excluded or modified by their own constitution. Table B of Sch 1 of the previous legislation comprised the equivalent provisions for no liability companies. The regulations in Tables A and B were repealed by 1998 amendments. Companies formed after 1998 are no longer deemed to have adopted the Table A or Table B articles as their default constitutions. However, if a pre-1998 company adopted Table A or B articles, those regulations still apply if it has not repealed its constitution. The replaceable rules have a number of advantages compared with the regulations in Table A. The replaceable rules are drafted in plain English and are easier to understand than equivalent Table A regulations which were drafted in the 19th century. Unlike the Table A regulations, the replaceable rules cater for the use of modern communications technology, such as teleconferencing and video-conferencing in directors’ and shareholders’ meetings: ss 248D and 249S. Table A did not cater for single director/shareholder proprietary companies and was therefore unsuitable for such companies which had to incur the additional expense of drafting their own constitutions. The regulations in Table A changed over time. A company that adopted Table A had the regulations that were in Table A of the company legislation applicable at the time of its formation. The replaceable rules, on the other hand, are those that are in the Corporations Act as amended from time to time. Consequently, a company does not have to change its internal regulations to keep up to date with changes in the Corporations Act.

THE COMPANY’S CONSTITUTION

[13.40] Prior to July 1998, all companies were required to have a constitution consisting of two documents — the memorandum of association and the articles of association. If a pre-1998 company has retained its memorandum and articles, these documents are still regarded as comprising the company’s constitution. Companies formed after July 1998 have a choice regarding the rules governing their internal administration. Under s 134 those rules may comprise a constitution 304

Chapter 13 Constitution and replaceable rules [13.50]

specially drafted to suit a company’s particular needs, or the replaceable rules in the Corporations Act or a combination of both. A constitution of a post-1998 company consists of a single document. The previous division of the constitution into two documents no longer applies. In particular, the requirement to have a memorandum of association has been abolished. Most of the information that previously was required to be contained in the memorandum is now set out in a company’s application for registration. This is discussed at [2.410] (Lipton).

Statutory requirements [13.45] ways:

Companies may adopt a constitution in any one of the following three

• a new company may adopt a constitution on registration if the persons named in the application for the company’s registration as having consented to become members, agree in writing to the terms of the constitution before the application is lodged (s 136(1)(a)); or • a company that is registered without a constitution may adopt one by passing a special resolution (s 136(1)(b)); or • a court order is made under s 233 (the oppression remedy, discussed at [17.15]–[17.280] (Lipton)) that requires the company to adopt a constitution: s 136(1)(b). Public companies that have a constitution are required to lodge a copy with ASIC. A copy of the constitution and relevant special resolutions must be lodged within 14 days of the company adopting or modifying the constitution: s 136(5). If a member makes a written request, a company must send a copy of its constitution to that member within seven days: s 139. In its October 1999 Report, Matters Arising from the Company Law Review Act 1998, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) recommended that proprietary companies should also be required to lodge a copy of their constitutions with ASIC. This recommendation has not been adopted.

Contents of constitution

[13.50] Except in the case of certain types of companies, the Corporations Act does not prescribe what information must be contained in a company’s constitution. Typically, a constitution sets out the rules governing matters such as the rights of members, the conduct of members’ and directors’ meetings, powers of directors and their appointment and remuneration. The replaceable rules listed at [13.15] serve as an indication of the type of rules that are usually contained in a company’s constitution. If a company limited by guarantee wishes to omit the word “Limited” in its name, s 150(1) provides that the company must be a registered charity as defined in s 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) and its constitution must: 305

[13.50] Corporations and Contract Law

• prohibit the company paying fees to its directors; and • require the directors to approve all other payments the company makes to directors. Section 112 requires the constitution of a no liability company to state that its sole objects are mining purposes and that the company has no contractual right to recover calls made on its shares from a shareholder who fails to pay them. Listed companies must have a constitution that is consistent with the ASX Listing Rules: ASX Listing Rule 15.11. For example, a listed company’s constitution must contain provisions that facilitate electronic share trading and the CHESS electronic settlement and transfer system that the ASX operates. This is discussed at [9.225] (Lipton). Other examples include provisions in a constitution that • the company has only one class of ordinary shares (ASX Listing Rule 6.2); and • shareholders have one vote per share on a poll: ASX Listing Rule 6.9.

Interpretation of constitution

[13.55] Constitutions are regarded by the courts as business documents. The courts interpret their provisions in a similar way to commercial contracts so as to give them a “business like interpretation”: Dome Resources NL v Silver [2008] NSWCA 322. In this case a provision in the constitution conferring a power on the directors was given as broad an interpretation as was reasonably available on the language of the provision so as not to impose procedural constraints on the directors. Courts are reluctant to imply further terms or permit evidence of an intention to depart from or add to the written provisions as this increases uncertainty and detracts from the entitlement of shareholders and others to rely on the written constitution as containing the full and complete constitution: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144. In this case it was held that a shareholder could not rely on pre-emptive rights contained in the company’s constitution to prevent a share buy-back from proceeding because the pre-emptive rights did not extend to share buy-backs. This was despite a clear statement in the constitution which prohibited any transfers of shares by shareholders and the registration of such transfers by the directors without compliance with the pre-emptive rights.

Objects clause

[13.60] A company’s constitution may contain an objects clause that identifies and restricts the businesses and activities in which the company may engage: s 125(2). Prior to 1984, all companies had to have an objects clause in their constitution. Since then, this requirement has been optional. Many companies formed after 1984 still choose to include objects in their constitutions. This is often because the company was formed for particular purposes and its members do not want the company to depart from these purposes. This is usually the case where a company is formed to carry out a joint venture or a social, cultural, charitable or non-commercial purpose. 306

Chapter 13 Constitution and replaceable rules [13.75]

While no longer compulsory, a statement of the company’s objects in its constitution may serve a useful function as it indicates to shareholders the nature of the business activities to which their funds will be devoted.

LEGAL CAPACITY AND POWERS OF A COMPANY

[13.65] Historically, companies were regarded as having limited legal capacity. They were once legally capable of engaging only in those businesses and activities specified in the objects clause of their constitutions. Amendments in 1983 significantly affected the rules dealing with the legal capacity of companies and companies now have the same legal capacity as a human being: s 124.

Section 124

[13.70] A company has the legal capacity and powers of an individual: s 124(1). This means that it is able to engage in any business or activity and may acquire and exercise rights in the same way as a natural person. Section 124(1) also gives a company certain powers that are not applicable to humans. It has all the powers of a body corporate, including the power to: • issue and cancel shares (this power does not apply to a company limited by guarantee); • issue debentures; • grant options over unissued shares in the company; • distribute any of the company’s property among members, in kind or otherwise; • grant a security interest in uncalled capital; • grant a circulating security interest over the company’s property; • arrange for the company to be registered or recognised as a body corporate in any place outside Australia; and • do anything that it is authorised to do by any other law (including the law of a foreign country). A company’s legal capacity to do something is not affected by the fact that the company’s interests are not served by doing a particular thing: s 124(2). This section aims to protect outsiders by enabling them to enforce contracts with a company even though the contract involved an abuse of power by the company’s directors or controlling shareholders.

Abolition of doctrine of ultra vires

[13.75] Historically, a company’s objects clause was regarded as the most important part of its memorandum of association — a key component of the constitution. Companies were once regarded as being capable of legally engaging only in those businesses and activities set out in the objects clause. Any company 307

[13.75] Corporations and Contract Law

contract or transaction that was not within the scope of one of its objects was referred to as “ultra vires”, or beyond the power of the company. The doctrine of ultra vires stated that such contracts or transactions were void and had no legal effect: Ashbury Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653. The doctrine of ultra vires operated together with the doctrine of “constructive notice”. This meant that people dealing with a company were regarded as being aware of a company’s objects merely because they were set out in its constitution, which was lodged with the registering authority and hence available for inspection by the public. The doctrine of constructive notice has been largely abolished by s 130. A person is not taken to have information about a company merely because the information is available to the public from ASIC. The original purpose of the doctrine of ultra vires was to protect a company’s shareholders and creditors. Shareholders were considered to have a right to expect that their capital would be used only for the objects specified in the company’s constitution. The doctrine aimed to protect creditors by ensuring that their loans to the company would only be used for its stated objects. Despite these purposes, a strict application of the ultra vires doctrine often resulted in the intention of the parties to a contract being thwarted by the application of a technical, unrealistic rule. It enabled both the company and the other contracting party to avoid an ultra vires contract. The doctrine of ultra vires has been abolished by the combined effect of ss 124 and 125. The doctrine could only have application to a company whose constitution contained an objects clause or other self-imposed restriction or prohibition on the exercise of its powers. The Corporations Act no longer requires a company to have an objects clause in its constitution. Indeed, as a result of 1998 amendments, a company does not even need a constitution as the replaceable rules may entirely govern its internal administration. All companies have the legal capacity and powers of an individual: s 124(1). If a company has an objects clause, s 125(2) provides that an act is not invalid merely because it is contrary to or beyond any of its objects. Further, if a company’s constitution contains an express restriction or prohibition on the exercise of any of its powers, the exercise of such a power is not invalid merely because it is contrary to such an express restriction or prohibition: s 125(1). In Hillig v Darkinjung [2006] NSWSC 594, Austin J drew a distinction between restrictions on the exercise of powers by a company and restrictions imposed on the company’s directors or members in a general meeting. In this case, a special majority vote was required under the constitution to remove directors. Several directors were removed without the requisite majority. It was held that the provision in the constitution was a restriction on the powers of the members in a general meeting and so s 125(1) did not apply to validate the removal of the directors because this concerned the internal rules of the company. Section 125(1) only operates in the context of the abolition of the ultra vires doctrine in relation to dealings between a company and outsiders. 308

Chapter 13 Constitution and replaceable rules [13.80]

Contraventions of a company’s constitution may have other consequences even though they cannot affect the validity of the company’s contracts. Allegations that a company acted contrary to its objects or other restrictions or prohibitions in the company’s constitution may be an element in a legal action against the company’s directors for breach of duty. A failure to comply with the constitution may also be contrary to the interests of members as a whole or oppressive and allow a member to seek a remedy under s 233: see [17.15] (Lipton). It may also allow a member to obtain an order for the winding up of the company on a just and equitable ground: s 461(1)(k); see [17.360] (Lipton).

EFFECT OF CONSTITUTION AND REPLACEABLE RULES Contractual effect

[13.80] Section 140(1) provides that a company’s constitution (if any) and any replaceable rules that apply to a company have effect as a contract between: • the company and each member (s 140(1)(a)); and • the company and each director and company secretary (s 140(1)(b)); and • a member and each other member (s 140(1)(c)); under which each person agrees to observe and perform the constitution and rules as far as they apply to that person. The s 140(1) statutory contracts have certain features that depart from ordinary principles of contract law. The construction of contracts generally takes into account the understanding of what a reasonable person would have taken the contract to mean. This may require consideration of the surrounding circumstances and a determination of the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451. The construction of a company constitution involves less consideration of surrounding circumstances because outsiders are more reliant on the written document and will often have no knowledge of the surrounding circumstances: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144. Ordinarily, contracts cannot be altered without the consent of all the parties. This is not the case with the s 140(1) contracts. A company may modify or repeal its constitution, or a provision of its constitution, by special resolution: s 136(2). This means that the terms of the s 140(1)(a) and (c) contracts are alterable and the alteration will bind even those members who voted against the modification. Similarly, the terms of the s 140(1)(b) contract can be altered by a special resolution of members and the alteration will bind the company’s directors and secretary: NRMA Ltd v Snodgrass [2001] NSWSC 76. The main purpose of s 140 is to provide a way for the parties to the statutory contracts to enforce compliance with a company’s constitution (if any) and any replaceable rules that apply. For example, shareholders can assert a breach of the 309

[13.80] Corporations and Contract Law

s 140(1)(a) contract if a company does not comply with provisions in its constitution that apply to shareholders. While damages are the usual remedy sought for breach of contract, this is not the case with the s 140(1) contracts. The appropriate remedy is a court injunction or declaration to enforce compliance with the constitution or applicable replaceable rules. The contractual rights under s 140(1) do not apply to by-laws made under a power conferred by the constitution: Wilcox v Kogarah Golf Club Ltd (1996) 14 ACLC 415. By-laws are detailed rules by which particular constitutional powers are implemented but do not have the same status under s 140(1) as the company’s constitution.

Contract between company and members

[13.85] Section 140(1)(a) provides that a company’s constitution (if any) and any applicable replaceable rules have effect as a contract between the company and each member. One consequence of this is that the company can take action against its members to force them to comply with the provisions in the constitution or applicable replaceable rules where they are unwilling to do so voluntarily. This was the situation in Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881.

Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881

[13.90] Hickman was a member of the Kent or Romney Marsh Sheep-Breeders’ Association, an incorporated non-profit-making company. He began a court action complaining of various irregularities in the affairs of the association. Clause 49 of the association’s constitution, however, provided that disputes between it and its members should be referred to arbitration. Relying on this clause, the association sought to prevent Hickman’s court case from proceeding. The court upheld the association’s case and stayed Hickman’s court case. Astbury J held that by virtue of the statutory contract in the English equivalent of s 140(1)(a) of the Corporations Act, cl 49 was binding on Hickman and he was therefore obliged to refer his disputes to arbitration.

Enforcement of constitution by members

[13.95] While Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881 illustrates the situation where a company enforces provisions in its constitution against a member, s 140(1)(a) also has contractual effect on the company so that a member is able to force the company to comply with the provisions of its constitution.

310

Chapter 13 Constitution and replaceable rules [13.100]

Only those provisions in a constitution or replaceable rules that confer rights on members in their capacity as members are enforceable as a contract. This is discussed at [13.100]–[13.110]. The replaceable rule in s 250E is an example of a rule that applies to members. According to s 250E(1), at a meeting of members of a company with a share capital, each shareholder has one vote on a show of hands, and on a poll, one vote for each share they hold. Members have the right to enforce provisions in a constitution that give them the right to have their votes counted at a general meeting: Pender v Lushington (1877) 6 Ch D 70. Similarly, they have the right to enforce payment of a declared dividend: Wood v Odessa Waterworks Co (1889) 42 Ch D 636. Section 1322(2) reinforces this right of members to enforce the constitution. It enables the court to invalidate a procedural irregularity that causes substantial injustice. In Chew Investment Australia Pty Ltd v General Corp of Australia Ltd (1988) 6 ACLC 87, it was held that a rejection of a valid demand for a poll constituted appropriate circumstances to invalidate resolutions passed at the meeting under the predecessor of s 1322(2). This power of the court is discussed in Chapter 14 (Lipton). In Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455, it was held that a shareholder was bound by a provision in the company’s constitution which allowed the directors to require a member to dispose of shares in circumstances where the company’s business was endangered.

Outside capacity

[13.100] In Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] 1 Ch 881 it was held that members may enforce only those provisions that confer rights on members in their capacity as members. Section 140(1) expresses this limitation when it says that the persons referred to in s 140(1)(a), (b) and (c) agree to observe and perform the constitution and rules so far as they apply to that person. Members cannot enforce provisions in the constitution that purport to give them rights in some other capacity than that of a member, such as a solicitor or promoter.

311

[13.105] Corporations and Contract Law

Eley v Positive Government Security Life Assurance Co Eley v Positive Government Security Life Assurance Co (1875) 1 Ex D 20 [13.105]

The company’s constitution, drafted by Eley, provided that he was to be its permanent solicitor and could only be dismissed for misconduct. He acted as solicitor for some time, though no separate employment contract was entered into. Eley also received an allotment of shares in consideration of the work he did in forming the company. Subsequently, the company ceased to employ him. Eley brought an action for breach of contract against the company but failed. It was held that the constitution conferred no rights on a member where the member seeks to enforce a right in a capacity other than as a member. Eley was seeking to assert a right in his capacity as solicitor of the company. In order to do so, he should have entered into a separate contract independent of the constitution.

[13.110] Section 232, discussed at [17.15]–[17.280] (Lipton), enables members to enforce rights where the constitution or applicable replaceable rules have been breached even though the member may be affected in an outside capacity. Under that provision, a member need only show that the breach is contrary to the interests of members as a whole, or is oppressive or unfair, in order to gain a remedy under that section.

Non-members

[13.115] A constitution does not have the effect of an enforceable contract between a company and non-members even if the constitution purports to give them rights.

Forbes v New South Wales Trotting Club Ltd Forbes v New South Wales Trotting Club Ltd [1977] 2 NSWLR 515 [13.120]

A committee of the New South Wales Trotting Club decided to exclude Forbes, a professional punter, from admission to the racetracks controlled by the club. Forbes tried to overturn this exclusion on the basis that in making its decision the committee did not comply with procedures in the company’s constitution for exclusion. The court held, however, that Forbes had no case on this ground. He could not force the Club to comply with its constitution, as he was not a member of the New South Wales Trotting Club Ltd. The only rights Forbes had were that of a spectator.

312

Chapter 13 Constitution and replaceable rules [13.130]

Contract between members

[13.125] Section 140(1)(c) provides that the constitution and applicable replaceable rules have effect as a contract between a member and each other member. The s 140(1)(c) contract applies where a company’s constitution contains a pre-emption or pre-emptive rights provision. Such provisions give shareholders rights of first refusal to buy other shareholders’ shares or to sell their own shares to the remaining shareholders. Registration of transfers of shares that breach a pre-emption provision are generally void and the register may be corrected under s 175: Carew-Reid v Public Trustee (1996) 14 ACLC 1106. Section 1322(4)(a) allows a court in certain circumstances to validate an act, matter or thing that contravenes the constitution of a company. The court can only make such an order if the act, matter or thing is essentially of a procedural nature, the persons concerned in, or party to, the contravention acted honestly, or it is just and equitable that the order be made. The order must not cause, or be likely to cause, substantial injustice. In the matter of QBiotics Ltd [2016] FCA 873 a large number of share transfers over a period of six years contravened a pre-emptive rights provision in a company’s constitution. The constitution provided that any purported transfer of shares in contravention of the pre-emptive rights provision would be ineffective and invalid. The company sought a court order validating the share transfers despite the contravention of the constitution. It was held that the contravention was inadvertent and the board was not attempting to dishonestly deprive the shareholders of their rights. In these circumstances it was just and equitable to validate the share transfers to fulfil the expectations of the parties and to provide certainty as to the accuracy of the share register. In the absence of any complaints from shareholders, no substantial injustice would be caused if the validating order was made

Re Caratti Holding Co Pty Ltd Re Caratti Holding Co Pty Ltd [1975] 1 ACLR 87

[13.130] One of the clauses in the company’s constitution empowered the majority shareholder to compulsorily acquire the shares of a minority shareholder. The Supreme Court of Western Australia held that there was a contractual right under the predecessor of s 140(1)(c) to enforce the compulsory acquisition. Further, that clause could be enforced against the minority shareholder by either the company or the majority shareholder himself. The compulsory acquisition, however, was ultimately disallowed for other reasons, including that it was oppressive. Oppression under s 232 is discussed at [17.15]–[17.280] (Lipton).

313

[13.132] Corporations and Contract Law

Gibbins Investments Pty Ltd v Savage Gibbins Investments Pty Ltd v Savage [2011] FCA 527 [13.132]

The constitution of a company contained a pre-emption clause that imposed conditions on members’ rights to transfer their shares. The constitution provided that all the members could by written agreement waive compliance with the pre-emption clause. The members made an informal unwritten agreement to allow a transfer of shares in a manner that was inconsistent with the pre-emption clause. Subsequently, an attempted transfer of shares was challenged successfully because the informal agreement did not constitute a written agreement to waive compliance with the pre-emption clause.

[13.135] The proprietary company replaceable rule in s 254D contains another type of pre-emption clause. It gives pre-emption rights to existing shareholders on the issue of additional shares. Under s 254D(1), before issuing shares of a particular class, the directors of a proprietary company must offer them to existing holders of shares of that class. As far as practicable, the number of shares offered to each shareholder must be in proportion to the number of shares of that class that they already hold. Non-compliance with s 254D would be a breach of the s 140(1)(a) contract and not the s 140(1)(c) contract because the shares are issued by directors on the company’s behalf. As is the case with the s 140(1)(a) contract, only those provisions in the constitution (if any) or applicable replaceable rules that apply to members in their capacity as members have effect as a contract and are hence enforceable by them. Some disputes between members, even if related to their respective obligations as members, may fall outside s 140.

Andy Kala Pty Ltd v E J Doherty (Northcote) Pty Ltd Andy Kala Pty Ltd v E J Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630 [13.140]

A dispute between members of a professional body relating to unethical poaching of clients did not come within s 140(1)(c) so as to create a legally enforceable agreement constituted by the constitution of the professional body. The dispute did not involve issues concerning the nature or incidence of the members’ relationships.

314

Chapter 13 Constitution and replaceable rules [13.155]

Contract between the company and its directors and secretary

[13.145] Section 140(1)(b) provides that a company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract between the company and each director and company secretary. As is the case with the s 140(1)(a) and (c) contracts, not every replaceable rule or provision in a company’s constitution has effect as a contract between the company and its directors and secretary. Only those provisions in a company’s constitution that apply to such officers have effect as a contract under s 140(1)(b). The replaceable rules in ss 198A, 201G, 201H and 202A dealing with the appointment, powers and remuneration of directors are examples of rules that apply to directors and therefore have effect as a contract under s 140(1)(b). Similarly, the s 204F replaceable rule applies to a company secretary and therefore has effect as a contract between the company and the secretary.

Directors’ contracts of service

[13.150] It is quite common for directors to enter into separate contracts of service that are independent of the company’s constitution and applicable rules. Such contracts are most frequently made when a managing director or executive director is appointed. If the constitution contains provision for the appointment of a specified person as a director for a nominated period, this has the effect of a contract between the company and that director under s 140(1)(b). However, a company cannot be prevented from altering its constitution or displacing applicable replaceable rules as long as the correct procedure for alteration is followed. The shareholders at general meeting may therefore pass a special resolution removing the provision appointing the director and the director will be unable to enforce his or her appointment under the constitution. There will be a breach enforceable by the director if the company purported to terminate the appointment and the correct removal procedures were not followed. If the constitution does not adequately provide a procedure for removal, the members can resolve to alter the constitution under s 136(2) to allow for removal without exposing the company to liability for wrongful dismissal.

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 [13.155]

The company’s constitution contained a provision that appointed a person director for life. Certain grounds for removal were specified. The company altered its constitution to add an additional ground for removal, enabling a director

315

[13.155] Corporations and Contract Law Shuttleworth v Cox Bros & Co (Maidenhead) Ltd cont. to be removed upon a written request signed by all other directors. Such a request was signed and the director dismissed. The court rejected the argument that the clause in the constitution appointing the director created a contract that could not be varied without his consent. The court held that the clause appointing him as a director for life was subject to the statutory power given to companies to alter their constitution. In this case, the director had no separate contract independent of the constitution.

[13.160] It is usual for executive and other paid directors to enter into separate contracts with the company. In such cases the company cannot avoid its contractual obligations under the separate contract by altering its constitution: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656. Sections 203C and 203D confirm that while a company has the power to remove a director, this does not deprive the director of any rights to compensation or damages. A difficult question of construction arises if the constitution and service agreement are expressed to be subject to one another.

Carrier Australasia Ltd v Hunt Carrier Australasia Ltd v Hunt (1939) 61 CLR 534 [13.165]

Hunt was appointed under a service agreement to act as the company’s managing director for five years. The agreement provided that his appointment could be terminated if he ceased to be a director of the company. Further, the agreement was stated to be subject to the company’s articles of association. One of the articles, on the other hand, provided: Subject to the provisions of any agreement for the time being subsisting the company may by extraordinary resolution remove any director before the expiration of his period of office.

After differences arose between Hunt and the company, it amended the above article by deleting the reference to any subsisting agreement. The company then removed Hunt from the office of director and terminated the service agreement. When he sued for wrongful dismissal, the Supreme Court of New South Wales held that the company had the power to alter its articles. Nevertheless, it was liable for damages for breach of contract. When the case went on appeal, the High Court was evenly divided and consequently the decision of the Supreme Court stood. Evatt and McTiernan JJ arrived at the same decision as the Supreme Court, holding the company liable in damages because it could not avoid contractual liability on the service agreement by altering its articles. Rich and Starke JJ, however, held that as the service agreement was subject to the articles, the company had the power to alter them and Hunt had no right to damages for breach of contract.

316

Chapter 13 Constitution and replaceable rules [13.175]

Remedies

[13.170] One issue that arises concerns the appropriate remedy that can be obtained if the company breaches an employment contract constituted by a replaceable rule such as s 201G or a provision in the constitution. Ordinarily, an injunction or declaration is the appropriate remedy where the complaint involves breach of either the s 140(1)(a) or (c) contract. This is because the member seeks to have the constitution or replaceable rule observed. However, the equitable remedies of injunction and specific performance are not generally granted to enforce employment contracts on unwilling parties. If this is true under s 140(1)(b), it means that directors cannot prevent the company from terminating their appointment but can only obtain damages for wrongful dismissal. In Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701, Lord Porter stated: A company cannot be precluded from altering its articles thereby giving itself power to act upon the provisions of the altered articles — but so to act may nevertheless be a breach of contract if it is contrary to a stipulation in a contract validly made before the alteration. Nor can an injunction be granted to prevent the adoption of the new articles, and in that sense they are binding on all and sundry, but for the company to act upon them will nevertheless render it liable in damages if such action is contrary to the previous engagements of the company.

ALTERATION OF CONSTITUTION AND REPLACEABLE RULES Statutory requirements

[13.175] Shareholder approval is required to alter a constitution or displace a replaceable rule. A company may displace or modify any one or more of the replaceable rules that applies to it by adopting a constitution: s 135(2). A company adopts a constitution if it passes a special resolution to that effect: s 136(1)(b). A special resolution is also required to modify or repeal a constitution or a provision of a constitution: s 136(2). It was held in Re Peninsula Kingswood Country Golf Club [2014] VSC 437 that an ordinary resolution directing the board of directors to act in contravention of the constitution was invalid as the constitution must be complied with and can only be altered by special resolution. If the entire constitution is repealed, the company’s internal management is then governed by the replaceable rules. Section 9 defines a “special resolution” as a resolution passed by at least 75 per cent of the votes cast by members entitled to vote on the resolution. In addition, s 249L(1)(c) requires the notice of the meeting at which a special resolution is proposed to set out an intention to propose the special resolution and state the resolution. Unless a different date is specified, a special resolution adopting, modifying or repealing a company’s constitution takes effect on the date the resolution is passed: 317

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s 137(a). There are different dates of effect of special resolutions to change a constitution that involve a change of name (s 157(3)), a change of company type (s 164(5)), or a variation or cancellation of class rights: s 246D. Section 136(5) requires a public company to lodge with ASIC a copy of a special resolution adopting, modifying or repealing its constitution within 14 days after it is passed. In addition, if a special resolution of a public company: • displaces a replaceable rule with a constitution, it must also lodge a copy of the constitution with ASIC within that period; or • modifies its constitution, it must also lodge a copy of that modification with ASIC within that period. ASIC may direct a company to lodge a consolidated copy of its constitution: s 138. This ensures that ASIC’s database contains a complete and up-to-date constitution and enhances comprehension of a constitution where there have been numerous changes.

Limits on right to alter constitution

[13.180] As discussed at [4.185] (Lipton), shareholders have the power to alter the replaceable rules and their company’s constitution by passing a special resolution to that effect. This means that s 140(1) contracts can be altered and the change will be binding on all members even if they opposed the special resolution. While members can generally vote to alter the replaceable rules and the constitution in any way they see fit, their power to do so is not unlimited. Both the Corporations Act and the common law impose certain limits and restrictions that seek to protect individual members and ensure that the shareholders who voted in favour of the special resolution do not abuse their powers.

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CHAPTER 14

The company’s relations with outsiders Introduction ................................................................................................... [14.05] The directing mind and will of a company .................................................. [14.10] Organic theory ......................................................................................... [14.10] Who is the directing mind and will? ....................................................... [14.25] Contracts with the company ........................................................................ [14.90] Execution of documents .......................................................................... [14.95] Contracts made by agents .................................................................... [14.135] Authority of the company’s agents ....................................................... [14.150] The statutory assumptions: s 129 ........................................................ [14.220] Customary authority of officers ............................................................. [14.310] Limitations to the statutory assumptions: s 128(4) .............................. [14.345] The effect of fraud or forgery ............................................................... [14.360]

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Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 5. Key points • Since a company is regarded as a legal entity separate and distinct from its members and directors it can only be represented by, or act through, individuals, either by application of the organic theory or the law of agency. • A company is comprised of two organs: the general meeting of shareholders and the board of directors. The organic theory holds that the acts of these organs that are authorised by the company’s constitution or applicable replaceable rules are acts of the company itself. • The organic theory also identifies individuals who are the “directing mind and will of the company”. Such persons are the “brains” of the company and have the power to act independently with full discretion to make decisions without relying on instructions from superiors. The acts, knowledge or intentions of persons who represent the directing mind and will of the company are attributed to the company itself. • Companies can enter into contracts only through the intervention of individuals. In some cases the company enters into a contract directly such as where its common seal is affixed to a document, but usually companies contract via an agent acting with the company’s authority who makes contracts on the company’s behalf. • Whether a company is bound by a contract made on its behalf is determined by the law of agency and the Corporations Act assumptions of regularity. • Under the Corporations Act, a person who has dealings with a company is entitled to rely on one or more of seven assumptions of regularity of the dealings and the company is not permitted to assert that the assumptions are incorrect. • A person who has dealings with a company cannot rely on an assumption if that person either knew or suspected that the assumption was incorrect.

INTRODUCTION

[14.05] In Chapter 11 we saw that one of the effects of registration is the creation of a legal entity separate and distinct from its members: see [11.35]. Because of the abstract nature of the corporate personality, a company can only be represented by, or act through, individuals. This creates conceptual difficulties in the context of the company’s relationships with outsiders. In some situations, the law must determine the company’s state of mind. This is particularly important in determining a company’s liability for a criminal offence. A successful prosecution for most serious criminal offences requires proof of criminal 320

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intent or mens rea. While a company cannot be imprisoned, it can be fined. How then, does one establish the necessary mens rea or criminal intent of a company? Companies are usually formed to carry on business ventures. This inevitably requires the company to enter into contracts with outsiders. The question then arises as to which individuals are capable of entering into contracts for the company? The question of authority may arise in two types of situations. The first involves the “organic theory” where the company contracts directly in its own name. The second and more usual means arises where an agent acts for the company. This involves the application of the principles of the law of agency. We see at [15.55], that a company comprises two constituent parts or organs: the board of directors and the general meeting of members. Typically, wide powers of management are conferred on the board of directors. Accordingly, under the organic theory, when the board exercises those powers, its acts are regarded as the acts of the company. In other instances, the acts of the members in general meeting are regarded as the acts of the company. Sometimes, the board of directors delegates some of its powers to particular individuals, such as the managing director or other senior officers and their acts may also be acts of the company.The organic theory seeks to attribute to the company the actions, state of mind, knowledge or purposes of its senior officers. In practice, outsiders rarely deal directly with the board of directors or the members in general meeting. More frequently, their relationship with the company involves dealings with its agents or employees. Companies are capable of being bound by the acts of their agents in the same way as natural persons: s 126. This involves the application of the principles of agency law, in particular the question arises whether those who purport to act on the company’s behalf have the authority to do so. Agency law has several distinct features in its application to companies.

THE DIRECTING MIND AND WILL OF A COMPANY Organic theory

[14.10] As is the case with any principal, a company can act through its agents provided they have the requisite authority. Where agents have actual or apparent authority, those actions within the scope of their authority bind the company. However, the organs of a company — its board of directors and the members in general meeting — are more than mere agents. When they act within the ambit of the powers conferred on them by the company’s constitution or replaceable rules, they are treated as acting as the company itself. This is the “organic theory” of corporate personality. The acts of the organs of a company are the acts of the company itself and their state of mind is the state of mind of the company. The organ is regarded as the directing mind and will of the company: its ego. The organic theory is an extension of the law of agency. The person who has actual or apparent authority in some cases may be regarded as not only acting as an agent of 321

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the company but acting as the company itself. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146, Dawson J stated: The organic theory, which was originated by Lord Haldane LC in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713-714 … has been used to impose liability upon companies beyond that which could be imposed by the application of the principles of agency alone. It is an approach which has been particularly useful in criminal cases where the liability of a company has depended upon a mental element … But the organic theory merely extends the scope of an agent’s capacity to bind a company and there must first be authority, actual or apparent. It is only then that a person may be regarded not only as the agent of a company, but also as the company itself — an organic part of it — so that “the state of mind of [the agent] is the state of mind of the company”: HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd at 172 per Denning LJ.

The organic theory is a legal fiction that allows the company to be identified with the individuals who control it. This is not always applicable. According to the High Court in Smorgon v Australia and New Zealand Banking Group Ltd (1976) 134 CLR 475, the organic theory can only be applied “in areas in which the ends of justice have been thought to require the attribution of mental states to corporations”.

Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 [14.15]

The expression “directing mind and will of the company” stems from the judgment of Viscount Haldane LC in this case. Lennard’s Carrying Co Ltd owned a ship. Lennard was the active director of the company and took an active role in the management of the ship. The ship carried oil owned by Asiatic Petroleum and, because it was in an unseaworthy state, it caught fire and its cargo was destroyed. Under s 502 of the Merchant Shipping Act 1894, the owner of a British ship was not liable for “any loss or damage happening without his actual fault or privity”. The company sought to avoid liability to Asiatic Petroleum under this provision, claiming that the loss arose not from its default but rather the default of Lennard himself. The House of Lords rejected this argument and held that Lennard’s default was attributed to the company and hence it could not rely on s 502 of the Act. Viscount Haldane LC described Lennard’s position with the company in the following terms: A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority coordinate with the board of directors given to him under the articles of association, and is appointed by

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Chapter 14 The company’s relations with outsiders [14.30] Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd cont. the general meeting of the company, and can only be removed by the general meeting of the company … For if Mr Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of s 502.

Meridian Global Funds Management Asia Ltd v Securities Commission Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3245 [14.20]

The Privy Council considered whether the knowledge of a company’s chief investment officer was to be attributed to the company. Lord Hoffmann stated that the emphasis in determining this question was on the purpose of the attribution. In this case, the company’s chief investment officer caused the company to contravene the New Zealand substantial shareholder provisions and concealed this from the company’s directors. It was held that because he had authority to enter into share transactions, his knowledge of the breach was attributed to the company. The Privy Council considered that this decision was in accordance with the policy of the legislation, as otherwise a company could claim lack of knowledge as a result of its failure to properly monitor its officers and employees. By attributing the directing mind and will of individuals to companies, the courts, in effect, lift the corporate veil to examine who is behind the company.

Who is the directing mind and will?

[14.25] Whether a particular person represents the directing mind and will of a company depends on the circumstances.

The “brains” of the company

[14.30] In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159, Denning LJ drew an analogy between a company and parts of a human body. In that case one of the issues raised was whether a company could be said to have formed an intention to occupy certain premises for its own business. The intentions of the general meeting or the board of directors could not be attributed to the company in this case as these organs had not formally met to consider the question. The company’s business was, however, managed by various directors. The court held that their intention was in fact the intention of the company. Denning LJ explained: A company may in many ways be likened to a human being. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in 323

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accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such … So here the intention of the company can be derived from the intention of its offıcers and agents. Whether their intention is the company’s intention depends on the nature of the matter under consideration, the relative position of the offıcer or agent and the other relevant facts and circumstances of the case.

Directors and senior management

[14.35] Directors and senior managers may be regarded as the directing mind and will of the company and their knowledge may be attributed to the company.

In the Matter of HIH Insurance Ltd In the Matter of HIH Insurance Ltd [2016] NSWSC 482 [14.36]

The financial results of HIH, a holding company that went into liquidation, contained misleading and deceptive representations in that certain reinsurance arrangements were wrongly accounted for and consequently the group operating profits were overstated. This constituted a contravention of s 1041H which is discussed at [19.190]–[19.220] (Lipton). Shareholders who suffered loss as a result of this contravention brought an action against two HIH subsidiaries which were both parties to the reinsurance arrangements and wrongly accounted for the reinsurance arrangements in their financial statements. The financial statements of the subsidiaries were incorporated into the consolidated accounts of HIH. In order to be liable as accessories it was necessary to show that the subsidiaries were involved in the contravention in that they participated in, assisted or encouraged the contravention and they had actual knowledge of the essential matters that constituted the contravention. It was held that the knowledge of a corporation can be established by the knowledge of a director, employee or agent acting within their actual or apparent authority. The directors of the subsidiaries, who were also the chief executive officer and chief financial officer of HIH, authorised and released the subsidiaries’ financial statements with the knowledge that they would be reflected in the consolidated accounts of HIH and that by doing so, the HIH accounts would be made misleading. This knowledge of the directors was imputed to the subsidiaries who were taken to have been knowingly concerned in or party to the contraventions of s 1041H and liable as persons involved in the contraventions.

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Chapter 14 The company’s relations with outsiders [14.40]

Tesco Supermarkets Ltd v Nattrass Tesco Supermarkets Ltd v Nattrass [1972] AC 153 [14.40]

The House of Lords indicated that the directing mind can be employees of the company to whom managerial powers have been delegated. However, only those managers who are entrusted with a significant degree of freedom from supervision of higher authority are so regarded.

In that case the company owned a chain of supermarkets. At one store, a large advertisement was displayed stating that a particular item was on sale at a reduced price. When the reduced-price items had all been sold, a shop assistant put out on display the same items marked at the normal, higher price. This was not reported to the store manager and the advertisement remained in the window. On the following day, a customer saw the advertisement and tried to buy the item at the reduced price. He was informed that there were none available at the reduced price, so he paid the normal price. The company was prosecuted for breaching the English equivalent of s 151(1)(i) of the Australian Consumer Law, which prohibits the making of false or misleading statements with respect to the price of goods. Under the English legislation the company had a defence and would therefore avoid criminal liability if it could show that: • •

the commission of the offence was due to the act or default of another person; and

it had taken all reasonable precautions and exercised all due diligence to avoid the commission of the offence.

The main issue in the case was whether the store manager was “another person” for purposes of the defence. The prosecution argued that the store manager was not. It asserted that in relation to pricing, the store manager was the directing mind of the company.

The House of Lords held that the store manager did not have the necessary responsibility or control of the company’s operations to be identified as the controlling mind and will of the company. For this reason the company was not liable for the act or default of one of its subordinate managers after it had done all it could to implement a proper system. Lord Reid said:

Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference that they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope

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[14.40] Corporations and Contract Law Tesco Supermarkets Ltd v Nattrass cont. of the delegation he can act as the company. It may not always be easy to draw the line but there are cases in which the line must be drawn. Lennard’s case was one of them.

[14.45] Tesco Supermarkets Ltd v Nattrass [1972] AC 153 has been criticised because it takes a narrow approach in imposing criminal liability on companies. The Criminal Code, discussed at [5.90] (Lipton), seeks to impose greater responsibility on companies by attributing criminal liability where a company authorises or permits the commission of an offence. This may occur where the corporate culture led to the non-compliance with a particular statutory provision rather than having to attribute the requisite mind and will of an officer or someone in senior management to the company.

Company secretary

[14.50] In some instances the company secretary may be regarded as an organ of the company so that any acts of the secretary are regarded as acts of the company. A secretary is so regarded when acting in relation to the company’s day-to-day affairs and administration. The customary authority of a company secretary is discussed at [14.330]–[14.340].

Change in control

[14.60] In some instances, where control of the company changes, the company may be taken to have changed its mind and adopted the intention and purpose of its new controllers.

Federal Commissioner of Taxation v Whitfords Beach Pty Ltd Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 [14.65] A company was formed to acquire land for the recreational purposes of

its shareholders. Several years later the company was taken over by developers who arranged for the company to develop and sell the land. Tax was assessed on the profits from the sale of the land. The High Court upheld the assessment on the basis that what was done constituted the carrying on of business and hence the proceeds should be included in the company’s assessable income. In arriving at that conclusion, the court considered that it was relevant to consider the purposes of the actions of the company. These purposes changed when the company engaged in commercial activities because the purpose of a company is determined by the purpose of those who control it. The controllers represented the directing

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Chapter 14 The company’s relations with outsiders [14.75] Federal Commissioner of Taxation v Whitfords Beach Pty Ltd cont. mind and will of the company and their state of mind was the state of mind of the company.

The mind and will of more than one person

[14.70] Ascertaining who is the directing mind and will of a large corporation is generally more difficult than in the case of a company with few directors and shareholders. In large corporations, control of the company’s business is typically delegated to a large number of executives and managers in an organisational hierarchy. The actions and intentions of senior management are relevant to determining the state of mind of a corporation and more than one person may be regarded as its directing mind and will.

Brambles Holdings Ltd v Carey Brambles Holdings Ltd v Carey (1976) 15 SASR 270 [14.75]

The company was engaged in a carrying business. Responsibility for ensuring that the company’s vehicles complied with the relevant legislation had been delegated to three employees: the company’s main driver, the heavy haulage supervisor and the operations manager. The company was charged with offences relating to the maximum loads of its vehicles. These offences occurred when the main driver was on sick leave and replaced by another who had not been properly instructed by the operations manager.

The company raised the defence of honest and reasonable mistake. It claimed that it had reasonable grounds for believing that its vehicles had not breached the relevant legislation. This was based on evidence that its heavy haulage supervisor honestly believed the vehicles were correctly loaded. On the other hand, the company’s operations manager knew, or ought to have known, that proper loading instructions had not been given to the drivers. The issue was therefore whose knowledge and belief could be attributed to the company. The court upheld the convictions and decided that in the circumstances, the operations manager was the directing mind of the company. Bray CJ stated: … in my view, it is a fallacy to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer alone and that the corporation can never know or believe more than that one man knows or believes. This cannot be so when it is a case of successive holders of the office in question or of the holder of the office and his deputy or substitute during his absence.

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Aggregated knowledge

[14.80] In some situations separate pieces of information known by several people can be aggregated and attributed to their company even though no one person knew all the various pieces of information. In Brambles Holdings Ltd v Carey (1976) 15 SASR 270, Bray CJ said: Let us suppose that a piece of information, x, is conveyed to one offıcer of the company, A. Then A goes on holidays and B takes his place and a further piece of information, y, is communicated to him. It is a fallacy to say that the company does not know both x and y because A only knows x and B only knows y. As a matter of fact, it may well be B’s duty when he is told about y to find out about x … I hasten to add that although I think a corporation has in a proper case the combined knowledge or belief possessed by more than one of its offıcers, that does not mean that it can know or believe two contradictory things at once. It is rational belief, not schizophrenia, which is to be attributed to it.

The knowledge of various company officers may not be aggregated where information has not been communicated to a company officer in the normal way. It may become important to ascertain precisely when the information is communicated within the company so that the company is taken to possess knowledge of the aggregated information.

Re Chisum Services Pty Ltd Re Chisum Services Pty Ltd (1982) 1 ACLC 292 [14.85]

One of the issues was whether a bank had reason to suspect that a customer was insolvent at the time the customer repaid a bank loan. At the time of the payment the bank’s branch manager was unaware of information published in Dun’s Gazette that a petition to wind up the company had been presented. The branch manager was aware the company was experiencing financial difficulties but did not believe it was insolvent. However, the Dun’s Gazette had been received by and noted by officers at the bank’s head office. While they were unaware of the company’s financial straits, the liquidator argued that the knowledge and beliefs of the branch manager and the officers at the head office could be combined and together indicated that the bank had the necessary suspicions. Separately, these pieces of information would not necessarily have amounted to a suspicion of insolvency. The court held that there was no “super mind” identified with the legal personality of the bank that would allow the knowledge of its various officers to be aggregated for the purpose of ascertaining its state of mind. In a large company, like a bank, the proper approach was to follow the established lines of communication in order to ascertain when, and in what manner, information would in the normal course be disseminated to its various officers and thus be attributed to the company. If head office had information that it was required to communicate to its branches, the bank could only be said to be aware of it when,

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Chapter 14 The company’s relations with outsiders [14.90] Re Chisum Services Pty Ltd cont. in the normal course of events, the information would have been received by the branch.

CONTRACTS WITH THE COMPANY

[14.90] A company, being an abstract entity, can enter into contracts only through the acts of humans such as the company’s officers or employees. At common law, a company could only contract directly by affixing its common seal to a contract in accordance with its constitution. While entering a contract in this way still occurs, s 123(1) provides that it is now optional for a company to have a common seal and under s 126(1), a company’s power to make a contract may be exercised by an individual acting with the company’s express or implied authority and on its behalf. This power may be exercised without using a common seal. The rules of agency law are applicable in cases where an agent acts on behalf of a company. However, because of the nature of companies, the law of agency has particular rules to take into account some specific problems that may arise in this context. At common law, contracts made by an agent could only bind the company as principal if they were within the objects of the company as stated in its constitution. Contracts outside the scope of the company’s objects are ultra vires and were once not binding on either the company or the other contracting party. Section 125(2), however, provides that an act of a company is not invalid merely because it is outside any objects in the company’s constitution. This is discussed at [13.75]. Where the acts of an agent occurred in a situation where the internal proceedings of a company had not been properly carried out in accordance with the company’s constitution, outsiders are usually not in a position to determine whether the constitution has been complied with, so they were able to assume that the internal proceedings of a company had been properly carried out, even though this may in fact not have been the case. This rule, known as the rule in Turquand’s case, prevented a company from relying on an internal irregularity to avoid a contract. This rule was subject to certain exceptions where the outsider did not act bona fide. The rule in Turquand’s case has been replaced by the various statutory assumptions an outsider is entitled to make under s 129: see [14.220]–[14.245]. Some of these assumptions are based on the common law rule and are subject to the limitations contained in s 128(4): see [14.345]–[14.355]. These limitations are based upon the common law exceptions to the rule in Turquand’s case but differ in some respects.

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Execution of documents

[14.95] A company is able to enter into a contract directly by executing a contractual document. This involves directors or other authorised persons signing the document as an act of the company. In 195 Crown St Pty Ltd v Hoare [1969] 1 NSWR 193, Asprey JA explained that: The execution of a document by a company … resembles the execution of a document by a natural person who cannot write except through the medium of someone else who signs the disabled person’s name at his request and direction. An authorised signatory of a company’s document when acting under this section is the company’s amanuensis.

A company may execute a document in accordance with the requirements of s 127, either by fixing its common seal to the document or without using a common seal. A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with s 127: s 127(3). Whether a document is expressed to be “executed as a deed” is determined by reading the document in its entirety and the exact words need not be included in the document. “The purpose of s 127 is to move away from these [common law] formalities and look to substance and intention”: Gibbons v Pozzan [2007] SASC 99.

Common seal

[14.100] The execution of a document by a company is an act of the company itself and has similar effect as the signature of a person. Historically, a company could only execute a document by affixing its common seal in accordance with its constitution. Since 1998, common seals have been optional: s 123(1). Under s 127(2), a company with a common seal may execute a document by affixing its common seal to a document and the fixing of the seal is witnessed by the appropriate officers. These are: • two directors of the company; or • a director and a company secretary; or • for a proprietary company that has a sole director who is also the sole company secretary — that director. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146, Mason CJ stated: The affıxing of the seal to an instrument makes the instrument that of the company itself; the affıxing of the seal is in that sense a corporate act, having effect similar to a signature by an individual, as I noted earlier. Thus, it may be said that a contract executed under the common seal evidences the assent of the corporation itself and such a contract is to be distinguished from one made by a director or offıcer on behalf of the company, that being a contract made by an agent on behalf of the company as principal.

Company constitutions often set out provisions regarding the use of the company seal. Typically, a constitution will provide that the seal may be used only with the authority of the company’s board of directors. 330

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The common seal of a company must set out the company’s name and its Australian Company Number (ACN) or its Australian Business Number (ABN): s 123(1). If the company seal is affixed to a contract and the affixing or witnessing of the seal is not in compliance with the company’s constitution, the contract may still be binding on the company.

MYT Engineering Pty Ltd v Mulcon Pty Ltd MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24 [14.105]

The company seal was affixed to a deed of company arrangement and witnessed by one person even though the company’s constitution required the affixing of the seal to be witnessed by a director and countersigned by another director or secretary. It was held that the deed was validly executed by the company because the shareholders and members of the board authorised the director to do so and agreed the instrument should be executed.

[14.110] The affixing of the seal may be void or unenforceable if the attesting directors or secretary act without authority. The circumstances where this may occur are discussed at [14.260]. [14.115] A company may have a duplicate common seal: s 123(2). This is useful where a company conducts business in various States.

Execution without common seal

[14.120] A company may also execute a document without using a common seal if two directors or a director and a company secretary sign the document: s 127(1).

One-person proprietary companies

[14.125] A sole director may witness the fixing of the seal of a proprietary company that has only one director who is also the sole secretary: s 127(2). Similarly, under s 127(1), a proprietary company with a sole director who is also the sole secretary may execute a document without using a common seal by that person signing the document on the company’s behalf. A proprietary company may now be formed with just one director who is also the sole shareholder. It need not have a secretary. Section 127 was not amended to deal with such companies and so does not expressly refer to execution of documents by one-person proprietary companies that do not have a secretary.

Significance of s 127

[14.130] Despite the fact that s 127(4) provides that a company can execute documents in ways other than those specified in s 127(1) and (2), executing 331

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documents in accordance with s 127(1) and (2) protects outsiders. If a company executes a document that appears to be in accordance with s 127(1) or (2), persons dealing with the company are entitled to make the assumptions of due execution set out in s 129(5) or (6). The s 129(5) and (6) assumptions are discussed at [14.260].

Contracts made by agents

[14.135] Section 126 allows a company to contract through an agent and under agency law, a company will be bound by the acts of its agents in the same way as any other principal. The law of agency is supplemented by overlapping statutory rules contained in ss 128 – 130. These statutory rules deal with matters such as the effect of non-compliance with the company’s constitution, whether an officer or agent of a company had the requisite authority to bind the company, whether a document apparently executed by a company could be taken by a person dealing with the company to have been validly executed or the validity of a contract in circumstances where the directors have breached their duties. Agency in the context of company contracts is discussed at [14.150]–[14.215]. An agency relationship, under which an agent’s acts bind the principal to a contract with an outsider, may arise in a number of ways. The most important that concern us here are agency created by: • actual authority; and • apparent or ostensible authority. Agency created by ratification of contracts entered into before registration of the company is discussed at [6.70]–[6.80] (Lipton).

Actual authority

[14.140] An agent who enters into a contract on the principal’s behalf binds the principal to the contract with an outsider if the contract is within the scope of the agent’s actual authority, whether express or implied. In this situation there are two relationships — the agency relationship between the principal and the agent, and a contract between the principal and outsider. There is no contractual relationship between the agent and the outsider. Having brought the principal and outsider into a contractual relationship, the agent drops out of the picture. An agent’s actual authority may derive from a principal expressly giving the agent authority to enter into particular contracts on the principal’s behalf. This type of authority is referred to as express actual authority. A common example of an agent with such authority is a person to whom a power of attorney has been granted. A power of attorney is the appointment of an agent by deed. The extent of the attorney’s actual authority is usually set out in the document that creates the power. An agent may also have implied actual authority. The extent of this authority, though actual, is not expressly agreed upon as between the agent and the principal. 332

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The authority is implied from the conduct of the parties and the circumstances. Implied actual authority most frequently arises when an agent is appointed to a particular position by the principal and such a position usually carries with it authority to do certain things. For example, an agent who is appointed to manage a business has implied authority to make all those contracts that a manager in such a position customarily has: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549. In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279, a director was taken to have implied actual authority to act as the company in the circumstances because he held a controlling shareholding and even though he had not been appointed as managing director, he assumed the role of managing director with the acquiescence of the other directors. The director often entered into transactions on behalf of the company without prior reference to the board and no attempt was made by the other directors to interfere with this assertion of control.

Apparent or ostensible authority

[14.145] An agent’s apparent or ostensible authority (the terms “apparent” and “ostensible” authority have the same meaning) arises if a principal gives the impression to an outsider that an agent has authority to act on the principal’s behalf. It does not depend on any agreement between principal and agent. It is quite rare for an outsider to know whether an agent has actual authority and the extent of that authority. Usually, all the outsider relies on is the appearance of authority. Depending on the circumstances, the extent of an agent’s apparent authority may be the same as the agent’s actual authority or it may exceed the scope of the agent’s actual authority. In some situations a person may have apparent authority to enter contracts for a principal because the principal has represented this to the outsider even though that person does not have actual authority to contract. If an agent’s apparent authority can be proved it creates an agency by estoppel. This means that as between principal and outsider, the principal is prevented (or estopped) from asserting that the agent lacked authority. An agency by estoppel creates a contract between the principal and outsider in the same way as a contract is created by an agent with actual authority. Apparent authority arises when: • the principal represents or holds out to the outsider that the agent has the requisite authority to make particular contracts on the principal’s behalf; and • the outsider relies on the principal’s representation to enter into the contract with the agent who is purportedly acting on the principal’s behalf. The principal must make the representation of the agent’s authority to the outsider. A principal is not liable merely because the agent has represented that he or she has authority. 333

[14.145] Corporations and Contract Law

The principal may expressly make the representation to the outsider. It is more usual for the representation to arise by the principal’s conduct. A representation by conduct may take either one of two forms: • It may arise when the principal permits the agent to occupy a particular position. In such cases the principal represents or holds out that the agent has the customary authority of a person in such a position. In this respect it is similar to an agent with implied actual authority resulting from the position occupied. • It may also arise when the principal’s conduct permits the agent to carry out particular tasks on the principal’s behalf that are beyond the scope of the agent’s customary authority. For example, a bookkeeper in an accounting firm would act beyond the job’s customary authority by purchasing office equipment. But if the employer holds out to the equipment supplier that the bookkeeper had such authority, the employer would be liable as principal in respect of such purchases.

Authority of the company’s agents

[14.150] A company may enter into a contract either through an organ such as its board of directors or by means of an authorised agent such as an officer or employee. Where a contract is entered into directly by the board and the constitution or replaceable rules authorise the board to act in this way, questions of authority of the board to enter into the contract may arise if there was an irregularity such as a failure to comply with the constitution or replaceable rules. This may occur if, for example, the particular meeting of the board was not properly convened, a quorum was not present, members of the board were not properly appointed or the required officers did not attest the company seal. Where such irregularities occur, a balance of interests arises. An outsider dealing with a company is generally protected where an irregularity arises which is internal to the company because the outsider generally has no way of knowing of the irregularity. However, in some cases such protection may unduly facilitate fraud at the expense of innocent shareholders and creditors of the company. Where the board has delegated its powers to a managing director, a committee of directors or another officer or agent, a question may arise whether the particular contract was within the authority of the person to whom the power was delegated.

The doctrine of constructive notice

[14.155] The constitutions of public companies must be lodged with ASIC: s 136(5). One consequence of this requirement is that the constitutions of public companies are available for public inspection. If the constitution contained a limitation on the authority of the company’s organs, officers or agents, the common law deemed this limitation to be known by an outsider dealing with the company whether or not the outsider was actually aware of the limitation. This was known as “the doctrine of constructive notice”. 334

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The doctrine of constructive notice has been abolished by s 130(1) and a person is not taken to have information about a company, such as the content of its constitution, merely because the information is available to the public from ASIC.

The rule in Turquand’s case

[14.160] At common law, the doctrine of constructive notice imposed difficulties on outsiders dealing with companies because it imputed knowledge of the company’s constitution to the outsider even though the outsider had not read the constitution. However, under the rule in Turquand’s case this doctrine did not operate where the constitution had not been complied with and this was not apparent from a reading of the constitution or other public documents of the company. For example, the constitution may state that a quorum for a meeting is five. An outsider will generally have no means of knowing that at a particular meeting there were only three present. This irregularity of a meeting proceeding without the required number to constitute a quorum would not be apparent on the face of the constitution. The rule in Turquand’s case stated that even though persons dealing with a company were taken to have constructive notice of the contents of the company’s public documents, they need not go further to ensure that the internal proceedings of the company have been properly carried out. They can assume that these proceedings were properly carried out even though this was not in fact true. The company cannot rely upon the rule as its purpose is to protect outsiders, not the company: Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653. According to Lord Simonds in Morris v Kanssen [1946] AC 459, the rule is “designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims”.

Royal British Bank v Turquand Royal British Bank v Turquand (1856) 6 E & B 327; 119 ER 886 [14.165]

The deed of settlement (the equivalent of the constitution of a company) empowered the board of directors to borrow such sums as were authorised by a resolution of the general meeting of the shareholders. The company borrowed money from a bank on the authority of two of its directors who authenticated the company’s common seal. There was no authority given by the general meeting. The company refused to repay the loan and argued that the bank had constructive notice of the constitution and should have been aware of the lack of authority. It was held that an outsider need not inquire into whether such a resolution had in fact been passed. The company was still bound to the bank because the passing of the resolution was a matter internal to the company.

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[14.170] Corporations and Contract Law

[14.170] The rule in Turquand’s case protected an outsider where, for example, there was an irregularity concerning the proper holding of a meeting. This may arise where a quorum was not present, the required notice of the meeting may not have been given or a voting irregularity occurred. Such irregularities would not be apparent just from reading the constitution. The rule also operated in situations where the common seal was not affixed in accordance with the constitution or the board was not properly constituted. In these cases, an outsider could assume that the constitution had been complied with and so hold the company liable under the contract. The rule in Turquand’s case has been adopted by s 129(1), which entitles outsiders to assume that the constitution of a company and any applicable replaceable rules have been complied with: see [14.225]–[14.235]. Aspects of the rule in Turquand’s case also form the basis of other statutory assumptions contained in s 129. The exceptions contained in s 128(4) are worded differently to the common law exceptions to the rule in Turquand’s case although in many cases they have a similar operation: see [14.345]–[14.355].

Exceptions to the rule in Turquand’s case

[14.175] The rule in Turquand’s case was subject to several exceptions. The most significant of these arose where the outsider had actual knowledge of the irregularity or was put upon inquiry by the circumstances of the case and failed to make inquiries. Where these exceptions applied, the outsider lost the protection of the rule and therefore could not assume that the constitution had been complied with. Mason CJ considered the reasons behind the rule in Turquand’s case and its exceptions in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. Even though the rule in Turquand’s case has been replaced by provisions in the Corporations Act, these policy considerations are applicable to the interpretation of the statutory assumptions and exceptions discussed below. What is important is that the principle and the criterion which the rule in Turquand’s case presents for application give suffıcient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of that rule calls for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of offıcers and the validity of instruments. On the other hand, an over-extensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.

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Northside Developments Pty Ltd v Registrar-General Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 [14.180]

Although this High Court case was decided under common law rules that no longer apply, it represents a useful fact situation that illustrates the problems which can arise where an irregularity occurs in the internal proceedings of a company.

The common seal of Northside was affixed to a mortgage document that secured a loan from Barclays to a company controlled by Sturgess, a director and shareholder of Northside. The mortgage was over land owned by Northside which was its only major asset. The common seal was affixed and signed by Sturgess as director and by his son who purported to sign as the company secretary. The son had not been appointed under the constitution although lodged documents named him as the company secretary. The other two directors, who were also the remaining shareholders, did not know of or authorise the execution of the mortgage, nor did they know of the purported appointment of the secretary. They had no interest in the borrowing company and Northside derived no benefit from the transactions. The High Court considered the validity of the mortgage. This depended upon whether it had been executed by Northside. The case was decided under the common law rules because the mortgage was purportedly executed in 1979, prior to the inclusion of the predecessors of ss 128 – 130 into the legislation.

The High Court held that Northside was not bound by the mortgage because the affixing of the common seal was invalid. Although the rule in Turquand’s case enabled Barclays to assume that the common seal was properly affixed and the internal proceedings of the company had been properly carried out in accordance with its constitution, the circumstances of the case should have put Barclays upon inquiry. Because Barclays failed to make further inquiries as to whether the common seal was properly affixed it was unable to rely on the rule in Turquand’s case and Northside was not bound by the mortgage.

The circumstance that put Barclays upon inquiry was that the mortgage secured Northside’s major asset where the transactions were outside its usual business and not for its benefit. Barclays was prevented from relying on the rule in Turquand’s case because it ought to have suspected an irregularity. Barclays did not have actual knowledge of the lack of authority of Sturgess and his son to affix the company seal.

Actual authority of company agents

[14.185] Where an outsider contracts with an agent of a company, the company is bound by the contract if the agent has actual authority in the same way as any other 337

[14.185] Corporations and Contract Law

principal is bound by the act of an agent. An agent’s actual authority may arise expressly, where the agent is appointed by the principal for a particular purpose, or by implication. It arises by implication when the company appoints the agent to occupy a particular position. Unless expressly limited, the agent’s implied actual authority extends to all those acts that are customarily done by persons occupying that position. For example, the replaceable rule contained in s 201J permits the directors to appoint a managing director for the period, and on the terms (including remuneration) as they see fit. In addition, under the replaceable rule in s 198C the directors may confer on a managing director any of the powers that the directors can exercise. The express actual authority of a managing director will consist of the powers specifically conferred on that person by the board. A managing director’s implied actual authority will also consist of the customary powers and authority of persons occupying the office of managing director provided those customary powers are not inconsistent with the managing director’s express actual authority. The customary authority of managing directors and other officers of a company is discussed at [14.310]–[14.340]. An agent’s implied actual authority may arise as a result of acquiescence to a course of behaviour. For example, generally the power of management is vested in the board to be exercised collectively, however if a board of directors stands by while a single director enters into transactions that would normally be outside the director’s authority, the board’s acquiescence in that course of dealing can constitute the grant of implied actual authority to the director to enter into those transactions: Junker v Hepburn [2010] NSWSC 88. Similarly, in Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 it was held that a dominant, de facto managing director had implied actual authority to manage the business of the company where that person acted with the acquiescence of the board to bind the company. This conferral of implied actual authority may be informal and based on previous dealings between the parties. Just because a director acts in a dominant way, does not necessarily mean that actual authority has been conferred. There must be some indication that the board knew of and acquiesced to the course of dealing.

National Australia Bank Ltd v Sparrow Green Pty Ltd National Australia Bank Ltd v Sparrow Green Pty Ltd [1999] SASC 280 [14.190]

A finance agreement and a debenture deed were executed by the only active director of a company. He signed the documents as a sole director and company secretary. The other director had agreed to step aside from management before the negotiations leading to the finance agreements began. The company’s constitution provided for at least two directors and the affixing of the company seal required the signatures of two directors or a director and secretary. A copy of

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Chapter 14 The company’s relations with outsiders [14.195] National Australia Bank Ltd v Sparrow Green Pty Ltd cont. the constitution was provided to the bank. Soon after the company went into liquidation and the liquidator claimed that the company was not bound by the finance agreements.

It was held that the remaining director did not have actual or apparent authority to bind the company. Actual authority could only be conferred through the constitution or by resolution of the board. In this case, the management of the company vested in the board, not a single director.

Apparent authority of company agents

[14.195] Outsiders, however, are rarely aware of the extent of an agent’s actual authority but they usually rely on the agent’s apparent or ostensible authority. Where the agent acts within the scope of this authority, the company is also bound by the agent’s actions. We saw at [14.145] that for apparent authority to arise, the principal must represent or hold out to the outsider that the agent had authority in relation to the contract and the outsider was induced by this representation of authority to enter into the contract. The rules relating to apparent authority have special features when the principal is a company. This stems from the fact that the company is an artificial entity that can only act through humans. The question arises: who can hold out for the company by making representations of authority to outsiders on the company’s behalf so as to bind the company? In the usual case where full management powers are bestowed on the board of directors by the constitution or replaceable rules, the board is the organ that is capable of acting as the company and making the necessary representations of authority. Outsiders, however, rarely negotiate contracts with the full board. They usually deal with persons to whom the board has delegated the necessary authority, for example the managing director. When this is the case, the managing director possesses actual authority to do those things concerned with management, and also has apparent authority to bind the company to contracts within the scope of the management powers. The representation by the company, through its organ, the board of directors, is established by the fact that the company has appointed a person to occupy the position of managing director with all the customary powers that accompany that office. In some instances an outsider may deal with a person who acts as a managing director but who has not actually been appointed to that position or whose appointment is defective in some way. The defect in the appointment may arise because the resolution of the board making the purported appointment is invalid for any number of reasons, such as there was no quorum present at the meeting where the

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[14.195] Corporations and Contract Law

appointment was made. The defect may also arise if the board fails to formally appoint at all, or the term of appointment has expired and a person is allowed to continue to act as the managing director.

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 [14.200]

Kapoor and Hoon formed a company for the purpose of developing a property. They each held half the issued shares and together with a nominee of each, comprised the board of directors. The quorum of the board was four, but at all material times, Hoon was overseas. Kapoor acted as managing director with the approval of the board, although he had not actually been appointed to that position.

Kapoor engaged a firm of architects and surveyors on behalf of the company. The firm brought an action claiming payment for work carried out when the company refused to pay its fees. It was held that the company had held out that Kapoor was its managing director and was therefore bound by his actions. He had apparent authority to employ the architects because this was within the customary authority of a managing director. Because the outsiders had relied on the apparent authority of the managing director, they did not have to examine the company’s constitution or inquire whether the managing director had been properly appointed. Diplock LJ examined the law of agency as it applies to contracts with companies where the agent does not have actual authority. He concluded: If the foregoing analysis of the relevant law is correct, it can be summarised by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. It must be shown: (a) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; (b) that such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates; (c) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied on it; and (d) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent. (Condition (d) does not apply in Australia: s 125(2).)

In Freeman and Lockyer the representation that Kapoor had authority was made by the board, which had actual authority to manage the affairs of the company. This was so, even though the board had made no formal decision to that effect.

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Chapter 14 The company’s relations with outsiders [14.210] Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd cont. The representation arose because the board failed to prevent him from acting as if he were the company’s managing director.

[14.205] In some instances a representation that someone has authority to act on behalf of a company may be made by a person who lacks actual authority to make such a representation. The representation then may not be sufficient to create an agent’s apparent authority because it was not a representation made by the company.

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 33 CLR 72 [14.210] Australian Direct Mail (ADM) was a family company. Its directors were Bruce McWilliam Senior, his son, Bruce McWilliam Junior, and their wives. The wives, however, took no active role in the company’s affairs. Another son, Peter McWilliam, was employed by the company but was not a director. A committee consisting of Bruce Senior, Bruce Junior and Peter collectively managed the company’s affairs. The company’s constitution provided for the appointment of a managing director by the board. While Bruce Junior was given that title, he had never been formally appointed. It was found that he had no actual authority to manage the company’s business, despite his title.

Peter negotiated a contract to buy machinery from Crabtree-Vickers. ADM’s own order form was used and signed by Peter on Bruce Junior’s behalf. ADM, however, refused to go ahead with the contract and argued that while Peter had authority to obtain quotations he was not authorised to finalise the agreement on the company’s behalf. There was evidence that Bruce Junior had held out to the other contracting party that Peter had the necessary authority to finalise the contract for their company.

The High Court applied the reasoning of Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 and held that as Peter had no actual authority to finalise the contract, the outsider could only succeed if it could establish that he had apparent authority to do this. This it could not do. The representation of Peter’s authority came from his brother, Bruce Junior, who himself lacked actual authority. At most, Bruce Junior had apparent authority to do those things concerned with management arising from the fact that the board held him out as managing director. The High Court held that an agent who merely has apparent authority is not capable of making representations for the company. The only persons who had actual authority to make the necessary representation in the Crabtree-Vickers case were either the three-man committee or the full board itself and there was no evidence that either had made any representations to the outsider. This decision

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[14.210] Corporations and Contract Law Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd cont.

can be criticised on the basis that it does not give due regard to commercial practice. It is almost impossible for an outsider in the position of Crabtree-Vickers to discover who has actual authority to make representations for the company.

[14.215] This case has been criticised on the basis that it seems anomalous that a company is bound by a contract entered into by a de facto managing director but not bound by representations of the de facto managing director that someone else has apparent authority. A company may hold out that a person occupies a particular position in the company. The extent of that person’s authority will be limited to the customary authority of a person occupying such a position. A company will not be bound by contracts made by officers or agents who exceed their customary authority unless the holding out extends their customary authority. The customary authority of directors and secretaries is discussed at [14.310]–[14.340].

The statutory assumptions: s 129

[14.220] A person dealing with a company is entitled to make certain assumptions of regularity in relation to those dealings. These assumptions are set out in s 129. If one or more of the s 129 assumptions apply, the company is not able to assert that the assumptions are incorrect: s 128(1). The right to make these assumptions is lost where a person knew or suspected that the assumptions were incorrect: s 128(4). The purpose behind the s 129 assumptions is to protect outsiders who deal in good faith with persons who can reasonably be expected to have authority to act for the company. A number of the assumptions codify and clarify the rule in Turquand’s case which is discussed at [14.160]. In particular, the entitlement to make the assumptions together with the limitations in s 128(4) attempt to strike the balance of competing interests referred to by Mason CJ in Northside Developments Pty Ltd v RegistrarGeneral (1990) 170 CLR 146, discussed at [14.175].

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Figure 14.1: Section 129 assumptions

The s 129 assumptions apply in relation to “dealings” with a company. In Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd [2013] NSWCA 459 it was held that for there to be dealings by an outsider with a company, the person with whom the outsider has the dealings must have actual or apparent authority to undertake some negotiation. However, that person is not also necessarily required to have actual or apparent authority to enter into the particular transaction the subject of the negotiation. In this case negotiations and written communications that included the signing and return of finance documents constituted “dealings” between a bank and a director of a company who purported to act on the company’s behalf. Despite the use of the plural “dealings” in s 128, the section may also apply to a single transaction: Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 343

[14.220] Corporations and Contract Law

703. In Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722, a bank took a mortgage over property owned by a company whose directors and shareholders were a husband and wife. The wife permitted the husband to have de facto control of the conduct of the company’s business. The husband forged his wife’s signature as director to the affixing of the company’s common seal without her knowledge of the mortgage transaction. It was held that because part of the loan moneys was in fact applied for the purposes of the company, the bank’s negotiations with the husband constituted “dealings” with the company. The concept of having dealings with a company extends beyond dealing with someone who has actual authority and includes situations where a document is forged and extends to purported dealings. Each of the s 129 assumptions is separate and discrete: Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279. This means that if an outsider cannot rely on one assumption, they may still rely on any of the other assumptions. While the assumptions are discrete, they may overlap and an outsider may rely upon more than one assumption: Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48. The effect of s 129(8) is to give cumulative operation to the assumptions. For example, a person may assume that an officer properly performs their duties under s 129(4) and in order to make this assumption may rely on the assumption under s 129(3) that the officer has been duly appointed and has the authority to perform those duties. It is not necessary for an outsider to have actually made these assumptions in order to rely upon them: Lyford v Media Portfolio Ltd (1989) 7 ACLC 271. In Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119, it was held that a predecessor of s 128(1) allowed the s 129 assumptions to be made only in relation to assertions by the company that they are not correct. Where an assertion of non-compliance with the constitution is made by a third party, the statutory assumptions do not apply because there must be dealings with a company, but the rule in Turquand’s case and its limitations may still operate.

Compliance with the constitution

[14.225] A person may assume, in relation to dealings with a company, that its constitution and any applicable replaceable rules have been complied with: s 129(1). Section 129(1) does not require the person to have knowledge of the constitution or replaceable rules: Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315. Under s 128(4), a person is not entitled to make this assumption if at the time of the dealing he or she knew or suspected that there had been non-compliance with the constitution or replaceable rules. Section 128(4) is discussed at [14.345]–[14.355].

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Oris Funds Management Ltd v National Australia Bank Ltd Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 [14.230]

Oris Funds Management (OFM) was established to be the trustee of a master trust fund for a superannuation business conducted by another company, OFS Pty Ltd (OFS). As OFM needed additional capital it agreed with Tower Life Australia Ltd that Tower would be issued 40 per cent of the shares in OFM. As part payment for the shares, Tower gave OFM two cheques for $150,000 each. Stanley, an OFM director, endorsed the cheques and purportedly authorised payment of the proceeds to OFS. The cheques were deposited into OFS’s account with the National Australia Bank (NAB) which collected them and credited the account with the proceeds. OFM’s constitution provided that any two directors could endorse cheques but that the directors could determine that a cheque could be endorsed in a different way other than by two directors.

OFM subsequently sued NAB for the proceeds of the cheques. It argued that as Stanley did not have OFM’s authority to endorse the cheques OFM remained their true owner. NAB’s collection of the cheques constituted the tort of conversion and NAB was liable to pay damages to OFM.

It was held that NAB could rely on the s 129(1) assumption. A person dealing with a company can assume that action taken by the company was in accordance with its constitution. Therefore, NAB was entitled to assume that OFM’s constitution had been complied with even if a single director endorsed the cheques. The court also held that the s 129 assumptions were cumulative. This meant that NAB could assume not only that the endorsement of the cheques was in accordance with OFM’s constitution, it was also entitled to rely on s 129(4) and assume that Stanley had properly performed his duties to OFM when he endorsed the cheques. Section 129(4) is discussed at [14.250].

Bank of New Zealand v Fiberi Pty Ltd Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 [14.235] A company seal was affixed to a mortgage in breach of its constitution. The company’s constitution required authorisation for use of the seal by the directors and attestation by a director and secretary. In fact, no authorisation was given and the person purporting to sign as secretary had not been appointed in accordance with the company’s constitution. Kirby P held that the mortgagee was entitled to rely on the predecessor of s 129(1) and could assume that the relevant provisions of the company’s constitution had been complied with. These included

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[14.235] Corporations and Contract Law Bank of New Zealand v Fiberi Pty Ltd cont. provisions that required the seal to be kept in safe custody and to only be used with proper authority and be properly attested by officers of the company. However, on the facts of the case, the limitations contained in the predecessor of s 128(4) prevented reliance on the assumption.

Person named as officer in public documents

[14.240] Under s 129(2), a person may assume, in relation to their dealings with a company, that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary: • has been duly appointed; and • has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company. Under s 128(4) a person is not entitled to make this assumption if at the time of the dealing he or she knew or suspected that the director or secretary had not been duly appointed or that the director or secretary did not have the authority to exercise the powers and perform the duties customarily exercised or performed by a director or secretary of a similar company. Section 128(4) is discussed at [14.345]–[14.355]. For the purpose of s 129(2), the information regarding directors and secretaries provided by a company that is available to the public from ASIC includes a s 205B notice of the personal details of directors and secretaries and the s 346C changes to officers’ details set out in the company’s annual statement. A person may rely on the s 129(2) assumption even if the person was unaware of the information contained in the ASIC notices or returns lodged by the company: Lyford v Media Portfolio Ltd (1989) 7 ACLC 271. The assumption enables outsiders to assume the accuracy of information in ASIC’s publicly accessible national database. By naming particular people as directors and secretary in documents lodged with ASIC, a company in effect holds out that those named people occupy the stated positions and have the authority that is customary for such officers. In this respect, there is an overlap between the s 129(2) and (3) assumptions. Under s 129(2), an outsider must establish that the particular officer acted within the scope of the customary powers of such an officer of a similar company. The customary powers of directors and secretaries are discussed at [14.310]–[14.340]. The assumption in s 129(2) applies whether the persons named as directors or secretaries have been improperly appointed or not appointed at all. In both cases, the outsider is protected.

Person held out as officer or agent

[14.245] Section 129(3) entitles a person to assume, in relation to dealings with a company, that anyone who is held out by the company to be an officer or agent has 346

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been duly appointed and has the authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. Under s 128(4) a person is not entitled to make this assumption if at the time of the dealing he or she knew or suspected that the officer or agent had not been duly appointed or that the officer or agent did not have the authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. Section 128(4) is discussed at [14.345]–[14.355]. Section 9 defines the term “officer of a corporation”. It includes the directors and company secretary as well as executives who hold senior positions below board level: see [13.0.20] (Lipton). To be classified as an “officer of a corporation” the executive must be a person • who makes or participates in making decisions that affect the whole or a substantial part of a company’s business; or • who has the capacity to affect significantly the company’s financial standing; or • in accordance with whose instructions or wishes the directors are accustomed to act. A person dealing with a company has the onus of proving each element of s 129(3) before being entitled to rely on the assumption contained in it. This means the outsider must establish two things: • a holding out by the company that a person is an officer or agent; and • that the particular power exercised by the person so held out is within the scope of the powers customarily exercised or performed by an officer or agent of a similar company. Where a company has held out that a person is an officer or agent, persons dealing with the company need not establish that the officer or agent has in fact been appointed. Section 129(3) allows them to assume that this is the case even if it is not true. In this respect, there is no difference between a defective appointment and a non-existent appointment. Section 129(3) requires proof that a company has held out a particular person to be an officer or agent. This raises the same question as arises in connection with the general agency rules of apparent authority. Who can make a holding out for the company? Section 129(3) restates the agency rules in this respect. As discussed at [14.195]–[14.215], under agency rules, a holding out by the company can be made only by a person who has actual authority “to manage the business of the company either generally or in respect of those matters to which the contract relates”: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. In Australia and New Zealand Banking Group Ltd v Australian Glass and Mirrors Pty Ltd (1991) 9 ACLC 702 it was held that a company had held out two persons to be a director and secretary respectively. The holding out had occurred because lodged documents named the two persons as its directors and they had previously conducted negotiations and signed documents as if they were directors. Similarly, in Re Madi Pty 347

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Ltd (1987) 5 ACLC 847 a company held out a person as its secretary by naming that person as its secretary in a document lodged with ASIC. The company was bound by the act of this person even though he had not been appointed at the time. The outsider dealing with the company in both these cases may also have been able to rely on the assumption contained in s 129(2) discussed at [14.240]. Re Madi Pty Ltd indicates that s 129(3) modifies the normal agency rules of apparent authority as stated in Freeman and Lockyer. One of the common law requirements for the existence of apparent authority is that the outsider relies on the representation made by the company. In Re Madi Pty Ltd, there was no suggestion that the creditor was aware of the information contained in the company’s return and so could not be said to have relied on the information contained in it. Under s 129(3) the person entitled to make the assumption must also establish that the disputed power exercised by the “held out” officer or agent is within the ambit of those powers customarily exercised or performed by that kind of officer or agent of a similar company. The customary powers of directors and secretaries are discussed at [14.310]–[14.340].

Officers and agents properly perform their duties

[14.250] A person may assume, in relation to dealings with a company, that the officers and agents of the company properly perform their duties to the company: s 129(4). The conduct with which s 129(4) is concerned is not whether acts are authorised or not but whether the acts involve a breach of duty. Therefore the statutory assumption contained in s 129(4) is insufficient to overcome a lack of authority: Great Investments Ltd v Warner [2016] FCAFC 85. Under s 128(4), a person is not entitled to make this assumption if at the time of the dealing they knew or suspected that the officer or agent did not properly perform their duties to the company. Section 128(4) is discussed at [14.345]–[14.355]. The duties to which s 129(4) refer include properly performing an officer’s statutory and fiduciary duties. Section 129(4) also applies where officers or agents act within the scope of their authority.

Pico Holdings Inc v Wave Vistas Pty Ltd Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13 [14.255]

Dominion Capital borrowed US$1 million from Pico Holdings. Voss, Dominion Capital’s chairman and managing director promised that another company, Wave Vistas, would provide Pico Holdings with a second mortgage over Wave Vistas’ land, to secure the loan to Dominion Capital. Voss was Wave Vistas’ sole director. Dominion breached its loan agreement and Pico Holdings initiated legal proceedings against Wave Vistas to enforce its rights as second

348

Chapter 14 The company’s relations with outsiders [14.260] Pico Holdings Inc v Wave Vistas Pty Ltd cont. mortgagee. The High Court held that under s 129(4) Pico Holdings was entitled to assume that Voss properly performed his duties to Wave Vistas and that therefore Voss had actual authority to make the promise to provide the mortgage security. Under s 128(1) Wave Vistas was not permitted to assert that the s 129(4) assumption was incorrect. The High Court also rejected the argument that Voss could not have been exercising his authority as a director of Wave Vistas because the grant of the second mortgage security over Wave Vistas’ land was of no benefit to Wave Vistas. The High Court held that s 129(4) permitted Pico Holdings to assume that Voss properly performed his duties to Wave Vistas and hence complied with his duty of care and diligence as well as his duty to act in good faith and in the best interests of Wave Vistas. Section 128(4) did not apply as Pico Holdings did not know or suspect that the s 129(4) assumption was incorrect.

Document duly executed

[14.260] A company may execute a document with or without fixing its common seal to the document. Section 129(5) sets out an assumption of due execution where a document is executed without a seal and s 129(6) sets out the equivalent assumption of due execution where a document is executed with a seal. As with the other assumptions, a person is not entitled to make an assumption under either s 129(5) or (6) if he or she knew or suspected that the assumption was incorrect: s 128(4). Section 129(5) provides that a person may assume, in relation to dealings with a company, that a document has been duly executed by the company if the document appears to have been signed in accordance with s 127(1): see [14.120]. A person may also assume under s 129(5) that anyone who signs the document and states next to their signature that they are the sole director and secretary of the company, occupies both offices. Section 129(5) focuses on the appearance of the document so this indicates that the entitlement to make this assumption is determined with reference to the objective appearance of the face of the document. It is unnecessary that the person seeking to rely on the s 129(5) assumption must establish a link with the assumptions in s 129(2) or (3). The assumption in s 129(5) does not require the person seeking to rely upon it to ascertain from information available from ASIC that the signatures on the document appear to be those of directors or the secretary of the company: Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84. As discussed at [14.120], s 127(1) provides that a company may execute a document without using its common seal if two directors or a director and company secretary sign the document. In the case of a proprietary company that has a sole director who is also the sole company secretary, a company may execute a document if that director signs it. Under s 129(6) a person may assume that a document has been duly executed if: • the company’s common seal appears to have been fixed to the document in accordance with s 127(2); and 349

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• the fixing of the common seal appears to have been witnessed in accordance with s 127(2): see [14.100]. A person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and secretary of the company occupies both offices: s 129(6). A person may assume that a company has duly executed a document if it “appears” to have been signed in accordance with s 127(1) or the fixing of the company’s common seal “appears” to have been witnessed in accordance with s 127(2). A document will “appear” to have been signed or witnessed in accordance with s 127(1) and (2) if the appropriate officer signs or witnesses the document and states next to their signature that they are either: • a director or secretary; or • in the case of a one-person proprietary company, the sole director and the sole company secretary.

Vero Insurance Ltd v Kassem Vero Insurance Ltd v Kassem [2010] NSWSC 838 [14.265]

Vero was a creditor of a company in voluntary administration. A creditors’ meeting was convened to consider the adoption of a deed of company arrangement. The court held that the chair of the meeting was entitled to reject Vero’s proxy appointing a representative to vote against the motion. Vero could not rely on the s 129(5) assumption because the proxy form was not executed in accordance with s 127(1). Vero’s executive manager signed the proxy form and while s 127(4) permits a company to execute documents in other ways, Vero failed to inform the chair of the meeting that the executive manager had actual authority to execute documents on its behalf. Vero also failed to lead evidence that signing proxy forms was within the executive manager’s customary authority for purposes of the s 129(3) assumption. Barrett J stated: Most large companies have in place well documented systems of delegation to officers of different ranks. Internal delegations are often accompanied by powers of attorney executed under the common seal embodying, by way of safeguard, limitations and requirements for multiple signatures and sometimes allowing sub-delegations. Arrangement of that kind give those companies a ready and convenient means of proving the authority of officers on any occasion on which it becomes necessary or desirable to do so, particularly in a legal context. On the evidence before me, Vero is not shown to have had any such system in place.

[14.270] The s 129(5) and (6) assumptions may apply even if the officer who signs or witnesses a document does not occupy the designated position.

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Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 [14.275]

A company fixed its seal to a guarantee witnessed by two directors, one of whom was incorrectly described as the company secretary as that person had not been appointed as secretary. It was held that under a predecessor of s 129(6) the other party to the guarantee could assume the guarantee was duly executed notwithstanding the incorrect designation. The court also held that the guarantor company had held out that the director who incorrectly signed as secretary was the secretary.

[14.280] Even though s 129(6) is worded differently from its predecessor, it is arguable that Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 would have been decided in the same way if s 129(6) had applied, although for different reasons. Since the witnesses to fixing Brick & Pipe’s seal to the guarantee were designated as a director and secretary, the document “appears” to have been witnessed in accordance with s 127(2)(b). The wrong designation of the office of one of the witnesses would still entitle the other party to the guarantee to assume it was duly executed. However, if that person knew or suspected that the witness did not occupy the designated position, then under s 128(4) he or she could not rely on the due sealing assumption.

MYT Engineering Pty Ltd v Mulcon Pty Ltd MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24 [14.285]

The company purported to execute a deed of company arrangement for the purposes of Pt 5.3A. A director, who purported to witness as both a director and secretary, attested the fixing of its common seal to the deed. The High Court held that a person would not have been able to assume that the document had been duly sealed under the predecessor of s 129(6) because the previous provision did not contemplate execution by sole director/sole secretary proprietary companies.

[14.290] The same result would probably have been reached in MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24 if s 129(6) had applied, though for different reasons. While s 129(6) now recognises execution of documents by one-person companies, a document executed by such a company will “appear” to be executed in

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[14.290] Corporations and Contract Law

accordance with s 127(2) only if the company is a proprietary company and the signatory states next to their signature that they are the sole director and sole company secretary.

Myers v Aquarell Pty Ltd Myers v Aquarell Pty Ltd [2000] VSC 429 [14.295]

The Supreme Court of Victoria held that a person was entitled to assume that a mortgage was duly executed under s 129(6) as the company seal was affixed in the presence of its sole director and secretary in compliance with s 127(2), even though the company’s constitution required that the company should have a minimum of two directors and that fixing the seal was to be witnessed by at least one director and countersigned by the company secretary.

[14.300] Under the assumptions contained in s 129(5) and (6), there is no requirement that the persons signing the document or witnessing the fixing of the seal need to be held out or named by the company as relevant officers. It is sufficient if the document appears on its face to have been signed, or the company seal witnessed, by the required officers.

Warranting documents genuine

[14.305] Under s 129(7), a person, in relation to dealings with a company, may assume that an officer or agent of the company who has authority to issue a document or certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy. Therefore, a company secretary may be assumed to have the requisite authority to warrant that a share certificate is genuine. At common law it was doubtful whether a company secretary had authority to warrant that a document was genuine and generally companies were not bound by forged certificates and other documents. The customary authority of a company secretary is discussed at [14.330].

Customary authority of officers

[14.310] We saw earlier that under s 129(2) and (3), an officer or agent of a company only binds the company to contracts with outsiders if he or she exercises the powers and performs the duties customarily exercised or performed by an officer or agent of a similar company. The question then arises: what are the customary powers and duties of particular officers or what is their customary authority?

Individual directors

[14.315] We see in Chapter 15 that the constitution or replaceable rules usually confer powers of management on the directors collectively as a board: see [15.35]. However, frequently individual directors are given the power to: 352

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• witness the fixing of the company’s common seal (s 127(2)); and • sign the company’s negotiable instruments, including cheques: s 198B. An individual director does not have customary authority to make contracts on the company’s behalf just because the person has been appointed as a director. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146, Dawson J stated: The position of director does not carry with it an ostensible authority to act on behalf of the company. Directors can act only collectively as a board and the function of an individual director is to participate in decisions of the board. In the absence of some representation made by the company, a director has no ostensible authority to bind it.

While the customary authority of individual directors is limited, they will nevertheless bind their company if they have actual authority or have been held out as having greater authority than is customary for individual directors. This may often arise in the case of small proprietary companies where management is effectively conducted by a particular director with the acquiescence of the other director or directors. In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279, a dominant director was taken to represent the mind and will of the company and have the authority of a managing director where the other directors acquiesced to this and did not involve themselves in transactions entered into by the dominant director. In the absence of acquiescence of other directors, an individual director does not have customary authority to represent that someone else has been appointed as secretary: Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48.

Managing director

[14.320] A managing director has the customary authority to make any contracts related to the day-to-day management of the company’s business. This includes engaging persons to do work for the company (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480) and borrowing money on the company’s behalf: British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176. A managing director’s customary authority may not include a purported sale of the entire business of the company. In Re Tummon Investments Pty Ltd (1993) 11 ACLC 1139, it was held that a managing director did not have customary authority to enter into a loan contract that was not in the ordinary course of the company’s business as the loan was not for the benefit of the company. In Re Qintex Ltd (1990) 8 ACLC 811, it was held that a managing director did not have the customary authority to make “critical” decisions following the presentation of an application to wind up the company. In that case, the managing director did not have authority to appoint solicitors to oppose the application. 353

[14.320] Corporations and Contract Law

In Smith v Butler [2012] EWCA Civ 314, a decision of the English and Welsh Court of Appeal, it was held that in the absence of an express delegation, the powers of a managing director do not extend to suspending the chair of directors.

Chair

[14.325] The chair has the same customary authority as any other individual director and consequently does not have the customary authority to contract on the company’s behalf: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.

Secretary

[14.330] The status of a secretary has, in the eyes of the courts, changed over the past century. So, too, has the secretary’s customary authority. The early cases held that a secretary had no customary authority to bind a company. A secretary now has customary authority to enter into contracts that are related to the administration of the company.

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 [14.335]

The present position with respect to a secretary’s customary authority is illustrated in this case. The secretary of Fidelis, without authority, hired cars from Panorama, which he stated were for the purpose of carrying his company’s important customers. The secretary, however, used the cars for his own purposes. When he failed to pay the hire charges Panorama sued his company, arguing that the secretary had apparent authority to enter into that contract. The court upheld Panorama’s claim and decided that a company secretary has the customary authority to enter into contracts connected to the administrative side of the company’s affairs.

[14.340] The customary authority of a company secretary is not as wide as that of a director. This role is limited to matters of an administrative, internal nature required for day-to-day running of the company’s affairs such as employing staff, and ordering cars. The customary powers of a secretary do not include authority to mortgage the company’s land: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

Limitations to the statutory assumptions: s 128(4)

[14.345] A person cannot rely on any of the assumptions set out in s 129 if the person knew or suspected that a particular assumption was incorrect at the time of the 354

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dealings: s 128(4). This provision contains two elements in relation to the state of mind of the person dealing with a company. That person either: • knew; or • suspected; that the assumption was incorrect. To some extent, s 128(4) adopts the general law limits to the rule in Turquand’s case. However, the general law limits are expressed in different words. The common law rule could not be relied upon where an outsider actually knew of the irregularity or the circumstances were such that they were put on inquiry: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. Section 128(4) does not refer to an outsider who was “put on inquiry”.

Figure 14.2: Section 129 assumptions

Knew assumption incorrect

[14.350] Under s 128(4), a person is not entitled to make an assumption in s 129 if at the time of the dealing they knew that the assumption was incorrect. Knowledge or suspicion acquired at a time later than the dealing does not deprive the person dealing with a company of the protection under s 128(4): Correa v Whittingham [2013] NSWCA 263. In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279, the Full Court of the Supreme Court of Victoria thought that the expression “actual knowledge” meant what it said and did not lend itself to definition or elaboration. The expression “actual knowledge” was used in a predecessor of the current s 128(4) and probably means the same as the word “knew”. However, it still depended on the facts and circumstances in a particular case and the inferences they allow. In this case the court indicated that it might be prepared to impute to the lender, the actual knowledge of its solicitor. This means that the knowledge of an agent may be taken to represent the actual knowledge of the outsider. 355

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Where the person dealing with a company is itself a company, the question may arise as to what it knew or suspected for purposes of s 128(4). As discussed at [14.10]–[14.20], a company is regarded as having the knowledge and suspicions of its directing mind and will. Sometimes, a company and another company dealing with it may have common directors. This raises the question whether the knowledge of the shared directors is attributed to their respective companies. This question has not been answered by the courts. In Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 the facts of which were outlined at [14.230] the court made it clear that s 128(4) was not concerned with constructive knowledge or constructive suspicions. This means that a person would not be regarded as knowing a piece of information merely because the information was on the public record or if a reasonable person would have known the information.

Suspected assumption incorrect

[14.355] A person cannot rely on the s 129 assumptions if at the time of the dealing they suspected that the assumption was incorrect: s 128(4). There are at least two possible interpretations of the suspicion exception in s 128(4). On one interpretation, s 128(4) prevents a person from making a s 129 assumption only if circumstances surrounding the dealing result in the person actually suspecting the assumption is incorrect. Consequently, a person could rely on a s 129 assumption if the person did not in fact form such suspicions, even though a reasonable person would have. This interpretation appears to have been applied in some cases. In Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315, the facts of which were outlined at [14.230], the court explained that to suspect “that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient evidence”. Similarly in Sunburst Properties Pty Ltd v Agwater Pty Ltd [2005] SASC 335 Gray J stated: Section 128(4) appears to place the burden on the company to establish the person’s subjective knowledge or suspicion that the s 129 assumptions relied on were incorrect. That is to say, a person does not lose the benefit of the assumptions in s 129 merely because the person’s suspicions, in the circumstances, should have been aroused. In this respect, the operation of s 128(4) can be contrasted with the “put on inquiry” test that applies when a person seeks to enforce a defective contract at common law: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

This interpretation may be criticised because it tends to encourage banks and others dealing with a company to “don blinkers” when faced with warning signs. It may “encourage ignorance and condone dereliction of duty” where lenders fail to make reasonable inquiries: Morris v Kanssen [1946] AC 459. By failing to make reasonable 356

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inquiries, a person dealing with a company may unwittingly assist company officers in breaching their duties and acting without authority to the detriment of the company, its innocent shareholders and creditors. Another possible interpretation of the suspicion exception in s 128(4) is that it prevents a person from making a s 129 assumption if the circumstances surrounding the dealing would result in a reasonable person suspecting the assumption is incorrect. Under this interpretation, the test of whether there are suspicions is objective and would prevent a person from relying on a s 129 assumption if the person failed to act reasonably in the face of suspicious circumstances. The explanatory memorandum to the 1998 amending legislation that inserted s 128(4) is unhelpful in deciding which of the above interpretations were intended. It stated that the test of whether a person suspected an assumption was incorrect under s 128(4) was objective and stricter than the replaced s 164(4)(b) exception. Further, the wording of s 128(4) is intended to make it clear that the common law “put on inquiry” test does not apply to the s 129 assumptions. This explanation raises several difficulties in the interpretation of the provision. It indicates that an objective assessment should be made in order to determine whether a person suspected that an assumption was incorrect. This is not apparent from a reading of s 128(4) which adopts subjective wording.

The effect of fraud or forgery

[14.360] A person may rely on the assumptions in s 129 even if an officer or agent of the company acts fraudulently or forges a document in connection with the dealings: s 128(3). Section 128(3) covers the situation where a company seal or signatures attesting its application are not genuine but are forged: Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722. This provision restates the common law rule that a company or employer is liable for the fraudulent acts of its officers, agents or employees where they have acted within their actual or apparent authority. It also overrules a principle stated in Ruben v Great Fingall Consolidated [1906] AC 439 that a forgery is a nullity and cannot bind a company.

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CHAPTER 15

Directors

Introduction ................................................................................................... [15.05] Who is a director? ........................................................................................ [15.10] Section 9 definition .................................................................................. [15.10] De facto directors .................................................................................... [15.15] Shadow directors ..................................................................................... [15.20] Functions and powers of the board ............................................................ [15.25] Functions of the board ............................................................................ [15.30] The power of management ..................................................................... [15.35] Shareholders cannot override management decisions .......................... [15.40] Separation of ownership and management ........................................... [15.55]

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Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 12. Key points • The definition of “director” is broad and includes persons appointed to that position as well as de facto and shadow directors. There are different types of directors reflecting the different roles directors may play on a board. A board may form committees to which particular areas of responsibility are delegated. • The two organs of a company are the board of directors and the general meeting of shareholders. The constitution, replaceable rules, Corporations Act and ASX Listing Rules determine the respective powers of the board and the general meeting. The board nearly always has the power of management of the business of the company as well as a number of ancillary powers. • The power of management is very broad and the general meeting cannot interfere with the exercise of this power. Shareholders may, however, remove directors of whom they disapprove. • Directors exercise their powers collectively at board meetings. Generally, the directors determine how board meetings are to be conducted. Because the legal rights of shareholders may be affected, board meetings must be held in compliance with some basic procedural rules in order to pass valid resolutions. • Directors are generally appointed by resolution of the general meeting. • A person may be disqualified from acting as a director for the purpose of protecting the public from directors who have committed certain offences or been involved with insolvent companies. • Directors may only be removed in accordance with the constitution and, in the case of public companies, by resolution of the general meeting. • The company secretary is the company’s chief administrative officer with responsibility over the company’s internal administration and compliance matters.

INTRODUCTION

[15.05] The directors are collectively referred to as a “board of directors”. Proprietary companies need only have one director: s 201A(1). Public companies must have at least three directors: s 201A(2). The initial directors are those persons named with their consent in the application for registration of the company: s 120(1). Subsequent appointments of directors may be made in accordance with the company’s constitution (if any) or replaceable rules contained in ss 201G and 201H. A company consists of two components or organs: • the board of directors; and • the members in general meeting. 360

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The ability of either of these organs to act as the company depends on the division of power between the board of directors and the members in general meeting and the extent of authority bestowed on them by the replaceable rules, the company’s constitution (if any) or the Corporations Act.

WHO IS A DIRECTOR? Section 9 definition

[15.10] A director of a company is defined in s 9 as a person who is appointed to the position of a director or alternate director regardless of the name given to their position. The s 9 definition also regards certain persons to be directors even though they are not validly appointed. Unless the contrary intention appears, a person who is not validly appointed as a director is also regarded as a director if: • they act in the position of a director (“de facto director”); or • the directors are accustomed to act in accordance with the person’s instructions or wishes (“shadow director”). According to the note in the s 9 definition of director, the following provisions of the Corporations Act are examples of a contrary intention where a de facto director or shadow director would not be included in the term “director”: • s 249C (power to call meetings of a company’s members); • s 251A(3) (signing minutes of meetings); and • s 205B (notice to ASIC of change of address). ASIC may ask a person to inform it whether they are a director or secretary of a particular company: s 205E. Where the person has ceased to be a director or secretary, ASIC may ask the date when this occurred.

De facto directors

[15.15] A director includes persons who act in the position of a director even though they have not been appointed to that position: s 9. Such people are referred to as “de facto” directors. In DFC of T v Austin (1998) 16 ACLC 1555, Madgwick J said that it is not practicable to formulate a general statement as to what constitutes acting as a director. This often involves a question of degree requiring a consideration of the duties performed in the context of the operations and circumstances of the company. A necessary condition of acting as a director is that the person exercised top level management functions. In the case of a small company, where a person has acted as the company in relation to important matters, this may indicate the person has acted in the capacity of a director. In the case of a large company, many important matters are delegated to employees and the exercise of such discretions does not necessarily 361

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indicate that the person is a director. It is also relevant to consider how the person claimed to be a director is perceived by outsiders who deal with the company where the person has been held out to be a director. A person may be regarded as a de facto director if the person is the driving force behind the company business despite not having been appointed to that position, or continues to participate in the management of the company after the expiration of the term of appointment as a director as if still a director: Corporate Affairs Commission v Drysdale (1978) 141 CLR 236. In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 it was held that a person who had been designated as a “consultant” could be found to be a de facto director. The determination of whether such a person is “acting in the position of a director”, and thereby caught by the s 9 definition of director, depends on the nature and extent of the functions to be performed, both in and beyond the consultancy, and on the constraints imposed therein. A person acting under a limited and specific consultancy is unlikely on her or his own to be regarded as a director. Whereas a person acting under a general and unconstrained consultancy under which he or she is permitted to take an active part in directing the affairs of the company, even if not necessarily on a full-time basis, is likely to be found to be a director.

Shadow directors

[15.20] As noted at [15.10], the s 9 definition of director also includes persons who act as “shadow” directors. These are persons whose instructions or wishes are customarily followed by the directors of a company. A person is not regarded as a director merely because the directors act on advice given by the person in the performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors. A body corporate can be a shadow director: Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290. Therefore a holding company may be a “shadow” director of a subsidiary if the directors of the subsidiary are nominee directors who customarily follow the holding company’s directions or instructions. A person may be a shadow director without necessarily exercising influence or control over the whole field of the company’s activities: Ho v Akai Pty Ltd [2006] FCAFC 159. The influence or control may be of a broad strategic nature or instrumental in arranging for the company to enter into significant transactions: ASC v AS Nominees Ltd (1995) 62 FCR 504. A creditor may be a shadow director of a company where the directors of the company are accustomed to act in accordance with the creditor’s instructions or wishes as to how they should act. However a creditor will not be a shadow director merely because the directors of the company feel obliged to comply with conditions imposed by that creditor in commercial dealings with the company: Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233. 362

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Determining whether a person is a shadow director or not is important where statutory duties are imposed on “directors”. This occurs in s 588G which imposes a duty to prevent insolvent trading. A shadow director may breach this duty and be held liable even though that person has not been validly appointed.

FUNCTIONS AND POWERS OF THE BOARD

[15.25] The board plays a crucial corporate governance role by setting the direction of the company and holding its management accountable. The powers of the board are determined by the replaceable rules, the company’s constitution (if any) and the Corporations Act. Usually, the board is given a broad power of management. The shareholders typically have the power to appoint or replace the directors.

Functions of the board

[15.30] The essential functions of the board are to provide leadership and set the company’s strategic objectives and monitor management. Recommendation 1.1 of the ASX Corporate Governance Principles and Recommendations 3rd ed suggests that a listed company should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated. The company should also disclose those matters expressly reserved to the board and those expressly delegated to management. Articulating the division of responsibilities between the board and management helps manage expectations and avoids misunderstandings about their respective roles and responsibilities. The Commentary to Recommendation 1.1 acknowledges that the nature of matters reserved to the board and those delegated to management will depend on the size, complexity and ownership structure of the company, and will be influenced by its history and corporate culture, and by the respective skills of directors and management. The Commentary sets out a number of usual responsibilities of the board. These are set out at [13.1.35] (Lipton). The ASX Corporate Governance Principles and Recommendations 3rd ed may be accessed on the ASX website which is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/. Corporate governance is discussed in Chapter 13.1 (Lipton).

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Figure 15.1: Board functions

Source: Bob Tricker Corporate Governance: Principles, Policies and Practices (3rd ed, Oxford University Press, 2015) p 168. In Figure 12.1 above, Tricker compartmentalises the important functions performed by the board according to whether they are future-focused or past- and present-focused and whether they have an inward- or outward-looking perspective. Therefore, future-focused concerns include the board’s involvement in formulating strategy. This involves identifying the company’s core purpose and values and establishing its direction. Once strategy is formulated, a board has an inward-looking policy-making responsibility, including the creation of a corporate culture. The board’s function in this respect is to ensure that the company has appropriate rules, procedures and systems in place to guide managers’ decision-making. Past and present focuses include monitoring and supervision of management and ensuring the organisation is accountable to external stakeholders. The function of the board that is generally regarded as the most important of all is the appointment of the chief executive officer. This appointment has major implications for all the other board functions. Another way of categorising the functions and roles of the board set out in Figure 12.1 above, is to distinguish between the performance and conformance functions of the board. The performance function involves tasks such as formulating strategies and determining policies. A board’s conformance function involves monitoring and supervising management and holding it accountable. How boards balance their conformance and performance functions differ from company to company. Some boards are actively involved in determining strategy and so are directly involved in the performance of the company. Other boards take a lesser role in formulating strategy which is largely delegated to senior management. Such boards focus on their conformance role which includes establishing a corporate governance framework and ensuring compliance with corporate governance requirements. 364

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The power of management

[15.35] The replaceable rule in s 198A states that the business of a company is to be managed by, or under the direction of, its directors who may exercise all the company’s powers except any powers that the Corporations Act or the company’s constitution (if any) requires the company to exercise in general meeting. The constitutions of most companies give the directors similar wide management powers. The scope of the management power in s 198A is extremely broad. It includes changing the direction of the company or selling the only business carried on by it. Directors do not have to obtain shareholder approval to sell the company’s only business: Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 9 ACLC 1018. ASX Listing Rules give shareholders of listed companies a say in significant management decisions. For example, under Listing Rule 11.1, the ASX may require shareholder approval if a listed company proposes to make a significant change to the nature or scale of its activities. Further, Listing Rule 11.2 requires shareholder approval if the significant change involves the company disposing of its main undertaking. The constitutions of some companies permit management of the company’s business to be delegated to a management company. The replaceable rules and the constitution (if any) also confer various specific powers on the board of directors which complement, or are incidental to, the power of management. Table 15.1 below sets out the important powers of the board. These powers are conferred on the directors as a board and not on individual directors.

TABLE 15.1 table 15.1: powers of the board Management

Company’s powers

Delegation of powers

Registration of transfers of shares

The replaceable rule in s 198A(1) gives the directors the power to manage the business of the company. It is extremely common for directors to be given similar broad management powers in a company’s constitution. The replaceable rule in s 198A(2) provides that directors may exercise all the powers of the company except any powers that the Corporations Act or the company’s constitution requires the company to exercise in general meeting. For example, directors may issue shares or debentures and borrow money on the company’s behalf. They may also make calls on partly paid shares. Section 198D provides that unless the company’s constitution provides otherwise, the directors may delegate any of their powers to a committee of directors, a director, an employee or any other person. In addition, the replaceable rule in s 198C gives the directors the power to confer any of their powers on a managing director. As discussed in Chapter 9 (Lipton), a person transferring shares remains the holder of the shares until the transfer is registered and the name of the transferee is entered in the company’s share register. The replaceable rule in s 1072F gives directors the power to register transfers of shares.

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Calling meetings

Dividends

Execute documents

Negotiable instruments

Under s 1072F(3) they may refuse to register a transfer of shares if the shares are not fully paid or the company has a lien on the shares. The replaceable rule in s 1072G, which applies to proprietary companies, enables directors to refuse to register a transfer of shares for any reason. Directors may also suspend registration of transfers of shares for periods not exceeding 30 days in any one calendar year: s 1072F(4). The replaceable rules set out the requirements for convening directors’ and members’ meetings. Section 248C allows a director to call a directors’ meeting by giving reasonable notice individually to every other director. A director may also call a meeting of the company’s members: s 249C. Members’ meetings are discussed in Chapter 14 (Lipton). The replaceable rule in s 254U gives directors the power to determine that a dividend is payable. They may also fix the amount, the time for payment and the method of payment. Dividends are discussed in Chapter 10 (Lipton). Under s 127(1) a company may execute a document without using a common seal if the document is signed by: two directors; or a director and a company secretary; or in the case of a proprietary company that has a sole director who is also the sole secretary that director. A company with a common seal may execute a document if the seal is affixed to the document and the fixing is witnessed by the people listed above: s 127(2). A person who has dealings with a company is able to assume that a document that appears to be executed in accordance with either s 127(1) or (2) is properly executed even if the signatories do not have authority to sign: s 129(5) and (6). The s 129 assumptions are discussed in Chapter 14. According to the replaceable rule in s 198B any two directors of a company that has two or more directors, or the director of a proprietary company that has only one director, may sign, draw, accept, endorse or otherwise execute negotiable instruments such as company cheques and bills of exchange.

Shareholders cannot override management decisions

[15.40] If the board has full management powers, shareholders cannot override the directors and involve themselves in the management of their company. It is also improper for shareholders to propose a non-binding advisory resolution that purports to express their opinion on how directors should exercise their management powers: NRMA v Parker (1986) 6 NSWLR 517. Shareholders’ limited rights to propose and vote on resolutions at general meetings are further discussed at [14.40] (Lipton).

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Automatic Self-Cleansing Filter Syndicate Co v Cunninghame Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34 [15.45]

The directors of a company were ordered by a general meeting to sell the company’s property. The directors refused to do this, relying on a provision in the constitution similar to s 198A. The members argued that the constitution was subject to the overriding rule that the directors, as agents of the company, were obliged to follow the instructions of their principal, the company; the will of the company being a resolution of the general meeting. The Court of Appeal rejected this argument. It held that the directions of the general meeting were a nullity that could be ignored by the directors. The constitution gave management powers to the board of directors, which included the power to sell the company’s property. The members could not interfere with the directors in this respect as they were contractually bound by the constitution.

John Shaw & Sons (Salford) Ltd v Shaw John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 [15.50]

This principle was applied to prevent the general meeting attempting to override a decision of the board to bring legal actions against some of the directors. The court held that the board of directors was properly exercising the powers of management vested in it by the constitution and the general meeting could not usurp this power. If the directors purport to exercise a power that should properly have been exercised by the general meeting, their action can be ratified by an ordinary resolution of the general meeting and the improper exercise of power becomes valid. The power of the general meeting to ratify the actions of the directors is discussed in Chapter 17 (Lipton).

Separation of ownership and management

[15.55] The conferral of wide powers of management on the board of directors is a necessary consequence of the separation of management and ownership. Ownership, in an economic sense, vests in the shareholders. This separation of functions is an important difference between companies and partnerships. Partnership law presumes that all partners have a right to participate in management. In the case of large, public companies it is essential that management vests in the board of directors. Where there are large numbers of shareholders, it would quickly become unworkable if the general meeting had the power to manage the company.

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In the case of small proprietary companies, there is no such difficulty. These may have evolved from sole traders or partnerships and even after incorporation they continue to function in a similar manner as before. The directors and shareholders of such companies are often the same people and in practice there is no separation of management and ownership. However, to meet the requirements of the legislation, the distinction between members in general meeting and directors is maintained even if in many cases it is an unrealistic distinction. The Corporations Act recognises the existence of proprietary companies with a single director who is also the sole shareholder. Further, proprietary companies are not required to hold an annual general meeting. The separation of ownership and control raises the possibility that management may act in its own interests in ways which may not be in the interests of the shareholders. For example, management may have an interest in maximising their remuneration while this may not be in the shareholders’ interests. The development of increased interest in corporate governance reflects higher expectations by the public and the investment community that greater efforts should be made by listed public companies to develop structures and procedures to ensure management is effective and acts in the interests of shareholders and adopts appropriate standards of corporate behaviour. Corporate governance is discussed in Chapter 13.1 (Lipton).

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CHAPTER 16

Good faith and proper purpose Duty to act in good faith in the best interests of the company ................. [16.05] Is the duty subjective or objective? ........................................................ [16.06] What are the best interests of the company?[16.10] Position of nominee directors ................................................................. [16.55] Company groups ..................................................................................... [16.90] Employees ............................................................................................. [16.115] Creditors ................................................................................................ [16.130] Directors’ duties and corporate social responsibility ............................ [16.135] Duty to exercise powers for proper purposes ........................................... [16.145] Issue of shares ...................................................................................... [16.150] Mixed purposes and the but for test .................................................... [16.175] Defending hostile takeovers .................................................................. [16.190] Use of company funds to promote re-election of directors ................. [16.195] Exercise of management powers ......................................................... [16.205] Exercising powers for the benefit of others ......................................... [16.220] Directors’ refusal to register a transfer ................................................ [16.230] Statutory duty to act in good faith and for a proper purpose: s 181 ...... [16.235] Directors who permit the corporation to contravene the Corporations Act ..................................................................................... [16.245] Consequences of contravening s 181 .................................................. [16.255] Duty to retain discretion ............................................................................. [16.260]

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Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 13.2. Key points • Directors are under both a fiduciary and statutory duty to act in good faith and in the best interests of the company. • The duty to act in good faith in the best interests of the company means that directors must act in the interests of the general body of shareholders. This includes an obligation to act fairly across different classes of shareholders. • The duty to act in the best interests of the company may cause difficulties for nominee directors and directors of a company that is a member of a larger corporate group. In both cases it may be difficult for a director to reconcile acting in the best interests of the company with acting in the best interests of the nominee director’s appointor. • Directors have a fiduciary and statutory duty to exercise their powers for a proper purpose and not for the purpose of conferring an advantage on themselves or someone else. This duty may be breached where directors issue shares for the purpose of preventing a takeover or altering the balance of power among shareholders. • Directors who have mixed purposes (proper and improper) for exercising a particular power will breach their duty if the motivating purpose was improper. • Shareholders have the power to ratify improper exercises of power by directors.

DUTY TO ACT IN GOOD FAITH IN THE BEST INTERESTS OF THE COMPANY

[16.05] Directors are under a fiduciary duty to act in good faith and in the best interests of the company. Section 181(1)(a), which requires a director or other officer to exercise their powers and discharge their duties in good faith and in the best interests of the corporation, sets out the same requirements as the fiduciary duty. Section 181(1)(a) is discussed at [16.235]. The law set out in the s 181(1)(a) cases is also relevant for the directors’ fiduciary duty to act in the best interests of the company. According to Malcolm CJ in Chew v R (1991) 4 WAR 21 the duty to act in the best interests of the company has a number of aspects: First, the directors must exercise their powers in the interests of the company, they must not misuse or abuse their powers. Secondly, they must avoid conflict between their personal interests and those of the company. Thirdly, they should not take advantage of their position to make secret profits. Fourthly, they should not misappropriate the company’s assets for themselves.

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Directors who breach the fiduciary duty or the s 181(1)(a) duty to act in the best interests of the company may also, in the same circumstances, breach their duty to avoid conflicts of interest or ss 180, 182 and 183.

Is the duty subjective or objective?

[16.06] The courts are divided on whether the duty to act in good faith in the best interests of the company is subjective or objective. Some cases assert that the test of whether directors act in good faith in the best interests of their company is subjective in the sense that directors comply with this duty if they genuinely believe that they are acting in the best interests of the company. They breach their duty where they engage deliberately in conduct, knowing that it is not in the interests of the company: ASIC v Maxwell [2006] NSWSC 1052. Other cases argue that there is also an objective test in determining whether directors acted in good faith in the best interests of the company. Directors will not comply with their duty merely by saying they have an honest belief that their actions are in the best interests of the company. In determining whether a director made improper use of his position, Toohey J in Chew v R (1992) 173 CLR 626 said that the test is “one to be determined objectively; essentially the issue is whether the conduct impugned is inconsistent with the proper discharge of the duties of the office in question”. Owen J in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 held that while it is not the court’s role to second-guess directors about management decisions, directors will breach their duty “if, on consideration of the surrounding circumstances (objectively viewed), the assertion of directors that their conduct was bona fide in the best interests of the company and for proper purposes should be doubted, discounted or not accepted”. This case is discussed at [16.225]. Owen J’s analysis of the subjective and objective elements of the fiduciary duty to act in the best interests of the company was affirmed on appeal in Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157. The duty to act in good faith in the best interests of the company is breached if a director acts in a way that no rational director would have considered to be in the best interests of the company: ASIC v Adler [2002] NSWSC 171. A similar point was made by the Victorian Court of Appeal in Mernda Developments Pty Ltd v Rambaldi [2011] VSCA 392 where the court held that the test was whether an intelligent and honest man in the position of the directors reasonably believed that their conduct was in the best interests of the company. Bowen LJ explained the reason for this in Hutton v West Cork Railway Co (1883) 23 Ch D 654: Bona fides (good faith) cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying its money with both hands in a manner perfectly bona fide yet perfectly irrational.

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Directors are presumed to have acted in good faith and in the best interests of their company and those persons alleging a breach of duty bear the onus of proving that this is in fact not the case.

What are the best interests of the company? Present and future shareholders

[16.10] A difficult question arises as to what is meant by the phrase “the best interests of the company”. As discussed at [11.35], a company is regarded as a legal entity separate and distinct from its shareholders. Despite this, the courts take the view that the duty to act in good faith in the best interests of the company means that the directors must act in the best interests of the shareholders as a collective group. Evershed MR, in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, stated: [T]he phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity distinct from the corporators: it means the corporators as a general body.

As long as the company is solvent, the interests of the company are the interests of its shareholders. However, as discussed at [13.5.10]–[13.5.95] (Lipton), where the company is in financial difficulties, the company’s creditors’ interests become increasingly important. In Darvall v North Sydney Brick & Tile Co Ltd (1987) 6 ACLC 154, Hodgson J, at first instance, considered that directors should have regard to both the interests of present and future shareholders as well as the interests of the company as a commercial entity. He stated: In my view, it is proper to have regard to the interests of the members of the company, as well as having regard to the interests of the company as a commercial entity. Indeed, it is proper also to have regard to the interests of creditors of the company. I think it is proper to have regard to the interests of present and future members of the company, on the footing that it would be continued as a going concern.

Hodgson J also held that directors may act in what they consider to be the best interests of the company as a commercial entity even though this may not be in the short-term interests of shareholders. In most situations the interests of the company as a commercial entity and the interests of its shareholders coincide. As a general rule, shareholders’ interests are paramount. Mahoney JA, in the Court of Appeal of the Supreme Court of New South Wales in Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1989) 16 NSWLR 260, asserted that a company has a legitimate interest in matters which extend beyond the company’s business and the security of its assets. These may include who its shareholders are, the price of its shares and achieving a proper understanding of the company’s business in the investment community. While directors are required to act in the best interests of the company, this does not mean that they breach their fiduciary duty if they also consider the interests of 372

Chapter 16 Good faith and proper purpose [16.30]

other stakeholders. The Senate Standing Committee on Legal and Constitutional Affairs stated in its 1989 Report, Social and Fiduciary Duties and Obligations of Company Directors: The courts have associated directors’ duties with “the interests of the company”. This does not mean that directors must not consider other interests. The “interests of the company” include the continuing well-being of the company. Directors may not act for motives foreign to the company’s interests, but the law permits many interests and purposes to be advantaged by company directors, as long as there is a purpose of gaining in that way a benefit to the company.

Individual shareholders

[16.15] Directors’ duty to act in good faith in the best interests of the shareholders does not mean that they owe duties to particular shareholders.

Percival v Wright Percival v Wright [1902] 2 Ch 421 [16.20]

A director of a company was approached by a shareholder wishing to sell his shares. The director agreed to buy them but did not disclose that there was an impending takeover bid at a substantially higher price. The shareholder afterwards sought to rescind the contract for the sale of his shares on the basis that the director breached his fiduciary duty to him by failing to disclose the information concerning the impending takeover even though it did not eventuate. The court rejected the shareholder’s claim. It held that directors only owe fiduciary duties to the company as a whole and not to individual shareholders.

[16.25] In some special circumstances, a director may owe fiduciary duties to an individual shareholder. For such circumstances to arise, the director must have been in direct and close contact with the individual member so that the director caused the member to act in a certain way which turned out to be detrimental to them: Peskin v Anderson (2001) 19 ACLC 3001.

Coleman v Myers Coleman v Myers [1977] 2 NZLR 225 [16.30] The managing director of a family company arranged for the company

to be taken over at an under-value by a new company controlled by him. It was held that the managing director breached fiduciary duties owed to the minority shareholders of the family company. The managing director failed to disclose material information concerning his potential profits and misled the shareholders as to the true value of the company’s assets. Woodhouse J noted the factors that would give rise to a fiduciary duty to individual shareholders:

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[16.30] Corporations and Contract Law Coleman v Myers cont. They include, I think, dependence upon information and advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and, of course, the extent of any positive action taken by or on behalf of the director or directors to promote it.

Brunninghausen v Glavanics Brunninghausen v Glavanics [1999] NSWCA 199 [16.35]

The New South Wales Court of Appeal held that there were special circumstances which justified a departure from the general rule that a director does not owe a fiduciary duty to act in the best interests of particular shareholders.

In that case, the company had two shareholders who were also its only directors. Glavanics, the minority shareholder, despite being a director, was not involved in the company’s management and had no access to its financial records. After a falling out, Brunninghausen, the majority shareholder and managing director, entered into negotiations to buy Glavanics’ shares. However, unknown to Glavanics, another person approached Brunninghausen offering to buy all the shares in the company. Eventually Glavanics agreed to sell his shares to Brunninghausen, who subsequently sold all the shares to the third party for a higher price. When Glavanics became aware of this, he sued Brunninghausen for breach of fiduciary duty and claimed equitable compensation.

The Court of Appeal held that while a director’s fiduciary duties were generally owed to the company and not individual shareholders, the nature of a transaction may give rise to a director owing fiduciary duties to a shareholder. Brunninghausen possessed special knowledge acquired while managing the company which provided an opportunity to sell the company’s business advantageously. This opportunity belonged to the company. Handley JA said: A fiduciary duty owed by directors to the shareholders where there are negotiations for a takeover or an acquisition of the company’s undertaking would require the directors to loyally promote the joint interests of all shareholders.

Beneficiaries of a trust

[16.40] Where a company acts as a trustee, directors of the trustee company may owe a duty to act in the best interests of the beneficiaries of the trust.

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Hurley v BGH Nominees Pty Ltd (No 2) Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499 [16.45]

The South Australian Supreme Court considered whether the directors of a trustee company breached their duties to beneficiaries. The trust carried on business at leased premises. It was argued that the directors breached their duty by acquiring the freehold of the premises for themselves. Walters J approved of the decision in Coleman v Myers [1977] 2 NZLR 225 and held that it was incorrect to say that directors of a company are entitled in all circumstances to act as though they owe no duty to individual shareholders. In appropriate circumstances, directors of companies that act as trustees owe duties not only to individual shareholders but also to the beneficiaries of the trusts.

Different classes of shareholders

[16.50] The task of ascertaining what constitutes the interests of the company as a whole is particularly difficult where its shares are divided into different classes. In such a case, the exercise of a power by the directors may benefit one class to the detriment of others. Classes of shares are discussed at [8.110] (Lipton). In Mills v Mills (1938) 60 CLR 150, Latham CJ held that the test of whether a director is acting in the interests of the company is not appropriate in such circumstances. Rather, it involves the question of what is fair as between the classes of shareholders. He also stressed that while directors are required to act in the interests of the company, the law does not require them to “live in an unreal region of detached altruism”. If they are also shareholders, they cannot reasonably be expected to disregard their own interests. As discussed at [17.15]–[17.280] (Lipton), s 232 enables a member to obtain a remedy if the court is of the opinion that a resolution of a class of members was contrary to the interests of the members as a whole, oppressive or unfairly prejudicial or unfairly discriminatory. This may apply where directors exercise their voting rights as holders of a class of shares in a way that is detrimental to holders of other classes of shares.

Position of nominee directors

[16.55] Nominee directors are sometimes appointed to represent sectional interests. They are often appointed to represent the interests of individual shareholders in a joint venture company. They may also be appointed to represent a majority shareholder, a class of shareholders, creditors, a holding company, employees or a government body. The position of directors within groups of companies is discussed at [16.90]. Typically, nominee directors are expected to act in the interests of their appointors rather than the company’s shareholders generally. 375

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The fiduciary and statutory duties to act in good faith in the best interests of the company as a whole require directors to act in the best interests of the shareholders as a collective group. However, difficulties arise in situations where a nominee director is appointed to represent the interests of particular persons. In such cases there may be problems in reconciling the nominee director’s duty to act in the interests of the appointor and the director’s duty to act in the interests of the company as a whole. Nominee directors are permitted to act in the interests of their appointor provided that they honestly and reasonably believe that there is no conflict between the interests of their appointor and the interests of the company.

Re Broadcasting Station 2GB Pty Ltd Re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648 [16.60]

A newspaper publishing company, Fairfax, gained control of Broadcasting Station 2GB Pty Ltd, a company that owned a radio station. The newspaper publishing company appointed a number of directors to the board of 2GB to represent its interests. One of the independent directors, who was also a shareholder, sought a remedy under a predecessor of s 232 alleging that the affairs of 2GB were being conducted in an oppressive manner. The alleged oppression concerned the appointment of the nominees to act solely in the interests of Fairfax and their conduct in withholding information from fellow directors concerning negotiations carried on by Fairfax in seeking the continuation of the radio station’s broadcasting licence.

The court held that there was no oppressive conduct. Jacobs J found that the Fairfax nominee directors would be likely to act, and were expected by Fairfax to act, in accordance with its wishes without close personal analysis of the issues. However, there was no evidence that the nominee directors believed that the interests of Fairfax diverged from the interests of the company as a whole. While nominee directors may breach their duties if they act in a way that is not in the best interests of the company, this conclusion is not lightly reached. It is unrealistic to expect directors to approach each company problem with a completely open mind. This would put a nominee director in an impossible position.

[16.65] A company’s constitution or a shareholders’ agreement may specifically permit the appointment of nominee directors to represent the interests of a particular shareholder or creditor.

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Levin v Clark Levin v Clark [1962] NSWR 686 [16.70]

Levin purchased the majority shareholding in a company and simultaneously mortgaged the shares to the vendor to secure payment of the purchase price. The company’s constitution named Clark and Rappaport as the governing directors with wide powers.

They were appointed to represent the interests of the vendor and mortgagee. Under the sale agreement the constitution was amended so as to allow Clark and Rappaport to exercise their powers as governing directors only in the event of default in payment of the loan to Levin. In this way they were able to protect the interests of the mortgagee/vendor. Levin defaulted and Clark and Rappaport proceeded to exercise their powers to enforce the mortgage. Levin challenged this exercise of power on the basis that as governing directors, Clark and Rappaport’s primary obligation was to the company and not to the mortgagee. The court held that the extent of the fiduciary duties of directors depends on the circumstances and these may include the fact that the constitution provided for the appointment of nominee directors. In this case it was implied that the nominee directors, Clark and Rappaport, were expected to protect the mortgagee’s interests in the event of default by the mortgagor. The fiduciary duties of Clark and Rappaport took into account the agreement of the shareholders even though this was not expressly stated.

[16.75] Nominee directors breach their duty where there is a clear conflict between the interests of the company and their appointor and the company’s interests are sacrificed. The duties of nominee directors of non-wholly owned subsidiaries was considered by the English Court of Appeal in Scottish Co-operative Wholesale Soc Ltd v Meyer [1958] 3 All ER 66. Lord Denning held that where the interests of a holding company and the subsidiary’s minority shareholders do not coincide, nominee directors appointed by the holding company are bound to put the interests of the subsidiary’s shareholders ahead of the interests of the majority shareholder.

Scottish Co-operative Wholesale Soc Ltd v Meyer Scottish Co-operative Wholesale Soc Ltd v Meyer [1958] 3 All ER 66 [16.80] The minority shareholders of a subsidiary of the Scottish Co-operative

Wholesale Society held slightly less than half the issued shares in the subsidiary. Three directors of the subsidiary were appointed as nominees of the holding company and the other two represented the minority shareholders. The subsidiary operated a profitable textile manufacturing business using yarn purchased from its holding company. After a time, the holding company decided to operate its own textile manufacturing business and stopped supplying yarn to its subsidiary. 377

[16.80] Corporations and Contract Law Scottish Co-operative Wholesale Soc Ltd v Meyer cont. As a result, the subsidiary’s activities were severely curtailed. The action of the holding company had the effect of preventing the subsidiary’s minority shareholders from participating in the profits of the textile manufacturing business.

It was held that the subsidiary’s directors appointed by the holding company acted contrary to the interests of the shareholders as a whole by failing to defend it from the actions of the holding company. Their failure to act, coupled with the holding company’s conduct, was regarded as oppressive under the English equivalent of s 232. This is discussed at [17.15]–[17.280] (Lipton).

[16.85] This approach was also taken by Street J in Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307, where he stated categorically that a nominee director must put the interests of the company ahead of the interests of the appointor whenever a conflict arises. Although nominee directors play an important role in a wide variety of situations, the inherent difficulties in determining the extent of nominee directors’ fiduciary duties have not been fully resolved by the courts. The duties of nominee directors are discussed in RP Austin “Representatives and Fiduciary Responsibilities — Notes on Nominee Directorships and Like Arrangements” (1995) 7 Bond LR 19. This article is linked to the Understanding Company Law website at http://www.uclaw.com.au/ resources/.

Company groups

[16.90] A holding company will usually appoint its nominees as directors of subsidiaries. In practice, nominee directors on the board of a subsidiary are required by the holding company to act in the best interests of the group of companies. For example, a holding company may require the directors of a subsidiary to approve their company’s participation in intra-group transactions, such as loans to other companies in the group or guaranteeing the external borrowings of other group members. In most cases, the interests of the holding company and the interests of a wholly-owned subsidiary will generally correspond. However, if there is a conflict between the interests of a subsidiary and the group, nominee directors must act in the subsidiary’s best interests and not in the interests of the group as a whole: Walker v Wimborne (1976) 137 CLR 1.

Mernda Developments Pty Ltd v Rambaldi Mernda Developments Pty Ltd v Rambaldi [2011] VSCA 392 [16.92]

A shadow director of Mernda Developments breached his duty to act in the best interests of the company when he arranged for it to enter into a loan facility agreement under which Alamanda would lend money to Mernda and 24

378

Chapter 16 Good faith and proper purpose [16.100] Mernda Developments Pty Ltd v Rambaldi cont. other companies also controlled by the shadow director. Mernda granted Alamanda a charge over all its assets as security. Under the loan facility agreement Mernda was not entitled to draw down any further advances beyond the initial advance and was required to repay to Alamanda not only its own indebtedness but also that of the other borrowing companies. The court held that an intelligent and honest person in the shadow director’s position could not have reasonably believed that entering into the facility agreement, whereby Mernda incurred a liability for the debts of other borrowers in circumstances where Mernda was itself not entitled to any further advances, was for the benefit of Mernda.

[16.93] While directors of a subsidiary company have a duty to act in the best interests of that company rather than the group as a whole, in some circumstances an intra-group transaction that is entered into primarily for the benefit of the group may also have collateral or derivative benefits for the subsidiary. In such a situation there will be no breach of duty if it can be shown that the first company indirectly benefited from the assistance that was given to other companies in the group.

Equiticorp Finance Ltd (in liq) v Bank of New Zealand Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 [16.95]

Funds were transferred from two companies in a group to satisfy the debt of a related company. The New South Wales Court of Appeal held that the dominant director of the group was justified in considering that the welfare of the group was intimately tied up with the welfare of the individual companies. The interests of the two companies were considered because provision was made for compensating them for the loss of the funds. The transactions were justified because the holding company of the group had guaranteed the debt which was repaid. The alternative was possible disaster for the whole group, including the two companies.

[16.100] Section 187, assists directors who serve on the boards of wholly-owned subsidiaries. Under this provision, a director of a wholly-owned subsidiary will be taken to act in good faith in the best interests of the subsidiary where: • the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and • the director in fact acted in good faith in the best interests of the holding company.

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In order to protect the interests of the subsidiary’s creditors, the operation of s 187 is limited to situations where the subsidiary is solvent at the time the director acts and does not become insolvent because of the director’s action. A holding company’s nominees on the board of a non-wholly owned subsidiary are in a more delicate position. They must balance the interests of the group with the interests of the subsidiary’s shareholders generally, including the minority shareholders. In most situations, the interests of a non-wholly owned subsidiary company and the wider interests of the group coincide. This may not, however, be the case where the various companies in the group are in financial difficulties. The movement of funds from one company to another group member may prejudice the interests of creditors of the transferring company. The duty of directors to creditors is discussed at [13.5.10]–[13.5.95] (Lipton). It may be detrimental to the interests of minority shareholders if directors fail to act in the interests of a particular company and instead treat the company as part of a group.

Re Spargos Mining NL Re Spargos Mining NL (1990) 3 WAR 166 and Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 [16.105]

A minority shareholder, Jenkins, obtained remedies under the equivalent of s 232 on the grounds that the directors of Spargos and Enterprise Gold Mines had diverted substantial assets that were used for the benefit of other companies in the group. This caused considerable losses to the shareholders not interested in the other companies because the transactions were of no commercial benefit to Spargos and Enterprise Gold Mines and their shareholders. These cases are discussed at [17.15]–[17.280] (Lipton).

Employees

[16.115] Directors should not consider the interests of employees at the expense of the interests of the company’s shareholders.

Parke v Daily News Ltd Parke v Daily News Ltd [1962] Ch 927 [16.120] A company that controlled two newspapers sold one of them. The

directors intended to distribute surplus proceeds from the sale among its employees by way of compensation for dismissal. A shareholder brought an action to prevent these payments. It was held that the directors breached their fiduciary duties to act in the best interests of the company because the proposed

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Chapter 16 Good faith and proper purpose [16.135] Parke v Daily News Ltd cont. payments were not reasonably incidental to the carrying on of the company’s business. They were gratuitous payments to the detriment of shareholders and the company as a whole. However, in Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250 the court said that a redundancy payment paid to a departing employee (sometimes called a “golden handshake”) may be in the interests of the company if it preserves goodwill, avoids disputation, and encourages continuing employees.

[16.125] In most cases, a payment to employees will be in the interests of the company where their employment continues because its industrial relations may be improved. This did not arise in Parke v Daily News Ltd [1962] Ch 927 because the company was in fact selling that part of its business operations. The employee entitlements provisions contained in Pt 5.8A of the Corporations Act require directors to consider the interests of employees in certain situations. These provisions were introduced in 2000 to protect employees by preventing directors of employer companies stripping the companies’ assets and making the companies insolvent so as to prevent employees enforcing their entitlements. These provisions are discussed at [19.180] and [25.625] (Lipton). The United Kingdom’s Companies Act 2006 (UK) requires directors to have regard to the interests of the company’s employees and the impact of the company’s operations on the community and the environment as well as promoting the success of the company for the benefit of its members as a whole. The Australian position is discussed at [16.135].

Creditors

[16.130] As discussed at [16.05], directors are subject to a fiduciary duty to exercise their powers in good faith and in the best interests of their company. When the company is solvent, the best interests of the company correspond with the best interests of its shareholders as a collective group. Different considerations apply if the company is insolvent or in financial difficulties. In such circumstances, the interests of the company are those of its creditors. Directors have a duty to exercise their powers in a way that does not prejudice the company’s ability to pay its creditors. Directors’ duties not to prejudice their company’s creditors are discussed in Chapter 19.

Directors’ duties and corporate social responsibility

[16.135] The traditional view is that directors’ duty to act in the best interests of the company means that they are required to consider the interests of the shareholders and in insolvency situations, the company’s creditors. There has been increasing concern that this view is too narrow and that companies also have wider social responsibilities. Consequently, directors may be required to consider the interests of other important 381

[16.135] Corporations and Contract Law

stakeholders apart from shareholders when making business decisions. Other stakeholders who have a legitimate interest in a company’s activities include: • the company’s employees; • the company’s customers and suppliers; • the environment; • regulators and other government agencies; and • the broader community. The CAMAC Report The Social Responsibility of Corporations (2006) addressed the question whether the Corporations Act should be revised to require directors to take into account the interests of stakeholders and the broader community when making corporate decisions. The report considered that the present law requiring directors and others to act in the interest of the company was sufficiently broad to enable corporate decision-makers to take into account the environmental and other social impacts of their decisions. The report also took the view that it would be counter-productive to amend the Corporations Act so as to require or permit directors to have regard to social responsibility matters or the interests of particular stakeholders as this would blur the purposes that directors are expected to serve and may make directors less accountable to shareholders without significantly enhancing the rights of other stakeholders. This report may be viewed on the CAMAC website, which is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

DUTY TO EXERCISE POWERS FOR PROPER PURPOSES

[16.145] We saw at [15.35] that certain powers are conferred on the board of directors by the replaceable rules and constitution (if any). These generally include broad powers of management. Examples of specific powers conferred on directors include the power to issue shares and to refuse to register transfers of shares. The fiduciary duty of directors requires them to exercise their powers for proper purposes. Directors may breach this duty even if they honestly believe their actions are in the best interests of the company as a whole. In cases where it is alleged that the directors have exercised their powers for improper purposes, the courts consider two matters: the objective purpose for which the power was granted and the purpose which actually motivated the exercise of the power: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. The onus of establishing that the directors acted improperly rests with those alleging the breach of duty: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199. The courts are generally reluctant to interfere in the internal management of a company unless improper purposes are clearly demonstrated. A director may be in breach of the duty to exercise powers for a proper purpose even though the director was not involved in a particular transaction. The duty is breached if the director disclosed a conflict of interest and abstained from voting but 382

Chapter 16 Good faith and proper purpose [16.150]

knew of the improper purpose of the other directors and failed to take steps to prevent the transaction from proceeding. In such a case, the director is under a positive duty to take steps to protect the company’s interests: Permanent Building Society v Wheeler (1994) 11 WAR 187. Under s 181, directors and other officers are under a duty to act in good faith in the best interests of the corporation and for a proper purpose. Breach of this duty to exercise powers for a proper purpose attracts the civil penalty provisions and possibly criminal liability where dishonesty is involved. The civil penalty provisions are discussed at [20.120]–[20.150].

Issue of shares

[16.150] While the duty to act for proper purposes may arise in a large variety of situations, most of the cases involving allegations of breach of directors’ duty to act for proper purposes have concerned directors exercising the power to issue shares. The power to issue shares is ordinarily conferred for the purpose of raising capital for the company. Shares may also be properly issued for the purpose of providing consideration for the purchase of property or as a means of remunerating employees of a company. Directors breach their fiduciary and statutory duties to exercise their powers for a proper purpose if they issue shares to: • maintain control of the company’s management or majority shareholding; • defeat a takeover bid; or • create or destroy the voting power of majority shareholders. The company has a number of remedies if directors issue shares for improper purposes. The main remedy is to rescind the share issue. A shareholder may apply for court leave under s 236 to sue the directors in the name of the company if it is unwilling to take such action against its directors. Issuing shares for an improper purpose may also constitute oppressive or unfair conduct and enable a shareholder to obtain a remedy under s 232. Sections 232 and 236 are discussed at [17.15] (Lipton) and [17.285] (Lipton), respectively. If directors suspect that a share issue may result in them breaching their fiduciary duty they can best protect themselves by obtaining shareholder approval at a general meeting. Shareholder approval is obtained by the passing of an ordinary resolution to ratify the directors’ actions. Shareholder ratification of directors’ breaches of duty is discussed at [13.7.05] (Lipton). To a large extent, the ASX Listing Rules ensure that directors of listed companies do not make significant share issues without obtaining shareholder approval. Under Listing Rule 7.1 share issues exceeding 15 per cent of a listed company’s issued capital in a 12-month period require shareholder approval. In addition, Listing Rule 10.11 requires shareholder approval for share issues to related parties of a listed company such as directors. 383

[16.155] Corporations and Contract Law

Shares issued to maintain control

[16.155] Directors who issue shares for the purpose of maintaining their position of control of the company breach their fiduciary duty and the share issue may be invalidated. In Ngurli Ltd v McCann (1953) 90 CLR 425, Williams ACJ, Fullagar and Kitto JJ in a joint High Court judgment stated: The power must be used bona fide for the purpose for which it was conferred, that is to say, to raise suffıcient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders.

Creating or destroying a majority of voting power

[16.160] In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, the Privy Council held that directors may act for improper purposes even where a share issue is not motivated by self-interest. Directors breach their duty to act for proper purposes if they use their power to issue shares for the purpose of creating a new majority shareholder or to manipulate control within the company. This is so even where the directors may honestly believe their actions are in the best overall interests of the shareholders.

Howard Smith Ltd v Ampol Petroleum Ltd Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 [16.165] This case arose out of a takeover battle for control of R W Miller (Holdings) Ltd. Its major shareholders were two independent companies, Ampol Petroleum and Bulkships Ltd, which between them controlled 55 per cent of Miller’s issued capital. Ampol and Bulkships decided to combine their holdings and made a joint takeover bid for all the other Miller shares. Soon after, Howard Smith, a company friendly to Miller’s board, made its own takeover bid offering a higher price. To give Howard Smith’s takeover bid a chance of success, Miller’s directors issued sufficient shares to it so as to reduce the Ampol-Bulkships majority shareholding to a minority position. When Ampol and Bulkships challenged the validity of the share issue, Miller’s directors argued that they were primarily motivated by the fact that their company was in urgent need of funds to finance tankers then under construction and to ease other existing financial problems.

The Privy Council held that Miller’s directors had breached their duty and invalidated the share issue to Howard Smith. It did not believe the directors’ explanation of their reasons for the share issue. The directors were motivated primarily to reduce the combined majority shareholding of Ampol and Bulkships

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Chapter 16 Good faith and proper purpose [16.170] Howard Smith Ltd v Ampol Petroleum Ltd cont. to a minority position in order to promote the Howard Smith takeover bid. This was improper even though a successful bid by Howard Smith meant that shareholders would have been able to obtain a higher price for their shares. Although Miller was in a position of tight liquidity, its financial position had improved at the time of the share issue partly by it pursuing a policy of raising loan capital.

Whitehouse v Carlton Hotel Pty Ltd Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 [16.170]

The facts of this case are unusual in that the decision of the court to invalidate a share issue operated to the advantage of the director who issued the shares and had changed his mind. Carlton Hotel was a family company controlled by the father who was its governing director. Under the articles, this position gave the father the sole power to issue shares. The company’s capital was divided into three classes of shares. The father held “A” class shares. His wife owned “B” class shares and his two sons and four daughters each owned “C” class shares, which had no voting rights. While the father was alive only “A” class shares had voting rights. His wife’s “B” class shares were given voting rights upon his death.

In 1973, the parents divorced. The daughters sided with their mother and the sons with their father. To ensure that his ex-wife and daughters would not gain control of the company after his death, the father purported to allot further “B” class shares to his sons. This allotment was made without the knowledge of the wife and was not recorded in the company’s share register but was noted in several annual returns. In 1980, the father fell out with his sons and purported to annul the allotment of shares to them. The sons brought an action to have the share register rectified so as to reflect the allotment. The company argued that the issue of the “B” class shares was invalid because the father, as governing director, had issued them for the improper purpose of realigning the relative shareholdings upon his death.

By a majority of three to two, the High Court confirmed the company’s argument and held that the allotment was invalid as a result of the governing director’s breach of duty. Mason CJ, Deane and Dawson JJ, in a joint judgment, stated the general rule derived from Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821: The reason why, as a general rule, it is impermissible for the directors of a company to exercise a fiduciary power to allot shares for the purpose of destroying or creating a majority of voting power was identified by the Privy Council in Howard Smith v Ampol Petroleum. It lies essentially in the distinction between indirect proprietorship and ultimate control of the shareholders on the one hand and the powers of management entrusted to the directors on the other. It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a

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[16.170] Corporations and Contract Law Whitehouse v Carlton Hotel Pty Ltd cont. fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders … … it is unavailing that Mr Whitehouse was not motivated by purely selfish considerations in that he believed that the manipulation of voting power in favour of his sons at the expense of his former wife was in the interests of the company in that it would ensure that the management of the company after his death was in the hands of those whom he favoured. Indeed, in the ordinary case of a purported allotment of shares for such an impermissible purpose, it is likely that the directors will genuinely believe that what they are doing to manipulate voting power is in the overall interests of the particular company … In this as in other areas involving the exercise of fiduciary power, the exercise of a power for an ulterior purpose or impermissible purpose is bad notwithstanding that the motives of the donee of the power in so exercising it are substantially altruistic.

Mixed purposes and the “but for” test

[16.175] When directors exercise their powers to issue shares, they may be motivated by a number of purposes. This is particularly the case when the directors are themselves shareholders in the company. They must exercise their power in the interests of their company, but in doing so they may also promote their own interests as shareholders to the detriment of other shareholders. In such cases the courts will not intervene unless it is established that their motivating purpose is improper. This is so, even if the directors are also motivated by some subsidiary proper purpose. In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, the High Court explained that where there was more than one purpose for a share issue, the “but for” test should be applied to work out whether the directors breached their duty and issued the shares for an improper purpose. An allotment of shares will be invalidated if the impermissible purpose is causative in the sense that, but for its presence, no allotment would have been made. Mason CJ, Deane and Dawson JJ stated: As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, “the power would not have been exercised”: Mills v Mills (1938) 60 CLR 150 at 186 per Dixon J.

Hannes v MJH Pty Ltd Hannes v MJH Pty Ltd (1992) 10 ACLC 400 [16.180] It was held that the motivating purpose and the real reason for a

governing director’s actions to issue shares to himself and enter into a service agreement was self-interest and the desire to derive additional personal benefits. 386

Chapter 16 Good faith and proper purpose [16.190] Hannes v MJH Pty Ltd cont. These motives overshadowed the director’s duties to act in the interests of the company. The director breached his duty to act for a proper purpose.

Kokotovich Constructions Pty Ltd v Wallington Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 [16.185]

The New South Wales Court of Appeal applied the “but for” test and held that an issue of shares by a governing director to his children was invalid even though one of the purposes of the issue was to raise capital. On the evidence, the court concluded that but for the governing director’s improper purpose of manipulating voting power, the share issue would not have been made.

Defending hostile takeovers

[16.190] The question of whether directors have exercised their powers for a proper purpose has often arisen in the context of defensive measures aimed at defeating a hostile takeover bid. Such measures raise the possibility that the directors may be motivated by a desire to retain control of their company at the expense of their shareholders’ interests. If directors do this they will breach their fiduciary duties. However, directors of target companies are not powerless in the face of an inadequate takeover bid. They will not breach their fiduciary duties if they engage in defensive measures designed either to maximise the value of members’ shares or advance the commercial interests of the company. A 1986 NCSC discussion paper, Defensive Schemes and the Duties of Directors, observed that shareholders have the right to determine the composition of their company’s board and that directors should not use their powers to block a takeover substantially as a means of retaining management. On the other hand, defensive measures may be desirable where the effect is to facilitate an auction for the company’s shares, thereby maximising the return to shareholders, or to force compliance with disclosure or other legal requirements imposed on bidders. While the discussion paper did not draw any final conclusions, it noted that the motive of directors was critical. This raises a number of difficulties of proof. The directors’ motives must be shown to be incompatible with their duties to shareholders. This is especially difficult to prove in the case of complex business decisions that may involve a number of considerations. This discussion paper is further discussed at [18.250]–[18.255] (Lipton) and may be accessed on the Takeovers Panel website and is linked to the Understanding Company Law website at http://www.uclaw.com.au/ resources/.

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Actions by target company directors which have the effect of frustrating a takeover bid may result in a declaration of unacceptable circumstances being made by the Takeovers Panel. The situations where this may arise are discussed at [18.245] (Lipton).

Use of company funds to promote re-election of directors

[16.195] Directors may exercise their powers for an improper purpose where they use company funds to promote their own re-election against other candidates.

Advance Bank Australia Ltd v FAI Insurances Ltd Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 [16.200]

The New South Wales Court of Appeal held that while there was no absolute prohibition on the expenditure of company funds in an election for directors, such expenditure should be kept to a minimum and be confined to providing information that promotes an informed decision by shareholders. Self-praise and irrelevant personality issues should be avoided.

The directors breached their duty even though they honestly believed they were acting in the company’s best interests because they resolved to form a campaign committee that used company funds to promote the re-election of certain directors and to secure the defeat of candidates nominated by FAI, a substantial shareholder. The information supplied by the committee to shareholders was emotional and misleading.

Exercise of management powers

[16.205] Directors may breach their duty where management powers are exercised for an improper purpose.

Permanent Building Society v Wheeler Permanent Building Society v Wheeler (1994) 11 WAR 187 [16.210]

The board of a building society caused the society to purchase land at an over-value. The purpose of this transaction was to provide the vendor with money to meet obligations to a company in which the majority of the society’s directors had personal interests. The court held that the powers and duties of directors may be exercised only for the purpose for which they were conferred and not for any collateral or improper purpose. In this case, the directors acted for an improper purpose. One of the directors who did not participate in the negotiations was held to have also acted for an improper purpose because he

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Chapter 16 Good faith and proper purpose [16.230] Permanent Building Society v Wheeler cont. knew of the improper purpose of the other directors and failed to prevent the transaction from proceeding. The court ordered that the directors in breach of duty compensate the society for its losses.

[16.215] In Bishopsgate Investment Management Ltd v Maxwell (1993) 11 ACLC 3128, a director was held to have used his powers as a director for an improper purpose where he gave away the company’s assets to a family company for no consideration.

Exercising powers for the benefit of others

[16.220] Directors may breach their duty if they exercise their powers in the interests of a third party such as a bank or ultimate parent company.

Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 [16.225]

The directors of the Bell group of companies were found to have exercised their powers for improper purposes by arranging for the group to enter into certain transactions with its banks. The transactions converted what were unsecured debts into secured debts. The directors entered into these transactions for the purpose of keeping the banks at bay so as to ward off liquidation. The court found that the directors exercised their powers for an improper purpose because they caused the Bell group to enter into transactions which were in the interests of the banks and the ultimate parent company, rather than in the interests of the Bell group and its creditors. Directors of companies in an insolvency context breach their duty to act for proper purposes if they exercise their powers in a way that fails to take into account the interests of creditors as part of their obligation to consider, and act in, the best interests of the company as whole. This decision was upheld on appeal: Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157. The duties owed by directors of insolvent companies are discussed at [13.5.10]–[13.5.95] (Lipton).

Directors’ refusal to register a transfer

[16.230] The right of a member to transfer shares to another is a feature that distinguishes companies from partnerships. This right may be restricted by the constitution or the replaceable rules. For example, under the replaceable rule in s 1072F directors may refuse to register a transfer of shares if the shares are not fully paid or the company has a lien on the shares: s 1072F(3). In the case of proprietary companies, the replaceable rule in s 1072G gives directors the power to refuse to register a transfer of shares for any reason. 389

[16.230] Corporations and Contract Law

Directors must exercise their discretion to refuse to register transfers of shares in good faith and in the best interests of the company and not for improper purposes. In Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199, Isaacs J discussed this discretionary power. He thought that if directors act honestly upon business considerations such as whether the transferee is solvent and maintaining the reputation of the company, the directors act within their power. Where they are not moved by a legitimate consideration but act upon an extraneous reason, the court would direct the transfer be registered. As discussed at [9.180]–[9.215] (Lipton), s 1071F provides that where directors refuse to register a transfer of shares without just cause, the transferee may apply to the court for an order that the transfer be registered. A member may also obtain a remedy under s 232 by showing that a refusal to register a transfer of shares is part of conduct that is contrary to the interests of members as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. This is further discussed at [17.15] (Lipton) onwards.

STATUTORY DUTY TO ACT IN GOOD FAITH AND FOR A PROPER PURPOSE: S 181

[16.235] A director or other officer of a corporation must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose: s 181(1). Section 181 is essentially the same as the fiduciary duty to act in good faith and in the best interests of the company. Consequently the legal principles discussed above dealing with the obligation to act in good faith and exercise powers for a proper purpose are applicable to the operation of s 181. Like the fiduciary duty, the s 181(1) duty to act in good faith and for a proper purpose may be contravened even if directors believe they are acting in the company’s best interests if no rational director could have reached that conclusion: ASIC v Adler [2002] NSWSC 171. This is particularly so where directors promote their personal interests in a situation where their personal interests conflict with the interests of the company. Directors must give real and actual consideration to the interests of the company: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239. The CAMAC Report Corporate Duties Below Board Level (2006) recommended that the statutory duties contained in ss 180 and 181 should extend beyond directors and other officers to any other person who takes part or is concerned in the management of a corporation. This adopts a recommendation of the HIH Royal Commission Report The Failure of HIH Insurance (April 2003) that the statutory duties in Ch 2D of the Corporations Act should apply to a wider range of persons defined by their role in a corporation rather than by their formal status. The HIH report considered that the definition of “officer” did not encompass persons who were “concerned in” management and so could exclude someone with important managerial responsibilities that might have a significant impact on a corporation and 390

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its stakeholders. The CAMAC and HIH Royal Commission Reports are linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/. The statutory duties contained in Ch 2D (ss 180 – 183) overlap. A director who causes a company to enter into an agreement that confers unreasonable personal benefits on the director and fails to make adequate disclosure of the conflict of interest acts “improperly” for the purposes of s 182 and also lacks good faith for the purposes of s 181. Section 182 is discussed at [17.110]–[17.155].

ASIC v Adler ASIC v Adler [2002] NSWSC 171 (confirmed on appeal [2003] NSWCA 131) [16.240]

HIH Casualty & General Insurance Co Ltd (HIHC), a subsidiary of HIH Insurance Ltd (HIH) provided an undocumented, unsecured $10 million loan to Pacific Eagle Equity Pty Ltd (PEE), a company controlled by Adler. At the time, Adler was also a non-executive director and, through Adler Corporation Ltd, a substantial shareholder of HIH. After the loan, PEE became trustee of Australian Equities Unit Trust (AEUT) which was controlled by Adler Corporation Ltd. HIHC’s $10 million loan to PEE was then applied to HIHC’s subscription for $10 million worth of AEUT units. Under the trust, Adler was entitled to 10 per cent of the trust’s income even though the $10 million was contributed by HIH. PEE used the $10 million in the following transactions: •

•

•

about $4 million was used to buy HIH shares on the stock market. PEE later sold its HIH shares at a $2 million loss. PEE’s purchase of HIH shares was designed to give the stock market the false impression that Adler was supporting HIH’s falling share price by personally buying its shares; nearly $4 million was used to purchase various unlisted shares in technology and communications companies from Adler Corporation. These shares were purchased at cost even though the stock market for such investments had collapsed and no independent assessment of their value was made. A total loss was made on these investments; and $2 million was loaned by the trust to Adler and associated interests. These loans were unsecured and not documented.

It was held that Adler breached his duties as an officer of HIH and HIHC under s 181 by reason of all these transactions. There was evidence of a consciousness of impropriety on Adler’s part because the normal investment safeguards put in place by HIH, such as the establishment of an Investment Committee, were bypassed in a semi-covert way. A contravention of s 181 does not require the director to gain a benefit from the conduct. It is sufficient to establish that the conduct was carried out in order to gain an advantage.

[16.242] ASIC v Adler [2002] NSWSC 171 involved the breach of several duties and is discussed in a number of places in this book. The duties not to improperly use 391

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position (s 182) and information (s 183) are discussed below ([17.110] and [17.295], respectively), the duty of care and diligence is discussed in Chapter 18 and the civil penalty provisions are discussed at [20.120].

Directors who permit the corporation to contravene the Corporations Act

[16.245] Directors may contravene the statutory duties owed to the company if they authorise or permit the company to contravene provisions of the Corporations Act. In ASIC v Adler [2002] NSWSC 171 discussed at [16.240] it was held that the s 181 duty may be breached where the interests of the company are put at risk by contraventions of other statutory provisions such as those dealing with related party transactions (s 208) and the financial assistance prohibition: s 260A. The related party transaction provisions are discussed at [17.40] onwards and financial assistance is discussed at [8.325] (Lipton) onwards. Section 181 does not impose a general duty on directors to conduct the affairs of the company in accordance with the Corporations Act. However, according to ASIC v Maxwell [2006] NSWSC 1052 directors will breach their duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose pursuant to s 181(1) if they permit or allow the corporation to contravene the Corporations Act and: • the corporation’s interests were jeopardised; and • the risks to the corporation outweighed any potential countervailing benefits to the corporation; and • there were reasonable steps that could have been taken to avoid those risks. In ASIC v Maxwell, Brereton J said that the interests of the corporation may be jeopardised if it is exposed to actual or potential liability or to civil penalties or other liabilities under the Corporations Act. Directors may breach their duty if they permit or authorise the corporation to engage in the contravening conduct where the risk to the company is clear and the countervailing potential benefit to the company is insignificant.

ASIC v Sydney Investment House Equities Pty Ltd ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224 [16.250]

Goulding was one of the directors of various companies in the Sydney Investment House Group (the SIH Group). Hamilton J applied the test set out by Brereton J in ASIC v Maxwell [2006] NSWSC 1052 and stated that Goulding had contravened ss 180 and 181 by causing or permitting some of the companies in the SIH Group to contravene various provisions of the Corporations Act. The corporations were found to have conducted an unregistered managed investment

392

Chapter 16 Good faith and proper purpose [16.260] ASIC v Sydney Investment House Equities Pty Ltd cont. scheme, carried on an unregistered financial services business and engaged in misleading and deceptive conduct. Section 180 is discussed in Chapter 18.

Consequences of contravening s 181

[16.255] Section 181 is a designated civil penalty provision: s 1317E. The court has the power to impose a civil penalty order on any person who is involved in a contravention of s 181(1). A person is involved in a contravention in the circumstances described in s 79. Involvement in a contravention may arise where a person aids and abets, induces or is knowingly concerned in, or party to the contravention. The civil penalty provisions are discussed at [20.120]–[20.150]. Criminal liability may be imposed under s 184(1) if a director or other officer of a corporation is reckless or intentionally dishonest and fails to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose. This implies that conduct which falls short of the s 184 criminal liability requirements may constitute a breach of s 181 even though the director possessed the subjective belief that they were acting for proper purposes: ASIC v Adler [2002] NSWSC 171. Criminal penalties are discussed at [20.155]–[20.175]. The statutory duty to act in good faith and for a proper purpose is discussed in several articles linked to the Understanding Company Law website at http:// www.uclaw.com.au/resources/. In its Paper, Review of Sanctions in Corporate Law (March 2007) the government sought views on whether directors and other officers should be able to avoid liability for breaches of ss 180 – 183 as well as s 558G where they act: • in a bona fide manner; • within the scope of the corporation’s business; • reasonably and incidentally to the corporation’s business; and • for the corporation’s benefit. The Paper is on the Treasury website and is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

DUTY TO RETAIN DISCRETION

[16.260] Directors have a fiduciary duty to retain their discretionary powers. Directors will breach this duty if they enter into an agreement with outsiders that requires them to vote in a certain way at future board meetings or to follow directions from another person. Such a contract is ineffective even if the directors are not otherwise in breach of their duties such as acting for an improper purpose. In ASIC v Macro Realty Developments Pty Ltd [2016] FCA 292, Macro and 21st Century 393

[16.260] Corporations and Contract Law

marketed an investment proposal whereby an investor agreed to become a sole director and shareholder of a company which would be subject to the sole decision-making of Macro, over which the investor had no real or effective control and which had an obligation to finance the acquisition of properties from Macro and assume legal liability for that finance. By entering into such contracts, the investors fettered their powers and breached their duty to retain their discretionary powers. In so doing the directors contravened s 181. However, directors may enter into contracts on behalf of the company, whereby they agree to vote in favour of a particular course of action if they properly consider this to be in the interests of the company at the time the agreement is entered into: Thorby v Goldberg (1964) 112 CLR 597. A nominee director may be appointed to represent the interests and act on the instructions of the appointor. In such cases, the nominee director’s discretion may be fettered, especially where the constitution allows the appointor to remove the nominee. The position of nominee directors is discussed at [16.55]. The replaceable rules and constitution (if any) may authorise the directors to delegate their powers. For example, the replaceable rule in s 201J empowers directors to appoint a managing director. However, the board may at any time revoke the delegation: s 203F.

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CHAPTER 17

Conflicts of interest and disclosure Introduction ................................................................................................... [17.05] Self-interested transactions with the company ............................................ [17.20] Fiduciary duties ....................................................................................... [17.20] Related party transactions: Ch 2E ......................................................... [17.40] Self-interested director boardroom voting[17.85] Personal profits arising from acting as director .......................................... [17.95] Improper use of position: s 182 ................................................................. [17.110] Meaning of improper ............................................................................. [17.115] To gain an advantage or to cause detriment ...................................... [17.160] Bribes and other undisclosed benefits ...................................................... [17.175] Taking up a corporate opportunity ............................................................. Diversion of contract ............................................................................. Company consent where director takes up opportunity ...................... Company need not suffer loss .............................................................

[17.200] [17.205] [17.235] [17.260]

Misuse of confidential information ............................................................. [17.270] Improper use of information: s 183 ........................................................... [17.295] Meaning of information ......................................................................... [17.300] Relationship between ss 181 and 183 ................................................. [17.320] Misuse of information about a company’s insolvency ......................... [17.330] Competing with the company .................................................................... [17.345] Disclosure of interests ................................................................................ [17.375] Under constitution and replaceable rules ............................................. [17.380] At common law ..................................................................................... [17.385] 395

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Under the Corporations Act ........................................................................... [17.410]

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Chapter 17 Conflicts of interest and disclosure [17.05]

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 13.3. Key points • The duty to avoid conflicts of interests is breached where directors fail to disclose their material personal interests in transactions with the company. The Corporations Act also imposes disclosure requirements. These disclosure requirements vary depending upon whether the company is a public or proprietary company. • At common law, directors avoid breaching their duties if full disclosure is made to the company and approval is given. This is generally taken to mean disclosure to and approval of the general meeting. • Under the Corporations Act, disclosure of a material personal interest must be made to the other directors. A public company that gives a financial benefit to a director or other related party is required to obtain the approval of members in accordance with a specified procedure. Exceptions arise where the financial benefit is given on arm’s-length terms or is reasonable remuneration. • The fiduciary duty to avoid conflicts of interest also requires directors not to make undisclosed personal profits arising from acting as director and not to take up corporate opportunities or misuse confidential company information. • There are corresponding statutory duties that prohibit officers or employees from making improper use of their position and improper use of information gained while acting in their position.

INTRODUCTION

[17.05] All fiduciaries are under a duty to avoid conflict of interest situations. This means that they must not allow a situation to develop where there is a conflict between their duties to the person for whose benefit they act and their personal interests. This is another aspect of the fiduciary duties owed by directors to their company. The obligation to avoid conflicts of interest aims to prevent directors improperly making a profit from their office. However, it goes further than this to prevent directors from putting themselves in a position where it appears that they may act in their own interests. In such a case, directors cannot avoid liability by claiming they did not make a profit, their company did not suffer any loss or that the contract was a fair one.

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[17.10] Corporations and Contract Law

Aberdeen Railway Co v Blaikie Bros Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 [17.10]

A railway company entered into a contract with a partnership for the supply of a large quantity of iron seats. The company sought to avoid the contract on several grounds, including that at the time the contract was entered into, one of the partners was a director of the company. The House of Lords held that the company could avoid the contract even though its terms were fair.

[17.15] The duty of directors to avoid a conflict of interest is strictly applied. The duty is imposed because of the recognition of the frailty of human nature. The duty is breached whether or not the directors had fraudulent motives. A conflict of interest occurs where a director has a personal interest of a contractual nature. It does not arise where there is a mere unenforceable expectation: Baker v Palm Bay Island Resort Pty Ltd [1970] Qd R 210. The strict fiduciary duty to avoid undisclosed conflicts of interest has been applied in various circumstances and these are categorised below. The common feature in all cases in which a breach of the duty has been established is that the directors placed themselves in a position where they put or may have put their own interests ahead of the interests of the company. The duty to avoid conflicts of interest, however, is not confined to these defined situations. In Phipps v Boardman [1967] 2 AC 46, Lord Upjohn stated: Rules of equity have to be applied to such a diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.

The duty to avoid conflicts of interest is also governed by the Corporations Act, especially ss 181 – 183. The duty under s 181 is breached when an officer fails to act in good faith in the best interests of the company or for a proper purpose. Section 181 is discussed at [16.235]. More specific duties may be breached where the officer makes improper use of their position or improper use of information within ss 182 and 183. These are discussed at [17.110] and [17.295], respectively. Chapter 2E, discussed at [17.40]–[17.80], also regulates certain conflicts of interest transactions. Directors who put themselves in a conflict of interest situation which amounts to a breach of their fiduciary or statutory duty may avoid liability for the breach if they disclose the details of their personal interest and obtain the company’s fully informed consent. Disclosure is discussed at [17.375]–[17.415].

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Chapter 17 Conflicts of interest and disclosure [17.25]

SELF-INTERESTED TRANSACTIONS WITH THE COMPANY Fiduciary duties

[17.20] Directors breach their fiduciary duty if they have undisclosed interests in transactions with their company because they are then in a position where their personal interests conflict or may conflict with the company’s interests. Directors should act in the interests of the company and not be seen to put themselves in a position where they may further their own interests. A company has a variety of remedies available if directors breach their fiduciary duty by having an undisclosed interest in a transaction with their company. These remedies are discussed at [20.10]–[20.30]. Rescission of contracts is the usual remedy in such circumstances. Directors can avoid liability for breaching their fiduciary duty if they make full disclosure of their personal interest in a transaction and obtain shareholder approval. Disclosure of interests is discussed at [17.375]–[17.415]. Shareholder approval (also referred to as “ratification”) is discussed at [13.7.05] (Lipton). The fiduciary duty regarding undisclosed self-interested transactions overlaps with both the fiduciary duty of good faith and best interests of the company (discussed at [16.05]–[16.135]) as well as the statutory duties in ss 181 (discussed at [16.235]), 182 and 183: discussed at [17.110] and [17.295], respectively. A breach of the fiduciary duty arises whether the director’s undisclosed interest in the contract is direct or indirect. A director who contracts personally with the company has a direct interest. An indirect interest in a contract arises when the director is a director or shareholder of another company that contracts with the company.

Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488 [17.25] Samuel and Harvey were two of the directors of Transvaal Lands.

Samuel was also a director of New Belgium. They both owned shares in New Belgium. Samuel’s shares were held in his own right while Harvey held the New Belgium shares as trustee under a will. At the instigation of Samuel, Transvaal Land’s board agreed to purchase certain shares owned by New Belgium. After the purchase was finalised, Transvaal Lands discovered Samuel and Harvey’s interests in New Belgium for the first time and sought to have the contract rescinded.

The court held that Samuel’s interests as both director and shareholder of New Belgium conflicted with his duty to act in the best interests of Transvaal Lands. He breached his fiduciary duty to that company even though he did not vote on the

399

[17.25] Corporations and Contract Law Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co cont. board’s resolution that agreed to the contract. Harvey was also held to have conflicting interests even though his shareholding in New Belgium was only as a trustee. He was under a duty to Transvaal Lands to make the best bargain he could for it in relation to the transaction. This conflicted with his duty to make the best bargain he could for the beneficiaries of the trust.

South Australia v Clark South Australia v Clark (1996) 66 SASR 199 [17.30]

The Supreme Court of South Australia held that Clark, the managing director of the State Bank of South Australia, had a conflict of interest when he arranged for the bank to enter into a contract that indirectly benefited another company in which Clark was a director and shareholder. The court also held that the circumstances surrounding the contract indicated that Clark had breached his duty of care. This aspect of the case is discussed at [18.70].

[17.35] A person who is a director of two companies that do business with one another may owe fiduciary duties to both companies. In R v Byrnes (1995) 183 CLR 501, the High Court stated: Being a fiduciary, the director of the first company must not exercise his or her power for the benefit or gain of the second company without clearly disclosing the second company’s interest to the first and obtaining the first company’s consent. Nor, of course, can the director exercise those powers for the director’s own benefit or gain without clearly disclosing his or her interest and obtaining the company’s consent.

Directors breach their fiduciary duty only if their undisclosed self-interested transaction is a material interest. For example, a director of a proprietary company who owns a relatively small parcel of shares in a large public company does not have a material interest in any contract between the companies merely because of that shareholding. The fiduciary duty regarding undisclosed self-interested transactions raises two important questions: • to whom must directors disclose their material interest; and • what information must directors disclose? These issues are discussed at [17.375]–[17.410]. Directors satisfy their fiduciary duty if they disclose to the company’s shareholders their material interest in a transaction with the company. They must also comply with the disclosure requirements in s 191. These disclosure requirements are discussed at [17.410]. A company’s constitution or the replaceable rules (if applicable) may however, modify the strict fiduciary requirement to disclose to shareholders by merely insisting 400

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on disclosure to the other directors: Woolworths Ltd v Kelly (1991) 22 NSWLR 189. For example, under the proprietary company replaceable rule in s 194, a proprietary company director may retain the benefit of a self-interested transaction if the director discloses that interest to the other directors pursuant to s 191 and abstains from taking part in the board’s decision on the matter. Mere disclosure of a conflict and abstaining from voting may be insufficient to satisfy a director’s fiduciary duty if the director has a position of power and influence over the board. The director may also be under a positive duty to take steps to protect the company’s interest such as by using their power and influence to prevent the transaction going ahead: ASIC v Adler [2002] NSWSC 171. It is not sufficient for directors merely to disclose that they have a material interest in a transaction with the company without giving details of it. They must make full disclosure of all relevant facts known to them about the matter so that the shareholders can assess whether or not they will consent to the transaction.

Related party transactions: Ch 2E

[17.40] Chapter 2E of the Corporations Act was introduced in 1992 and is designed to protect shareholders of a public company by requiring prior shareholder approval before the public company gives financial benefits to directors and other related parties: s 207. The Explanatory Memorandum accompanying the 1992 amendments explained the purpose of the legislation: The Part is intended to protect shareholders of public companies against the possibility that the value of their investment will be eroded by a related party arranging for the company to enter into a transaction which gives a benefit to the related party. The Part will not prevent a public company from entering into full value, commercial transactions with related parties. The proposed Pt 3.2A (now Chapter 2E) will prevent only “uncommercial” transactions, as these are the kinds of transactions which have a potential to adversely affect shareholders’ interests. And even in this case, [Ch 2E] will allow any transaction that has been agreed to by a majority of the public company’s disinterested shareholders, provided they have been fully informed about the transaction and its likely impact upon the company.

Directors are not relieved of any of their duties under the Corporations Act or fiduciary duties merely because shareholders authorise a transaction under Ch 2E: s 230. Uncommercial transactions that improperly benefit a director of a public company may also involve a breach of the general duties owed by a director as they may result in a conflict of interest.

Prior shareholder approval needed

[17.45] Section 208 is the key provision of Ch 2E and applies to public companies as well as entities controlled by public companies. Under s 208(1)(a)(i), a public company may give a financial benefit to a related party if it obtains the approval of its 401

[17.45] Corporations and Contract Law

shareholders in accordance with ss 217 – 227. Shareholder approval must be obtained no more than 15 months before the public company gives the financial benefit: s 208(1)(a)(ii). Under s 208(1), public company shareholder approval is also required where an entity controlled by a public company gives a financial benefit to a related party of the public company. The detailed shareholder approval requirements in ss 217 – 227 seek to ensure that where a public company gives a financial benefit to related parties, it is agreed to by a majority vote of disinterested shareholders who are fully informed about the financial benefit and its impact on the company. A financial benefit to a related party does not need the approval of the public company’s shareholders if the financial benefit falls within an exception set out in ss 210 – 216: s 208(1)(b).

Figure 17.1: Related party transactions

Giving a financial benefit

[17.50] The expression “giving a financial benefit” is defined in s 229. Section 229(1) requires a broad interpretation in determining whether a financial benefit has been given, even if criminal and civil penalties may be involved. The commercial substance of the transaction prevails over its legal form and any 402

Chapter 17 Conflicts of interest and disclosure [17.55]

consideration is to be disregarded even if it is adequate. According to s 229(2), a financial benefit may be given indirectly through interposed entities or by informal or unenforceable agreement. It may also comprise the conferring of a financial advantage that does not involve payment of money. Examples of giving a financial benefit are provided in s 229(3). They include: • giving or providing finance or property (s 229(3)(a)); • buying or selling an asset (s 229(3)(b)); • leasing an asset (s 229(3)(c)); • supplying or receiving services (s 229(3)(d)); • issuing securities or granting an option (s 229(3)(e)); and • taking up or releasing an obligation: s 229(3)(f).

Related parties

[17.55] Section 228 defines the term “related party”. A related party of a public company can be an individual as well as an “entity”. The word “entity” includes a company and a partnership as well as the trustee of a trust: s 9. According to s 228, the following people are regarded as related parties of a public company: • directors of the public company (s 228(2)(a)); • the spouses, de facto spouses, parents and children of public company directors (s 228(2)(d) and (3)); and • directors of an entity that controls the public company as well as the spouses, de facto spouses, parents and children of the controlling entity’s directors: s 228(2)(b) and (3). The following entities are related parties of a public company: • an entity that controls the public company (s 228(1)); • an entity controlled by a related party referred to in s 228(1), (2) or (3) (s 228(4)); • an entity that was a related party of the kind referred to in s 228(1), (2), (3) or (4) during the previous six months (s 228(5)); or • an entity that acts in concert with a related party of a public company on the understanding that the related party will receive a financial benefit if the public company gives the entity a financial benefit: s 228(7). As noted above, an entity controlled by a related party referred to in s 228(1), (2) or (3) is regarded as a related party of a public company. Under s 50AA, “control” is the capacity of a person or entity to determine the outcome of decisions about a second entity’s financial and operating policies.

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[17.60] Corporations and Contract Law

When shareholder approval not required

[17.60] Shareholder approval for the giving of a financial benefit is not required if any one of the exceptions in ss 210 – 216 applies. If an exception applies the public company’s directors control whether or not to give the financial benefit to the related party. The exceptions include: • transactions that would be reasonable in the circumstances if the parties were dealing at arm’s length or the terms were less favourable to the related party than arm’s-length terms (s 210); • reasonable remuneration as an officer or employee of the public company or an entity that controls or is controlled by the public company (s 211(1)); • repayment of expenses incurred by a related party in performing duties as an officer or employee of the public company or a controlling or controlled entity (s 211(2)); • payment of reasonable insurance premiums in respect of a liability incurred as an officer of the public company (s 212(1)); • payments in respect of legal costs incurred by an officer in defending an action involving a liability incurred as an officer of the public company (s 212(2)); • amounts of money given to a director or spouse of less than $5,000 (s 213); • financial benefits to or by a closely held subsidiary (s 214); and • benefits given to the related party as a member of the public company where the benefits do not discriminate unfairly against the other members: s 215. As noted above, a financial benefit on terms that would be reasonable if the public company and the related party were dealing at arm’s length does not need shareholders’ approval: s 210(a). According to ASIC v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267, the reasonableness of the terms of a financial benefit is determined on objective criteria and is to be measured against the terms of a transaction that a public company would enter into if it were: • unrelated to the other party to the transaction in any way, financially or through ties of family, affection or dependence; • free from any undue influence or pressure; • through its relevant decision-makers, sufficiently knowledgeable about the circumstances of the transaction, sufficiently experienced in business and sufficiently well advised to be able to form a sound judgment as to what is in its interests; and • concerned only to achieve the best available commercial result for itself in all of the circumstances.

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In Regulatory Guide RG 76 Related Party Transactions ASIC thought that public companies should at a minimum take into account the following factors when deciding whether the giving of a financial benefit to a related party came within the “arm’s length terms” exception in s 210: • how the terms of the overall transaction compare with those of any comparable transactions between parties dealing on an arm’s length basis in similar circumstances; • the nature and content of the bargaining process, including whether the entity followed robust protocols to ensure conflicts of interest were appropriately managed in negotiating and structuring the transaction; • the impact of the transaction on the company (for example the impact of dealing on those terms on the financial position and performance of the company) and non-associated members; • any other options that may be available to the entity; and • expert advice received by the entity (if any).

Shareholder approval meeting

[17.65] The public company must call a shareholders’ meeting to consider a resolution to approve the giving of the financial benefit. The company must lodge with ASIC the notice convening the meeting and other accompanying documents at least 14 days before the notice is given to members: s 218(1). ASIC may approve a shorter period: s 218(2). To ensure members are fully informed about the proposed financial benefit, an explanatory statement must accompany the notice convening the meeting: s 221(b). The explanatory statement must set out full details of the circumstances surrounding the proposed resolution in accordance with s 219. The explanatory statement must include all the information known to the company or any of its directors that is reasonably required by members in order to decide whether or not it is in the company’s interests to pass the proposed resolution to approve giving the financial benefit. Section 219(2) provides examples of the kind of information that should be disclosed. The explanatory statement should state from an economic and commercial point of view the true potential costs and detriment of giving the financial benefits including opportunity costs, taxation consequences and benefits forgone. Within 14 days after lodgment of the materials to be put to members, ASIC may give to the company written comments on those documents but not on whether the proposed resolution is in the company’s best interests: s 220. Any comments by ASIC must be included in the documents sent to members with the notice convening the meeting: s 221(d). In the past ASIC conducted a number of campaigns to crack down on related party disclosure documents to ensure that shareholders received sufficient information to 405

[17.65] Corporations and Contract Law

make a decision about whether to grant related party benefits. ASIC observed that there were a number of common defects in related party documentation supplied to shareholders. The most common defect was not adequately valuing the financial benefit. According to ASIC, an adequate valuation requires disclosure of the basis of the valuation and the principal assumptions behind it. Another common defect was the failure to explain the reason for giving the financial benefit.

Voting exclusions

[17.70] A related party or associate to whom the proposed resolution would permit a financial benefit to be given cannot cast a vote on the resolution: s 224(1). ASIC may allow the related party to vote where it is satisfied that this would not cause unfair prejudice to the interests of any member of the company: s 224(4). A vote may be cast by a person as a proxy for someone who is not an interested related party: s 224(2). It is an offence to cast a vote in contravention of s 224(1) whether or not the resolution is passed: s 224(6). A contravention of s 224 does not generally affect the validity of a resolution: s 224(8). A notice setting out the resolution must be lodged with ASIC within 14 days after it is passed: s 226.

Consequences of breach

[17.75] A contravention of s 208 does not affect the validity of any contract or transaction connected with the giving of the benefit. The public company or entity that it controls is not guilty of an offence: s 209(1). However, any person involved in a contravention of s 208 by a public company contravenes s 209(2). This is a civil penalty provision: s 1317E. The civil penalty provisions are discussed at [20.120]–[20.150]. A person commits a criminal offence if their involvement in the contravention of s 208 is dishonest: s 209(3). A proposed benefit to a related party that contravenes s 208 may be stopped by the court where an application for an injunction is brought under s 1324. Injunctions under s 1324 are discussed at [17.305]–[17.325] (Lipton).

Adler v ASIC Adler v ASIC [2003] NSWCA 131 [17.80]

The facts of this case are set out at [16.240]. The Court of Appeal held that the payment of $10 million by HIHC (an entity controlled by a public company, HIH) to PEE was an interest-free unsecured loan. This amounted to HIHC giving a financial benefit to each of PEE, Adler Corporation and Adler within the meaning of

406

Chapter 17 Conflicts of interest and disclosure [17.85] Adler v ASIC cont. s 229. PEE, Adler Corporation and Adler were all related parties of HIH. Further, the terms of the loan were unreasonable and therefore not on arm’s-length terms within the meaning of s 210. As there was no shareholder approval, it followed that HIH and its controlled entity, HIHC, both contravened s 208. The court also held that both Adler and Williams were involved in the contravention. Adler was fully aware that the $10 million loan was not on reasonable arm’s-length terms, having instigated it. Williams was also involved in the contravention because he authorised the payment knowing that Adler controlled PEE. Williams also ensured that the transaction was not brought to the attention of HIH’s other directors or its Investment Committee. Fodera, HIH’s CFO, was also involved in the contravention because he had sufficient knowledge of the essential factual elements constituting the contravention even though he did not know every detail of it.

Self-interested director boardroom voting Public companies

[17.85] Under s 195(1), a director of a public company who has a material personal interest in a matter before the board is prohibited from voting on the matter and must not be present while the matter is being considered by the board meeting. The term “material personal interest” is not defined in the Corporations Act. In Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513 it was held that the word “material” conveyed the idea that the interest must be of some substance or value, rather than merely a slight interest. Further, the reference to a “personal interest” in s 195(1) suggested that the section did not normally apply to a situation where the director’s conflict of interest involved being on the board of two companies that were engaged in business dealings. Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488 discussed at [17.25] is an example of such a conflict of interests. A director has a personal interest in a matter if the director can derive a financial or other benefit. For example, in McGellin v Mount King Mining NL (1998) 144 FLR 288 a director was regarded as having a material personal interest in board discussions about whether the company should issue shares to him. This prohibition does not apply where the disinterested directors pass a resolution stating that they are satisfied that the interest should not disqualify the interested director from voting or being present. This resolution must also identify the director, the nature and extent of the director’s interest and its relation to the affairs of the company: s 195(2). The prohibition on being present and voting does not apply where the interest does not need to be disclosed to the board under s 191: s 195(1A)(b). The s 191 disclosure requirements are discussed at [17.410]. ASIC may declare that a director of a public company may be present and/or vote despite having a material personal interest. A declaration may only be made if the 407

[17.85] Corporations and Contract Law

number of directors entitled to be present and vote would be less than a quorum and the matter needs to be dealt with urgently or there is some other compelling reason for the matter to be dealt with at a directors’ meeting rather than by the general meeting: s 196(1). Section 195(4) provides for the general meeting to deal with matters where there are not enough directors entitled to be present and vote to form a quorum.

Proprietary companies

[17.90] The Corporations Act does not prohibit an interested proprietary company director from voting at a directors’ meeting that is considering matters that relate to the interest. This is left to the company’s constitution (if any) or the proprietary company replaceable rule in s 194. Section 194 provides that if the director makes disclosure to the board under s 191, then the director can vote, related transactions may proceed, the director may retain benefits under the transaction and the company cannot avoid the transaction merely because of the existence of the interest.

PERSONAL PROFITS ARISING FROM ACTING AS DIRECTOR

[17.95] The directors’ duty to avoid undisclosed conflicts of interest applies not just to self-interested transactions with the company. Directors are also under a fiduciary duty not to make undisclosed personal profits while acting in their position. This attempts to ensure that when acting for the company, directors are not tempted by the prospect of deriving private benefits for themselves or for others. This equitable principle applies even where the company has not suffered any loss, indeed it may even have benefited. Further, there is a breach of duty even if the transaction was fair from the company’s point of view. Directors must be seen to act in good faith. Directors cannot place themselves in a position where it may appear that they are motivated by considerations other than what is in the best interests of the company.

Regal (Hastings) Ltd v Gulliver Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n [17.100]

Regal (Hastings) Ltd owned a cinema in Hastings. The directors wished to lease two other cinemas in the town and sell the whole business of the company as a going concern. A subsidiary company was formed for this purpose, with a capital of 5,000 £1 shares because the lessor of the two cinemas required the directors to guarantee payment of the rent unless the paid up capital of the subsidiary was £5,000. It was originally intended that Regal (Hastings) Ltd would own all the shares in the subsidiary; however, it was only able to contribute £2,000. At board meetings of the two companies, it was decided that the balance

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Chapter 17 Conflicts of interest and disclosure [17.100] Regal (Hastings) Ltd v Gulliver cont. would be allotted to the four directors, the company solicitor and persons nominated by the chairman of directors. They were allotted 500 shares each in the subsidiary. The chairman, Gulliver, held the shares as trustee for two companies and one individual. He was a director as well as minority shareholder in both of these companies. It was decided that instead of selling the business, the purchasers would buy all the shares in both Regal (Hastings) Ltd and its subsidiary. The shareholders of the subsidiary thereby acquired a profit of nearly £3 per share. The purchasers of the shares appointed new directors of the companies and then caused Regal (Hastings) Ltd to bring an action against the former directors and the solicitor seeking to recover the profit they had made. It was found as a fact that all the transactions were honestly made; nevertheless, the House of Lords held that the four directors were liable to repay the profits they had made on the sale of the shares. Lord Russell of Killowen stated: The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or consideration as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account … Let me now consider whether the essential matters, which the plaintiff (Regal Hastings Ltd) must prove, have been established in the present case. As to the profit being in fact made there can be no doubt … Did such of the first five respondents as acquired these very profitable shares acquire them by reason and in the course of their office of directors of Regal? In my opinion, when the facts are examined and appreciated, the answer can only be that they did … In the result, I am of the opinion that the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of execution of that office, are accountable for the profits they have made out of them.

The House of Lords, however, considered that the positions of the chairman and solicitor were different from that of the other directors. While the solicitor had profited from the sale of the shares, he was not a director and had disclosed his profit to the appropriate organ of the company, the board of directors. Indeed, he only acquired the shares in the first place on their request. Gulliver, Regal’s chairman, was also found not to have breached his duty to the company. The court accepted that he held the shares in the subsidiary as a trustee for others and consequently he derived no personal profit from the transaction.

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[17.105] Corporations and Contract Law

[17.105] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n illustrates the far-reaching implications of the equitable principle that directors cannot make an undisclosed personal profit arising from acting in their position as directors. The directors, who personally profited, acted in good faith and the company had not been deprived of a business opportunity because it did not have the required funds. In fact, the company benefited as a result of the other shareholders taking up shares in the subsidiary. In addition, the successful action only benefited the purchasers of Regal (Hastings) Ltd who had contracted to pay an agreed price. The return of the profits to Regal (Hastings) Ltd meant that they succeeded in obtaining a reduction from the contracted purchase price. Directors in similar circumstances may now be able to avail themselves of s 1318. This section permits the court to relieve an officer from any liability for negligence, default, breach of trust or breach of duty if it appears that they acted honestly and having regard to the circumstances of the case, they ought fairly to be excused. Section 1318 is discussed in [13.7.30] (Lipton).

IMPROPER USE OF POSITION: S 182

[17.110] Section 182 prohibits officers or employees of a corporation from improperly using their position to gain an advantage for themselves or for any other person or to cause detriment to the corporation. Section 182 is the statutory version of the fiduciary principle applied in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n that directors are under a duty not to make undisclosed personal profits arising from their position. However, s 182 is wider in that it applies to employees as well as officers. Further, s 182 is breached if officers or employees improperly use their position to gain an advantage for others. It appears that this would extend to a person in the chairman’s position in Regal (Hastings) Ltd v Gulliver since a profit was made by him as trustee for others. The directors’ duty not to improperly use their position in s 182 overlaps with both their fiduciary duty to act in good faith in the best interests of the company as well as s 181. These obligations are discussed in Chapter 13.2. In Southern Real Estate Pty Ltd v Dellow [2003] SASC 318, Debelle J referred to the relationship between the duty to act in the best interests of the company and s 182: [Section 182] plainly flows from and might be regarded as one aspect of the duty to act in good faith in the best interests of the company. The duty spells out the obligations of a director not to allow personal interests to conflict with a duty to the company. That obligation stems from the fact that a director is a fiduciary.

Section 182 is a designated civil penalty provision: s 1317E. Any person who is involved in a contravention of s 182 also contravenes a civil penalty provision: s 182(2). The civil penalty provisions are discussed at [20.120]–[20.150].

Meaning of “improper”

[17.115] The term “improper” means a number of things. It refers to conduct that is inconsistent with the “proper” discharge of the duties, obligations and responsibilities 410

Chapter 17 Conflicts of interest and disclosure [17.125]

of an officer: Grove v Flavel (1986) 43 SASR 410. In other words, directors improperly use their position if they breach their fiduciary duties. In Chew v R (1992) 173 CLR 626, the High Court held that a director may act improperly even though the director considered they were acting in the best interests of the company as a whole and did not intend to act dishonestly. In determining whether a director made improper use of his position, Toohey J said that the test is “one to be determined objectively; essentially the issue is whether the conduct impugned is inconsistent with the proper discharge of the duties of the office in question”. Directors may also improperly use their position if they act without authority.

R v Byrnes R v Byrnes (1995) 183 CLR 501 [17.120]

Two directors of Magnacrete Ltd, without authority of the board, arranged for their company’s seal to be affixed to a guarantee and other documents that provided security for a loan to another company they controlled. It was held that the directors breached a predecessor of s 182 even though they reasonably but mistakenly believed that executing these documents was in the interests of Magnacrete. Brennan, Deane, Toohey and Gaudron JJ stated: Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. When impropriety is said to consist in an abuse of power, the state of mind of the alleged offender is important: the alleged offender’s knowledge or means of knowledge of the circumstances in which the power is exercised and their purpose or intention in exercising the power are important factors in determining the question whether the power has been abused. But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that they have no authority to do.

R v Cook; Ex parte Director of Public Prosecutions (Cth) R v Cook; Ex parte Director of Public Prosecutions (Cth) [1996] 2 Qd R 283 [17.125]

The principles in R v Byrnes (1995) 183 CLR 501 were applied in this case where the chairman of a company was held to have improperly used his position to gain an advantage for himself when he arranged, without authority of the board, for the company to transfer $199,000 from its bank account to a joint

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[17.125] Corporations and Contract Law R v Cook; Ex parte Director of Public Prosecutions (Cth) cont. account he held with his wife. The court rejected the director’s argument that the transfer was in the best interests of the company and not improper because he was concerned that the company’s bank account might be frozen by the predecessor of ASIC.

ASIC v Adler ASIC v Adler [2002] NSWSC 171 (confirmed on appeal [2003] NSWCA 131) [17.130]

The facts are set out at [16.240]. The court decided that Adler contravened s 182 when he arranged for part of HIHC’s $10 million loan to PEE to be used to acquire HIH shares on the stock exchange. This acquisition was intended to support the HIH share price and enable Adler Corporation to sell its own HIH shares ahead of the sale of PEE’s HIH shares. It was held that as a result of this transaction, Adler improperly used his position as a director of HIH, an officer of HIHC and a director of PEE to gain an advantage for Adler Corporation. The court held that Williams also breached his s 182 duty not to improperly use his position as a director of both HIH and HIHC to gain an advantage for Adler. He also improperly used his position to cause detriment to HIH and HIHC in authorising the $10 million payment without proper safeguards and without approval from HIH’s investment committee as required by HIH’s investment guidelines.

The court held that Adler also improperly used his position as a director in relation to PEE’s acquisition of a number of unlisted venture capital companies from Adler Corporation at their cost price and without obtaining independent valuations. These acquisitions enabled Adler to extricate himself and Adler Corporation from commercially unviable business ventures. Adler knew that each of these companies had major cash flow difficulties and that there was a significant risk that they would fail. Adler failed to disclose his personal interest in these acquisitions to HIH’s board other than to Williams and Fodera.

ASIC v Soust ASIC v Soust [2010] FCA 68 [17.135]

Soust, the managing director of Select Vaccines Limited, was entitled to receive a bonus if the company’s share price reached a certain level at the close of trading on 31 December 2007. Despite the fact that the company’s share trading policy prohibited directors trading in the shares of Select Vaccines during the period 1 July 2007 to 31 January 2008, Soust placed an order with a stockbroker for the purchase of the company’s shares in his mother’s name during the afternoon of 31 December 2007. The effect of this trade was that Select Vaccine’s

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Chapter 17 Conflicts of interest and disclosure [17.155] ASIC v Soust cont. share price rose above the price required to trigger Soust’s bonus which he subsequently received. Goldberg J stated that Soust had purchased the shares for his own benefit and that he had contravened ss 181(1) and 182(1) of the Act not only by placing the order to purchase $2,550 worth of shares in Select Vaccines at market on the ASX, but also by contravening Select Vaccines’ Share Trading Policy and failing to inform his fellow directors of his involvement in the purchase and deliberately concealing that involvement from them.

[17.140] A predecessor of s 182 has also been applied in an insolvency context to directors of phoenix companies.

Jeffree v NCSC Jeffree v NCSC [1990] WAR 183 [17.145]

In this case, the facts of which are discussed at [13.5.65] (Lipton), the Supreme Court of Western Australia held that a director improperly used his position in breach of the section when he sold all the company’s business to another company he controlled without obtaining payment for goodwill. This sale, which left the company as a dormant shell, was entered into to defeat the claim of a contingent creditor. The director also acted contrary to the interests of the company’s future creditors.

Brentwood Village Limited (in liq) v Terrigal Grosvenor Lodge Pty Limited (No 4) Brentwood Village Limited (in liq) v Terrigal Grosvenor Lodge Pty Limited (No 4) [2016] FCA 1359 [17.150]

Klumper, a director of Brentwood, was found to have used his position improperly when he transferred for no consideration a nursing home owned by the company to a second company controlled by family members. Markovic J found that ss 181 and 182 had been breached. He said: There is no evidence that Mr Klumper gave any consideration to the interests of Brentwood in effecting the Veronica Nursing Home transaction. To the contrary there is evidence that supports the conclusion that he acted for a collateral purpose. Namely, in the face of imminent or actual recovery action by the ATO of tax liabilities of tens of millions of dollars, he divested a significant asset of the company for no consideration.

[17.155] Directors improperly use their position in contravention of s 182 if they allow the company to contravene the Corporations Act. The duty will be breached if 413

[17.155] Corporations and Contract Law

the contravention is likely to jeopardise the interests of the corporation, the risks to the corporation outweigh any potential countervailing benefits and there are reasonable steps that could be taken to avoid those risks: ASIC v Maxwell [2006] NSWSC 1052. In Maxwell, a director caused his company to contravene s 727 of the Corporations Act, discussed at [7.25] (Lipton), by offering securities to investors without a disclosure document. The director was also intimately involved in the company soliciting loans from investors causing the company to breach the advertising and publicity restrictions in s 734 of the Corporations Act (see [7.175] (Lipton)). It was held that the director improperly used his position in breach of s 182 because he arranged for the company to pay him commissions on each investor loan he introduced. Similarly, in ASIC v Warrenmang Ltd [2007] FCA 973 a director caused his company to breach ss 722 and 723 of the Corporations Act, discussed at [7.140] and [7.145] (Lipton), when it failed to keep investors’ subscription moneys for securities in trust until the securities were issued and ensure the moneys were returned when the company did not achieve ASX listing as specified in its disclosure document. It was held that the director contravened ss 181 and 182 when he deliberately misappropriated a portion of investors’ subscription moneys for his own personal benefit.

To gain an advantage or to cause detriment

[17.160] To contravene s 182, a director, officer or employee must not only improperly use their position but must also do so “to gain an advantage for themselves or for another person or to cause detriment to the corporation”. A majority of the High Court in Chew v R (1992) 173 CLR 626 interpreted the predecessor of s 182 as being purposive. This means an officer breaches the section if improper use is made of their office in order to gain advantage or to cause detriment. It is not necessary that the accrual of an advantage or suffering of a detriment actually occur. In their majority judgment, Mason CJ, Brennan, Gaudron and McHugh JJ said: it is necessary to establish not merely that the accused intended that a result should ensue, but also that the accused believed that the intended result would be an advantage for himself or herself or for some other person or a detriment to the corporation.

A director may gain an advantage even where a profit has not been obtained.

Doyle v ASIC Doyle v ASIC [2005] HCA 78 [17.165] Doyle was a director of CM Ltd, a listed company which issued shares

to DCP, another company of which Doyle was a director. The ASX informed CM that the share issue breached the listing rules and the share issue was invalid. Doyle, on behalf of DCP, demanded a refund of the money paid for the share issue. At a board meeting of CM at which Doyle was present and voted, CM’s 414

Chapter 17 Conflicts of interest and disclosure [17.180] Doyle v ASIC cont. board resolved to cancel the shares issued to DCP and refund the money paid for the share issue. Soon after, CM became insolvent and entered administration. The High Court held that Doyle contravened s 182. As a director of CM he had sought to gain an advantage for DCP as the effect of his actions was to obtain a refund of money. Prior to the refund, DCP merely had an arguable claim to the return of the money.

R v Donald; Ex parte Attorney-General R v Donald; Ex parte Attorney-General [1993] 2 Qd R 680 [17.170]

Donald was managing director and owned half the shares of Ardina Pty Ltd. The company entered into contracts with two other companies that he controlled. The invoices for payment to the two companies were passed directly to Donald for payment instead of being checked by employees of Ardina Pty Ltd, as was the usual practice. Some invoices were falsely made out. Donald did not disclose his interest in the two companies and was charged with a breach of the predecessor of s 182. The Queensland Court of Appeal applied the purposive test adopted in Chew v R (1992) 173 CLR 626. It held that the equivalent of s 182 was breached even though some payments were due under the contracts. The companies that received payment were still gaining an advantage and it was not necessary for them to gain a profit. This advantage was gained because the payments were made without the usual checking and scrutiny.

BRIBES AND OTHER UNDISCLOSED BENEFITS

[17.175] An obvious example of making an undisclosed personal profit arising from acting in the position of director occurs when a director is paid a bribe or secret commission in order to procure a particular course of action by the company or to influence the director in a particular way. The receipt of the payment would also amount to a breach of the duty to act in good faith in the best interests of the company as well as ss 181 and 182.

Boston Deep Sea Fishing & Ice Co v Ansell Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 [17.180]

Ansell was the managing director of the company and organised the construction of fishing boats on its behalf. However, unknown to his company, he was paid a commission by the shipbuilders. The company was also unaware that Ansell was a shareholder in an ice-supplying company and a fish-carrying company. These companies paid bonuses to shareholders who employed their

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[17.180] Corporations and Contract Law Boston Deep Sea Fishing & Ice Co v Ansell cont. services. Ansell contracted with the two companies in respect of Boston’s fishing business. The court held that Ansell’s personal interests conflicted with his fiduciary duty to Boston in respect of both the commission received from the shipbuilders as well as the bonuses received from the two companies of which he was a shareholder.

[17.185] Directors who derive an undisclosed personal benefit breach their fiduciary and statutory duties irrespective of whether the company suffered loss as a result. In such cases, the director can be ordered to account to the company for the personal benefit derived. The various remedies for breach of directors’ fiduciary and statutory duties are discussed in Chapter 20.

Furs Ltd v Tomkies Furs Ltd v Tomkies (1936) 54 CLR 583 [17.190]

Furs Ltd carried on the business of processing furs for the manufacture of coats. Tomkies was its managing director and had special knowledge of the tanning, dyeing and dressing operations of the business, including secret formulae, which were of considerable value. Tomkies was instructed by the Furs Ltd board to negotiate the sale of the business for the company for an initial asking price of £8,500 plus £4,500 for the formulae. Tomkies began negotiating with a potential purchaser who insisted that it would buy the business only if Tomkies agreed to work for the purchaser. Tomkies disclosed this to the chairman of Furs Ltd who stated that Furs Ltd could not afford to continue to employ Tomkies and advised him to make the best arrangements for himself. The purchaser agreed to hire Tomkies under a three-year contract. Tomkies was to be issued shares in the purchasing company. The purchaser also agreed to pay Tomkies an additional £5,000. Tomkies kept secret his shares in the purchasing company as well as the receipt of the £5,000. Because Tomkies promised to provide his knowledge of the secret formulae to the purchaser, it offered to pay only £8,500 for the business and nothing for the formulae. Furs Ltd accepted this reduced purchase price. After the sale of the business Furs Ltd discovered the £5,000 payment to Tomkies and his receipt of shares in the purchasing company. Furs Ltd successfully brought an action seeking to recover from Tomkies the amount of profit he made by reason of his breach of duty. The court held that Tomkies had a clear conflict of interests and ordered that he account to Furs Ltd for the undisclosed profits he made. As the managing director negotiating the sale of the business Tomkies had a duty to negotiate as high a price for the business as possible. The undisclosed receipt of £5,000 and the shares in the purchasing company indicated that Tomkies preferred his personal interests.

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Chapter 17 Conflicts of interest and disclosure [17.210]

TAKING UP A CORPORATE OPPORTUNITY

[17.200] A director breaches the duty to avoid a conflict of interests where the director, without appropriate disclosure or approval, takes up an opportunity that should have been taken up by the company. In such cases, the director may be liable to account to the company for any profit. The company may instead seek a constructive trust order, the effect of which is that the company takes the business opportunity for itself. Directors who take up a corporate opportunity in breach of their fiduciary duty will also breach their fiduciary duty to act in good faith in the best interests of the company as well as ss 181 and 182. The various remedies for breach of directors’ fiduciary and statutory duties are discussed in Chapter 20.

Diversion of contract

[17.205] A breach of the fiduciary duty regarding corporate opportunities occurs where a director, while negotiating a contract for the company, without appropriate disclosure and approval, arranges for the contract to be diverted from the company to the director personally or to another company in which the director is involved.

Cook v Deeks Cook v Deeks [1916] 1 AC 554 [17.210]

Toronto Construction Co was formed to engage in railway construction work on contract with the Canadian Pacific Railway. Its shares were held by four contractors in nearly equal proportions. They were also the directors. The company successfully completed several contracts of considerable value. Disagreements arose between three of the directors and the fourth, Cook. The three directors, GS Deeks, GM Deeks and Hinds, then negotiated a further contract on behalf of Toronto Construction Co. Towards the end of negotiations, Deeks, Deeks and Hinds indicated that the contract was for them and not for the company. The three directors formed a new company to carry out this contract. When Cook protested, resolutions were passed by the three as shareholders of Toronto Construction, approving the sale of part of its plant to the newly formed company, declaring that Toronto Construction Co had no interest in the new contract and authorising the directors to defend any action brought by Cook. Cook then brought a derivative action on behalf of Toronto Construction Co seeking an order that the contract and benefit of the contract belonged in equity to that company. The Privy Council held that the three directors breached their duty to Toronto Construction Co by diverting the contract to their newly formed company and consequently they held the contract as trustees for Toronto Construction Co. The Privy Council also held that the resolution passed by the general meeting declaring that Toronto Construction Co had no interest in the contract was invalid as it constituted a fraud on the minority shareholder, Cook. The rights of a member

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[17.210] Corporations and Contract Law Cook v Deeks cont. to bring a legal action in the name of a company and to seek an order under the oppression remedy are discussed at [17.15] (Lipton) onwards.

[17.215] Directors who negotiate the diversion of a business opportunity from their company to themselves or others breach their fiduciary duty even if the negotiations have not been concluded. Directors who divert a business opportunity without obtaining their company’s informed consent breach their duty even if the company was not able to take up the business opportunity.

Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] FCAFC 166 [17.220] American film studios owned equipment that converted movie

projection from analogue to digital that they wanted to sell to cinema owners throughout Australia. As an incentive to purchase the expensive equipment, the film studios were prepared to pay a subsidy to purchasing cinema owners called a Virtual Print Fee (VPF). However, the film studios were not prepared to deal directly with individual cinema owners. Rather, they sought to enter into VPF agreements with a “digital integrator” who had the support of a sufficient number of cinema owners to make the project worthwhile to the studios.

Digital Cinema Network (DCN), a joint venture between two companies, MGS Group Pty Ltd and digitALL Pty Ltd, was formed for the purpose of exploiting business opportunities in the cinema industry arising from the conversion of movie projection from analogue to digital. Smith, a director of DCN and also controller of MGS, initially began negotiations with a number of Hollywood film studios with a view to them entering VPF agreements with DCN as the digital integrator. In conducting these negotiations with the film studios Smith purported to represent DCN and told them that DCN had the support of an industry body (ICAA) that represented cinema owners and operators in Australia and that ICAA members would purchase the equipment. Prior to the VPF agreements being finalised, ICAA made it clear that it wanted its company, Ominilab Media Pty Ltd, to be nominated as the digital integrator in the VPF agreements instead of DCN. There were negotiations between Smith and ICAA for Ominilab Media to buy DCN’s business and assets. Even though the purchase did not eventuate, Smith handed over the draft VPF agreements to Omnilab Media, effectively cutting DCN out of the valuable digital integrator business opportunity with the Hollywood studios. The court held that Smith breached his fiduciary duty as director of DCN and in doing so also contravened ss 181(1), 182(1) and 183(1) of the Corporations Act. Smith came across the corporate opportunity to negotiate VPF agreements with the studios in his capacity as a director of DCN. He breached his duty when he

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Chapter 17 Conflicts of interest and disclosure [17.235] Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd cont. assisted Omnilab Media, DCN’s rival, to take from DCN the leading role in the negotiations with the studios. He did so without making a full and true disclosure of the relevant circumstances to the other DCN shareholder; without obtaining a non-disclosure agreement from the Omnilab Parties; and without securing a binding agreement from Omnilab Media to purchase the assets of DCN. Moreover, Smith also stood to obtain benefits from Omnilab Media in the form of a board seat and monetary payments. It was no defence for Smith’s breach of duty that DCN could not have profited from the opportunity itself. The court held that Ominilab Media was also liable because it had actual knowledge of Smith’s breach of duty to DCN and knowingly assisted in his breach.

[17.225] A breach of the fiduciary duty regarding corporate opportunities also occurs where a director who is involved in a business that competes with the company arranges for the company to shut down its own business. The effect of this is that the company loses the benefit of its business.

Mordecai v Mordecai Mordecai v Mordecai (1988) 12 NSWLR 58 [17.230]

Three brothers, Joseph, David and Meyer, were directors of Morpack Packaging Pty Ltd. Joseph and David each held 50 per cent of the shares. Joseph separated from his wife. Later, he died and in his will deliberately excluded his wife and left his shares to his brothers as trustees for his infant son. His brothers caused Morpack to cease business. They set up a rival company that took over all Morpack’s customers. Joseph’s wife, on her son’s behalf, claimed damages from David and Meyer alleging that they had breached their duty both as her son’s trustees and as directors by disposing of Morpack’s business in such a way as to reduce the value of her late husband’s estate. The Supreme Court of New South Wales agreed that David and Meyer had breached their duties as directors. They did more than merely set up a rival business in competition with Morpack — they deliberately closed down Morpack’s business purely for their own private benefit. They improperly depreciated the value of the business by asking Morpack’s customers to cease to deal with it and to deal with them instead.

Company consent where director takes up opportunity

[17.235] Directors who take up a corporate opportunity avoid breaching their fiduciary duty if they make full disclosure and the company gives its approval or consent. Directors who fail to make full disclosure and obtain consent cannot defend themselves by asserting that they acted honestly and that they benefited the company by taking up the opportunity or that the company did not have the means to take up the opportunity itself. In Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n, the facts 419

[17.235] Corporations and Contract Law

of which are discussed at [17.100], the House of Lords noted that it was irrelevant that the company could not take up the opportunity to acquire shares in the subsidiary. The directors were in breach of duty despite appearing to act honestly and the company not having suffered any loss. Directors satisfy their fiduciary duty if they make full disclosure to the company’s shareholders and obtain their approval or consent. Section 191 also requires directors to make full disclosure to the board. The s 191 disclosure requirements are discussed at [17.410]. In both Furs Ltd v Tomkies (1936) 54 CLR 583 and Regal (Hastings) Ltd v Gulliver, the respective courts indicated that disclosure by a director must be made to the general meeting of shareholders. However, in some circumstances, particularly in closely held companies, it may not be necessary to call a general meeting as long as shareholders are kept fully informed of the relevant circumstances and give their informed consent. This is discussed at [17.385] and [13.7.05] (Lipton).

Queensland Mines Ltd v Hudson Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 [17.240]

Hudson was the managing director of Queensland Mines. He took up mining exploration licences in circumstances where the company was financially unable to do so. Hudson made full disclosure of his intention to personally take up the licences and then resigned as managing director. He met all expenses and ran all risks until he proved the existence of valuable deposits. The rights were then sold to an American company with Hudson being entitled to royalties. When control of Queensland Mines changed, the company took proceedings against Hudson alleging breach of duty.

The Privy Council held that the opportunity to earn the royalties arose from the use Hudson made of his position as managing director. But he fully informed Queensland Mines shareholders as to his interest in the licence, and the company renounced its interest and assented to Hudson proceeding with the venture alone. Queensland Mines failed in its action for an account of the past and future profits from the royalties payable to Hudson. The Privy Council also held that the disclosure by Hudson to the board of directors, who were nominees of the respective shareholders, was sufficient.

Peso Silver Mines v Cropper Peso Silver Mines v Cropper (1966) 58 DLR (2d) 1 [17.245] The Supreme Court of Canada came to a similar conclusion in this case. A mining claim was offered to Peso by a prospector. This offer was rejected 420

Chapter 17 Conflicts of interest and disclosure [17.255] Peso Silver Mines v Cropper cont. after the directors acted in good faith, in the interests of the company and with sound business reasons. Soon after, the managing director, Cropper, was privately approached to take up the claims together with two others. Mayo Silver Mines was incorporated for this purpose. Peso merged with Charter Oil and after disagreements between Charter Oil’s chairman and Cropper, Peso sought a declaration that Cropper’s shares in Mayo were held by him in trust for Peso. It also sought an order requiring Cropper’s shares in Mayo, or an account of the proceeds to be delivered to Peso. It was held that the circumstances of the case differed from Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n — Cropper had been approached to take up the claims in his capacity as an individual member of the public and not as a director of Peso.

[17.250] Directors have the onus of proving that they provided full and frank disclosure of all material information to the shareholders. Directors breach their duty if the information they disclose is misleading or inadequate.

Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2005] QSC 233 [17.255]

Ensham operated and managed an open-cut coal mine on behalf of its shareholders who were involved as joint venturers. Foots, Ensham’s CEO, convinced the joint venturers that Ensham needed an additional dragline, a machine used in open-cut coal mining, for its operations. Foots advised that he had formed a company, Southern Cross Mine Management, which would buy a dragline and lease it to Ensham. Ensham’s board consented to this arrangement and entered into a lease agreement with Southern Cross Mine Management which acquired the dragline from its original owner. The court found that Foots induced Ensham’s consent by a number of misrepresentations. He falsely claimed that: •

•

the original owner of the dragline would not sell it to Ensham because it had already sold it to Southern Cross Mine Management; and it was significantly cheaper for Ensham to hire the dragline from Southern Cross Mine Management than to buy it outright.

Foots also failed to disclose to Ensham that Southern Cross Mine Management anticipated profits from the dragline lease would provide it with a return of more than 400 per cent on its investment.

It was held that because Foots was Ensham’s CEO, he owed it a fiduciary duty in relation to dealings with the dragline. He learned of the opportunity to acquire the dragline because of his position as Ensham’s CEO. It was his duty to acquire the dragline for Ensham. As Ensham’s fiduciary, Foots could be relieved of this duty and acquire the dragline himself only if Ensham consented after Foots

421

[17.255] Corporations and Contract Law Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd cont. disclosed all relevant information. While Foots disclosed his interest in Southern Cross Mine Management, his misrepresentations meant that Ensham’s consent was not fully informed of all relevant information. The court described Foots’ conduct as “disgraceful” and that the object of the arrangement was to “swindle Ensham of the profits from the dragline”. Since Southern Cross Mine Management and Foots were regarded as indistinguishable, the court held that it knowingly participated in Foots’ breach of fiduciary duty. The court declared that Southern Cross Mine Management held the dragline on a constructive trust for Ensham. A company’s constructive trust remedy is discussed at [20.90]–[20.115].

Company need not suffer loss [17.260] A company illustrated in Green v [17.265] and Omnilab FCAFC 166, discussed

need not suffer any loss to establish a breach of duty. This is Bestobell Industries Pty Ltd [1982] WAR 1 discussed at Media Pty Ltd v Digital Cinema Network Pty Ltd [2011] at [17.220].

Green v Bestobell Industries Pty Ltd Green v Bestobell Industries Pty Ltd [1982] WAR 1 [17.265]

Green used information arising from his former position as Victorian manager of a company to prepare a building construction tender. His tender, which was submitted by a company he formed for the purpose, was successful. Bestobell Industries also tendered for the same project but came third. The court held that Green breached his duties and ordered an account of profits to Bestobell even though it would not have won the tender in any event.

MISUSE OF CONFIDENTIAL INFORMATION

[17.270] Directors have a fiduciary duty not to misuse confidential company information for their own benefit without appropriate disclosure and approval. This principle includes the misuse of trade secrets, lists of customers and other confidential information. The duty overlaps in many instances with the duty not to take up a corporate opportunity, discussed above. The fiduciary duty regarding the misuse of confidential information is an aspect of the wider fiduciary and statutory duty to act in good faith in the best interests of the company. It also overlaps with the duty not to compete with the company, discussed at [17.345]–[17.370]. The duty not to misuse confidential information often arises when a director leaves one company to commence work for a competitor. A director or an employee after ceasing employment is not permitted to use confidential information obtained in the course of that employment for the purpose of competing with their former employer: Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117. 422

Chapter 17 Conflicts of interest and disclosure [17.280]

Confidential information includes trade secrets, customer lists and pricing information. In Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, Kirby P listed the following five factors to be considered in deciding whether information was confidential: • the skill and effort expended to acquire the information; • the degree to which the information is jealously guarded by the employer, is not readily made available to employees and could not, without considerable effort or risk, be acquired by others; • whether it was plainly known to the employee that the material was regarded by the employer as confidential; • the usages and practices of the industry; and • whether the employee in question has been permitted to share the information only by reason of their seniority or high responsibility within the employer’s organisation.

Artedomus v Del Casale Artedomus v Del Casale [2006] NSWSC 146 [17.275]

Two former directors and employees of Artedomus founded a company which imported stone from a location and supplier they had learned about during the time they were employed by Artedomus. It was held that the source of stone and the identity of the supplier were confidential information taking into account the usage and practices of the industry. Artedomus had taken considerable measures to impart to its employees the importance attached to this information remaining confidential. The former directors also contravened s 183, discussed at [17.295].

Thomas Marshall (Exporters) Ltd v Guinle Thomas Marshall (Exporters) Ltd v Guinle [1978] 3 WLR 116 [17.280]

Guinle was managing director of a company that carried on an importing business. It imported goods from Eastern Europe and the Orient which it later resold in England. Without his company’s knowledge, Guinle began to trade on his own account in competition with his company. When this was discovered his company sought an injunction to restrain him from dealing with the company’s customers and suppliers. It also sought an injunction to prevent him from disclosing or using the company’s confidential information or trade secrets. The court granted the injunctions after deciding that Guinle had breached his fiduciary duties.

423

[17.285] Corporations and Contract Law

Riteway Express Pty Ltd v Clayton Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238 [17.285]

Riteway Express carried on a freight business. Clayton was an executive director and the second defendant was its New South Wales state manager. In 1987 the company entered into a marketing agreement with Riteway Marketing, a company formed by Clayton and the second defendant. Riteway Marketing was granted the exclusive right to sell freight for Riteway Express. Clayton and the second defendant ceased their full-time employment with Riteway Express, though Clayton remained on its board as a non-executive director. After disputes arose between the two companies, Riteway Express terminated the marketing agreement and was granted an injunction to prevent Riteway Marketing and its directors from disclosing confidential information concerning Riteway Express’ business. The confidential information concerned the names and requirements of the clients of Riteway Express as well as the prices it customarily charged those clients.

Forkserve Pty Ltd v Jack & Aussie Forklift Repairs Pty Ltd Forkserve Pty Ltd v Jack & Aussie Forklift Repairs Pty Ltd [2000] NSWSC 1064 [17.290]

The Supreme Court of New South Wales held that the fiduciary duty regarding misuse of confidential information was breached when a former employee who was a de facto director set up his own business and began, prior to ceasing his employment, soliciting his former company’s customers using the company’s teledex book containing customers’ names and telephone numbers. The teledex book could be classified as a customer list even though it could not be classified as confidential. Taking the teledex book for use in the future to compete with the employer would, but for the employer’s consent, have amounted to a breach of duty by the employee. Santow J stated: It is long settled that during a period of employment an employee and/or a director may not solicit customers for a future time when the employment has ceased and the employee or director has established his or her own business. However, once the employment has ceased, in the absence of special stipulation, the employee may canvass the customers of the late employer and may send a circular to every customer. Further, during the course of employment an employee is not able to make or copy a list of the employer’s customers but cannot be restrained from sending circulars to customers whose names the employee remembers.

424

Chapter 17 Conflicts of interest and disclosure [17.300]

Improper use of information: s 183

[17.295] Section 183 supplements the fiduciary duty regarding the misuse of confidential information. It is wider than the fiduciary duty in that it also applies to employees. Under s 183, a person who obtains information because they are or have been a director, officer or employee of a corporation must not improperly use the information to make a gain for themselves or any other person or to cause detriment to the corporation. It is clear that s 183 applies to former directors, officers and employees as well as current directors, officers and employees. The High Court in Chew v R (1992) 173 CLR 626 suggested that the predecessor of s 183 should also be interpreted as being purposive in the same way as s 182. This means that the accrual of an advantage or suffering of a detriment need not actually occur as long as the defendant believed that an advantage or detriment would result. This is further discussed at [17.160].

Meaning of “information”

[17.300] While s 183 prohibits improper use of “information”, the section does not use the word “confidential”. The cases are divided as to whether confidentiality is an element of s 183. In Es-me Pty Ltd v Parker [1972] WAR 52, the Supreme Court of Western Australia made it clear that for the purposes of the fiduciary duties and a predecessor of s 183, the information need not necessarily be secret but must be confidential information possessed by the company. There is some doubt as to the correctness of the proposition in Es-me Pty Ltd v Parker that the information used by officers must be confidential. In McNamara v Flavel (1988) 6 ACLC 802, the South Australian Supreme Court held that for purposes of a predecessor of s 183 a breach depended on how the information was acquired and not whether it was confidential. If a plaintiff must prove that the information was at least confidential, breach of this duty would be more difficult to prove than the broader duty under s 181 or the fiduciary duty not to make undisclosed profits. Young J, in Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269, interpreted “information” as referring to that type of information that equity would restrict the director from using to their personal profit. Section 183 also may include a situation where an employee sets up in competition and makes improper use of information after leaving the company, even though there is no restraint of trade clause in the employee’s contract with the company.

425

[17.305] Corporations and Contract Law

Armstrong World Industries (Australia) Pty Ltd v Parma Armstrong World Industries (Australia) Pty Ltd v Parma [2014] FCA 743 [17.305]

Parma was the Chief Financial Officer of Armstrong World Industries (Australia) Pty Ltd until his employment was terminated in 2014. Following his termination, Parma copied from his company-owned laptop a large number of files containing business records of the company and then deleted them. Parma admitted that he had some business records of the company in his possession and that he intended to use those records to support a legal action he had commenced against the company arising from his dismissal. The court ordered Parma to return the business records to the company because it was satisfied that his stated purpose for using the documents would amount to a breach of s 183(1). Parma obtained the documents as an employee, he had the documents in his possession, and he had threatened to use them for his own advantage. This amounted to an improper use of that information.

[17.310] A director may improperly use confidential information to gain personal profits by obtaining inside information regarding the company’s affairs and then trading in the company’s shares. In such cases, the other trading party has no rights to a remedy under s 183 but may have rights under the insider trading provisions contained in ss 1042A – 1043O. Insider trading is discussed at [19.235] (Lipton) onwards.

ASIC v Vizard ASIC v Vizard [2005] FCA 1037 [17.315]

ASIC brought civil penalty proceedings against Vizard after he confessed to being involved in contraventions of the predecessors of s 183 in relation to three share transactions that were made as a result of confidential information he gained as a non-executive director of Telstra. To keep his involvement in the share trading secret, Vizard set up a share trading company, Creative Technology Investments Pty Ltd (CTI) of which his accountant was the sole director and shareholder. Vizard also controlled another company, Brigham Pty Ltd (Brigham), which was trustee of the Vizard family trust. Brigham lent money to CTI to fund its share trading activities. The loan agreement provided that CTI would pay Brigham 90 per cent of the proceeds derived from the sale of any shares. Through his membership of Telstra’s board, Vizard became aware of the following confidential information:

426

Chapter 17 Conflicts of interest and disclosure [17.320] ASIC v Vizard cont. •

•

•

In 2000, Telstra was involved in confidential merger discussions in which it was proposed that two other listed companies, Sausage Software Ltd and Solution 6 Holdings Ltd, would merge and that Telstra would acquire a substantial holding in the merged entity. Guessing that once the proposed merger became public there would be a significant increase in the share price of Sausage Software, Vizard caused CTI to buy shares in Sausage Software. Vizard’s guess was correct and following the public announcement of the merger, Sausage Software’s share price rose substantially giving CTI an immediate paper profit on its acquisition. CTI subsequently sold its Sausage Software shares. Telstra owned a substantial interest in another listed company, Computershare Ltd. Telstra’s board decided that it would sell its shares in Computershare to raise funds to help pay for its interest in the Sausage-Solution 6 merger. Telstra’s proposed sale was kept confidential until the sale was completed. As CTI owned shares in Computershare, Vizard correctly reasoned that the market price of shares in that company would fall after the public announcement of Telstra’s sale of its holding. Vizard caused CTI to sell its shares in Computershare ahead of Telstra’s sale. In 2000, Telstra’s board secretly proposed that the company should acquire a 51 per cent interest in Keycorp Ltd, a listed company. Vizard, realising that this would mean that Keycorp’s share price would rise after the announcement of Telstra’s acquisition, caused CTI to buy some shares in Keycorp ahead of Telstra. CTI later sold its Keycorp shares at a profit.

It was held that as a result of the above transactions, Vizard was involved in a contravention of the predecessors of s 183. In each instance he acquired confidential information by reason of his position as a non-executive director of Telstra. He made improper use of the information when he caused CTI to buy or sell shares. Vizard improperly used the information to gain an advantage for CTI, Brigham and ultimately for himself personally. The court ordered Vizard to pay a pecuniary penalty and imposed a disqualification order on him. These remedies are discussed at [20.135] onwards.

Relationship between ss 181 and 183

[17.320] The fiduciary and statutory duties regarding the misuse of information are an instance of the wider duty to act in good faith in the best interests of the company: Southern Real Estate Pty Ltd v Dellow [2003] SASC 318. A director who contravenes s 183 may in the same circumstances also contravene s 181.

427

[17.325] Corporations and Contract Law

Marson Pty Ltd v Pressbank Pty Ltd Marson Pty Ltd v Pressbank Pty Ltd [1989] 1 Qd R 264 [17.325]

The overlapping operation of ss 181 and 183 is illustrated by this case. Pressbank was a joint venture company whose shareholders were companies controlled by Mr and Mrs Margolis on the one hand and Mr and Mrs Urban on the other. Mr and Mrs Urban were Pressbank’s only directors. The company was formed to acquire land and a business. A deposit of $50,000 was due to the vendor. Pressbank raised this amount by borrowing $30,000 from the Urbans’ company and $20,000 from the Margolis’ company, Marson Pty Ltd.

When Mr and Mrs Margolis experienced trouble raising their share of the balance of the money required to settle the purchase it was agreed that the joint venture would be abandoned and that the Urbans would proceed with it themselves. It was accepted that Pressbank owed Marson $20,000 and would eventually repay this debt. When the Urbans told the vendor that Pressbank was unable to settle the purchase, the contract was rescinded and the deposit forfeited to the vendor. Because the vendor was anxious to settle the sale as quickly as possible he agreed that if Urban could find a new purchaser the vendor would refund $30,000 of the forfeited deposit. The Urbans formed another company that settled the contract with the vendor for the same price. Mr Urban convinced the vendor to credit the new company with $30,000 of the total deposit paid by Pressbank. The remaining $20,000 remained forfeited to the vendor. When Margolis learned of this he caused his company to bring an action against the Urbans arguing that they were liable to Pressbank for breach of both their statutory and fiduciary duties as directors.

The Supreme Court of Queensland held that the directors had breached their duties under predecessors of ss 181 and 183. The court found that it was only because of the Urbans’ connection with Pressbank that they were able to negotiate what was in effect a reduction in price for their new company. Their actions indicated that they lacked honesty for purposes of an earlier version of s 181(1). This may now indicate a lack of good faith and a failure to exercise powers for a proper purpose within the meaning of s 181(1). They also made improper use of information acquired by them as directors of Pressbank to gain an advantage for themselves and their company; the information being their awareness that the vendor would agree to a credit of $30,000 to a purchaser connected with Pressbank. The court noted that the Urbans would not have breached their duties if they had arranged for their own company to conclude the contract with the vendor at the same price but with the $30,000 refund being credited to Pressbank. That would have left Pressbank with sufficient funds to repay the debt due to the Margolis’ company.

428

Chapter 17 Conflicts of interest and disclosure [17.345]

Misuse of information about a company’s insolvency

[17.330] Directors may contravene s 183 if they make improper use of information that their companies are in financial difficulties to gain an advantage for themselves over the company’s creditors.

Grove v Flavel Grove v Flavel (1986) 43 SASR 410 [17.335]

The internal indebtedness within a group of companies was rearranged after a director acquired information that a company within the group was close to insolvency. A “round robin” of cheques resulted in the director, and the financially secure companies of which he was also a director, ceasing to be creditors of the company experiencing financial difficulties. Other companies of the group ceased being debtors of the troubled company and the danger of a liquidator calling up the debts was thereby removed.

It was held that the director had made improper use of information under a predecessor of s 183 acquired by virtue of his position as an officer. The information led him to believe that the company faced a risk of liquidation that was real and not remote. He acted to protect himself and other companies of which he was a director from the consequences of a liquidation. This was detrimental to the creditors of the company in financial difficulties.

[17.340] In McNamara v Flavel (1988) 6 ACLC 802, a director transferred for no consideration a valuable asset owned by his insolvent company to another company that he controlled. This was detrimental to the creditors of the first company. The extent to which directors owe duties to creditors is discussed at [13.5.10]–[13.5.95] (Lipton).

COMPETING WITH THE COMPANY

[17.345] As a general rule, fiduciaries are not permitted to enter into competition with the persons for whom they act. Trustees cannot compete with their beneficiaries and partners cannot compete with their partnerships. Despite the similarities of the duties of directors to the duties arising in these other relationships, it is not entirely settled that directors breach their fiduciary duty merely by being involved in a business that competes with their company. The courts draw a distinction between executive and non-executive directors. In Bell v Lever Bros Ltd [1932] AC 161, the court held that non-executive directors of a company cannot be prevented from acting as a director of a competing company. While they are permitted to compete they cannot divulge confidential information obtained by them as director of one company to the other company or use for their

429

[17.345] Corporations and Contract Law

own purposes information entrusted to them while acting as a director: Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508. A company may provide in its constitution or in a service agreement entered into with a director that the director shall only engage in work related to the business of the company during normal office hours. Such a provision prevents the director from working for anyone else during those hours, whether or not they are engaged in a competing business.

Hivac Ltd v Park Royal Scientific Instruments Ltd Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 [17.350]

A company employed two employees who engaged in highly skilled, technical work. At least one of the employees had access to the company’s manufacturing data. In their spare time they were employed by a rival company doing similar work and they persuaded other employees to work for the rival company in their spare time. There was no evidence that the employees had revealed any confidential information to the rival company. It was held by the Court of Appeal, that an employee owes a duty of fidelity (good faith and no undisclosed conflicts) to the employer. However, an employee may work for another employer in their spare time. This is so in the case of a manual worker: what is done in their spare time is a private concern. However, a contract of employment may contain an express or implied term that an employee will not work for a competitor.

[17.355] Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 appears to suggest that an executive director employed under a service agreement at least owes an employees’ duty of fidelity. This prevents the employee competing with the employer, the company. While directors may sit on the boards of rival companies, they are not permitted to use or disclose the confidential information of one company to the rival company.

Riteway Express Pty Ltd v Clayton Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238 [17.360]

The facts of this case are set out at [17.285]. The Supreme Court of New South Wales noted that the law permits former employees of a company to compete with their company and use or disclose certain categories of information gained in the course of their employment. Former employees may, after leaving the company, legitimately use or disclose information that they have memorised. They can also use all their skills and experience acquired in the course of their previous employment.

430

Chapter 17 Conflicts of interest and disclosure [17.370]

Riteway Express Pty Ltd v Clayton cont. Ex-employees, however, are not permitted to use or disclose trade secrets of their former employer. The court decided that the information in the present case fell into the permitted use category so that had Clayton merely been in the position of a former employee of the company he would have been permitted to use and disclose it. The court held, however, that because Clayton was still a nonexecutive director of Riteway Express he was not permitted to use the information. The court granted the injunction but made it subject to certain conditions. It would be lifted if either a general meeting of the company consented to Clayton carrying on a competing business or he ceased to be a director.

[17.365] A director who forms an undisclosed intention to resign and set up a competing business is not permitted to actively solicit the company’s customers for the competing business prior to the resignation or for a reasonable period of time thereafter: Southern Real Estate Pty Ltd v Dellow [2003] SASC 318. Directors are also not allowed to compete with their company where this involves them closing down the company’s business and operating it for themselves: Mordecai v Mordecai (1988) 12 NSWLR 58.

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154 [17.370]

While employed by Holyoake Industries, its managing director and two other senior managers set up their own company, V-Flow Pty Ltd, and without disclosure or approval from their employers arranged for that company to purchase the business of one of Holyoake Industries’ competitors. The three employees resigned from Holyoake Industries and proceeded to compete with their former employer. It was held that they breached their contractual and fiduciary duties to Holyoake Industries. They also contravened ss 182(1) and 183(1) of the Corporations Act. The court further held that the managing director also contravened s 181(1). The three officers breached their implied contractual duties of loyalty and fidelity as well as their fiduciary duties as officers of Holyoake Industries in several respects. While still employed by Holyoake, and without the knowledge of the management of Holyoake, the three officers set about obtaining customers for their proposed new business, which was to compete with Holyoake. They also set up the trust structures that they proposed to use to conduct the purchased business at a time while they were still employed by Holyoake. In negotiating the purchase of the business they used confidential information in Holyoake’s records relating to the nature of the business they purchased. By acting in those ways, the three officers placed themselves in a position in which their interests conflicted materially with those of their former employer. The court held that V-Flow was also liable because it knowingly participated in the breaches of fiduciary duty.

431

[17.370] Corporations and Contract Law

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd cont. Given the circumstances of their breaches of contractual and fiduciary duties described above, the court also held that the three officers improperly used their positions to gain an advantage for themselves and their company, V-Flow, in contravention of s 182(1). Their use of confidential Holyoake information relating to the business they purchased also meant they improperly used information in contravention of s 183(1).

The managing director breached his fiduciary duty and s 181(1) duty to act in the best interests of Holyoake and for a proper purpose in several respects. As well as the conflicts of interest described above, when the managing director came across the information that the competing business was for sale, he failed to pass on this information to Holyoake. When negotiating the employment contracts with the other two senior managers prior to purchasing the competing business, the managing director deliberately ensured that those employment contracts omitted Holyoake’s usual clauses that prohibited employees having conflicts of interest; 12-month restraint on employees soliciting Holyoake’s customers; and restrictions on the disclosure of confidential information and intellectual property.

DISCLOSURE OF INTERESTS

[17.375] Directors who enter into a self-interested transaction with the company or otherwise put themselves in a conflict of interest situation which amounts to a breach of their fiduciary duty must disclose the details of their personal interest and obtain the company’s fully informed consent if they are to avoid liability for the breach. Examples of such conflict of interest situations include where a director: • makes a personal profit that arises from their position; • diverts an opportunity from their company; or • misuses confidential company information. A key issue in relation to disclosure of interests is to whom directors must disclose their interests. As a general rule, directors’ fiduciary obligations require them to make full disclosure of their potential conflicts of interest to the company’s shareholders at a general meeting and obtain their consent (also referred to as “ratification”). However, as discussed at [17.365], a company’s constitution may relax the obligation to disclose conflicts of interest to shareholders and allow disclosure to be made to the board. The Corporations Act also imposes disclosure and approval requirements. For example, as discussed at [17.45], s 208 requires prior shareholder approval if a public company provides a financial benefit to a related party. In addition, under s 191 directors who have a material interest in a matter that relates to the affairs of the company have a duty to disclose that to the other directors. Section 191 is discussed at [17.410].

432

Chapter 17 Conflicts of interest and disclosure [17.390]

Under constitution and replaceable rules

[17.380] A company’s constitution may require a director’s material interest to be disclosed to and approved by the company’s directors instead of the general meeting of shareholders: Woolworths Ltd v Kelly (1991) 22 NSWLR 189. The effect of such a provision in a company’s constitution is to relax the strict fiduciary obligation to disclose conflicts of interest to shareholders. Even though such provisions are relatively common, companies recognise the possibility of the potential for conflicts of interest and their constitutions often provide that directors must disclose their personal interests and refrain from voting on the matter at directors’ meetings. This is the case with the replaceable rule in s 194. The proprietary company replaceable rule in s 194 permits directors of proprietary companies to have an interest in contracts with the company provided certain conditions are satisfied. The director must disclose the nature and extent of the interest at a directors’ meeting. The rule also permits proprietary company directors to vote on whether the company enters into the contract if the director discloses the nature and extent of the interest at a directors’ meeting: s 194(c). While a company’s constitution may prohibit an interested director from voting, such prohibitions only apply to voting at directors’ meetings. A director who is also a shareholder is generally not disqualified from voting at a general meeting of members on matters affecting their personal interests as a shareholder: North-West Transportation Co v Beatty (1887) 12 App Cas 589. In some cases though, members may seek a remedy. This is discussed in Chapter 17 (Lipton).

At common law

[17.385] Directors’ fiduciary obligations require them to make full disclosure of their potential conflicts of interest to the company’s shareholders at a general meeting and obtain their consent (also referred to as “ratification”). Ratification by the general meeting of acts that constitute breach of directors’ fiduciary duties is further discussed at [13.7.05] (Lipton). As a general rule, the appropriate organ of the company to whom disclosure must be made is the general meeting of shareholders.

Furs Ltd v Tomkies Furs Ltd v Tomkies (1936) 54 CLR 583 [17.390]

The facts of this case are set out at [17.190]. The director defended his actions on the basis that he had disclosed his interest in a contract to his company’s chairman of directors. The High Court rejected this defence on the basis that neither the chairman of directors nor the whole board had the power to

433

[17.390] Corporations and Contract Law Furs Ltd v Tomkies cont. authorise him to disregard the interests of the company in pursuing his own interests.

Regal (Hastings) Ltd v Gulliver Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n [17.395]

The facts of this case are set out at [17.100]. The House of Lords took a similar view when it held that the directors could have protected themselves by making full disclosure to, and having their actions ratified by, the general meeting. This would have been a mere formality because the directors controlled the voting of the general meeting.

Queensland Mines Ltd v Hudson Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 [17.400]

A more lenient approach was taken by the Privy Council in this case, the facts of which are outlined at [17.240]. The company, after a change in control, brought an action claiming that Hudson had breached his duty as its managing director by taking up a corporate opportunity and making a profit for himself and that his profits should be accounted to the company. This argument was rejected by the Privy Council on the ground that Hudson had kept the boards of two companies, which originally controlled Queensland Mines Ltd, fully informed of his dealings. They permitted him to take up a mining licence himself, because the company had insufficient funds to utilise the opportunity itself. The two companies had very few shareholders and the respective boards were their nominees so that board approval was effectively the same as shareholder approval. Hudson was thus not in breach of his duty even though no formal disclosure had been made to the company’s general meeting and it had not ratified his actions.

Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2005] QSC 233 [17.405]

The facts of this case are discussed at [17.255]. It was held that the CEO had breached his fiduciary duty even though he had the company’s shareholders’ consent to his taking a corporate opportunity. As he had misrepresented important information, he had not satisfied his fiduciary obligation

434

Chapter 17 Conflicts of interest and disclosure [17.410] Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd cont. to make full disclosure. His misrepresentations meant that the shareholders’ consent was not fully informed and was therefore invalid.

Under the Corporations Act Disclosure to other directors

[17.410] Section 191(1) requires a director who has a material personal interest in a matter that relates to the affairs of the company to give notice of the interest to the other directors. Directors must make disclosure to both the shareholders and to the board as s 191 has effect in addition to and not in derogation of any general law rule about conflicts of interest and any applicable provision in the company’s constitution: s 193. The meaning of the expression “material personal interest” is discussed at [17.85] in the context of the s 195 restrictions. Directors of proprietary companies who have a material personal interest in a matter relating to the affairs of the company are subject to the replaceable rule set out in s 194. It provides that if a director gives notice in accordance with s 191, the company cannot avoid the transaction merely because of the existence of the interest. The director may retain benefits under the transaction and can vote on matters that relate to the interest. The notice required by s 191(1) must give details of the nature and extent of the interest and the relation of the interest to the affairs of the company: s 191(3)(a). It must be given at a directors’ meeting as soon as practicable after the director becomes aware of their interest in the matter: s 191(3)(b). The requirement to give notice under s 191(1) does not apply in the circumstances specified in s 191(2). For example, a director does not have to give notice of an interest if it is part of the director’s remuneration or it relates to a proposed contract of the company that is subject to member approval and does not impose any obligation on the company if member approval is not obtained: s 191(2)(ii) and (iii). Section 191 also does not apply to a proprietary company that has only one director: s 191(5). A director may give standing notice to the other directors of the nature and extent of the director’s interest in a matter: s 192(1). The details required to be disclosed correspond to the disclosure requirements set out in s 191 and it must also be recorded in the minutes. The standing notice ceases to have effect when a new director is appointed until notice is given to the new director: s 192(5). It also ceases to have effect if the nature or extent of the interest materially increases above that disclosed in the notice: s 192(6). Standing notice is often given by directors who are on the boards of companies that may have frequent dealings with each other. A contravention of s 191 or s 192 does not affect the validity of any act or transaction: ss 191(4) and 192(7). However, a breach constitutes an offence. 435

[17.415] Corporations and Contract Law

Disclosure to the ASX

[17.415] Under s 205G, directors of listed companies must notify the ASX of relevant interests they hold in securities of the company or a related body corporate. They must also disclose any rights or options. Any changes in these holdings must be notified within 14 days. ASX Listing Rule 3.19A requires disclosure by a listed company of this information within five business days of a director acquiring a security holding or changing an existing holding. The information required to be given to the ASX includes details of relevant interests in securities which are indirectly held through interposed entities.

436

CHAPTER 18

Duties of care, skill and diligence Introduction ................................................................................................... [18.05] Changing attitudes and expectations ........................................................... [18.10] Current standards of care, skill and diligence ............................................ [18.15] Corporation’s circumstances ................................................................... [18.20] Director’s office and responsibilities ....................................................... [18.30] Familiarity with and understanding of the company’s financial affairs ................................................................................ [18.100] Duty to safeguard the company’s interests ......................................... [18.120] Directors who permit the company to contravene the law ................. [18.140] Frequency of board meetings and attendance ......................................... [18.155] The business judgment rule ....................................................................... [18.160] Reliance on others: s 189 .......................................................................... [18.175] Responsibility for actions of delegates: s 190 .......................................... [18.200] Consequences of contravention ................................................................. [18.205]

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[18.05] Corporations and Contract Law

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 13.4. Key points

• Directors and officers are under both common law and statutory duties to exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exercise if they were a director in the corporation’s circumstances and had the same responsibilities as the directors. • Directors are now expected to meet higher standards of care and diligence than was previously required. Directors are expected to make inquiries and be properly informed so as to effectively monitor management and satisfy themselves that the company complies with the law. • The statutory duty of care imposes an objective standard of a reasonable director in the corporation’s circumstances and in the director’s position. Breach of this duty gives rise to civil and not criminal liability. • The business judgment rule was introduced as a defence for directors against claims arising from breaches of the duty of care. To gain the protection of this rule, directors must show their business judgment was made in good faith and for a proper purpose, they had no material personal interest, they were informed and they rationally believed their business judgment was in the company’s best interests. • Directors may rely upon information or advice provided by others. Directors may also delegate their powers to others provided they are properly informed and the reliance or delegation is reasonable in the circumstances.

INTRODUCTION

[18.05] Directors and other officers are under a duty to exercise a reasonable degree of care and diligence. These duties are imposed by s 180(1) as well as the common law tort of negligence and the equitable duty of care. The substance of these duties is the same: Vines v ASIC [2007] NSWCA 75. Directors and other officers who breach their duties of care and diligence will be liable to pay damages to the company if it is proved that: • they breached their standard of care and diligence (in other words they were not careful enough in the circumstances); and • their carelessness caused the company’s loss or damage; and • the kind or type of loss suffered by the company was reasonably foreseeable. The court may impose civil penalty orders on directors or officers who contravene the statutory duty of care and diligence in s 180(1). 438

Chapter 18 Duties of care, skill and diligence [18.10]

Directors and other officers avoid liability for breaching their duties of care and diligence if they satisfy the business judgment rule defence in s 180(2), discussed at [18.160]. Most of the cases dealing with breaches of the duties of care and diligence have focused on the applicable standard of care and diligence. It is recognised that directors are involved in managing a business with its attendant risks and uncertainties. As a consequence, the law allows directors a degree of flexibility in how they exercise their management functions and shareholders are taken to accept this. The standard of care that directors and officers must exercise varies and depends on the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a company in the company’s circumstances and occupied the office and had the same responsibilities as the director or officer in question. The standard of care expected has changed over the past 100 years: see [18.10]. The current standards of care, skill and diligence are discussed at [18.15]–[18.155]. There are also a number of other provisions that are allied to the duty of care and diligence: • s 189 explains when directors are entitled to rely on information or advice; and • s 190 deals with directors’ responsibility for the actions of their delegates.

CHANGING ATTITUDES AND EXPECTATIONS

[18.10] In the past, the courts adopted a very lenient approach in determining the standards expected of directors. The rules governing directors’ standards of care, skill and diligence were established in a series of English cases in the late 19th and early 20th centuries. In those days there were relatively few companies and their boards largely comprised part-time, non-executive directors who were regarded as figureheads and who were often appointed because of their title or reputation and not because of their business abilities. The effect of the early cases, such as Overend & Gurney & Co v Gibb (1872) LR 56 HL 480 and Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, was that directors would only be regarded as having breached their duty of care if they were grossly negligent. The old cases also did not require directors to possess minimum levels of skill. Standards of skill were measured subjectively by reference to the particular director’s knowledge and experience. In Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, it was held that a director need not exhibit a greater degree of skill than may reasonably be expected from someone of their knowledge and experience. For example, a director of a life insurance company was not required to have the skills of an actuary. The implications of this were that the less knowledge and experience possessed by a director, the lower the standard of care. Conversely, a director with considerable business experience and knowledge was required to exercise a higher degree of care and skill. The courts were generally reluctant to override matters 439

[18.10] Corporations and Contract Law

involving directors’ business judgments and took the view that if shareholders elected incompetent amateurs they had only themselves to blame. In the past, the courts took a very lenient view of directors’ duty of diligence. In Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, Romer J stated that a director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.

In more recent times there has been a change in community attitudes and expectations concerning directors’ standards of care, skill and diligence. In its 1989 report, Social and Fiduciary Duties and Obligations of Company Directors, the Senate Select Committee on Legal and Constitutional Affairs (the Cooney Committee) recommended changes in the legislation to impose elements of an objective standard of care. It commented: The case law has developed the company director’s general duty of care in this way because it has been recognised that her or his role involves a degree of risk taking and uncertainty. The courts have been concerned to allow flexibility and not to hamper entrepreneurs unduly. The standards laid down, however, barely meet the requirements of contemporary business and fall far short of the standards required of other professions.

There is no objective common law standard of the reasonably competent director, as there are objective standards for other professions. It is not an easy task to determine uniform minimum standards of behaviour for company directors. The activities and types of companies are diverse and consequently there is a wide range of skill and experience in directors. The changed judicial attitudes were initially reflected in a number of insolvent trading cases decided in the early 1990s such as Statewide Tobacco Services Ltd v Morley [1993] 1 VR 423 and Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946. These cases required all directors to make inquiries about their company’s financial position and to have the skills to understand a balance sheet and profit and loss statement. As Tadgell J observed in Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946: As the complexity of commerce has gradually intensified (for better or for worse) the community has of necessity come to expect more than formerly from directors whose task it is to govern the affairs of companies to which large sums of money are committed by way of equity capital or loan. In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. In particular, the stage has been reached when a director is expected to be capable of understanding his company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity.

440

Chapter 18 Duties of care, skill and diligence [18.20]

CURRENT STANDARDS OF CARE, SKILL AND DILIGENCE

[18.15] Directors’ and other officers’ duties of care, skill and diligence are imposed by s 180(1) as well as the common law tort of negligence and the equitable duty of care. The present standards of care, skill and diligence that directors and other officers must exercise are expressed in s 180(1) which was inserted by the 1999 amendments and was intended to reflect increasing expectations and to be consistent with modern case law on the common law duty of care. Section 180(1) provides that a director or other officer of a corporation must exercise their power and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: • were a director or officer of a corporation in the corporation’s circumstances; and • occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. The common law and s 180(1) both impose an objective “reasonable person” standard. However, it is recognised that the precise degree or standard of care and diligence that a reasonable person would exercise in a particular case varies depending on the corporation’s circumstances as well as the office and responsibilities held by the director or officer in question. Even though the standard of care is variable, the leading cases, such as Daniels v Anderson (1995) 37 NSWLR 438, discussed at [18.40], make it clear that the law imposes minimum standards of care and diligence on directors. General tort law principles apply in determining how careful a reasonable director or officer should be when making decisions that involve a risk of harm: ASIC v Vines [2005] NSWSC 738. According to those principles, the standard of care that would be exercised by a reasonable person when making business decisions that involve risk is determined by weighing up the following factors: • the magnitude of the risk of harm and the probability of it occurring; • the seriousness of the loss that would result if the harm occurs; and • the expense, difficulty and inconvenience of taking alleviating action.

Corporation’s circumstances

[18.20] Section 180(1)(a) recognises that a corporation’s circumstances are one of the factors to be taken into account when deciding the degree of care and diligence which a reasonable person would exercise in a particular case. The reference to the “corporation’s circumstances” was inserted by 1992 amending legislation. The explanatory paper explained the purpose of including these words: What constitutes the proper performance of the duties of the director of a particular company will be dictated by a host of circumstances, including no doubt the type of the company, the size and nature of its enterprise, the provisions of its articles of association, the composition of its board and the distribution of work between the board 441

[18.20] Corporations and Contract Law

and other offıcers (Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, at 955 for Tadgell J; see also Explanatory Memorandum to the Corporate Law Reform Bill 1992, paragraph 86, which specifically mentions the state of the corporation’s financial affairs and the urgency and magnitude of any problem).

ASIC v Rich ASIC v Rich [2003] NSWSC 85 [18.25]

In this case the rapidly deteriorating state of the financial circumstances of the One.Tel group of companies was regarded as relevant for purposes of determining whether the group’s chairman contravened s 180(1). While the case dealt only with the adequacies of ASIC’s pleadings against One.Tel’s chairman, it was noted that the One.Tel group’s financial position and performance progressively deteriorated in the months prior to its May 2001 collapse. It required an immediate cash injection of about $270 million by the end of February 2001 if it was to continue its existing operations and meet current and reasonably foreseeable liabilities. Amongst other things, ASIC argued that a reasonable chairman of a company in One.Tel’s circumstances would have known about the group’s financial position and performance and would have ensured that the board was informed about this on a month-by-month basis. ASIC also argued that a reasonable chairman of a company in One.Tel’s circumstances would have promptly recommended to the board that the group cease trading or appoint an administrator unless a cash injection of about $270 million was obtained.

Director’s office and responsibilities

[18.30] Section 180(1)(b) makes it clear that the office held by a director or officer and their responsibilities in the corporation are relevant factors in deciding the degree of care and diligence that a reasonable person would exercise in the corporation’s circumstances. This requirement recognises that the standard of care, skill and diligence that a reasonable person would exercise may vary from company to company depending on the type of office a particular director occupies and their responsibilities. For example, as discussed at [12.30] (Lipton), one of the directors will be appointed to the position of the chair of the board with the special responsibilities attaching to that position. The boards of many companies consist of both executive directors, such as the managing director and chief financial officer, and non-executive directors. In some companies, directors may be on a board committee and be given particular committee responsibilities or may be appointed to the board because they have particular skills or experience.

In ASIC v Rich [2003] NSWSC 85, it was held that the word “responsibilities” in s 180(1)(b) refers to the factual arrangements operating within the company and affecting the director in question and is not limited to legal duties. This means that a 442

Chapter 18 Duties of care, skill and diligence [18.35]

director’s responsibilities involve a consideration of the specific tasks delegated to the director by the company’s constitution or the board, and the way in which work is actually distributed within the company as well as the particular director’s experience and skills. Austin J stated: [T]he word “responsibilities” was intended to direct attention to the factual arrangements operating within the company and affecting the director in question — as opposed to the legal duty of care, implying specific legal duties in particular circumstances. The content of those specific duties would be affected by the factual matters specified in the section, relating to the corporation’s circumstances, the nature of the director’s offıce, and the director’s responsibilities. The director’s responsibilities would include arrangements flowing from the experience and skills that the director brought to his or her offıce, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. The precise duty of care flowing from these arrangements would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position.

Sometimes a director or officer may simultaneously occupy more than one position in a company. For example, in Shafron v ASIC [2012] HCA 18, Shafron came within the s 9 definition of “officer” by virtue of his position as both the general legal counsel of James Hardie Industries Ltd (JHIL) as well as its company secretary. The High Court held that it was inappropriate to consider the responsibilities associated with an officer’s various positions separately. The “responsibilities” referred to in s 180(1)(b) were not confined to Shafron’s statutory responsibilities as company secretary; they included whatever responsibilities he had within the company, regardless of how or why those responsibilities came to be imposed on him.

Non-executive directors

[18.35] The boards of large listed companies usually consist of both non-executive and executive directors. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 3rd ed suggests that the boards of listed companies should consist of a majority of independent non-executive directors. This is further discussed at [13.1.40] (Lipton). Non-executive directors are not directly involved in the daily management of the company’s business. Of necessity, non-executive directors of large companies must rely on management, led by the company’s managing director or chief executive officer, for information to properly carry out their roles as directors. The standard of care of non-executive directors recognises that their duties are of an intermittent nature to be performed at periodic board meetings and at meetings of any committee of the board to which the director has been appointed: AWA Ltd v Daniels (1992) 7 ACSR 759. While non-executive directors do not expect to be informed of the minute details of how the company is managed, they expect to be informed of anything untoward or anything appropriate for consideration by the board. 443

[18.35] Corporations and Contract Law

Even though the law does not require non-executive directors to have any particular educational qualifications or business experience, reflecting changing community attitudes and expectations of the modern director’s duty of care, cases such as Daniels v Anderson (1995) 37 NSWLR 438 set out minimum standards of care and diligence applicable to non-executive directors of listed public companies.

Daniels v Anderson Daniels v Anderson (1995) 37 NSWLR 438 [18.40]

AWA, a listed company, incurred large losses from foreign exchange transactions carried out by one of its middle level managers. The foreign exchange dealings were not adequately supervised by senior AWA executives who did not put in place adequate internal controls to monitor foreign exchange activities. Nor did they ensure that there were adequate records kept of the numerous foreign currency dealings. For a time, the foreign exchange manager concealed these losses from senior executives when he arranged unauthorised foreign currency borrowings from a number of banks. AWA’s auditor failed to detect the unauthorised foreign currency borrowings. However, he warned AWA senior executives of the inadequacies of the company’s internal controls. The auditor failed to inform AWA’s board of the full extent of the inadequacies even though he knew that the senior executives had not acted on his warnings. The auditor wrote to the company’s chief executive officer (who was also chairman) suggesting improvements to the company’s internal audit procedures but did not specifically mention the problems with the foreign exchange operations or stress the urgency of the matter. The board later became aware of the full extent of the unsupervised foreign exchange deals and the unauthorised loans.

AWA sued its auditors for negligence, who then alleged contributory negligence on the part of AWA and instituted a cross-claim against all the AWA directors seeking contribution. In the cross-claim the auditors argued that AWA’s directors had breached their duty of care. The New South Wales Court of Appeal held that the auditors were negligent but that AWA’s contributory negligence reduced the audit firm’s liability. AWA’s contributory negligence arose because both its senior executives and chief executive officer were held to have been negligent and this was attributed to AWA. The Court of Appeal held that directors of listed companies are required to take reasonable steps to place themselves in a position to guide and monitor the management of a company. In particular: •

•

444

directors must become familiar with the company’s business when they join the board;

while directors need not have equal knowledge and experience of every aspect of the company’s activities, they are under a continuing obligation to make inquiries and keep themselves informed about all aspects of the

Chapter 18 Duties of care, skill and diligence [18.50] Daniels v Anderson cont.

•

•

• •

company’s business operations. “A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto dummy director: Francis v United Jersey Bank 432 A 2d 814 (1981)”;

directors must also be familiar with their company’s financial position by regularly reviewing its financial statements as they will be unable to avoid liability for insolvent trading by claiming that they do not know how to read financial statements (Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946); directors who are appointed because they have special skills or experience in an aspect of the company’s business must also pay attention to other aspects of the company’s business which might reasonably be expected to attract inquiry even if this is outside their area of expertise. They must ensure that the board has the means to monitor management so as to satisfy themselves that the company is being properly run;

directors are allowed to make business judgments and take commercial risks. However, they cannot safely proceed on the basis that ignorance and a failure to inquire are protection against liability for negligence; and

directors cannot shut their eyes to corporate misconduct and then claim that they did not see the misconduct and did not have a duty to look. “The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect.”

It was held that AWA’s non-executive directors did not breach their standard of care because on the facts of the case they had made inquiries and requested information about the foreign exchange dealings from senior management and the auditor but the full details were concealed from them.

[18.45] A non-executive director who has special skills or experience in the company’s business has a duty to give the company the benefit of that skill or experience. Such a director cannot avoid liability for negligence simply by asserting that they relied on the company’s executive directors and officers.

Gold Ribbon (Accountants) Pty Ltd v Sheers Gold Ribbon (Accountants) Pty Ltd v Sheers [2006] QCA 335 [18.50] Dunn was a non-executive director of Gold Ribbon and was the only

director on the five-man board with extensive lending experience. Together with the other directors, Dunn assisted the company in setting up a scheme that involved Gold Ribbon lending money to practising accountants or their associated service companies. The loans were at high interest rates and unsecured. Gold Ribbon’s directors delegated the administration of the scheme to another company, Austide Holdings Pty Ltd, which was required to make “due diligence”

445

[18.50] Corporations and Contract Law Gold Ribbon (Accountants) Pty Ltd v Sheers cont. inquiries about prospective borrowers’ professional fees and their capacity to service their loans. Gold Ribbon’s lending scheme effectively ceased when its bank, which had funded its lending activities, terminated its loan facility and demanded that Gold Ribbon repay its bank loan. Gold Ribbon in turn called up the loans it had made to borrowing accountants, however, five of the accountant borrowers defaulted under their respective loan agreements leaving Gold Ribbon with bad debts of over $3 million. Gold Ribbon went into liquidation and its liquidator commenced legal proceedings against Dunn and the other directors. In relation to Dunn it was alleged that he had breached his duty of care in relation to both the setting up of the lending scheme and the scheme’s operation.

The court at first instance held that Dunn breached his duty of care in a number of respects. By its nature, Gold Ribbon’s business was a high risk venture that was only likely to attract accountants who had had difficulties in borrowing money from other sources. Being the only person on Gold Ribbon’s board with extensive lending experience, Dunn failed to ensure that the scheme was set up to comply with “accepted lending practice” to minimise the risk of borrowers’ defaults. A reasonable director with Dunn’s background and experience would have ensured that the company had appropriate procedures for making due diligence inquiries to ensure loan applicants had the financial capacity to service and repay their loans. Dunn breached his duty of care by failing to monitor Austide’s administration of the scheme in circumstances where a director with his lending experience would have identified obvious deficiencies. Dunn also breached his duty of care because he failed to ensure that Austide’s managers had the capacity to administer the scheme properly. He also failed to advise the other directors that Austide should be replaced as scheme administrator when it became apparent that it was incompetent. On appeal the court held that even though Dunn failed to ensure that his company’s lending business was adequately administered and complied with accepted lending practice, his failure did not cause the company’s losses in relation to the five “bad” loans. Dunn was therefore not personally liable. The Queensland Court of Appeal found that on the evidence the company would have approved these “bad” loans even though they would not have satisfied due diligence inquiries because, in each case, other Gold Ribbon directors had business interests with the borrowers and stood to personally benefit from the loans. There was no evidence that proper supervision by Dunn would have made any difference.

Chair

[18.55] The chair of a listed company has special responsibilities and therefore is subject to a different standard of care and diligence than is applicable to non-executive directors discussed at [18.35].

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Chapter 18 Duties of care, skill and diligence [18.60]

ASIC v Rich ASIC v Rich [2003] NSWSC 85 [18.60] ASIC brought civil penalty proceedings against Greaves, the chairman

of One.Tel, alleging that he contravened s 180(1). The court did not make a decision on whether Greaves breached s 180(1) but dealt only with the preliminary issue of whether Greaves’ position as chairman and his skills and experience came within the meaning of “responsibilities” for the purposes of s 180(1)(b).

ASIC’s statement of claim alleged that Greaves had special responsibilities beyond those of the other non-executive directors by reason of his position as chairman of the board, chairman of its finance and audit committee and also because of his high qualifications, experience and expertise relative to the other directors. ASIC argued that these special responsibilities meant that Greaves had a higher standard of care which he failed to meet in the circumstances. In particular, ASIC’s case was that a reasonable person occupying the offices occupied by Greaves and having Greaves’ responsibilities would have known One.Tel’s financial circumstances, would have promptly ensured that the board was informed and would have recommended that the company cease trading or appoint an administrator unless a significant cash injection was obtained. ASIC asserted that Greaves’ responsibilities as a chairman of the board and chairman of its audit committee included the following: •

the general performance of the board;

•

the establishment and maintenance of systems for information flow to the board;

•

• • • •

the flow of financial information to the board (including information about cash reserves, actual segment performance and key transactions);

the employment of a finance director;

the public announcement of information;

the maintenance of cash reserves and group solvency; and

making recommendations to the board as to prudent management of the One.Tel group.

Greaves argued that whether he had discharged his “responsibilities” for purposes of s 180(1) should turn only on the specific tasks that had been delegated to him by the company’s constitution or by the board. Greaves noted that under One.Tel’s constitution, the chairman’s responsibilities were of a ceremonial or procedural nature concerned with chairing board meetings or shareholders’ meetings. The court rejected Greaves’ argument and held that the factual responsibilities of chairman of a listed company were more than “ceremonial or procedural matters” relating to chairing board meetings or shareholders’ meetings. The court accepted the analysis of Rogers J in AWA Ltd v Daniels (1992) 7 ACSR 759 who asserted that a chairman has the primary responsibility of selecting matters and documents to be brought to the board’s attention, in formulating the policy of the

447

[18.60] Corporations and Contract Law ASIC v Rich cont. board and in promoting the position of the company. The court thought it would be appropriate for ASIC to provide expert opinion evidence of responsibilities ordinarily undertaken by chairmen of listed public companies in Australia as well as corporate governance literature describing the customary responsibilities and the role of chairman of a listed public company.

Executive directors and officers

[18.65] Executive directors not only occupy a position on the board, they are also full-time employees of the company to whom the board has delegated particular managerial responsibilities. Their involvement in management means that executive directors have special responsibilities commensurate with their positions and have a greater knowledge of the daily operations of the company. They are therefore subject to more stringent standards of care and diligence than non-executive directors. Officers (defined in s 9) below board level are in a similar position in relation to their duty of care as executive directors. Executive directors and other officers who are appointed to positions requiring the exercise of skill are also subject to objective standards of skill even though s 180(1) does not use the word “skill”: ASIC v Vines [2003] NSWSC 1116. Because chief executive officers and managing directors have the overall responsibility for the day-to-day management of the company’s business, they will breach their standard of care if they do not ensure that the company has appropriate management systems in place and that those systems are functioning properly.

South Australia v Clark South Australia v Clark (1996) 66 SASR 199 [18.70]

The South Australian Supreme Court held that Clark, the managing director of the State Bank of South Australia, breached his duty of care to the bank. He arranged for the bank to acquire a subsidiary of APA Holdings Ltd for considerably more than its true value in the knowledge that APA would use the proceeds to repay a loan due to Equiticorp Holdings Ltd. Further, notwithstanding this was an unusually large transaction for the bank, Clark did not ensure that the bank carried out the usual due diligence inquiries and did not obtain an independent valuation of the subsidiary. Clark did not disclose to the other directors that he was indirectly benefiting from the transaction because he was also a director of Equiticorp Holdings Ltd and his family owned a large parcel of its shares. Perry J commented on the degree of skill expected of Clark as the chief executive officer and managing director of a bank:

448

Chapter 18 Duties of care, skill and diligence [18.85] South Australia v Clark cont. As the chief executive officer and managing director of a large bank, he was obliged to bring to bear an appropriate level of skill having regard to the responsibilities which that office entailed. No doubt, as is the case with all large corporations, it was necessary for him to delegate responsibility for the operation of different functions of the bank, in the circumstances where no further oversight could be expected. But he must unquestionably be regarded as responsible for the overall control of the operations of the bank, both in a day to day sense and in giving effect to the broader policies spelt out in the State Bank of South Australia Act and by the board of directors. Furthermore, it is clear that the board of directors looked to him and relied upon him not only to provide the board full and accurate information as to all of the matters which it was proper for the board to consider, but to see to it that any specific decisions of the board were implemented in a way which did not expose the bank to unnecessary risk.

[18.75] Managing directors may breach their duty of care if they fail to monitor management effectively.

Daniels v Anderson Daniels v Anderson (1995) 37 NSWLR 438 [18.80]

The facts of this case are outlined at [18.40]. The court held the AWA’s chief executive officer breached his duty to act with reasonable care because he failed to make inquiries of the company’s senior executives that would have led to a better appreciation of the risks and dangers of the foreign exchange dealings. As the company’s chief executive officer, he was under a continuing obligation to supervise management and seek satisfactory explanations regarding the deficiencies of the foreign exchange trading system and procedures.

[18.85] A person occupying the position of the chief financial officer of a listed company has special responsibilities regarding preparation of the company’s financial statements and profit forecasts. Persons appointed to such executive positions must exercise the level of skill of a reasonably competent chief financial officer: Vines v ASIC [2007] NSWCA 75. Chief financial officers may breach their standard of care if they fail to inquire and obtain information in circumstances where a reasonable officer occupying a similar position would have done so.

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[18.90] Corporations and Contract Law

Vines v ASIC Vines v ASIC [2007] NSWCA 75 [18.90] ASIC brought civil penalty proceedings against Vines, Fox and

Robertson, officers of GIO Australia Holdings Ltd, alleging that they breached their respective statutory duties of care and diligence under the predecessor of s 180(1) in relation to their involvement in preparing a profit forecast for their company. In 2000, AMP made a takeover offer for GIO, another listed insurance company. GIO’s directors were of the opinion that AMP’s takeover bid was inadequate and took vigorous defensive measures to defeat it. As required by the takeover provisions, GIO’s directors responded to AMP’s takeover bid by giving a target’s statement (then called a “Part B statement”) to their shareholders. A target’s statement must include all the information that shareholders would reasonably require to make an informed assessment whether to accept the takeover offer: s 638(1). GIO’s Part B statement included a profit forecast which indicated that GIO was “well on track to achieve a significant profit”. The forecasted profit did not eventuate because it did not take into account material underwriting losses arising from a hurricane that occurred shortly before the forecast was finalised. Vines, while not a director, was GIO’s chief financial officer (CFO) and in addition to his CFO’s role he had a prominent role in relation to GIO’s Part B profit forecast and provided the GIO board’s due diligence committee an unqualified assurance of its reliability. Fox and Robertson, who worked under Vines’ supervision, were also officers of GIO in relation to its reinsurance business which was directly affected by the hurricane. Their particular responsibilities included formulating and supervising the preparation of the profit projections for the reinsurance business for inclusion in GIO’s profit forecast. Both Fox and Robertson also expressed unqualified satisfaction with the reliability of the reinsurance division’s profit forecast.

The NSW Supreme Court at first instance held that Vines, Fox and Robertson all breached their standard of care in a number of respects. In relation to Fox and Robertson, the court at first instance held that they breached their standard of care because they failed to obtain up-to-date information about the level of hurricane claims being made in circumstances when they should have done so. Despite the fact that they were aware that the level of claims would make the profit forecast improbable, they did not inform Vines and other senior GIO managers of this.

Vines appealed the first instance decision that he was negligent. The NSW Court of Appeal held that Vines breached his standard of care when he signed off on GIO’s profit forecast without taking positive steps to advise the board’s due diligence committee of the basis of the assumptions underlying the forecast. His supervisory and operational responsibilities required him to be proactive and to take steps to ensure that the monitoring process about the hurricane claims was continuing and was up to date. He could not simply rely on Fox to provide him with up-to-date information about the extent of GIO’s hurricane claims when there were warning signals that would have led a reasonable person in Vines’ position

450

Chapter 18 Duties of care, skill and diligence [18.95] Vines v ASIC cont. to take steps to verify Fox’s advice that the reinsurance division’s profit forecast was accurate. GIO’s external auditors warned Vines on a number of occasions prior to the preparation of the forecast that attention had to be given to the extent of potential liability for the losses caused by the hurricane.

While Fox and Robertson were regarded as officers of GIO, the Corporations Act definition of officer changed in 2004. Under the current s 9 definition, Fox and Robertson would not be regarded as officers because they were only middle managers of GIO. Consequently, they would not now have been prosecuted for contravening s 180(1). As discussed at [13.0.20] (Lipton), a person below board level is classified as an officer if they are involved in making decisions that affect the whole or a substantial part of a company’s business.

[18.95] Standard of care of company secretaries and other officers. Company secretaries come within the s 9 definition of officer of a corporation. The office of company secretary carries with it certain statutory responsibilities as well as other responsibilities delegated to that person by the board. The statutory responsibilities of a company secretary under s 188(1) are discussed at [12.360] (Lipton). Part of a listed company secretary’s responsibilities includes a responsibility for lodging the company’s continuous disclosure announcements with the ASX as well as ensuring the accuracy of those announcements: Morley v ASIC [2009] NSWSC 287. The continuous disclosure requirements of ASX listed companies are discussed at [15.140] (Lipton). Apart from the s 188 responsibilities, the board may give the company secretary additional responsibilities. It is quite common for company secretaries to occupy more than one position in a company. For example, a company may appoint a person as its secretary and in addition give that person responsibility as its chief legal officer, chief financial officer or chief human resources officer. In determining whether a person in such a situation has exercised the required degree of care, it is inappropriate to separate the person’s responsibilities as a secretary from their responsibilities in another capacity. The “responsibilities” referred to in s 180(1)(b) include whatever responsibilities a person has within the company, regardless of how or why those responsibilities came to be imposed on them. Officers below board level who are appointed to their positions because of their particular skills and responsibilities are required to exercise that degree of skill that a reasonable person would exercise with that level of skill and responsibility in the company’s circumstances.

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[18.95] Corporations and Contract Law

Shafron v ASIC Shafron v ASIC [2012] HCA 18 [18.97]

Shafron, a qualified lawyer, was the general legal counsel of James Hardie Industries Ltd (JHIL) when the company was involved in a complex restructure to separate itself from subsidiaries that were exposed to present and future liabilities of tort claimants who were harmed by the subsidiaries’ asbestos manufacture. Another part of the restructure involved JHIL setting up a compensation fund for asbestos victims. JHIL made misleading announcements to the ASX and in media releases alleging that the asbestos fund was sufficient to cover all asbestos-related claims. The case is discussed further at [18.145].

As general counsel and company secretary, Shafron was one of a group of three senior JHIL executives responsible for developing and implementing the restructure and for providing advice, including legal advice, about the company’s disclosure requirements associated with the restructure. He was also delegated the task of providing the board with cash flow modelling concerning the ability of the asbestos compensation fund to cover asbestos-related claims. It was held that Shafron contravened s 180(1) in a number of respects. He failed to advise JHIL’s board or its chief executive officer that the ASX announcements about the sufficiency of the compensation fund were based on inappropriate cash flow modelling assumptions and failed to draw their attention to the deficiencies in actuarial reports. He also failed to advise the board or its managing director of the need to disclose to the ASX all material aspects of the company’s restructuring arrangements. These matters were all within Shafron’s responsibilities as general counsel and secretary of JHIL. As discussed at [18.145], the High Court in ASIC v Hellicar [2012] HCA 12 held that the directors of JHIL also breached s 180(1).

Familiarity with and understanding of the company’s financial affairs

[18.100] All directors, whether they are executive directors or non-executive directors, have a continuing obligation to familiarise themselves with the company’s financial position by regular review and understanding of its financial statements: Daniels v Anderson (1995) 37 NSWLR 438. Directors may breach their duty of care and diligence if they are unaware of their company’s financial position.

Sheahan v Verco Sheahan v Verco [2001] SASC 91 [18.105]

In this case two investors became non-executive directors of an established company after they invested in a share issue. Their investment,

452

Chapter 18 Duties of care, skill and diligence [18.110] Sheahan v Verco cont. together with a secured bank loan, enabled the company to expand its business. On becoming directors, they told the company’s managing director and major shareholder that they did not want to be involved in managing the company’s business and expected to be treated as “sleeping partners”.

The managing director misled the non-executive directors as to the company’s financial position, falsely representing that it was profitable when in fact it owed a large amount to its bank as a consequence of previous unsuccessful business ventures. While the company’s businesses themselves operated profitably, the company was incurring losses because of its high interest payments on its bank loans and inadequate deduction for amortisation and depreciation. The company was reliant on the continuing support of its banks and did not have the capacity to meet its obligations under the bank loans in the event of being asked to repay them. Eventually, the bank appointed a receiver because of non-payment of interest and instalments of principal. The company was subsequently placed in liquidation and the liquidator sued the non-executive directors alleging that they were negligent and responsible for the losses incurred by the company from the time of their appointment until the bank’s receiver was appointed. The court held that the non-executive directors breached their common law and statutory duties of care. When they became directors they did not ask to see even the basic financial statements for previous years which would have revealed the company’s substantial bank debt. Neither of them sought any information as to how the business expansion had been financed or its capacity to meet any such financial obligations. They did not become familiar with the business and how it was conducted so that they could form a sound judgment about whether it was being properly run. They did not take reasonable steps to place themselves in a position to monitor and guide the company but were content to leave the management of the company entirely to the company’s managing director. Even though the non-executive directors breached their common law and statutory duties of care, they were not liable for damages as their breach did not cause the company’s losses. The losses stemmed from its continuing inability to meet the interest payments on bank loans which were taken out before the non-executive directors joined the company.

[18.110] Directors have a key role in relation to their company’s financial reports. As discussed at [15.25] a directors’ declaration, which forms part of the company’s financial report, must include a statement of the directors’ opinion whether the financial statements are in accordance with applicable accounting standards and present a true and fair view of the company’s financial position and performance: s 295(4)(d). In order to form such an opinion directors must have the ability to read and understand the company’s financial statements. Even though directors are entitled to delegate the task of preparing the financial statements to others, delegation does not absolve them of the responsibility to ensure the information contained in the financial statements is consistent with the directors’ knowledge of the company’s affairs and that the financial statements do not omit material information known to them or that 453

[18.110] Corporations and Contract Law

ought to be known to them. Where the financial statements contain material omissions that would have been apparent on a careful and diligent review, directors breach their duty of care and diligence if they fail to make further enquiries where enquiries are called for.

ASIC v Healey ASIC v Healey [2011] FCA 717 [18.115]

In this case it was held that the directors of the ASX listed entities in the Centro Properties Group and the Centro Retail Group contravened s 180(1) by approving the 2007 financial reports of the two groups. The consolidated balance sheet of the Centro Properties Group failed to disclose $1.5 billion of short-term liabilities by classifying them as non-current liabilities. In addition, the notes to the financial statements failed to disclose post-balance date guarantees of short-term liabilities of an associated company of about US$1.75 billion. The consolidated balance sheet of the Centro Retail Group also misclassified $500 million of short-term liabilities as non-current. The court held that the directors also contravened s 344 which requires directors to take reasonable steps to comply with the financial reporting provisions of the Corporations Act. This aspect of the case is discussed at [15.200] (Lipton). The Centro directors delegated the task of preparing the 2007 financial reports to the group’s accounting staff, headed by the group’s CFO and the CEO, both of whom signed off on the reports. There was no dispute that the financial reports contained the material omissions described above. However, the directors argued that they relied on appropriately qualified accounting staff and the company’s external auditor who failed to detect the misclassifications and did not alert the directors to the deficiencies in the financial reports.

The court held that even though directors were entitled to delegate to others the preparation of the books and accounts, this did not absolve them of the responsibility to read and understand the content of the financial statements and make further enquiries if necessary. Middleton J stated: The omissions in the financial statements … were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representative for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.

According to Middleton J the directors should have queried the level of current and non-current liabilities reported in the financial statements. This was because when the directors were considering the 2007 financial reports, they were aware of the volatile market conditions caused by the onset of the global financial crisis. There had been extensive boardroom discussions about the need to convert

454

Chapter 18 Duties of care, skill and diligence [18.117] ASIC v Healey cont. billions of dollars of short-term debt to longer-term borrowings. For this reason, the errors in the financial statements should have been obvious to any reader of them who had the requisite financial literacy and the knowledge that the Centro directors had of the affairs and debts of the company. Middleton J referred to this as the “Blind Freddy” proposition. Middleton J explained the minimum degree of financial literacy required of directors to satisfy their duty of care and diligence. In my view, the objective duty of competence requires that directors have the ability to read and understand financial statements, including the understanding that financial statements classify assets and liabilities as current and non-current, and what those concepts mean. This classification is relevant to the assessment of solvency and liquidity. Equally, a director should have an understanding of the need to disclose certain events post balance sheet date. It would not be possible for a director to form the opinion required by s 295(4)(d) without such an understanding. … The Act explicitly requires that the declaration required by s 295(4) and the annual directors’ report must be made in accordance with a resolution of the directors. In that manner the Act imposes ultimate responsibility for those matters upon the directors in a way that they cannot delegate.

Middleton J’s reasoning has been applied to a director’s ability to read and understand prospectus documents before they are approved.

In the matter of Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934

[18.117] In this case the court found that Sino Australia contravened s 728(1)(a) of the Corporations Act by offering shares under a replacement prospectus that contained misleading or deceptive statements. Misleading and deceptive statements in prospectuses are discussed at [7.185] (Lipton). Davies J applied Middleton J’s reasoning in finding that Shao, the managing director, chairman and chief executive officer of Sino Australia breached his duty of care in s 180 when he signed and authorised the release of prospectus documents when he admitted that he did not understand the English language contained in them and did not obtain a Chinese translation of them. Davies J stated that the duty of care owed by Shao required him to inform himself fully and comprehensively about the content of the prospectus documents to ensure that the information contained in those prospectus documents was accurate. The failure by Mr Shao to ensure that he could understand, even in the most basic sense, the content of the documents he was signing was a breach of his director’s duties.

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[18.120] Corporations and Contract Law

Duty to safeguard the company’s interests

[18.120] A director may breach the duty of care by causing the company to enter into transactions that exposes it to risks without the prospect of producing any benefit for the company.

ASIC v Adler ASIC v Adler [2002] NSWSC 171 [18.125]

The facts of this case are set out at [16.240]. It was held that Adler, a non-executive director, breached s 180(1) because a reasonably careful and diligent director of HIH and HIHC in Adler’s position would not have caused or procured the $10 million payment by HIHC to PEE, a company controlled by Adler, part of which was applied in purchasing HIH shares. Further, Adler’s failure to ensure that HIH and HIHC followed authorised investment practices which he was familiar with and his failure to safeguard HIH and HIHC’s interests also fell well short of the standard of a reasonably competent person in his category of appointment. Williams, the managing director of both HIH and HIHC, was also held to have breached s 180(1) because he failed to make sure that there were proper safeguards in place before HIHC lent the money to PEE. Williams failed to ensure that there was an independent appraisal of the proposed investment and failed to ensure that there were appropriate safeguards to avoid investments being made in breach of the Corporations Act. The court also held that Fodera (HIH’s finance director) breached s 180 because he failed to submit the proposal to lend PEE $10 million to HIH’s Investment Committee or board for approval.

Circle Petroleum (Qld) Pty Ltd v Greenslade Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 [18.130]

It was held that a highly experienced managing director of a petroleum supplier breached his duty to exercise a reasonable degree of care under a predecessor of s 180(1) when he allowed a customer to exceed its credit limits in a substantial departure from normal industry practice and in defiance of a resolution of the board. The managing director knew that the customer had been a difficult trade debtor and was not in a position to meet its obligations.

Permanent Building Society v Wheeler Permanent Building Society v Wheeler (1994) 11 WAR 187 [18.135] A managing director was held to have breached his duty of care when

he failed to make inquiries into an unusual transaction that was capable of causing 456

Chapter 18 Duties of care, skill and diligence [18.142] Permanent Building Society v Wheeler cont. harm to the company. The managing director had a responsibility to ensure that the other directors were made aware of the potential harm and so breached his duty even though he declared a conflict of interest and did not vote on the board resolution in relation to the transaction.

Directors who permit the company to contravene the law

[18.140] Directors may breach their duty of care if they permit the company to contravene the Corporations Act. Contravening the Corporations Act may result in the company being exposed to criminal penalties or civil liability. For example in ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224 it was held that a director contravened ss 180 and 181 when he permitted his companies to conduct an unregistered managed investment scheme, an unregistered financial services business and to engage in misleading and deceptive conduct in contravention of various provisions of the Corporations Act. Hamilton J said: The duties imposed by ss 180 and 181 of the Corporations Act are owed to the company itself. They are not directly concerned with the obligation of directors to conduct the affairs of the company in accordance with the law. But it has been recognised that causing a company to engage in a course of conduct that breaches the law may involve on the part of directors a failure to exercise reasonable care and skill …

ASIC v Citrofresh International Ltd (No 2) ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27 [18.142]

A managing director was held to have breached his duty of care when he authorised the release of a continuous disclosure announcement to the ASX that claimed that his company had developed a cream that could stop the spread of the HIV virus, human influenza A virus, the SARS virus and the human rhinovirus. These claims constituted a contravention of s 1041H because they were misleading and deceptive. The prohibition contained in s 1041H on misleading and deceptive conduct in relation to a financial product is discussed at [19.190] (Lipton). Goldberg J rejected the managing director’s argument that ASIC’s reliance upon s 180 “was a device to introduce the pecuniary penalty and disqualification provisions into the case which were not otherwise available” against the director. ASIC’s allegations of the director’s breach of s 180(1) was not a backdoor method for imposing accessorial civil liability on the director for the company’s contravention of the Corporations Act. A determination of whether the managing director breached his duties as a director depended upon an analysis of the extent to which the company’s interests were jeopardised and, if they were, whether the risks resulting from his conduct outweighed any potential countervailing benefit to the company.

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[18.142] Corporations and Contract Law

ASIC v Citrofresh International Ltd (No 2) cont. The question of whether directors breach their duty of care when they expose their company to the risk of criminal or civil liability was considered by the High Court in the context of ASIC’s litigation against the directors and officers of James Hardie Industries for various breaches of s 180.

[18.143] The question of whether directors breach their duty of care when they expose their company to the risk of criminal or civil liability was considered by the High Court in the context of ASIC’s litigation against the directors and officers of James Hardie Industries for various breaches of s 180.

ASIC v Hellicar ASIC v Hellicar [2012] HCA 12 [18.145]

In 2001 James Hardie Industries (JHIL) underwent complex restructure arrangements involving a series of transactions in an effort to quarantine itself from the present and future asbestos liabilities of its subsidiaries. One aspect of the restructure involved the establishment of a company, Medical Research & Compensation Foundation Ltd (MRCF), with a board independent of JHIL, to act as trustee of a trust fund established to compensate the asbestos victims. Another aspect of the restructure involved the group’s move to The Netherlands. A new Dutch company, James Hardie Industries NV (JHINV), was formed and under a scheme of arrangement, JHINV became the holding company of the James Hardie Group and JHIL became a wholly owned subsidiary of the Dutch company. JHIL made a continuous disclosure announcement to the ASX and issued subsequent press releases about the restructure that gave the false and misleading impression that an effect of the restructure was that MRCF would have access to sufficient funds to meet current and future asbestos-related claims. In about 2004 it became apparent that the compensation foundation was substantially under-funded and would soon run out of money to meet future claims. The unexpected early exhaustion of the compensation fund resulted in the New South Wales State government setting up a royal commission to investigate the circumstances surrounding the restructures.

In ASIC v Macdonald (No 11) [2009] NSWSC 287 the New South Wales Supreme Court held that JHIL and JHINV both contravened the predecessor of s 1041H by making misleading or deceptive statements that the compensation foundation was “fully funded”. These two companies also contravened their continuous disclosure obligations under the ASX Listing Rules and s 674. This case resulted in appeals to the NSW Court of Appeal and the High Court. The ultimate finding in the case was that JHIL’s managing director, Macdonald, its

458

Chapter 18 Duties of care, skill and diligence [18.150] ASIC v Hellicar cont. chief financial officer, Morley, its company secretary and general counsel, Shafron, and all seven non-executive directors failed to take reasonable care when they approved the ASX announcement.

In relation to Macdonald, the court noted that as the board gave him ultimate responsibility for planning the restructure proposal and the public statements in relation to them, he bore a high standard of care in relation to those matters. He breached s 180 in a number of respects including that he failed to advise the board that the draft ASX announcement was expressed in too emphatic terms concerning the adequacy of compensation funding. He negligently approved the final ASX announcement that contained the misleading or deceptive statements. He also failed to advise the board of the limited nature of the external consultants’ reviews of the financial modelling for future asbestos claims.

Morley contravened his statutory duty of care and skill. He was closely involved in the restructuring proposals and cash flow modelling on which he gave a presentation to the board, and these matters were consequently part of his responsibilities. The contravention occurred because he failed to advise the board that the external consultants’ reviews of the cash flow model were limited in nature and did not involve reviews of the key assumptions underlying the cash flow modelling. This erroneously gave the impression that an unlimited review had been conducted. The liability of Shafron, the company secretary and general counsel is discussed at [18.97].

The non-executive directors were held to have contravened s 180(1). They all knew or ought to have known that if JHIL’s announcement about the sufficiency of compensation funding was misleading there was a danger that JHIL would face legal action, its reputation would suffer and there would be an adverse market reaction to its share price. They were intelligent people with considerable business skills who were well aware of the importance of the issue of the sufficiency of compensation funding and its communication to stakeholders. They approved the draft ASX announcement even though they must have been aware it contained misleading statements. A reasonable person who occupied the office of a non-executive director of a company in JHIL’s circumstances, would not have voted in favour of, or authorised the execution of the misleading ASX announcement.

ASIC v Cassimatis (No 8) ASIC v Cassimatis (No 8) [2016] FCA 1023 [18.150]

The liability of directors for breach of their duty of care when they expose their company to the risk of civil liability was also considered in this case.

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[18.150] Corporations and Contract Law

ASIC v Cassimatis (No 8) cont. Mr and Mrs Cassimatis were the directors of Storm Financial Limited (Storm), a financial advice company. In advising clients, Storm used an investment model that involved clients investing borrowed sums of money secured by mortgages against their homes and margin loans. Storm promoted this investment model to all of its clients, regardless of their circumstances. The court found that Storm breached s 945A(1)(b) and (c) of the Corporations Act by failing to give consideration to the subject matter of the advice given to certain investors, not properly investigating the subject matter of the advice given to certain investors and by providing advice to certain investors that was inappropriate to their personal circumstances. Mr and Mrs Cassimatis were found to have breached their duty of care and diligence under s 180 by permitting their company to advise clients who were retired or near retirement with limited income and few assets that they should mortgage their homes and invest the borrowed funds. A reasonable director would have determined that it was inappropriate to provide this advice to this class of investor.

Part of ASIC’s case was that the directors breached s 180 because they placed Storm in a situation where it breached the Corporations Act. Edelman J held that an actual breach by Storm of the Corporations Act was not by itself sufficient to establish a breach of the duty of care. Directors will not always be in breach of s 180 where they allow their companies to breach the Corporations Act. However, a contravention of the law by the corporation, or the risk of such contraventions is one of the circumstances that the court will take into consideration when it is determining whether a director or officer exercised care and diligence. Edelman J held that when determining whether directors had breached their duty of care, the courts balance the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question. In considering the harm that may arise, directors must give consideration to matters beyond the financial consequences of a particular action. They should consider all of the possible harm that may arise — including reputational harm and potentially, the loss of a licence arising from a failure by the company to comply with the law. Edelman J held that Mr and Mrs Cassimatis breached their duty of care because they: •

•

should have been reasonably aware that the application of the Storm model would be likely to (and did) cause contraventions of s 945A(1)(b) and (c); and

those contraventions were not merely likely to occur, they were contraventions which could have (and did have) devastating consequences for many investors in that class and the discovery of those breaches would have threatened the continuation of Storm’s Australian Financial Services Licence (AFSL) and Storm’s very existence.

Edelman J also said that in cases where directors expose their companies to potential breaches of the law, it is not necessary that the company be found to

460

Chapter 18 Duties of care, skill and diligence [18.155] ASIC v Cassimatis (No 8) cont. have actually breached the Corporations Act in order for the directors to be liable for a breach of the duty of care. A breach by the corporation is not a condition of the director’s liability. Endelman J said: I have serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1) by an officer. For instance, suppose a director unreasonably (within the terms of s 180(1)) and intentionally commits acts which are extremely likely to involve a serious breach of the Corporations Act perhaps even threatening the very existence of the corporation. … it might be seriously doubted whether the director could escape liability simply because, by some good fortune, no actual breach eventuates.

FREQUENCY OF BOARD MEETINGS AND ATTENDANCE

[18.155] Judicial attitudes regarding directors’ attendance at board meetings and the frequency of such meetings have changed over the years. The old cases took an extremely lenient view. Non-executive directors were not required to give continuous attention to the affairs of their company. According to Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, non-executive directors’ duties were regarded as of an intermittent nature to be performed at periodical board meetings. Directors were not, however, bound to attend all such meetings. An extreme example of non-attendance occurred in Re Cardiff Bank; Marquis of Bute’s Case [1892] 2 Ch 100. In that case the Marquis of Bute was appointed president of a bank at the age of six months. Losses arose from irregularities in the bank’s operations but the Marquis was not held liable despite having attended only one board meeting in 38 years. The modern cases take a more demanding approach. The obligation to attend board meetings is an aspect of a director’s duty of care. Unless directors regularly attend board meetings they will be unable to participate in the governance of the company and therefore fulfil one of their prime responsibilities: Gold Ribbon (Accountants) Pty Ltd v Sheers [2005] QSC 198. The Corporations Act does not prescribe how many board meetings a company should have. This is generally left to the board itself to decide. Directors should meet as often as is necessary in order to fulfil their obligation to monitor management: Daniels v Anderson (1995) 37 NSWLR 438. Directors are expected to attend all board meetings unless exceptional circumstances, such as illness or absence from the State, prevent them doing so: Vrisakis v ASC (1993) 9 WAR 395. To assist shareholders in knowing the extent of directors’ attendance at board meetings, s 300(10) requires a public company’s directors’ report to include details of the number of board meetings (including committee meetings) held in the financial year and each director’s attendance at the meetings. 461

[18.160] Corporations and Contract Law

THE BUSINESS JUDGMENT RULE

[18.160] Section 180(2) sets out a defence (called the business judgment rule) for directors and officers who make a business judgment that would otherwise contravene their statutory, common law or equitable duties of care and diligence. The section provides that a director or other officer who makes a business judgment is taken to meet the requirements of s 180(1) and their equivalent duties at common law and in equity, in respect of the judgment if they: • make the judgment in good faith for a proper purpose (s 180(2)(a)); and • do not have a material personal interest in the subject matter of the judgment (s 180(2)(b)); and • inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate (s 180(2)(c)); and • rationally believe that the judgment is in the best interests of the corporation: s 180(2)(d). The director or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Directors and officers who are alleged to have breached their duty of care have the onus of proving the four elements in s 180(2). If they are able to establish that they fulfil each one of these elements, they have an explicit “safe harbour” and are shielded from personal liability for any breach of their duty of care and diligence. [18.165] The business judgment rule defence applies only in respect of a “business judgment” made by a director or officer. “Business judgment” is defined to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporation: s 180(3). In ASIC v Rich [2009] NSWSC 1229 it was held that “matters relevant to business operations of the corporation” included matters of planning, budgeting and forecasting. Consequently, the definition of “business judgment” encompassed the setting of policy goals, the apportionment of responsibilities between the board and senior management relating to corporate personnel and the termination of litigation provided these matters involve a “decision to take or not to take action”. In order to be a business judgment, a director or officer must make a conscious decision to take or refrain from taking action. This means that a director who “simply neglected to deal with proper safeguards, with no evidence that he even turned his mind to a judgment of what safeguards there should be” has not made a business judgment: ASIC v Adler [2002] NSWSC 171. Consequently, the business judgment rule cannot operate to protect a director where the breach of the duty of care consists of a failure to monitor the company’s affairs or a failure to maintain familiarity with the company’s financial position. In ASIC v Rich [2009] NSWSC 1229 Austin J stated: I agree with ASIC that the discharge by directors of their oversight duties, including their duties to monitor the company’s affairs and policies and to maintain familiarity of 462

Chapter 18 Duties of care, skill and diligence [18.170]

the company’s financial position, is not protected by the business judgment rule, because the discharge or failure to discharge those duties does not involve any business judgment as defined. … Monitoring the company’s affairs and maintaining familiarity with its financial position are not in themselves matters that involve a “decision to take or not to take action” in respect of a matter relevant to the company’s business operations.

A decision to undertake a particular kind of business activity promoted in a prospectus is an example of a business judgment that would come within the scope of s 180(2). However, the rule would not apply to a failure to comply with the fundraising provisions. This is subject to its own liability regime with its own specific defences. The business judgment rule protects directors and officers against liability for breaches of the duty of care in s 180(1) and its common law and fiduciary equivalents. It does not operate in relation to breaches of other duties such as the s 181(1) duty to act in good faith and for a proper purpose or the s 588G duty to prevent insolvent trading. [18.170] Because the onus is on directors and officers to produce evidence that they satisfy each of the elements of s 180(2) they will not be able to gain the protection of the business judgment rule defence if the circumstances surrounding their breach of duty indicates that they did not make a business judgment in good faith and for a proper purpose as required by s 180(2)(a). For example, in ASIC v Adler [2002] NSWSC 171 (the facts of which are outlined at [16.240]) it was held that Adler, a non-executive director of HIH, could not rely on the business judgment rule because the evidence regarding his contravention of s 181 disclosed his lack of good faith. It was also held that Williams, the HIH CEO, could not rely on the business judgment rule defence because his failure to ensure that proper safeguards were adopted in relation to HIH’s $10 million loan to Adler Corporation Ltd was not a business judgment and even if it was, he failed to present evidence that his judgment was made in good faith and for a proper purpose as is required by s 180(2)(a). Section 180(2)(b) requires a director or officer to prove that they did not have any material personal interest in the subject matter of the judgment. In ASIC v Adler [2002] NSWSC 171 Adler was held to have had a clear conflict of interest in relation to the decision to invest HIHC’s $10 million in PEE and therefore could not rely on s 180(2)(b). As Williams was a major shareholder of HIH he also had a material personal interest that prevented him from relying on s 180(2)(b). Under s 180(2)(c) a director or officer must inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate. In ASIC v Rich [2009] NSWSC 1229 Austin J stated: The statutory language [of s 180(2)(c)] relates to the decision-making occasion, rather than the general state of knowledge of the director. It requires the director to become informed about the subject matter of the decision prior to making it, since the business judgment rule should not protect decisions taken in disregard of material information readily available. The qualifying words, “to the extent they reasonably believe to be appropriate”, convey the idea that protection may be available even if the director was 463

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not aware of available information material to the decision, if he reasonably believed he had taken appropriate steps on the decision-making occasion to inform himself about the subject matter.

The final element of the business judgment rule is that the director or officer rationally believes that the judgment is in the best interests of the corporation: s 180(2)(d). The director or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. The two aspects of s 180(2)(d) appear, at first sight, to suggest that a “rational” belief that a judgment is in the best interests of the corporation is determined by whether or not it is a “reasonable” belief. This is an incorrect interpretation of the subparagraph. In ASIC v Rich [2009] NSWSC 1229 it was held that the director’s or offıcer’s belief would be a rational one if it was based on reason or reasoning (whether or not the reasoning was convincing to the judge and therefore “reasonable” in an objective sense), but it would not be a rational belief if there was no arguable reasoning process to support it. … The director or offıcer’s belief about the best interests of the corporation is to be formed, and its rationality assessed, on the basis of the information obtained through compliance with [s 180(2)(c)].

RELIANCE ON OTHERS: S 189

[18.175] There is considerable uncertainty in the case law on the extent to which directors may rely on information and advice provided by others. In its 1989 report, Social and Fiduciary Duties and Obligations of Company Directors, the Cooney Committee noted: The entitlement to rely on others is not set down in the companies legislation. The limits of reliance are not firm and are worked out on a case-by-case basis. There is no requirement that directors actively supervise delegates or positively believe an offıcial, on whom reliance is placed, is trustworthy.

In AWA Ltd v Daniels (1992) 7 ACSR 759, Rogers J was of the opinion that directors were entitled to rely without verification on the judgment, information and advice of senior management. The right of reliance would be removed only where a director was aware of circumstances that were so obvious that no person with any degree of prudence would have relied on the particular judgment, information and advice. On appeal in Daniels v Anderson (1995) 37 NSWLR 438, the majority of the New South Wales Court of Appeal disagreed with the observations of Rogers J in relation to reliance. They thought that directors are under a positive obligation to keep informed about corporate activities and satisfy themselves that the person they are relying upon is competent and reliable. While directors are entitled to rely on others for such matters as the preparation of the company’s financial statements, according to ASIC v Healey [2011] FCA 717 directors retain the responsibility to read, understand and focus on the contents of the financial statements.

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Duke Group Ltd v Pilmer Duke Group Ltd v Pilmer (1999) 73 SASR 64 [18.180]

The court thought that directors who are informed and experienced business people are expected to be able to make sound estimates of share and company valuations. They cannot simply accept an expert’s advice without question where this involves disregarding their own knowledge and suspending judgment. This failure by the directors was attributed to the company which therefore failed to take reasonable care for its own protection. As a result, the liability of the expert arising from the misstatement regarding the fairness of the share price was reduced by the extent of the company’s contributory negligence.

[18.185] Section 189 clarifies when directors may rely on others. Section 189 provides that a director may rely upon information or advice provided by: • an employee whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned (s 189(a)(i)); or • a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence (s 189(a)(ii)); or • another director or officer in relation to matters within the director’s or officer’s authority (s 189(a)(iii)); or • a committee of directors on which the director did not serve in relation to matters within the committee’s authority: s 189(a)(iv). Under s 189(b), the reliance must be made in good faith and after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of its structure and operations. For purposes of s 189, a director’s reliance on information or advice is taken to be reasonable unless the contrary is proved. This means that the onus of proof rests upon the person asserting that the director’s reliance was not reasonable. The protection afforded to directors who reasonably rely on information or advice arises in proceedings to determine whether the directors have breached their duties under the Corporations Act, Pt 2D or an equivalent general law duty: s 189(c).

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Sheahan v Verco Sheahan v Verco [2001] SASC 91 [18.190]

The facts of this case are outlined at [18.105]. The court held that the extent to which the non-executive directors were justified in trusting and relying on the company’s managing director depended on the nature and circumstances of the company as they existed, not as the non-executive directors thought them to exist. This was so because of their failure to inform themselves about the affairs of the company. Had they done so and found it to be financially healthy and well-managed with appropriate procedures for reporting through the managing director to the board of directors, it may be expected that the non-executive directors could have left many matters to the managing director without being in breach of their duties as directors. However, the non-executive directors were content to leave the management of the company entirely to the managing director without having made any relevant inquiries about the company, including its financial position, management structure and business.

RESPONSIBILITY FOR ACTIONS OF DELEGATES: S 190

[18.200] Section 190 complements s 189, the reliance provision, and makes it clear when directors are permitted to delegate tasks to others. That section also explains directors’ responsibilities for the actions of their delegates. Section 190(1) states the general rule that if directors delegate a power under s 198D, they are responsible for the exercise of power by the delegate as if the power had been exercised by the directors themselves. Section 198D authorises the directors of a company to delegate any of their powers to: • a committee of directors; • a director; • an employee of the company; or • any other person. The delegation must be recorded in the company’s minute book in accordance with s 251A. This power is subject to contrary provision in the company’s constitution. The exercise of the power by the delegate is as effective as if the directors had exercised it themselves: s 198D(3). Under s 190(2), a director avoids responsibility if the director believed on reasonable grounds that the delegate would exercise the power in conformity with the duties imposed on directors by the Corporations Act and company’s constitution, in good faith, after making proper inquiry if the circumstances indicated the need for 466

Chapter 18 Duties of care, skill and diligence [18.205]

inquiry and the delegate was reliable and competent in relation to the power delegated and would exercise the power in conformity with the duties imposed on the directors by the Corporations Act. If the s 190(2) requirements are satisfied, a director will not be responsible for the acts of a delegate if the delegate acts fraudulently, negligently or outside the scope of their delegation. In ASIC v Adler [2002] NSWSC 171, Santow J summarised the various factors that should be taken into account in deciding whether a director’s decision to rely on a delegate was reasonable for purposes of either s 189(c) or s 190(2): • the function that has been delegated is such that “it may properly be left to such officers” (Re City Equitable Fire Insurance Co Ltd [1925] Ch 407); • the extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry (Re Property Force Consultants Pty Ltd [1997] 1 Qd R 300); • the relationship between the director and delegate must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on whom reliance can be placed. Knowledge that the delegate is dishonest or incompetent will make reliance unreasonable (Dempster v Mallina Holdings Ltd (1994) 15 ACSR 1); • the risk involved in the transaction and the nature of the transaction (Permanent Building Society v Wheeler (1994) 11 WAR 187); • the extent of steps taken by the director, for example, inquiries made or other circumstances engendering “trust”; and • whether the position of the director is executive or non-executive.

CONSEQUENCES OF CONTRAVENTION

[18.205] While the content of common law and statutory duties of care are essentially the same, different consequences result if there is a breach. Since the common law duty of care is owed to the company it can sue a director or officer for damages if their breach of the common law standard of care causes loss. Shareholders may bring proceedings in the name of the company under s 236 if they obtain prior leave of the court. This is discussed further at [17.285]–[17.300] (Lipton). Contravention of the s 180(1) duty of care and diligence has different consequences. Section 180(1) is a designated civil penalty provision under s 1317E. As discussed at [20.140]–[20.150], a person who contravenes a civil penalty provision may be ordered to pay a pecuniary penalty of up to $200,000 under s 1317G; compensation to the corporation for damage suffered by it under s 1317H; or be disqualified from management under s 206C. Contravention of s 180(1) is not a criminal offence as criminal liability requires the existence of dishonesty — an active awareness of wrongdoing. Since the concepts of 467

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negligence and failure to exercise sufficient care and diligence do not involve dishonesty, contravention of s 180(1) is deliberately excluded from s 184, which provides for criminal offences where other directors’ duties are breached dishonestly.

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CHAPTER 19

Directors of insolvent companies Introduction ................................................................................................... [19.05] Duty to prevent insolvent trading ................................................................. [19.10] Section 588G ............................................................................... [19.15] Defences .................................................................................................. [19.80] Consequences of contravention ........................................................... [19.145] Liability for unremitted taxation .................................................................. [19.175] Employee entitlements ............................................................................... [19.180] Fraudulent conduct ..................................................................................... [19.185]

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Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 13.5. Key points • Directors owe a duty to their company not to prejudice the interests of the company’s creditors. The obligation to take creditors’ interests into account arises where the company is insolvent or in financial difficulties. • Directors may disregard the interests of creditors where they use “phoenix” companies. These are insolvent companies whose assets have been deliberately stripped, leaving the insolvent company with insufficient funds to meet the claims of creditors. A new company with the same or similar directors and shareholders acquires the business of the insolvent company at undervalue and, like the mythical phoenix, the new company arises from the ashes of the insolvent company. • The Corporations Act imposes a duty on directors to avoid insolvent trading. This requires directors to prevent their company incurring debts when there are reasonable grounds to suspect that the company is insolvent. • An insolvent trading action is usually brought by the liquidator seeking compensation from the directors. Amounts recovered from directors are primarily available to meet the claims of unsecured creditors.

INTRODUCTION

[19.05] Creditors, especially unsecured creditors such as employees and suppliers of goods and services, take a risk when they are owed money by a limited liability company. Shareholders are not personally liable for their company’s debts. Consequently, if the company becomes insolvent, its unsecured creditors will be unable to fully recover their debts because it will not have sufficient funds to repay its outstanding debts in full. When an insolvent company is wound up, a liquidator is appointed, sells its property and divides the proceeds among unsecured creditors according to the rules dealing with priorities on distributions to unsecured creditors discussed at [25.670]–[25.675] (Lipton). Directors of an insolvent company prejudice the interests of the company’s creditors if they permit the company to give away its property or otherwise dispose of its assets at less than commercial values. Such actions prejudice the interests of the existing creditors of an insolvent company because the pool of assets available to pay the company’s outstanding debts is diminished or assets are put out of the reach of the company’s liquidator and cannot therefore be distributed to its creditors. The law regards arrangements that have the effect of putting valuable property out of the reach of an insolvent company’s creditors as improper behaviour by directors. For this reason, directors of companies in financial difficulties are subject to a fiduciary duty not to engage in activities that prejudice creditors’ interests. This duty 470

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is an aspect of directors’ fiduciary duty to act in good faith in the best interests of the company as well as their duty to exercise their powers for proper purposes: Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157. As discussed at [16.10] where the company is solvent, directors must exercise their powers in the long term interests of its shareholders. However, where the company is in financial difficulties, shareholders cease to be the key stakeholders and directors’ fiduciary duties mean they must not prejudice the interests of the company’s creditors. Directors who prejudice creditors’ interests may also breach their statutory duties in ss 181 (best interests of the company and proper purposes), 182 (improper use of position) and 183 (improper use of information). As discussed in Chapter 25 (Lipton), the following provisions supplement directors’ fiduciary and statutory duties not to prejudice creditors’ interests: • the provisions in s 588FE(5) which deal with company transactions that have the purpose of defeating the rights of creditors on a winding up (see [25.560] (Lipton)); • the uncommercial transaction provisions in s 588FB which allow a liquidator to recover company gifts and other uncommercial transactions from the other party to the transaction (see [25.520] (Lipton)); and • the unreasonable director-related provisions in s 588FDA which allow a liquidator to recover payments from, or avoid transactions with, directors or their close associates, that are of no commercial benefit to the company: see [25.550] (Lipton). Directors may also adversely affect creditors if they fail to prevent their company incurring debts when there are reasonable grounds to suspect that the company is insolvent. This is because the continuation of trading after the onset of insolvency often increases the extent of the insolvency and so reduces the amount available to creditors in the liquidation. As discussed at [19.10], directors contravene s 588G if they fail to prevent their company incurring debts when there are reasonable grounds to suspect that it is insolvent. This is referred to as “insolvent trading”.

DUTY TO PREVENT INSOLVENT TRADING

[19.10] A director is under a duty to prevent the company incurring debts if there are reasonable grounds for suspecting that it is insolvent: s 588G. This is referred to as “insolvent trading”. Subject to four alternative defences set out in s 588H, contravening directors are liable to pay compensation to the company of an amount equal to the loss or damage suffered by unsecured creditors in relation to the debts so incurred because of the company’s insolvency: ss 588J, 588K and 588M. In addition, contravention of s 588G may result in directors being liable for a civil penalty order pursuant to Pt 9.4B or a criminal offence under s 588G(3). In Hawkins v Bank of China (1992) 26 NSWLR 562, Kirby P explained the legislative purpose of insolvent trading legislation in the following terms: 471

[19.10] Corporations and Contract Law

The whole purpose or object of [a predecessor of s 588G] was to discourage offıcers of corporations from improvidently committing the corporation to obligations to pay money as a debt when they have reasonable grounds for supposing that their corporation is (or will, upon incurring the debt in question) become insolvent.

Section 588G aims to encourage directors to carry out their duties properly if the company is at or approaching insolvency, and provides a sanction if they fail to do so: Edwards v ASIC [2009] NSWCA 424. There have been relatively few insolvent trading cases since 1993 when s 588G was introduced into the Corporations Act. This may be due to the increasing use of the voluntary administration procedure, which encourages directors to appoint an administrator rather than continue in business and incur debts. This is discussed by Abe Herzberg in an article “Is Section 588G a Paper Tiger?” ASIC has published Information Sheet 42: Insolvency: A Guide for Directors and a regulatory guide RG 217 Duty to Prevent Insolvent Trading: Guide for Directors on its website. The article “Is Section 588G a Paper Tiger?” and RG 217 may be found on the Understanding Company Law website at http://www.uclaw.com.au/resources/.

Section 588G Who is liable?

[19.15] The duty to prevent insolvent trading applies to a person who is a director at the time when the company incurs the relevant debt: s 588G(1)(a). The duty is imposed only on directors because they control overall management of the company and have the ultimate power to prevent debts being incurred. Imposing the duty on directors is also consistent with s 295(4)(c) which obliges directors, in a declaration attached to the company’s financial statements, to declare whether or not there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. A registered director who claims that they resigned as a director prior to the debt being incurred will be considered to be a director of the company at the time of the incurring of that debt if they are not able to produce evidence of their resignation: In the matter of KMS Imports (Aust) Pty Ltd (In Liq) [2016] FCA 1571. Persons not formally appointed as directors but who act as either “de facto” or “shadow” directors are also subject to the duty because they come within the wide definition of “director” in s 9.

Incurring a debt

[19.20] An essential element in establishing a contravention of s 588G is the requirement that a company incurs a debt. According to the dictionary definition, a debt is an obligation by one person to pay a sum of money to another: Powell v Fryer [2001] SASC 59. A debt is incurred when a company “so acts to expose itself 472

Chapter 19 Directors of insolvent companies [19.20]

contractually to an obligation to make a future payment of a sum of money as a debt”: Hawkins v Bank of China (1992) 26 NSWLR 562. Most reported insolvent trading cases involve a company contracting with a supplier to buy goods or services on credit terms. The debt is the obligation to pay the purchase price at the agreed time for payment. A debt is also incurred if a company: • borrows money from a bank or other lender (Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946); or • leases business premises from a landlord: Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150. In Hawkins v Bank of China (1992) 26 NSWLR 562, the New South Wales Court of Appeal noted that the expression “incurs a debt” was capable of a number of meanings and the appropriate meaning depended on the context and the statutory purposes of the legislation. It was held that the word “debt” included a contingent debt such as a guarantee and the word “incurs” included “the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved is uncertain”. These interpretations best advanced the purpose of the legislation. The expression “incurs a debt” also covers situations that do not necessarily involve contracts under which a company exposes itself to an obligation to make a future payment of a sum of money as a debt. For example, in Powell v Fryer [2001] SASC 59 it was held debts included statutory obligations to pay taxes, assessed penalties for non-payment of taxes, statutory levies for workers’ compensation insurance and assessed penalties for non-payment of such levies. In Jelin Pty Ltd v Johnson (1987) 5 ACLC 463, it was held that a “debt” was a claim for an ascertained amount and did not include unliquidated claims for damages for fraudulent misrepresentation. However, in Hawkins v Bank of China (1992) 26 NSWLR 562, Gleeson CJ left open the possibility that incurring a debt included incurring a liability for damages. Section 588G(1A) gives an expanded meaning to the expression “incurs a debt”. That section contains a table (see Table 13.5.1), which indicates that if a company takes any of the seven actions set out in column 2, it incurs a debt at the time set out in column 3. For example, under s 588G(1A), a company incurs a debt if it pays a dividend, buys back its shares or enters into an uncommercial transaction as defined in s 588FB.

TABLE 19.1 table 19.1: when debts are incurred 1

Action of a company paying a dividend

When debt is incurred when dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared

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[19.20] Corporations and Contract Law

2

3 4 5 6 7

Action of a company making a reduction of share capital to which Div 1 of Pt 2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) buying back shares (even if the consideration is not a sum certain in money) redeeming redeemable preference shares that are redeemable at its option issuing redeemable preference shares that are redeemable otherwise than at its option financially assisting a person to acquire shares (or units of shares) in itself or a holding company entering into an uncommercial transac tion (within the meaning of s 588FB) other than one that a court orders or a prescribed agency directs, the company to enter into

When debt is incurred when the reduction takes effect

when the buy back agreement is entered into when the company exercises the option when the shares are issued when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided when the transaction is entered into

When is a debt incurred?

[19.25] It is important to ascertain the time when a debt is incurred because s 588G(1)(b) requires proof that the company was insolvent at the time the debt was incurred or became insolvent by incurring that debt. The time when a debt is incurred depends on the terms of the agreement between the parties and when, in “substance and commercial reality”, the company is exposed to the unavoidable liability to pay the debt for which it otherwise would not have been liable: Leigh-Mardon Pty Ltd v Wawn (1995) 17 ACSR 741. This is usually at the time the contract is entered into but this may not always be the case.

Hawkins v Bank of China Hawkins v Bank of China (1992) 26 NSWLR 562 [19.30]

It was held that a debt is incurred when, by its conduct or operations, a company has necessarily subjected itself to a conditional, but unavoidable, obligation to pay a sum of money at a future time. In that case, a company guaranteed the pre-existing debts that two other companies in the same group owed to the Bank of China. At the time of the guarantee, the borrowing companies were unable to repay their loans because they were insolvent. It was held that the guarantor company incurred a debt to the bank when the guarantee was executed because after that date the company’s obligation to the bank under the guarantee was unavoidable by any action of its own.

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[19.35] In ASIC v Plymin [2003] VSC 123, it was held that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. For example, in Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150, it was held that a debt for rent was incurred when the tenant executed the agreement to lease and not on the days when rent was due but not paid. On those days the tenant company merely accrued a liability for an amount. Similarly, in John Graham Reprographics Pty Ltd v Steffens (1987) 5 ACLC 904, a debt for interest under a loan agreement was incurred on the date of execution of the agreement, not on the days interest became due and payable.

ASIC v Plymin ASIC v Plymin [2003] VSC 123 [19.40]

In some situations a company may incur a debt in “substance and commercial reality” after the contract giving rise to it is entered into. In this case the company contracted to buy raw materials for its business from a large number of suppliers. The contract with one of the suppliers provided that the company could place orders for the raw materials from time to time and payment was to be made 30 days after delivery. The court held that the debt for a particular order was incurred, in “substance and commercial reality”, when the company made the delivery order. A contract with another supplier related to the sale of a quantity of wheat, which was to be stored by the supplier and delivered to the company as required. In this case, it was held that the debt was incurred when the contract was made and not when the deliveries were ordered. The company also had a contract for the supply of electricity. It was held that as a matter of substance and commercial reality, the debt for the supply of electricity was incurred when the electricity was used and not on the date of the contract with the electricity supplier.

[19.45] In Playspace Playground Pty Ltd v Osborn [2009] FCA 1486, the court was required to determine when a debt for the supply of component parts for 15 children’s playgrounds was incurred. The playground equipment was delivered in separate batches over a period of months, commencing two months after it was ordered. Reeves J said that once the supplier dispatched these goods they were unlikely to have been of any real commercial value to anyone else. The debt was incurred when the purchaser became obliged to pay for the goods and this obligation arose once the dispatch date on the order form passed without the purchaser cancelling the order.

Insolvency

[19.50] Section 588G(1)(b) requires proof that the company was insolvent at the time the debt was incurred or became insolvent by incurring that debt. The s 95A 475

[19.50] Corporations and Contract Law

definition of insolvency has regard to the company’s inability to pay its debts as and when they become due and payable. A person is solvent if, and only if, the person is able to pay all their debts, as and when they become due and payable: s 95A(1). A person who is not solvent is regarded as being insolvent: s 95A(2). Whether or not a company is able to pay its debts when they become due is based on a cash flow test and is not determined simply on the basis of a surplus of assets over liabilities. In Powell v Fryer [2001] SASC 59, Olsson J stated: The conclusion of insolvency must be derived from a proper consideration of the Company’s financial position, in its entirety, based on commercial reality. Generally speaking, it ought not to be drawn simply from evidence of a temporary lack of liquidity. Regard should be had not only to the Company’s cash resources immediately available, but also to moneys which it can procure by realization by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of, it. It is the inability, utilizing such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due which indicates insolvency.

In International Cat Manufacturing (in liq) v Rodrick [2013] QCA 372 the Queensland Court of Appeal found that a company was not insolvent because at the relevant time it was being provided with loans by a de facto director of the company. The court was satisfied on the evidence that the loans were likely to continue and that they provided sufficient working capital for the company to meet its debts as and when they fell due. However, in Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28 the Queensland Court of Appeal held that a company was insolvent when debts were incurred despite the fact that one of the directors had offered to pay the company’s debts. This offer was not enough to support a finding of solvency because it was qualified such that the director would only pay the company’s debts if certain circumstances existed. In ASIC v Plymin [2003] VSC 123, Mandie J of the Victorian Supreme Court thought that the following 14 indicators were common features in insolvency situations: 1.

Continuing losses.

2.

Liquidity ratios below 1.

3.

Overdue Commonwealth and State taxes.

4.

Poor relationship with present Bank, including inability to borrow further funds.

5.

No access to alternative finance.

6.

Inability to raise further equity capital.

7.

Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.

8.

Creditors unpaid outside trading terms.

9.

Issuing of post-dated cheques.

10.

Dishonoured cheques.

11.

Special arrangements with selected creditors.

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Chapter 19 Directors of insolvent companies [19.60]

12.

Solicitors’ letters, summons[es], judgments or warrants issued against the company.

13.

Payments to creditors of rounded sums which are not reconcilable to specific invoices.

14.

Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

The meaning of “insolvency” is further discussed at [25.60] (Lipton).

Presumptions of insolvency

[19.55] Two presumptions of insolvency are available under s 588E to assist in proving that a company was insolvent at the relevant time. The presumptions do not apply in connection with criminal proceedings for contravention of s 588G. The presumptions may be rebutted by evidence to the contrary: s 588E(9). Under s 588E(3), there is a presumption of continuing insolvency. If it can be proved that a company was insolvent at a particular time during the 12 months ending on the “relation-back day”, it is presumed that the company remained insolvent thereafter. The relation-back day in the case of a compulsory winding up is the date that the application to wind up the company was filed: s 9. Consequently, where a company incurs debts at different times within the 12-month period prior to the relation-back day, this presumption obviates the need to prove that it was insolvent on each occasion. Under s 588E(4) there is also a presumption of insolvency where the company has for a time contravened either s 286(1) or (2) by failing to keep or retain adequate financial records. In such cases, it must be presumed that the company is insolvent during the period of contravention. This presumption seeks to overcome difficulties of proving insolvency in the absence of proper accounting records. It does not apply to a minor or technical contravention of s 286: s 588E(5). Nor does it apply if the s 286 contravention is due solely to someone other than the director destroying, concealing or removing the company’s accounting records: s 588E(6). In Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533, a company was presumed to be insolvent under s 588E(4) because its financial records had been falsified in contravention of the predecessor of s 286.

Reasonable grounds for suspecting

[19.60] Directors do not contravene s 588G merely because the company is insolvent at the time a debt is incurred. Section 588G(1)(c) requires that there must be reasonable grounds for suspecting that the company was insolvent at the time the debt was incurred. This section involves two separate issues. What is meant by the word “reasonable” and what are suspicions of insolvency? 477

[19.60] Corporations and Contract Law

In ASIC v Plymin [2003] VSC 123, it was held that the word “reasonable” imported the standard of reasonableness appropriate to non-executive directors of reasonable competence and diligence, seeking to perform their duties as imposed by law and capable of reaching a reasonably informed opinion as to the company’s financial capacity. Reasonable grounds for suspecting insolvency arise when a reasonably competent and diligent director would have had grounds for suspecting insolvency in the circumstances. It is not necessary for a plaintiff to prove that the director actually suspected insolvency. This case considered a number of aspects of the insolvent trading provisions. The decision of Mandie J in ASIC v Plymin [2003] VSC 123 was affirmed by the Victorian Court of Appeal in Elliott v ASIC [2004] VSCA 54.

Williams v Scholz Williams v Scholz [2007] QSC 266 [19.65]

The directors of an insolvent company argued that they had not engaged in insolvent trading because there were no reasonable grounds for suspecting insolvency. Chesterman J, in finding the directors liable for insolvent trading, stated that there were reasonable grounds for suspecting that the company was insolvent during the relevant period because: •

the company traded unprofitably and accumulated losses continuously;

•

the company’s bank sent monthly bank statements to the directors indicating that the company was exceeding its overdraft limit;

•

• •

the company’s overdraft facility was frequently exceeded and the directors negotiated with the bank to increase the limit on three occasions;

a bank officer regularly telephoned the directors when the account exceeded its approved limit and when cheques were dishonoured; and

eventually the bank advised the directors that no further increase to the overdraft facility would be approved.

Chesterman J stated that the only sensible conclusion that could be drawn from these factors was that the business was running at a loss.

[19.70] Under the predecessor of s 588G, proof was required that a director had reasonable grounds to expect insolvency. A suspicion of insolvency is different from an expectation of insolvency. In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, the High Court held that a “suspicion” requires a degree of satisfaction, not necessarily amounting to actual belief but extending beyond speculation. An “expectation” of insolvency, on the other hand, involves a higher probability of insolvency than a “suspicion” of insolvency. Consequently, it is easier to prove a suspicion of insolvency than an expectation of insolvency.

478

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The Harmer Report observed that the change from expecting insolvency to suspecting insolvency was more than an exercise in semantics. It was intended to impose a higher obligation on directors to act and to be more rigorous in monitoring the company’s financial position.

Failure to prevent incurring of debt

[19.75] Section 588G(2) requires proof that a director failed to prevent the company incurring the debt. According to ASIC v Plymin [2003] VSC 123, the expression “failing to prevent” covers inactivity or the failure to attempt to prevent the company from incurring the debt. A director fails to prevent the company incurring a debt if the director acquiesced in the company continuing to incur all such debts as it would incur in the ordinary course of business. It is not necessary for a plaintiff to prove that a director had the power to prevent the company incurring debts or continuing to trade. Nor is it necessary to prove that an individual director failed in their duty to take a particular step which would have been effective to prevent the company incurring the debt: Elliott v ASIC [2004] VSCA 54. A director contravenes s 588G by failing to prevent the company incurring the debt if the director is aware that at the time the debt is incurred there are reasonable grounds for suspecting the company’s insolvency: s 588G(2)(a). In ASIC v Plymin [2003] VSC 123, it was held that s 588G(2)(a) requires proof that the director is aware that there are reasonable grounds for suspecting the company’s insolvency. It is not necessary to prove that the director had an actual suspicion that the company was insolvent. It is sufficient if the director was aware of facts which would cause a reasonably competent non-executive director to suspect that the company was insolvent at the time it incurred a debt. A director also contravenes s 588G by failing to prevent the company incurring the debt if a reasonable person in a like position in a company in the company’s circumstances would be aware of reasonable grounds for suspecting insolvency: s 588G(2)(b). This corresponds to the duty of care and diligence under s 180(1) and covers situations where a director was unaware of the facts or circumstances constituting reasonable grounds for suspecting insolvency because the director failed to ascertain them, but a reasonable person in a like position in a company in the company’s circumstances would or ought to have ascertained those facts and circumstances: Powell v Fryer [2001] SASC 59.

Defences

[19.80] Section 588H sets out four alternative defences (reasonable grounds to expect solvency, delegation and reliance on others, absence from management and reasonable steps to prevent debt being incurred) available to directors who otherwise contravene s 588G(2). In addition, directors may be able to rely on the honesty defences in ss 1317S and 1318 to excuse them from liability for a contravention of 479

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s 588G: McLellan v Carroll [2009] FCA 1415. Sections 1317S and 1318 are discussed at [13.7.30] (Lipton). According to the Explanatory Memorandum to the legislation that introduced ss 588G and 588H: The s 588H defences are designed to assist a director who has] acted diligently and has actively participated in management, but has nevertheless been unable to prevent the incurring of the crucial debt.

The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017, which inserted a “safe harbour” for insolvent trading defence is discussed below [19.140].

Reasonable grounds to expect solvency

[19.85] Under s 588H(2) it is a defence if the director proves that, at the time when the debt was incurred, the director had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. The s 588H(2) defence refers to reasonable grounds to expect the company’s solvency whereas contravention of s 588G requires proof of reasonable grounds to suspect insolvency. According to the Federal Court in Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699: to “suspect” something requires a lower threshold of knowledge or awareness than to “expect” it. It implies a measure of confidence that the company is solvent. The directors must have reasonable grounds for regarding it as likely that the company would at the relevant date have been able to pay its debts as and when they fall due.

In that case the court held that the company’s three directors could not prove the s 588H(2) defence. Their expectations of solvency were based on optimism regarding the company’s future. These expectations were based on hope and were not objectively reasonable expectations. As noted above, a company that experiences a temporary lack of liquidity is not regarded as being insolvent. Directors may seek to rely on expectations of additional external financial support from the company’s bank or major creditors to demonstrate that they had reasonable grounds to expect that the company was solvent for purposes of the s 588H(2) defence. However, a director’s expectations of additional financial support must be objectively reasonable in the circumstances.

Hall v Poolman Hall v Poolman [2007] NSWSC 1330 [19.90]

The court provided some guidance for determining when a director would be justified in expecting solvency for purposes of the s 588H(2) defence. In that case the director knew his company could not pay a disputed tax debt and was not paying debts owed to its trade creditors as and when they fell due. On

480

Chapter 19 Directors of insolvent companies [19.100] Hall v Poolman cont. being sued for contravening s 588G, the director relied on the s 588H(2) defence and argued that he believed on reasonable grounds that the tax dispute would soon be resolved in the company’s favour and that in the meantime there was no obligation to sell substantial assets as the company’s creditors were not pressing for payment. Palmer J stated: Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available. Bearing in mind the commercial reality that creditors will usually prefer to wait a reasonable time to have their debts paid in full rather than insist on putting the company into insolvency if it fails to pay strictly on time, I think it can be said, as a very broad general rule, that a director would be justified in “expecting solvency” if an asset could be realised to pay accrued and future creditors in full within about ninety days. The position becomes murkier the less certain are the outcomes. The market value of the asset may not be ascertainable until the market is tested, so that it is not certain that the realisation will pay in full both existing debts and those to be accrued during the realisation period. The time at which the proceeds of realisation become available may depend upon the state of the market and the complexity of the transaction. There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: “How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within three months? Is that outcome certain, probable, more likely than not, possible, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?” If the honest and reasonable answer is “certain” or “probable”, the director can have a reasonable expectation of solvency. If the honest and reasonable answer is anywhere from “possible” to “no way of knowing”, the director can have no reasonable expectation of solvency.

[19.195] A director does not establish the s 588H(2) defence by showing that they were completely unaware of the company’s financial position.

Tourprint International Pty Ltd v Bott Tourprint International Pty Ltd v Bott [1999] NSWSC 581 [19.100]

Bott was a director for less than one year before the company went into voluntary administration and ultimately liquidation. Bott was held liable under s 588G(1) as he did not inform himself of the true financial position of the company either before becoming a director or while a director. He made no inquiries of the accountant or other director and did not inspect the company’s books. Bott

481

[19.100] Corporations and Contract Law Tourprint International Pty Ltd v Bott cont. therefore did not have reasonable grounds to expect that the company was solvent at the time the debts were incurred for the purposes of s 588H(2). Austin J stated:

Expectation, as required by s 588H(2), means a higher degree of certainty than mere hope or possibility or suspecting: 3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185, 192; Dunn v Shapowloff [1978] 2 NSWLR 235, 249. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty (Metal Manufacturers Ltd v Lewis (1986) 4 ACLC 739, 749) and cannot hide behind ignorance of the company’s affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries (Morley v Statewide Tobacco Services Ltd (1990) 8 ACLC 825, 847).

Delegation and reliance on others

[19.105] The s 588H(3) defence applies to a director who has delegated the monitoring of the company’s financial position to others upon whom the director relies. This defence is based on a recommendation in the Harmer Report which explained that such a defence was necessary for directors of larger companies. For such companies it could not be expected that directors have control over every action taken in the conduct of the company’s business. In addition, it thought that a defence of this nature could encourage a proper system of financial management. A director must establish a number of matters before being able to rely on the defence in s 588H(3). First, the director must prove that at the time when the debt was incurred, the director had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing the director with adequate information about whether the company was solvent and that the other person was fulfilling that responsibility: s 588H(3)(a).

ASIC v Plymin ASIC v Plymin [2003] VSC 123 [19.110]

It was held that Elliott, a non-executive director, could not rely on this defence. Elliott argued that he relied on information about the company’s financial position provided to him by its managing director, Plymin, and the company’s management. The court was not satisfied that Elliott believed that Plymin and the management were competent and reliable persons who were fulfilling the responsibility to provide him with adequate information about whether the company was solvent.

482

Chapter 19 Directors of insolvent companies [19.125]

ASIC v Plymin cont. The court held that a reasonable person would not have regarded that Plymin and the management were competent and reliable persons who were fulfilling their responsibilities, including that of providing adequate information about the company’s solvency. The evidence disclosed that Plymin did not comply with board requirements for financial information. The court was not satisfied that Elliott, an experienced businessman and an astute intelligent individual, did not know that he could and should have obtained from management regular lists of debtors and creditors by age and amount, regular profit and loss and cash flow statements and reports on negotiation with creditors whose debts were outside trading terms. The court thought that Elliott turned a blind eye to the details of the company’s liquidity crisis in the hope that “something would turn up”.

[19.115] In order to make out the s 588H(3) defence, the director must also prove that the director expected, on the basis of information provided to the director by the other person, that the company was solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. A director cannot be said to have expected that the company was solvent under s 588H(3)(b) if the director does not obtain any information about the company’s solvency from a competent and reliable person.

Metropolitan Fire Systems Pty Ltd v Miller Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 [19.120]

Two directors of a company asserted that they had relied on the third director who had the responsibility for running the company and for providing them with all necessary information about its finances and that as far as they were aware, the third director was fulfilling those responsibilities. It was held the s 588H(3) defence did not apply in the circumstances. The evidence indicated that the two directors made no inquiries of the third director as to the state of the company’s finances. Consequently, their belief that the company was solvent was not based on information provided by the third director. The court held that directors are under an obligation to take an interest in and demand information on the financial state of their company. They will not be able to rely on s 588H(3) if they fail to demand information when suspicions about the company’s financial viability and survival should and would have been aroused.

Absence from management

[19.125] Section 588H(4) provides a defence for a director who was absent from management because of illness or for some other good reason at the time when the company incurs the debt in question. A director may have a good reason for being absent from management at the time a debt was incurred if the director did not take part in the board decision on the matter 483

[19.125] Corporations and Contract Law

because the director had a material personal interest. There may be other situations where a director may have a good reason for being absent from management. In ACCC v ASIC [2000] NSWSC 316, the ACCC applied to the court to reinstate a deregistered company so that the ACCC could join the company as a defendant in other court proceedings alleging various breaches of the predecessor of the Competition and Consumer Act 2010 (Cth). In granting the ACCC’s application, the court noted that on reinstatement the company’s directors would resume office. However, they would have no power to manage its affairs and so would have a s 588H(4) defence to any liability for insolvent trading. At first sight, s 588H(4) appears to provide a complete defence for a passive director who fails to be involved in the company’s management. This is not how the courts have interpreted s 588H(4). In Tourprint International Pty Ltd v Bott [1999] NSWSC 581, it was held that a director does not have a “good reason” for being absent from management merely by not participating in managing the company’s business. The policy underlying the insolvent trading provisions requires directors to have a “necessary commitment to an involvement with the management of a company in financial difficulties”.

Deputy Commissioner of Taxation v Clark Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 [19.130]

The New South Wales Court of Appeal held that a married woman, who was a director of a family company run by her husband, could not rely on the absence from management defence where she had taken no part in the management of the company because she had deferred to her husband, the managing director. The court held that the legislative policy underpinning s 588G was that a person should not become a director unless they were prepared to assume the obligations and duties of such an office.

All reasonable steps to prevent debt being incurred

[19.135] Under s 588H(5), it is a defence if the director proves that they took all reasonable steps to prevent the company from incurring the debt. The Explanatory Paper accompanying the exposure draft of the 1992 Bill that inserted that defence indicated that s 588H(5) requires directors to take “unequivocal action”. To take advantage of s 588H(5), a court might require unequivocal action on the part of those directors seeking to rely on the defence to exercise what powers and functions they possess, either to prevent the incurring of the debt directly or to bring the matter to the attention, either of an officer with the necessary authority to prevent the incurring of the debt or to the board of directors where that is required. In Byron v Southern Star Group Pty Ltd (1997) 136 FLR 267, the New South Wales Court of Appeal held that an executive director could not avoid personal 484

Chapter 19 Directors of insolvent companies [19.140]

liability under a predecessor of s 588G simply by telling the company’s managing director that he had reservations and did not agree with the company incurring further debts. If a director cannot prevent the debt being incurred, Ormiston J in Statewide Tobacco Services Ltd v Morley [1993] 1 VR 423 indicated that the director should seek to have the company wound up or resign. Section 588H(6) encourages directors to make prompt use of the voluntary administration provisions. This is discussed in Chapter 24 (Lipton). In determining whether a defence under s 588H(5) has been proved, s 588H(6) directs the court to have regard to matters including any action the director took with a view to appointing an administrator of the company, when that action was taken and the results of that action.

Safe harbour for insolvent trading

[19.140] The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 (Cth) inserted s 588GA which introduced a “safe harbour” for directors from civil liability for insolvent trading. According to the explanatory memorandum the safe harbour is intended to protect directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. It is thought that the legislation will drive cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of simply placing the company prematurely into voluntary administration or liquidation. Section 588GA(1) provides that s 588G(2) does not apply to a person and a debt if:: • at a particular time after the person starts to suspect the company may become or be insolvent, the person starts taking one or more courses of action that are reasonably likely to lead to a better outcome for the company; and • the debt is incurred directly or indirectly in connection with any such course of action during the period starting at that time, and ending at the earliest of any of the following times: • if the person fails to take any such course of action within a reasonable period after that time – the end of that reasonable period; • then the person ceases to take any such course of action; • when any such course of action ceases to be reasonably likely to lead to a better outcome for the company; • the appointment of an administrator, or liquidator, of the company. According to s 588GA(2) in working out whether a course of action is reasonably likely to lead to a better outcome for the company, regard may be had to whether the person: • is properly informing himself or herself of the company’s financial position; or 485

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• is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or • is taking appropriate steps to ensure the company is keeping appropriate financial records consistent with the size and nature of the company; or • is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or • is developing or implementing a plan for restructuring the company to improve its financial position. The term “better outcome” for the company means an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company. According to s 588GA(4) the safe harbour for insolvent trading does not apply if: • when the debt is incurred, the company is failing to do one or more of the following matters: • pay employee entitlements by the time they fall due; • give returns, notices, statements, applications or other documents as required by taxation laws; and • that failure: • amounts to less than substantial compliance with the matter concerned; or • is one of two or more failures by the company to do any or all those matters during the 12 month period ending when the debt is incurred. Section 588HA provides for an independent review of the following matters after two years: • the impact of the availability of the safe harbour to directors of companies on: • the conduct of directors; and • the interests of creditors and employees of those companies. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Act 2017 applies similar safe harbour protection in the case of a holding company’s liability for debts incurred by its insolvent subsidiary under s 588V.

Consequences of contravention

[19.145] Several consequences may flow from a contravention of s 588G. The court may order the director to pay compensation. In addition, since s 588G is a civil penalty provision, contravention may also result in the imposition of a pecuniary penalty order under s 1317G or disqualification from managing corporations under s 206C. Further, under s 588G(3) contravention is a criminal offence, punishable by a fine or imprisonment (or both) if a director’s failure to prevent the company incurring the debt in breach of s 588G was dishonest. 486

Chapter 19 Directors of insolvent companies [19.150]

Compensation

[19.150] The court can make a compensation order against a director who contravenes s 588G in a number of circumstances. Compensation orders can be made in the context of an application for civil penalty orders and as part of proceedings for the criminal offence: ss 588J and 588K. Compensation orders can be made whether or not the court imposes a civil penalty order or a criminal penalty. Compensation orders under either s 588J or 588K may be made whether or not the company is in liquidation. If the company that incurred the debt has been placed in liquidation, s 588M gives the liquidator the ability to seek compensation from a director who contravenes s 588G. Liquidators are permitted to mount compensation recovery proceedings whether or not ASIC has commenced an application for a civil penalty order or criminal proceedings: s 588M(1)(e) and (f). For liquidators, the advantage of the compensation procedures in ss 588J and 588K is that ASIC initiates the proceedings and bears the legal costs in mounting actions for contravention of s 588G as part of the application for a civil penalty order or criminal proceedings. Unsecured creditors are also given a limited right to initiate their own compensation claims against directors: s 588M(3). They may only do this if the company’s liquidator fails to launch an action or the liquidator consents to the creditor’s action. Where creditors initiate their own action they must prove the director has contravened s 588G. Sections 588R – 588U set out a regime for creditor-initiated compensation recovery actions. These provisions ensure that liquidators have sufficient time to consider whether to mount their own compensation claims. They require unsecured creditors to wait at least six months after the beginning of winding up and then apply for the liquidator’s consent to the individual creditor’s action. The creditor’s application must be initiated in the period during which the company “is being wound up”. The company is no longer “being wound up” once the liquidator lodges a s 509(3) return with ASIC. The s 509(3) return is required to be lodged following a meeting of the creditors at which the liquidator provides an account of how the affairs of the company have been wound up. Creditors are not able to initiate a claim for compensation after the lodgment of the s 509(3) return: International Greetings UK Ltd v Stansfield [2010] NSWSC 1357. Section 588S sets out the procedure for gaining a liquidator’s consent. It requires the creditor to give the company’s liquidator written notice of the creditor’s intention to bring proceedings under s 588M. The notice can be given only after the end of six months from the beginning of winding up. In the notice the creditor must ask the liquidator to give consent to the creditor beginning the proceedings or to state the reasons why those proceedings should not be initiated. The liquidator has three months to respond to the notice. If the liquidator consents, a creditor may begin proceedings under s 588M in relation to the incurring by the company of an unsecured debt that is owed to the creditor: s 588R(1). Where, however, the liquidator 487

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has not consented to the creditor’s action by the end of the three-month notice period, the creditor must apply for leave of the court to begin the proceedings: s 588T(2)(b). Section 588U(1) ensures that in some circumstances creditors are not permitted to begin direct proceedings against a director. Creditors cannot begin their own proceedings if the liquidator has: • applied under the antecedent transactions provisions of s 588FF (discussed at [25.480] (Lipton) onwards) in relation to the debt, or in relation to a transaction under which the debt was incurred; or • begun proceedings under s 588M in relation to the incurring of the debt; or • intervened in an application for a civil penalty order against the director in relation to a contravention of s 588G in relation to the incurring of the debt.

Amount of compensation

[19.155] Under ss 588J, 588K and 588M, directors are liable to pay compensation equal to the amount of loss or damage suffered by all unsecured creditors whose debts were incurred in contravention of s 588G because of the company’s insolvency. However, in the case of creditor-initiated actions, under s 588M(3), the amount recoverable is the amount of loss or damage suffered by the individual creditor. As a general rule, the amount of “loss or damage suffered” by a creditor is the amount of the unpaid debt: Powell v Fryer [2001] SASC 59. However, in ASIC v Plymin [2003] VSC 123, the court accepted that the amount of loss or damage recoverable from directors could be reduced by the amount of actual or expected dividends distributed to creditors. Where a deed of company arrangement is entered into by creditors and an administrator, the loss or damage suffered by creditors for the purposes of s 588J is the amount representing the shortfall between what was received under the deed and the amount of the debt. This is despite the fact that the remaining debt may have been extinguished under the terms of the deed: Elliott v ASIC [2004] VSCA 54. Deeds of company arrangement are discussed at [24.235]–[24.365] (Lipton). The amount recoverable from directors is restricted to the loss or damage suffered by creditors in relation to debts that are wholly or partly unsecured: ss 588J(1)(b), 588K(b)(i) and 588M(1)(c). In Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699, the Federal Court held that a creditor whose debt was secured by a retention of title clause was still an unsecured creditor. In this case the creditor had made no claim under the retention of title clause. If, however, a secured creditor proves for the debt as an unsecured creditor, s 588D regards the debt as unsecured.

Who receives the benefit of compensation?

[19.160] An amount recovered from directors pursuant to an application for a civil penalty order, a criminal proceeding or a liquidator-initiated proceeding is payable to the company and is available for distribution to all unsecured creditors including those 488

Chapter 19 Directors of insolvent companies [19.170]

creditors whose debts were incurred before reasonable suspicions of insolvency arose. In the case of creditor-initiated actions, however, the amount recovered is payable to the unsecured creditor who initiated the action. Amounts recovered are not available to pay a secured debt of the company unless all the company’s unsecured debts have been paid in full: s 588Y(1). Section 588Y stems from an ALRC recommendation that amounts recovered from directors should only be available for unsecured creditors because insolvent trading has a major impact on them. Further, under s 588Y(2) the court has power to order that compensation recovered is not available to pay the debt of a creditor who, at the time the debt was incurred, knew that the company was insolvent, unless all the company’s other unsecured debts have been paid in full. This may mean that a director who is an unsecured creditor of the company is unable to share in the proceeds of the compensation. The power to exclude creditors from participating in the amount recovered does not, by virtue of s 588Y(3), apply in relation to creditor-initiated proceedings.

Court relief

[19.165] Pursuant to s 1317S(2), the court may relieve a person, either wholly or partly, from a liability for contravention of s 588G if it appears that the person has acted honestly and having regard to all the circumstances of the case ought fairly be excused. Section 1317S(3) reiterates s 588H(6) when it explains that in determining whether a person ought fairly be excused, the matters to which regard is to be had include any action the person took, with a view to appointing an administrator of the company, when that action was taken and the results of that action. Section 1317S is discussed at [13.7.30]–[13.7.45] (Lipton).

National Insolvent Trading Program

[19.170] ASIC established the National Insolvent Trading Program in July 2003 to deal with possible insolvent trading before it occurs. Under the program, ASIC identifies specific companies that are financially stressed and reviews them for purposes of ensuring compliance by directors with their duties to prevent insolvent trading. In the review, ASIC discusses the company’s financial position with its directors and reviews both their historical and current financial records and forecasts. According to ASIC, the program aims to: • make company directors aware of their company’s financial position; • make directors of potentially insolvent companies aware of their responsibilities and the implications of continued trading if they know they are insolvent; • encourage directors to seek external advice from accountants and lawyers on restructuring; and • encourage directors to seek advice from insolvency professionals where appropriate, and to take action to appoint a voluntary administrator or liquidator where necessary. 489

[19.175] Corporations and Contract Law

LIABILITY FOR UNREMITTED TAXATION

[19.175] Income tax legislation requires employer companies to deduct employees’ taxation contributions from their wages and salaries. These amounts of tax must be remitted to the Commissioner of Taxation. There are similar requirements for companies that collect Goods and Services Tax (GST) from sales to remit the GST. In some situations directors may become personally liable for unremitted amounts if their company fails to remit them. Directors may be liable not only for actual unremitted amounts but also for amounts estimated as being liable. Under the provisions of the tax legislation, the Commissioner of Taxation must give 14 days’ notice to the directors setting out details of the unpaid amount and the penalty. Directors will not be penalised if one of the following occurs: • the company pays the unremitted amount; • the company enters an agreement relating to the unremitted amount; • an administrator is appointed; or • the company goes into liquidation. Directors who may be liable are those who were in office on or before the due date for payment of the deducted amount and any persons who became directors after this date. Any amount paid to discharge the liability of either the company or a director discharges other liabilities to the extent of that amount. Directors subject to recovery proceedings by the Commissioner may be able to utilise two defences: • the director, because of illness or other reason, took no part in management of the company at the time when one of the four prescribed courses of action should have been taken; or • the director took all reasonable steps to ensure deductions were paid; or the company complied with the four alternative courses of action by the due date; or there were no steps that the director could have taken.

EMPLOYEE ENTITLEMENTS

[19.180] Employees of insolvent companies are assisted to recover their entitlements by a number of provisions in the Corporations Act: • a company incurs a debts for purposes of s 588G by entering into an uncommercial transaction: s 588G(1A). This enables a liquidator to pursue insolvent trading claims against individual directors. A liquidator also has the ability to seek court orders to undo uncommercial transactions under s 588FB. Uncommercial transactions are discussed at [25.520] (Lipton) onwards; • persons who deliberately enter into agreements and transactions for the purpose of avoiding employee entitlements may be guilty of a criminal offence: s 596AB. 490

Chapter 19 Directors of insolvent companies [19.185]

This provision was a response to situations where assets were stripped from employer companies resulting in employees being unable to enforce their entitlements while related entities held substantial assets; and • in addition to the criminal offence, s 596AC provides for payment of compensation. Compensation may be payable even in the absence of a conviction as the burden of proof is lower than in the case of a criminal offence. Generally, the liquidator may bring an action seeking compensation and effectively lift the corporate veil so as to make anyone involved in the agreement or transaction liable to compensate the employees for otherwise lost entitlements. In some cases the employees may bring the action where the liquidator does not do so.

FRAUDULENT CONDUCT

[19.185] It is an offence under s 592(6) for any person to be knowingly concerned in the doing of an act by a company with the intent of defrauding creditors of the company or any other person or for any other fraudulent purpose. Where a person has been convicted of an offence under s 592(6), the court may, on application by the Commission, creditors or members, order that that person be personally liable to the company without limitation of liability for an amount up to the whole of its debts as the court thinks proper: s 593(2). Creditors benefit because the insolvent company is then in a better position to pay its debts. The ALRC, in its General Insolvency Inquiry Report, recommended that creditors should be able to take action without waiting for the conviction of a person for the criminal offence. Creditors may be defrauded under s 592(6) where the intention is to defraud only some creditors and not all. It is not necessary, in order to establish an offence under s 592(6), to show that creditors were in fact defrauded. An intention to defraud is sufficient. An intention to defraud is an intention to deprive creditors, or some creditors, of an economic advantage or inflict upon them some economic loss: Coleman v R [1988] WAR 196.

491

CHAPTER 20

Remedies and penalties for breach of duty Introduction ................................................................................................... [20.05] Company’s remedies .................................................................................... [20.10] Damages or compensation ..................................................................... [20.35] Account of profits .................................................................................... [20.50] Rescission of contract ............................................................................. [20.65] Injunctions ................................................................................................ [20.80] Return of property and constructive trusts ............................................. [20.90] Civil penalties .............................................................................................. [20.120] What are civil penalty provisions? ........................................................ [20.120] Declaration of contravention ................................................................. [20.135] Pecuniary penalty orders ...................................................................... [20.140] Disqualification orders ........................................................................... [20.145] Compensation orders ............................................................................ [20.150] Statutory injunctions ................................................................................... [20.152] Criminal penalties ....................................................................................... [20.155] Relationship between civil penalties and criminal penalties ................ [20.155] Criminal offences ................................................................................... [20.160] Application of the Criminal Code .......................................................... [20.165] Consequences of conviction ................................................................. [20.170] Penalty notices ...................................................................................... [20.175] Personal Liability for Corporate Fault Reform Act 2012 ..................... [20.180] Protection for whistleblowers ................................................................ [20.185] Reform proposals .................................................................................. [20.190]

493

[20.05] Corporations and Contract Law

Extracts from Lipton, Herzberg and Welsh, Understanding Company Law, Ch 13.6. Key points • Directors’ duties are owed to the company and therefore the company is generally the proper plaintiff. The main common law remedies are compensation and account of profits. • The Corporations Act provides civil penalties where certain statutory duties are breached. • ASIC may seek a pecuniary penalty order, a disqualification order, and/or an order for compensation. In such proceedings, the burden of proof is the civil burden, on the balance of probabilities. • Criminal liability may arise in relation to breaches of statutory duty involving dishonesty.

INTRODUCTION

[20.05] A breach of directors’ duty may harm the company, its shareholders or creditors. For example, directors who make undisclosed profits from the misuse of their position may deprive the company of profits or property to which it would otherwise be entitled. This indirectly affects the shareholders because the value of their investment in the company is thereby reduced. In other circumstances, a breach of duty may affect shareholders directly. This can occur when the directors improperly refuse to register a transfer of shares. When the company is in financial difficulties, creditors may also be adversely affected by improper use of the company’s assets by its directors. Such acts may diminish the value of assets available for distribution to creditors on a winding up. As a general rule, the company is the proper plaintiff to remedy wrongs done to it by the directors. This is because directors’ duties are owed to the company and it is regarded as a legal entity separate from its shareholders. If the company is in liquidation, its liquidator can bring an action in the name of the company against present or former directors. Under Pt 2F.1A of the Corporations Act, shareholders and other eligible applicants have the right, with prior court leave, to bring legal proceedings against directors on behalf of the company. This is discussed at [17.285] (Lipton). ASIC may bring proceedings in the name of a company to recover damages or property from directors who breach their duty or engage in misconduct: ASIC Act, s 50. These actions are discussed at [21.50] (Lipton). ASIC may also bring proceedings in its own name against directors who have breached the statutory directors’ duties which are designated to be civil penalty provisions by Pt 9.4B of the Corporations Act: s 1317E(1). Those statutory duties include: 494

Chapter 20 Remedies and penalties for breach of duty [20.20]

• care and diligence (s 180); • good faith and proper purpose (s 181); • improperly using position (s 182); and • improperly using information: s 183. The consequences of breaching civil penalty provisions are discussed at [20.120]. Under s 184, a contravention of the duties contained in s 181, 182 or 183 is regarded as a criminal offence if the director or other officer did so recklessly or dishonestly. Several reports and reviews have considered various aspects of directors’ and officers’ liabilities. In its Report, Personal Liability for Corporate Fault (2006), CAMAC reviewed the way in which directors and other people involved in companies may incur personal criminal liability as a consequence of misconduct of their companies. This Report is on the CAMAC website which is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/. A paper prepared for the government Taskforce on Reducing Regulatory Burden on Business, Review of Sanctions in Corporate Law (2007) formed the basis of the government’s review of civil and criminal sanctions in the Corporations Act and the ASIC Act. The Paper is on the Treasury website which is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

COMPANY’S REMEDIES

[20.10] If directors or officers breach any of their fiduciary duties, the company has a variety of remedies available. The appropriate remedy depends on the circumstances. In some cases, a company may have more than one remedy available and it may seek the remedy that achieves the best result from its point of view.

Tavistock Holdings Pty Ltd v Saulsman Tavistock Holdings Pty Ltd v Saulsman (1991) 9 ACLC 450 [20.15]

A director who breached his fiduciary duties was ordered to account for an overpayment made by a company to him and another company controlled by him. A manager of the company also breached his duties because he actively assisted the director to obtain payment. The court awarded equitable compensation to relieve the company against loss arising from the breach of fiduciary duty. The manager was liable to compensate the company to the extent it was unable to recover its losses from the director and his company.

[20.20] A company has similar remedies against outsiders who knowingly participate in a director’s breach of duty.

495

[20.25] Corporations and Contract Law

Green v Bestobell Industries Pty Ltd Green v Bestobell Industries Pty Ltd [1982] WAR 1 [20.25]

Bestobell’s Victorian manager, Green, breached his duty to avoid a conflict of interests when he incorporated his own company to obtain a contract that rightfully belonged to Bestobell. The court held that Green’s company knowingly participated in the breach and ordered that it account to Bestobell for the profits made under the contract. This case is an example of the court lifting the corporate veil where a company is formed to assist someone in his breach of duty.

[20.30] Occasionally, the person who derives a benefit from a breach of duty by a director may not knowingly be concerned in the breach. The company bears the onus of proving that the person had knowledge of the essential facts constituting the breach before property may be recovered. In this sense, “knowledge” may be actual knowledge, wilful shutting of the eyes to the obvious or knowledge of the circumstances which an honest and reasonable person would recognise as improper: Abeles v PA (Holdings) Pty Ltd [2000] NSWSC 1008.

Damages or compensation

[20.35] If a director breaches the fiduciary duties owed to the company and it suffers loss as a result, the company may apply for the equitable remedy of compensation. This is similar to the common law remedy of damages. If the officer is fraudulent, the company has a common law action for the tort of deceit and may recover damages. If the breach of duty arises from a failure to exercise reasonable care, the company has an action for negligence and can recover damages for any loss that results. The object of compensation or damages is to place the company, as near as possible, in the position it would have occupied had the breach of duty not occurred. All directors who participate in the breach of duty are jointly and severally liable. This means that the company can sue any one of several directors in breach of duty for the full amount of the damages or compensation. That director then has a right to seek contribution from the others who participated in the breach of duty.

Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508 [20.40] Markwell Bros Pty Ltd held a franchise to distribute marine engines

manufactured by a Japanese supplier. The relationship between Markwell and the Japanese supplier deteriorated and the franchise was withdrawn and acquired by CPN Diesels (Qld) Pty Ltd. CPN was a company formed by two of Markwell’s

496

Chapter 20 Remedies and penalties for breach of duty [20.50] Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd cont. former directors and employees. After the loss of the franchise, Markwell agreed to purchase engines from CPN at landed cost plus 10 per cent. Two years later, it was discovered that CPN had sold engines to Markwell based on a price greater than the actual landed cost with the result that Markwell had been overcharged approximately $23,000. Markwell brought an action against CPN and its former directors seeking equitable damages or compensation for breach of fiduciary duty. The Queensland Supreme Court held that the former directors breached their duties and were liable to compensate the company. The measure of compensation was the same whether the breach was of a contractual nature or of fiduciary duty. It was also held that CPN was liable for damages resulting from breach of duty by the directors as it knowingly participated in the breaches of duty. As discussed at [20.90], CPN may also have been liable to account for profits as a constructive trustee.

[20.45] Where a company is entitled to compensation it may recover for the loss of the use of the money of which it has been deprived. This enables the company to be awarded compound interest at the bank overdraft rate paid by it. Overdraft interest rates are not appropriate where the company seeks an order for an account of secret profits paid by someone else because the company had not been deprived of the use of this money.

Account of profits

[20.50] An officer’s fiduciary duty to the company is breached when the officer makes undisclosed profits arising from a conflict of interest situation. In such circumstances, compensation may not be a satisfactory remedy for the company, since the breach can arise even if the company suffers no loss. The company may obtain an order that the officer hand over the profit made in breach of duty to the company. This is called “an account of profits”. For example, in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n, the facts of which are set out at [17.100], the directors breached their duty when they profited from the sale of shares in the company’s subsidiary. They were in breach even though their company suffered no loss because it could not afford to acquire the subsidiary’s shares itself. The directors were still ordered to disgorge the profits they had made.

497

[20.55] Corporations and Contract Law

Tavistock Holdings Pty Ltd v Saulsman Tavistock Holdings Pty Ltd v Saulsman (1991) 9 ACLC 450 [20.55]

A manager breached his fiduciary duties by taking a management fee without the authority of the company. He was held liable to repay the money; however, he did provide services that benefited the company and was entitled to a just allowance for these.

[20.60] If a director breaches the statutory duties contained in ss 180 – 183 and the company suffers loss as a result, the company may apply for a civil penalty compensation order: s 1317H. The application for compensation can be made regardless of whether a declaration of contravention has been made. A person who is found to have contravened the statutory directors’ duties may be ordered by the court to pay compensation to the company for any loss suffered by the company. The amount of compensation may include any profits made by the person resulting from the contravention: s 1317H(2). The civil penalty provisions are discussed at [20.120]–[20.150].

Rescission of contract

[20.65] Directors breach their duties if they have an undisclosed interest in a contract with the company. Subject to the company’s constitution, the company may, at its option, rescind the contract. This enables the company to avoid an unfavourable contract to which the company no longer wishes to be bound. The aim of rescission is to put both parties to the contract in the position they would have been in had no contract been made. Thus, any money paid or property transferred is returned.

Kinsela v Russell Kinsela Pty Ltd Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 [20.70]

The facts of this case are set out at [13.5.90] (Lipton). A liquidator successfully sought a declaration that a lease was voidable at the company’s option. This lease was granted by an insolvent company to its directors in breach of their duty to take into account the interests of the company’s creditors.

[20.75] If the directors profited from the contract, they are liable to account for the profit, irrespective of whether the company exercises its right to rescind. A company’s right to rescind may be lost if it is no longer possible to restore the parties to their original positions, if outsiders have bona fide acquired rights in the subject matter of the contract, or if the company fails to rescind within a reasonable time. 498

Chapter 20 Remedies and penalties for breach of duty [20.90]

A company may also lose the right to rescind a contract if the person dealing with it is able to rely on the assumption in s 129(4). This allows persons who have dealings with a company to assume that company officers and agents properly perform their duties to the company. However, in most circumstances, directors who have dealings with their company will not be permitted to rely on this assumption because of the operation of s 128(4). The entitlement to make assumptions is discussed at [14.220] onwards.

Injunctions

[20.80] Where directors or officers breach or threaten to breach any of their fiduciary duties, the company can apply to the court for an injunction. An injunction is an order which requires a person to refrain from doing a particular thing. It is a useful remedy if the breach by the director is of a continuing nature or if the directors are proposing to engage in activity which will constitute a breach of duty. Section 1324 enables ASIC, or a person whose interests are affected by conduct that constitutes a contravention of the Corporations Act, to apply to the court for an injunction restraining the person from engaging in the contravening conduct. A person whose interests are affected by the contravention could include the company, a shareholder or creditor. Applications for statutory injunctions by ASIC are discussed at [20.152] and by shareholders at [17.305]–[17.315] (Lipton).

Thomas Marshall (Exporters) Ltd v Guinle Thomas Marshall (Exporters) Ltd v Guinle [1978] 3 WLR 116 [20.85]

The facts of this case are set out at [17.280]. A director was found to be in breach of duty for trading on his own account in competition with his company. When this was discovered the company successfully sought an injunction preventing him from dealing with the company’s customers and suppliers and disclosing or using the company’s confidential information or trade secrets.

Return of property and constructive trusts

[20.90] Where a director acquires property as a consequence of a breach of duty, the company may seek a declaration that the director holds the property on a constructive or resulting trust for the company with the effect that the property is returned to the company. This remedy is most appropriate where the director misappropriates property or misapplies money belonging to the company for their own purposes.

499

[20.95] Corporations and Contract Law

O’Brien v Walker O’Brien v Walker (1982) 1 ACLC 59 [20.95]

One of the directors of the Nugan Hand group of companies misapplied funds from one of the companies in the group to purchase a house in his own name. After the director died and the companies went into liquidation, the liquidator obtained an order that the director’s estate held the house on a constructive or resulting trust for the company. The company was then entitled to have the house registered in its own name. A similar remedy was obtained in Cook v Deeks [1916] 1 AC 554, discussed at [17.210].

Paul A Davies (Aust) Pty Ltd v Davies Paul A Davies (Aust) Pty Ltd v Davies [1983] 1 NSWLR 440 [20.100]

The facts of this case are discussed at [13.3.225] (Lipton). It was held that as the property acquired in breach of duty had not been sold, the directors held the entire property on a constructive trust for the company and in the circumstances any funds raised by way of mortgage to finance the acquisition of the property was not regarded as having come from the directors’ own funds. Consequently, they were only entitled to be indemnified for debts incurred in the acquiring and running of the property and to be provided with reasonable remuneration associated with running the business.

[20.105] The law of constructive trusts enables a company to recover assets that have come into the hands of third parties as a result of a breach of duty by a director. The third party may be compelled to return the property to the company if the property was received with knowledge of the breach of duty or if the third party knowingly assisted the director to commit a breach of fiduciary duty. This doctrine was developed in the context of breaches of duty by trustees and also operates in relation to directors: Barnes v Addy (1874) LR 9 Ch App 244 and Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. The principle allowing property to be recovered after it was received by third parties who had knowledge of the breach of duty is referred to as the first limb in Barnes v Addy. The principle allowing property to be recovered from third parties who knowingly assist the directors to commit a breach of fiduciary duty is referred to as the second limb in Barnes v Addy. Only one limb need be established for property to be recoverable. In Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 it was stated that the first limb in Barnes v Addy will be made out where the following factors are established: • the directors owe a fiduciary duty to the company; 500

Chapter 20 Remedies and penalties for breach of duty [20.110]

• the fiduciary duty extends to or encompasses property the receipt of which is later called into question; • the directors are in breach of their fiduciary duty; • the third party receives the property in the course of, or arising from, the acts or omissions involved in the breach; and • at the time when the property was disposed of or transferred, the third party knows of the existence of the fiduciary duty and of the breach of that duty. According to Australian Staging & Rigging – Events Pty Ltd v Elite Systems Australia Pty Ltd [2016] SASC 204 the second limb in Barnes v Addy will be made out where the following factors are established: • the director dishonestly and fraudulently breached their fiduciary duties; • the accessory had knowledge of the directors’ breach of fiduciary duties; and • the accessory assisted the directors’ breach of fiduciary duties.

Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 [20.110]

The facts of this case are discussed at [16.225] and [13.5.25] (Lipton). The plaintiffs claimed that assets were recoverable under both limbs in Barnes v Addy. Owen J held that the directors of the Bell Group of companies owed fiduciary duties to the companies in the group. The directors breached the fiduciary duties to act bona fide in the best interests of the companies in the group and to exercise powers for proper purposes when they allowed companies in the group to enter into refinancing and security transactions with a group of banks. The transactions allowed the banks to take security over assets of the Bell Group of companies at a time when the solvency of many of the companies in the group was in doubt. These arrangements were found to have prejudiced the interests of the creditors of the Bell Group of companies. The court was satisfied that at the time the refinancing arrangements were put in place the banks knew of the existence of the fiduciary duties and knew of the breaches of duty. The money was recoverable from the banks under the first limb in Barnes v Addy. Owen J held that in order for the second limb to be made out the plaintiffs had to show that there had been conscious wrongdoing on the part of the directors. This had not been established so the claim under the second limb in Barnes v Addy failed.

501

[20.112] Corporations and Contract Law

Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157

[20.112] The decision in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 was appealed by the banks on a variety of grounds, one of which was that Owen J had erred in finding that the first limb of Barnes v Addy had been made out. The Court of Appeal found against the banks and upheld Owen J’s findings in relation to the company’s ability to recover assets under the first limb in Barnes v Addy. As part of the same action the companies in the group appealed Owen J’s finding that the second limb of Barnes v Addy had not been made out. The Court of Appeal upheld the companies’ claim and found that the second limb in Barnes v Addy had been made out. The banks had knowingly assisted the directors in a dishonest breach of their fiduciary duties and the fraudulent disposition of company property, and this was sufficient to make out the second limb in Barnes v Addy. A later court confirmed that in order to recover property under the second limb in Barnes v Addy it is necessary to prove that the director’s breach of duty amounted to dishonest conduct: Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609.

[20.115] The meaning of “knowledge” for the purpose of the law of constructive trusts is very broad and includes constructive knowledge such as where the third party failed to make reasonable inquiries where the circumstances required inquiries to be made.

CIVIL PENALTIES What are civil penalty provisions?

[20.120] Certain provisions of the Corporations Act are deemed to be civil penalty provisions. If a civil penalty provision is breached, the civil penalty regime applies. Under that regime ASIC may apply to the court for a declaration of contravention, a pecuniary penalty, a disqualification order and/or a compensation order. Several of the civil penalty provisions are listed in Table 20.1.

TABLE 20.1 Table 20.1: Selected civil penalty provisions Section ss 180(1), 181(1) and (2), 182(1) and (2), 183(1) and (2)

502

Topic Officers’ duties

Discussed in Chapter 16

Chapter 20 Remedies and penalties for breach of duty [20.120]

Section s 188(1) and (2) s 209(2) ss 254L(2), 256D(3), 259F(2) and 260D(2) s 344(1) s 588G(2) ss 601FC(5), 601FD(3), 601FE(3), 601FG(2), 601JD(3) ss 674(2), (2A), 675(2) or (2A) ss 798H(1), 961K, 961L, 961Q, 962P, 963E, 963F, 963G, 963J, 963K, 964A, 964D, 964E, 965, 985E(1), 985H(1), 985J(1), 985K, 985L, 985M, 1041A, 1041B(1), 1041C(1), 1041D and 1043A(1) and (2)

Topic Responsibilities of secretaries for certain corporate contraventions Related parties rules Share capital transactions Requirements for financial reports Insolvent trading Managed investment schemes Continuous disclosure Market integrity rules, provisions relating to financial services licensees, provisions relating to the remuneration of financial services, margin lending rules, market manipulation, false trading and market rigging, dissemination of information about illegal transactions, and insider trading

Discussed in Chapter 15 Chapter 17 Chapter 9 (Lipton)

Chapter 15 (Lipton) Chapter 19 Chapter 20 (Lipton)

Chapter 15 (Lipton) Chapter (19) Lipton)

Section 1317DA classifies the civil penalty provisions into two broad categories: • corporation/scheme civil penalty provisions that include the duties owed by company directors and secretaries, related party rules, share capital transactions, requirements for financial reports and insolvent trading; and • financial services civil penalty provisions that include continuous disclosure, market manipulation, false trading and market rigging, dissemination of information about illegal transactions and insider trading. These two categories were created because the pecuniary penalties for contravention of financial services civil penalty provisions are greater than those for contravention of the corporation/scheme civil penalty provisions. Contravention of the financial services civil penalty provisions is discussed at [19.345] (Lipton). Part 9.4B provides for three types of civil penalty orders to punish people who contravene designated civil penalty provisions: • a pecuniary penalty of up to $200,000 for contraventions of the corporation/ scheme civil penalty provisions: s 1317G(1). The pecuniary penalty for contraventions of some of the financial services civil penalty provisions is $1 million for bodies corporate and $200,000 for individuals (s 1317G(1B)). Section 1317G(1BA) states that if a declaration of contravention of s 188(1) or (2) has been made, a court may order the person to pay a pecuniary penalty of up to $3,000; • disqualification from management (s 206C); and • compensation for damage suffered: ss 1317H, 1317HA and 1317HB. On 23 March 2017 the Senate Economics References Committee published its report Lifting the Fear and Suppressing the Greed: Penalties for White-Collar Crime and 503

[20.120] Corporations and Contract Law

Corporate and Financial Misconduct in Australia. The report noted that participants to the inquiry generally agreed that the maximum pecuniary penalties for non-criminal contraventions, including the maximum pecuniary penalty of $200,000 available under the civil penalty regime, were inadequate. The Report recommended that: the Government amend the Corporations Act to increase the current level of civil penalties, both for individuals and bodies corporate, and that in doing so it should have regard to non-criminal penalty settings for similar offences in other jurisdictions.The Report also recommended that the government provide for civil penalties in respect of white-collar offences to be set as a multiple of the benefit gained or loss avoided. The Report is available on the Senate Economics References Committee’s website and is linked to the Understanding Company Law website at http:// www.uclaw.com.au/resources/.

ASIC v Vizard ASIC v Vizard [2005] FCA 1037 [20.125]

The facts of this case are set out at [17.315].

Finkelstein J made the following observations for determining the orders which should be imposed under the civil penalty provisions: •

• • • •

the main consideration is the nature of the offence rather than the character of the defendant and the likelihood of further offences in the future; it is irrelevant whether or not a profit was made;

the aim of the orders is to act as a general deterrent to improper commercial conduct; shaming is not a substitute for formal punishment imposed by the courts; and

early acknowledgment of wrongdoing and co-operation with regulatory authorities entitle the defendant to a reduction of penalties.

[20.130] As noted at [20.120], ss 180 – 183 are designated corporation/scheme civil penalty provisions. Directors and officers who contravene these provisions are liable to civil penalty orders. In addition, any person who is involved in the contravention also contravenes the relevant section: ss 181(2), 182(2) and 183(2). Under s 79 a person is “involved” in a contravention if the person has: • aided, abetted, counselled or procured the contravention; • induced the contravention; • been in any way, by act or omission, knowingly concerned in or party to the contravention; or • conspired with others to effect the contravention.

504

Chapter 20 Remedies and penalties for breach of duty [20.135]

For a person to be involved in a contravention they must have actual knowledge of the essential, material factual ingredients of the contravention. Knowledge may be inferred from the fact of exposure to the obvious where the person has wilfully remained ignorant and failed to make appropriate inquiry: ASIC v Adler [2002] NSWSC 171. In ASIC v Somerville [2009] NSWSC 934 Windeyer AJ said: aiding and abetting a plan means helping or assisting or encouraging its implementation. Counselling means advising conduct (here wrongful conduct), and procuring means taking action to bring about the (improper) result in that there must be a causal connection between that action and the conduct impugned.

Windeyer AJ said that usually solicitors giving advice will not be “involved” in a contravention pursuant to s 79. However in ASIC v Somerville [2009] NSWSC 934 a solicitor was held to have aided and abetted a number of directors to breach their duty of care because: he advised on and recommended the transaction which breached the sections in question, he prepared or obtained all documents necessary to carry out the transaction, he arranged execution of the documents in all cases with knowledge of the relevant facts. I think it clear that he aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction. There was a direct causal connection between his involvement and the breach. I find the transactions would not have taken place but for his involvement.

Declaration of contravention

[20.135] If a court is satisfied that a person contravened a designated civil penalty provision, it must make a declaration of contravention under s 1317E(1). A declaration of contravention must specify the matters set out in s 1317E(2). These matters include identification of the conduct which constituted the contravention and the section contravened. The rules of evidence and procedure for civil matters apply in relation to hearings for a declaration of contravention and pecuniary penalty orders: s 1317L. This means that the burden of proof is the civil burden (on balance of probabilities) and not the criminal standard (beyond reasonable doubt): ASIC v Plymin [2003] VSC 123. However, given the nature of the penalties that can be imposed under the civil penalty regime the courts have stated that a modified version of the civil burden of proof is to be applied: Briginshaw v Briginshaw (1938) 60 CLR 336 at 368. In ASIC v Adler (No 3) (2002) 20 ACLC 576 at 583 Santow J stated that although the proceedings before the court were not criminal, the character of civil penalty proceedings required the court to invoke requirements for prosecutorial fairness and a standard of proof that took into consideration the gravity of the allegations. In its Paper, Review of Sanctions in Corporate Law (March 2007) the government sought views on whether the Corporations Act should more clearly define the rules of 505

[20.135] Corporations and Contract Law

procedure to be adopted by courts in civil penalty proceedings. The Paper is on the Treasury website and is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/. The Senate Economics References Committee’s 2017 report Lifting the Fear and Suppressing the Greed: Penalties for White-Collar Crime and Corporate and Financial Misconduct in Australia recommended that the government consider reforms to provide greater clarity regarding the evidentiary standards and rules of procedure that apply in civil penalty proceedings involving white-collar offences. The Committee’s Report is on the Senate Economics References Committee’s website and is linked to the Understanding Company Law website at http://www.uclaw.com.au/ resources/. ASIC has the power to initiate civil penalty proceedings by applying to a court for a declaration of contravention, a pecuniary penalty order, a compensation order (s 1317J(1)) or a disqualification order: s 206C. A corporation also has the power to apply to the court for a compensation order: s 1317J(2). A corporation may also intervene in an application for a declaration of contravention or a pecuniary penalty order and is entitled to be heard on all matters other than whether the declaration or order should be made: s 1317J(3).

Pecuniary penalty orders

[20.140] Under s 1317G(1), the court may order a person to pay a pecuniary penalty to the Commonwealth of up to $200,000 if the contravention of a corporation/scheme civil penalty provision is serious; or materially prejudices the interests of the corporation or its members; or materially prejudices the corporation’s ability to pay its creditors. If a declaration of contravention by a secretary of s 188(1) or (2) has been made under s 1317E, a court may order the secretary to pay a pecuniary penalty of up to $3,000: s 1317G(1BA). In relation to a contravention of a financial services civil penalty provision, the maximum pecuniary penalty for a body corporate is $1 million: s 1317G(1B)(b). The maximum for an individual is $200,000: s 1317G(1B)(a). A pecuniary penalty is regarded as a civil debt payable to ASIC on the Commonwealth’s behalf and may be enforced as if it were an order made in civil debt recovery proceedings: s 1317G(2). The purpose of a pecuniary penalty is to act as a personal and general deterrent against failure to comply with appropriate standards of commercial conduct in the management of corporations. The penalty should be no greater than is necessary to achieve this purpose and is at the discretion of the court. In exercising its discretion, the court will consider factors such as the amounts involved, whether efforts were made to repay misappropriated funds, whether actions involved dishonesty or negligence and carelessness, whether there were expressions of contrition or a likelihood of further contraventions and previous good character: ASC v Donovan (1998) 28 ACSR 583. 506

Chapter 20 Remedies and penalties for breach of duty [20.145]

It is also relevant for the court to consider the capacity of the defendant to pay the penalty: ASIC v Healey (No 2) [2011] FCA 1003. However, the fact that a company is in liquidation does not mean that a court should not impose a significant pecuniary penalty on it. In the matter of Sino Australia Oil and Gas Limited (in liq) [2016] FCA 1488, the facts of which are discussed at [18.117], Davies J said the principle purpose of imposing a pecuniary penalty is to act as a specific deterrent to the contravener and as a general deterrent to others. Therefore it was appropriate for a significant pecuniary penalty of $800,000 to be ordered against the company in this case, despite the fact that it was in liquidation. Where there have been multiple contraventions, the “totality principle” applies so that the court reviews the entirety of the conduct to determine whether the proposed penalty is appropriate as a whole. Where there are a number of co-defendants, the penalties imposed should be similar unless there are factors present that justify the imposition of different penalties: ASIC v Healey (No 2) [2011] FCA 1003. In assessing a pecuniary penalty order, it is relevant to consider the consequences of an associated disqualification order. If these consequences are significant, a lesser penalty may be appropriate: ASIC v Adler [2002] NSWSC 171. The courts consider imposing a pecuniary penalty only if a civil penalty disqualification provides an inadequate or inappropriate remedy: Rich v ASIC [2004] HCA 42. Pecuniary penalty orders are therefore made in addition to disqualification orders: Morley v ASIC (No 2) [2011] NSWCA 110.

Disqualification orders

[20.145] An important consequence of a declaration under s 1317E that a person has contravened a civil penalty provision is that ASIC may seek an order disqualifying (banning) that person from being a director or managing a corporation. The meaning of “managing a corporation” is discussed at [12.195] (Lipton).The court may make such an order if it is satisfied that the disqualification is justified and for such period as the court considers appropriate: s 206C(1). The court must be satisfied not only that an order for disqualification is justified, but that the period of disqualification is justified: Gillfillan v ASIC [2012] NSWCA 370. In determining whether a disqualification order is justified, s 206C(2) directs the court to have regard to the person’s conduct in relation to the management, business or property of any corporation and any other matters considered appropriate. The policy behind the disqualification provisions was stated in ASIC v Adler (No 5) [2002] NSWSC 483 as being for the purposes of protecting the public from harmful use of corporations and from use which is contrary to proper commercial standards. A disqualification order aims at personal and general deterrence and may also be imposed for the purpose of punishment: ASIC v Vizard [2005] FCA 1037. There is no fixed duration of the disqualification under s 206C. Disqualification is for a period that the court considers appropriate. In ASIC v Adler [2002] NSWSC 171, Santow J considered the following factors in determining an appropriate period of 507

[20.145] Corporations and Contract Law

disqualification. Longer periods of disqualification are appropriate for contraventions which are of a serious nature, such as where: • dishonesty is involved; • the contraventions are recurring and large financial losses have occurred; and • there is a likelihood of similar conduct in the future which is likely to be harmful to the public. The court will be inclined to impose longer periods of disqualification where a director has previously been subject to a disqualification order: ASIC v Citrofresh International Ltd (No 3) [2010] FCA 292. A mitigating factor is where contrition is shown and there is a likelihood of the disqualified person reforming. Disqualification orders imposed by the courts have ranged from a period of six months (Doyle v ASIC [2005] WASCA 17) to permanent disqualification: ASIC v Elm Financial Services Pty Ltd [2005] NSWSC 1065; ASIC v White [2006] VSC 239; and ASIC v Maxwell [2006] NSWSC 1052. Part 2D.6 of the Corporations Act contains a number of other provisions under which a person may be disqualified. These are discussed at [12.185]–[12.265] (Lipton).

Compensation orders

[20.150] The court has the power to order a person who contravenes a corporation/scheme civil penalty provision to compensate a corporation for the damage that resulted from the contravention: s 1317H. The order must specify the amount of compensation. Applications for corporation/scheme compensation orders may be made by ASIC or the corporation: s 1317J. A company can apply to the court for a compensation order regardless of whether ASIC has obtained a declaration of contravention. The damage suffered by a corporation for purposes of a compensation order includes any profits made by any person resulting from the contravention: s 1317H(2). The purpose of an account of profit order made pursuant to s 1317H(2) is to prevent the unjust enrichment of directors by compelling them to surrender any profits actually made improperly, and nothing beyond that. It is only profits properly attributable to the breach of duty that should be the subject of the compensation order: V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16. The court can order that profits be repaid under s 1317H(2) even in situations where there is no corresponding loss to the corporation: Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. Where a compensation order is made against several defendants, the court has a discretion whether or not to make a compensation order against a particular defendant. However, the court should not differentiate between defendants in the apportionment of compensation as this is not authorised by the legislation and would not be in accord with the principles of joint and several liability applicable to multiple 508

Chapter 20 Remedies and penalties for breach of duty [20.153]

tortfeasors. Such issues should be determined in separate contribution proceedings involving the defendants: ASIC v Adler (No 5) [2002] NSWSC 483. Under s 1317S, a person may be relieved from liability for contravention of a civil penalty provision if the court is satisfied that the person acted honestly and ought fairly to be excused for the contravention. This power of the court operates in conjunction with a similar general power contained in s 1318. These provisions are discussed at [13.7.30] (Lipton).

STATUTORY INJUNCTIONS

[20.152] ASIC has standing under s 1324 to apply to the court for an injunction restraining conduct where a person has engaged in conduct that constitutes a contravention of the Corporations Act, counsels or procures a person to contravene the Act or is in any way knowingly concerned in or party to the contravention. Section 1324 also enables any person whose interests are affected by a contravention of the Corporations Act to apply for an injunction. This is further discussed at [17.305]–[17.315]. ASIC v Macro Realty Developments Pty Ltd [2016] FCA 292

[20.153] Macro and 21st Century marketed an investment proposal whereby an investor agreed to become a sole director and shareholder of a company which would be subject to the sole decision-making of Macro, over which the investor had no real or effective control and which had an obligation to finance the acquisition of properties from Macro and assume legal liability for that finance. ASIC brought an application seeking an injunction restraining Macro from promoting and marketing the investment proposal and entering into any arrangements or dealing with funds in relation to it. ASIC alleged that Macro and 21st Century were counselling and procuring investors to contravene their duties as directors in contravention of s 181(1) by causing them to enter into contracts that fettered their powers and required them to follow directions and fail to retain their discretionary powers. This fiduciary duty is discussed at [16.260]. It was held that Macro and 21st Century urged, prevailed upon and sought to persuade investors to enter into arrangements by which the investors would contravene s 181 and so had the requisite state of mind in terms of counselling or procuring for the purposes of s 1324. In deciding whether to grant an injunction the court should consider whether the injunction will have some utility or will serve some useful purpose contemplated by the Act. The grant of an injunction marks the court’s disapproval of the conduct and operates as a deterrent to others.

509

[20.155] Corporations and Contract Law

CRIMINAL PENALTIES Relationship between civil penalties and criminal penalties

[20.155] Under s 184 a contravention of the civil penalty provisions contained in ss 181 – 183 may constitute a criminal offence if a director or officer was reckless or intentionally dishonest. “Dishonesty is judged objectively by the standard of ordinary decent people”: R v Fodera [2007] NSWSC 1194. Contravention of s 180(1), the statutory duty of care and diligence, cannot give rise to criminal sanctions. Criminal proceedings may be started against a person even though a civil penalty order has been made against that person: s 1317P. The rights of a defendant are protected to some extent by s 1317Q, which makes evidence previously given in civil proceedings inadmissible in a prosecution for a criminal offence involving substantially similar conduct. A court hearing a criminal prosecution cannot make civil penalty orders if the defendant is found not guilty. ASIC must bring fresh civil penalty proceedings if it wishes to pursue civil penalty orders following an unsuccessful criminal prosecution.

Criminal offences

[20.160] There are numerous provisions in the Corporations Act that expressly state that contravention is a criminal offence. For example, under s 184(1) a director or officer commits a criminal offence if they are reckless or intentionally dishonest and fail to exercise their powers in good faith in the best interests of the corporation. Section 1311(1) and (1A) create criminal offences for sections of the Corporations Act that are listed in Sch 3. Under s 1311(1) and (1A) a person is guilty of an offence if they contravene a provision of the Corporations Act that is listed in Sch 3. An example of a provision listed in Sch 3 is s 209(3) which makes it an offence to be dishonestly involved in a contravention of the related party transactions provisions contained in Ch 2E.

Application of the Criminal Code

[20.165] Chapter 2 of the Criminal Code sets out the general principles of criminal responsibility that apply to criminal offences under the Corporations Act. Section 3.1(1) of the Criminal Code specifies that an offence consists of physical elements (defined in ss 4.1 – 4.3) and fault elements (defined in ss 5.1 – 5.6). A physical element of an offence includes conduct or the result of conduct. A fault element for a particular physical element may be intention, knowledge, recklessness or negligence. Section 3.1(2) of the Criminal Code recognises that a law that creates an offence may provide that there is no fault element for one or more physical elements. This is the case with the Corporations Act which contains numerous offences that are characterised as either offences of strict liability or absolute liability. 510

Chapter 20 Remedies and penalties for breach of duty [20.180]

A “strict liability” offence is one that has no fault elements for any of the physical elements: Criminal Code, s 6.1(1)(a). The defence of mistake of fact under s 9.2 is available for strict liability offences: s 6.1(1)(b). A mistake of fact defence arises if at the time of the conduct constituting the physical element, the accused person was under a mistaken but reasonable belief about those facts and had those facts existed, the conduct would not have constituted an offence. An “absolute liability” offence is one that has no fault elements for any of the physical elements and the defence of mistake of fact is unavailable: s 6.2(1).

Consequences of conviction

[20.170] A person who is guilty of an offence under the Corporations Act is punishable on conviction by a penalty not exceeding the penalty applicable to the offence: s 1311(2). If the section that creates the offence is included in the Sch 3 list then the maximum penalty is the penalty mentioned in that Schedule: s 1311(3). If a provision sets out its own penalty, then that is the maximum penalty on conviction: s 1311(4). Where a penalty is not otherwise provided, then the applicable penalty is 5 penalty units ($900): s 1311(5).

Penalty notices

[20.175] Minor offences under the Corporations Act incur an “on the spot” fine under s 1313. ASIC is able to serve a penalty notice if it has reason to believe that a person has committed a prescribed offence. Payment of the penalty and remedying the contravention precludes further criminal proceedings. The prescribed penalty for offences under s 1311(5) is 5 penalty units ($900) for natural persons.

Personal Liability for Corporate Fault Reform Act 2012

[20.180] CAMAC released a report, Personal Liability for Corporate Fault (2006) which reviewed the way in which directors and other people involved in companies may incur personal criminal liability as a consequence of the misconduct of their companies. CAMAC expressed concern about: • provisions that imposed personal liability on directors or officers for the misconduct of the company in situations where the director or officer could not reasonably have influenced or prevented the misconduct; • provisions that imposed personal liability on directors or officers for the misconduct of the company unless the director or officer could make out a defence; and • the fact that directors and officers may be subject to a wide range of statutory provisions with inconsistent standards of responsibility and defences. The report recommended that a principled and consistent approach to personal liability should be adopted. In particular, the committee recommended that: 511

[20.180] Corporations and Contract Law

• individuals should be liable for misconduct only where they were accessories to the misconduct of the company, that is where the director or officer personally assisted or was privy to the misconduct; • directors and officers should not be subjected to a form of liability that a legislature would not be prepared to apply and enforce more generally; and • a more standardised approach to liability should be adopted across Commonwealth, State and Territory jurisdictions. This Report is on the CAMAC website which is linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/. The Personal Liability for Corporate Fault Reform Act 2012 (Cth) implemented some of the reforms proposed in the CAMAC report. The reforms introduced by the 2012 Act were designed to commit the Commonwealth and all States and Territories to establishing a nationally consistent and principles-based approach to the imposition of personal criminal liability on directors for corporate fault. The Act amends a number of provisions across a range of Commonwealth legislation that imposes personal criminal liability for corporate fault, including the Corporations Act. The Explanatory Memorandum to the Personal Liability for Corporate Fault Reform Bill 2012 (Cth) stated that the Act was designed to ensure that the imposition of personal criminal liability on a director for the misconduct of a corporation should be confined to situations where: • there are compelling public policy reasons for doing so (for example, in terms of the potential for significant public harm that might be caused by the particular corporate offending); • liability of the corporation is not likely on its own to sufficiently promote compliance; and • it is reasonable in all the circumstances for the director to be liable.

Protection for whistleblowers

[20.185] The protection and encouragement of whistleblowers who disclose corporate crime or misconduct is seen as an important aspect of detecting and proving criminal conduct. In many cases corporate crime is only discovered because of individuals who disclose it, often at great personal risk. A whistleblower protection regime recognises the critical role played by whistleblowers in the reporting of misconduct and such protections play an important role in improving corporate compliance and promoting a more ethical corporate culture. Sections 1317AA – 1317AE establish a framework designed to encourage officers, employees and others to report suspected breaches of the Corporations Act to ASIC, the company’s auditor or other appropriate senior people within the company such as a director, secretary or senior manager. Whistleblowers who disclose suspected breaches of the legislation by the company, its officers or employees in good faith are protected in a number of ways. For 512

Chapter 20 Remedies and penalties for breach of duty [20.190]

example, a whistleblower cannot be subjected to civil or criminal liability for making the disclosure: s 1317AB(1)(a). Whistleblowers are not, however, protected from liability for illegal conduct in which they have been involved. They have qualified privilege in relation to their disclosures and therefore have no liability for defamation: s 1317AB(2). Whistleblowers are also protected from being victimised because of their disclosures: s 1317AC. This whistleblower regime has been the subject of several inquiries which found a number of shortcomings and made various recommendations aimed at improving the existing laws. In particular it has been found that there are significant gaps in the statutory protections which leave whistleblowers vulnerable to personal or professional reprisals. As a result, these laws have been rarely used. The Treasury Laws Amendment (Whistleblowers) Bill 2017 was released in October 2017 and proposes the creation of a single whistleblower protection regime in the Corporations Act. It proposes a number of reforms including: • expanding the protections to a broader range of people; • expanding the types of disclosure that will be protected; • allowing certain disclosures to members of Parliament and the media; • imposing stricter confidentiality obligations regarding a whistleblower’s identity; • facilitating whistleblowers’ compensation claims for victimisation; and • requiring all large companies to have a whistleblower policy in place. The Treasury Laws Amendment (Whistleblowers) Bill 2017 Exposure Draft and Explanatory Materials are available on the Treasury’s website and are linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/.

Reform proposals

[20.190] The Financial System Inquiry (2014) recommended that ASIC be provided with stronger regulatory tools and that civil and criminal penalties should be substantially increased to deter misconduct. The government established the ASIC Enforcement Review which issued a Positions Paper Strengthening Penalties for Corporate and Financial Sector Misconduct in October 2017. This paper sought comment on a number of positions including: • increasing maximum imprisonment and pecuniary penalties for criminal offences; • establishing a formula to determine maximum pecuniary penalties for criminal offences based upon the maximum imprisonment term; and • removal of imprisonment as a possible sanction for strict and absolute liability offences.

513

INDEX A Acceptance communication of, [4.190], [4.330] by offeree, [4.200] silence, [4.220], [4.230] stipulation of method, [4.290]-[4.320] unauthorised person, by, [4.210] waiver of right to, [4.240] conditional, [4.90], [4.100] categories of contract, [4.110] finality of agreement, [4.120]-[4.180] conduct constituting, [4.250], [4.280] counter-offer distinguished, [4.80] cross-offer distinguished, [4.20] deceased’s estate, [4.40] definition, [4.10] electronic means, [4.490] email, by, [4.570] essential contractual element, [2.50] fax, by, [4.570], [4.580] knowledge of offer required, [3.280], [3.290], [4.30] mere knowledge, [3.300], [3.310] language used, [3.30] manner of, [4.190]-[4.490] not stipulated, [4.330] stipulated by offeror, [4.280]-[4.320] mere inquiries, [3.350], [3.360] misdirected letters, [4.560] more than one person, by, [4.60], [4.70] motive immaterial, [4.30] non-offeree, by, [4.40], [4.50] post, by, [4.290], [4.340] postal rule, [4.340]-[4.360], [4.370] abnormal delay, [4.440]-[4.450] contemplation of parties, [4.370]-[4.390] deemed time of acceptance, [4.440], [4.450] effect of, [4.340], [4.440], [4.450] inconvenience or absurdity, [4.390] limits of, [4.470], [4.490] misdirected letters, [4.460] negating effect of, [4.400]-[4.430] protracted, contentious dealings, [4.370], [4.380] revocation of posted acceptance, [4.510] response to offer, must be, [4.30] revocation, [4.500] posted acceptance, [4.510] reward offers, [4.60] silence, by, [4.220], [4.230] subject to formal contract, [4.90], [4.100] categories of agreements, [4.110] finality of agreement, [4.120]-[4.180]

principles determining finality, [4.180] telegram, by, [4.470] telephone, by, [4.470] telex, by, [4.470] time limit, [3.550] express stipulation, [3.560] implied, [3.570], [3.580] reasonable time, definition, [3.570], [3.580], [3.610] termination of offer on lapse of, [3.400], [3.550] unilateral contracts, [4.240] waiver of right to communication, [4.240] what may be accepted, [4.80] who is capable of, [4.30] Acceptor communication of offer to, [3.260], [3.270], [4.30] motive immaterial, [3.280], [4.30] who may be, [4.30]-[4.70] Account of profits breach of duty by director, [20.50] Actual breach — see Breach Administrative tribunals — see Tribunals Advertisement invitation to treat, [3.100], [3.110] offer, whether, [3.100], [3.110], [3.160] offer to the world at large, [3.160] puff, [3.220]–[3.250] Affirmation of contract misrepresentation, after, [8.670] Agency payment of consideration by agent, [6.50], [6.60] specific performance and, [10.650] Agent agency relationship, nature of, [14.130] assumptions in relation to dealings, [14.215] constitution, compliance with, [14.220]-[14.230] customary authority, [14.310] document duly executed, [14.260]-[14.300] fraud or forgery, effect of, [14.370] incorrectness, knowledge or suspicion of, [14.360], [14.365] limitations, [14.355]-[14.365] person held out as agent, [14.240]

515

Corporations and Contract Law

Agent — cont proper performance of duties, [14.245]-[14.255] warranting documents genuine, [14.305] authority, [14.10], [14.130], [14.145] actual, [14.135], [14.190]-[14.195] apparent, [14.140], [14.200]-[14.220] constitution limiting, [14.160] constructive notice, [14.160] contract with company through, [14.05], [14.80], [14.130] assumptions of regularity, [14.215] authority of agent, [14.10], [14.130], [14.145] actual, [14.135], [14.180]-[14.185] apparent, [14.140], [14.190]-[14.210] constructive notice, doctrine of, [14.150] Northside Developments case, [14.10], [14.170], [14.175] Turquand’s case, rule in, [14.90], [14.155]-[14.165] exceptions, [14.170]-[14.175] person held out as, [14.240] subsidiary as, [11.205]-[11.215] Agreement collateral contract, [7.420]-[7.430] contractual force, intention of, [5.20] definition, [2.50] subject to contract, [4.90], [4.100] finality of agreement, [4.120]-[4.180] whether constitutes contract, [5.10] Ambiguity parol evidence rule, [7.50], [7.190]-[7.210]

proprietary company, [15.90] public company, [15.50] Auditors appointment, companies limited by guarantee, exemption for, [12.20] company, by, [12.50] registration Australian Business Number (ABN) common seal, on, [11.15] Australian Company Number (ACN) common seal, on, [11.15] Australian Consumer Law collateral contracts, and, [7.540] damages for misleading conduct, [8.740] disclaimers, and, [8.200]-[8.220] misleading conduct, [8.750] silence and, [8.190] unconscionable conduct, [8.750] unfair contract terms, [8.750] unfair practices, [8.750] Australian Securities and Investments Commission Act 2011, [8.760] misleading conduct, [8.760] Australian Securities Exchange (ASX) Corporate Governance Council, [15.30] corporate governance principles, [15.30] listed entities, constitution, [13.50] disclosure of interests by directors, [17.375]

Annual general meeting (AGM) proprietary company, [15.45] public company, [15.45]

B

Anti-competitive behaviour, [8.750]

Battle of the forms, [3.380], [3.390]

Articles of association — see Constitution

Beneficiary best interests of, trustee’s duty to act in, [16.40]

Appellate courts High Court, [1.320] jurisdiction, [1.280] role of, [1.60] Supreme Courts, [1.310] ASX — see Australian Securities Exchange (ASX) Audit company obligations, proprietary company, [15.50] public company, [15.50]

516

Bilateral contracts, [2.20], [2.40] consideration, [6.70] Bill definition, [1.190] Board of directors — see also Directors chair, customary authority, [14.335] standard of care, [18.55] company organ, as, [15.05]

Index

Board of directors — cont corporate governance, [15.25], [15.30] — see also Corporate governance delegates, responsibility for actions of, [18.200] functions, [15.25], [15.30] management power, [15.35] meetings, attendance, [18.155] powers, [15.35] delegation of, [18.200] roles and functions, [15.30] shareholders not to override decisions of, [15.40]-[15.50]

contravention of Corporations Act, permitting or authorising, [16.245][16.250], [17.155], [18.140]-[18.150] corporate collapses, [16.235] corporate veil, lifting, [11.135]-[11.140] corporate groups, [11.165] criminal liability, [16.255] criminal penalties, [20.170] reform proposals, [20.180], [20.190] damages, [20.35] good faith, duty of, [16.05]-[16.06], [16.235]-[16.242] consequences of contravention, [16.255] HIH Royal Commission, [16.235] improper purposes, [16.145], [16.235] injunction, [20.80]-[20.85] insider trading — see Insider trading insolvent trading — see Insolvent trading liability, [20.05] rescission of contract, [20.65]-[20.75] return of property, [20.90]-[20.115]

Body corporate artificial legal person, as, [11.15] corporation, as, [11.15], [15.05] meaning, [15.05] powers, [11.15] strata title legislation, under, [15.05] types, [15.05] Breach conditions, [7.580]-[7.590], [7.620]-[7.650] continuation of contract, [10.30] damages — — see Damages deposits, [10.500]-[10.530] relief against forfeiture, [10.510]-[10.530] discharge through, treating as discharged, [10.20] election to terminate, [10.20] exemption clauses and — see Exemption clauses innocent party’s election on, [10.20] intermediate or innominate term, of, [7.620]-[7.650] liquidated damages — see Damages penalties, [10.410]-[10.490] quantum meruit, [10.20] remedies, [10.10] damages — see Damages nature of breach, [10.10] restitution — see Restitution specific performance — see Specific performance warranty, of, [7.600]-[7.610], [7.620] Breach of directors’ duties — see also Directors’ duties account of profits, [20.50]-[20.60] care and diligence, duty of, [18.205] civil penalty provisions, [20.120]-[20.130] company’s remedies, [20.10]-[20.30] compensation, [20.35]-[20.45] conflict of interests — see Conflict of interests consequences, [16.255], [20.05] constructive trust, [20.90]-[20.115]

Breach of duty director — see Breach of directors’ duties promoter constructive trust order, [6.55] liability under Corporations Act, [6.60] remedies, [6.45]-[6.60] rescission of contract, [6.50] secret profit, recovery of, [6.55] Bribes directors taking, [17.175]-[17.180] Business judgment rule, [18.05], [18.160]-[18.170] Business or commercial agreements ex gratia agreements, [5.390] honour clauses, [5.330]-[5.360] intention to be bound, [5.40], [5.320] “old” presumption, [5.270], [5.320] onus of proof, [5.320] practical joke, [5.300], [5.310] rebutting of presumption, [5.280]-[5.310] interpretation, [7.250] social or domestic agreements distinguished, [5.40]

C Capital raising — see Fundraising reduction — see Share capital reduction share capital — see Share capital

517

Corporations and Contract Law

Caveat emptor, [8.60], [8.100] Certificate registration, of, [11.10] share certificate — see Share certificate Chair board of directors, customary authority, [14.335] standard of care, [18.55] Change of circumstances frustration of contract, [9.160]-[9.420] termination of offer, [3.400] Charges officers, in favour of corporate veil, lifting, [11.85] Chief financial officer standard of care, [18.85]-[18.90] Civil law common law, and, [1.50] Civil penalty provisions contravention of, [20.140] compensation orders, [20.60], [20.150], [19.340] declaration of, [20.120], [20.140], [20.135] disqualification orders, [20.145] pecuniary penalty orders, [20.120], [20.140] criminal penalties, relationship to, [20.155] declaration of contravention, [20.120], [20.140], [20.135] financial services, [20.140] pecuniary penalty orders, [20.120], [20.140] types, [20.120] what are, [20.120] Collateral contracts agreement, proof of, [7.420]-[7.430] breach, [7.530] damages, [7.530] Competition and Consumer Act 2010 (Cth), effect, [7.540]-[7.560] consideration, [7.440]-[7.470] creation of, [7.390]-[7.400], [8.10] definition, [7.390]-[7.400] enforceability, [7.390]-[7.400], [7.530] intention, [7.480]-[7.490] main contract, consistency with, [7.500][7.520] misrepresentation and, [8.10] parol evidence rule, [7.390] promise, requirement for, [7.420]-[7.430] promissory estoppel, [7.520] proving existence of, [7.410]-[7.520]

518

relief under Competition and Consumer Act 2010 (Cth), [7.540]-[7.560] three party, [7.440]-[7.470] consideration for, [7.440]-[7.470] validity and binding nature, [7.390] Commercial agreements — see Business or commercial agreements Common law — see also Precedent characteristics, [1.60] civil law, and, [1.50] development, [1.4] equity distinguished, [1.70], [1.90] fusion with equity, [1.110] modern meaning, [1.50] national and international context, [1.50] Norman Compilation, [1.40] received law, [1.30] Common seal ACN or ABN on, [11.15] contract by company, [14.90] execution of document, [11.15], [14.100][14.110] without common seal, [14.115] requirement to have, [11.15] Companies — see Corporations Company agents — see Agent body corporate — see Body corporate characteristics, [11.05] charges — see Charges classification, [12.05] common seal — see Common seal constitution — see Constitution contracts with — see Contracts with company corporate veil, lifting — see Corporate veil, lifting criminal liability — see Criminal liability definition, [11.05] deregistration, [11.15] directing mind and will of, [14.10], [14.15], [14.25] aggregated knowledge, [14.80]-[14.85] “brains” of company, [14.30] change in control, [14.60]-[14.65] corporate veil, lifting, [11.145] directors, [14.35]-[14.45] misleading and deceptive representations, [14.36] more than one person, [14.70]-[14.75] “organic theory”, [14.05], [14.10] secretary, [14.50]-[14.55] senior management, [14.35]-[14.45] financial reports — see Annual financial reports formation, [11.70]

Index

Company — cont group — see Corporate group guarantee, limited by — see Company limited by guarantee holding — see Holding company individuals, acting through, [14.05] legal capacity, [11.15], [13.65] objects clause of constitution, formerly limited by, [13.65] s 124 Corporations Act, [13.70] ultra vires doctrine, abolition of, [13.75] liability of members, [11.20] classification according to, [12.10] company limited by guarantee, [12.20] company limited by shares, [12.15] company limited by shares and guarantee, [12.35] unlimited company, [12.25] limited liability, [11.20] board of directors — see Board of directors impact on creditors, [11.20], [11.30] reasons for, [11.20] management — see Management of company name — see Name no liability — see No liability company one person company — see Single director/shareholder company “organic theory”, [14.05], [14.10] ownership, management, separation from, [15.55] powers, [11.15] property, power to own, [11.15] proprietary — see Proprietary company public — see Public company raising capital, [11.170] — see also Fundraising registered office — see Registered office registers — see Register registration — see Registration of company separate legal entity, [11.05], [11.10], [11.15], [11.35]-[11.65, [14.05] lifting the corporate veil — see Corporate veil, lifting Salomon’s case, [11.35], [11.40]-[11.45] shares, limited by — see Company limited by shares shares and guarantee, limited by, [12.35] state of mind, [14.05], [14.10] suing and being sued, [11.15] types, [12.10] unlimited — see Unlimited company winding up — see Winding up Company charge — see Charges Company funds director re-election, use to promote, [16.195]

Company limited by guarantee auditor appointment exemption, [12.20] categories, [12.20] constitution, [13.50] definition, [12.20] liability of members, [12.20] members, liability, [12.20] name, omission of “Limited”, [12.20] constitution requirements, [13.50] replaceable rules, [13.25] winding up, [12.20] Company limited by shares definition, [12.15] liability of members, [12.15] members, — see also Members liability, [12.15] name, [12.15] winding up, [12.15] Compensation breach of civil penalty provisions, [20.150] breach of duty by director, [20.35]-[20.45] insolvent trading, [19.150] amount of, [19.155] persons receiving benefit of, [19.160] Competition and Consumer Act 2010 (Cth) — — see also Australian Consumer Law consumer protection, [8.750] disclaimers, and, [8.200]-[8.220] effect on collateral contracts, [7.540]-[7.560] implied terms under, [7.720] Conditions — — see also Warranties breach, effect of, [7.580]-[7.590], [7.620][7.650], [10.10] definition, [7.580] failure of, effect on offer, [3.400] intermediate or innominate term distinguished, [7.620]-[7.650] subsequent, [7.670], term of contract, as, [7.580]-[7.590] terms labelled as, [7.660] warranty distinguished, [7.570] Conduct acceptance by, [4.250]-[4.280] agreement inferred from, [4.250]-[4.280] Confidential information misuse by directors, [17.270]-[17.290], [17.300]-[17.315] what constitutes, [17.270] Conflict of interests bribes, [17.175]-[17.180]

519

Corporations and Contract Law

Conflict of interests — cont competing with company, [17.345][17.370] confidential information, misuse of, [17.270]-[17.290] “information”, meaning, [17.300]-[17.315] corporate opportunity, taking up, [17.200] company need not suffer loss, [17.260]-[17.265] consent of company, [17.235]-[17.245] disclosure of information to shareholders, onus of proving, [17.250]-[17.255] diversion of contract, [17.205]-[17.230] directors’ duty to avoid, [17.05] strict nature of duty, [17.15] disclosure of interests — see Disclosure financial benefit — see Financial benefit improper use of position, [17.110] best interests defence, [17.125] gain advantage or cause detriment, to, [17.160]-[17.180] HIH case, [17.130] knowledge and consciousness of actions, [17.120] manipulation of share prices, [17.135] meaning of improper, [17.115]-[17.155] phoenix companies, [17.140]-[17.150] risks outweigh benefits, where, [17.155] information, improper use of, [17.295] confidential information, [17.270]-[17.290], [17.300]-[17.315] fiduciary and statutory duties, [17.320]-[17.325] insolvency of company, [17.330]-[17.340] meaning of information, [17.300]-[17.315] personal profits from acting as director, [17.95]-[17.105] self-interested transactions with company by director, breach of fiduciary duty, [17.20]-[17.35] disclosure, [17.20]-[17.35], [17.375]-[17.415] financial benefits — see Financial benefit material interest, of, [17.35] vote, entitlement to, [17.85], [17.90] undisclosed benefits, [17.185] voting by interested director proprietary company, [17.90] public company, [17.85] Consideration adequacy, [6.150] benefit to promisor, [6.100]-[6.120] collateral contracts, [7.440]-[7.470] definition, [6.10] detriment to promisee, [6.100]-[6.120]

520

essential contractual element, [2.50] executed, [6.130] executory, [6.130] failure of, frustration, [9.570]-[9.610] features, [6.40]-[6.210] forbearance or acts, [6.210] past consideration, [6.130] forbearance to sue, [6.210] form of, [6.10] frustration, effect of, [9.570]-[9.610] good, what constitutes, [6.130]-[6.140] gratuitous promise distinguished, [6.10] motive, distinguished from, [6.160]-[6.200] past, [6.130]-[6.140] price paid for promise, [6.40] promisee detriment to, [6.100]-[6.120] moving from, [6.50], [6.60] promisor benefit to, [6.100]-[6.120] need not flow to, [6.80], [6.90] sufficiency, [6.150] value in eyes of the law, [6.150] Constitution adoption of, [13.45] alteration, [13.175] limits on right, [13.180] special resolution, [13.80], [13.175] statutory requirements, [13.175] articles of association, [13.40] assumption of compliance with, [14.220][14.230] authority of officers or agents, limiting, [14.150] constructive notice, [14.150] breach of, [13.75] remedies, [13.80], [13.170] business document, interpretation as, [13.55] choice to be governed by, [13.40] company limited by guarantee, [13.50] contents, [13.50] contractual effect, [13.80] company and directors, between, [13.145]-[13.165] company and members, between, [13.85], [13.90] provisions outside capacity as members, [13.100]-[13.110] company and secretary, between, [13.145] members, between, [13.125]-[13.140] non-members, [13.115]-[13.120] remedies, [13.80], [13.170] corporations power, [8.780] disclosure of interest requirements, [17.375], [17.380] internal management of company, [13.05], [13.40] interpretation, [13.55]

Index

Constitution — cont lodgment with ASIC, [13.45] members contract between, [13.125]-[13.140] contract between company and, [13.85] enforcement by or against, [13.85]-[13.100] provisions outside capacity as members, [13.100]-[13.110] pre-emptive rights, [13.125] memorandum of association, [13.40] no liability company, [13.50] objects clause, [13.60], [13.75] legal capacity of company formerly limited by, [13.65] one document, as, [13.40] pre-1998 companies, [13.40] proprietary company, [12.65] single director/shareholder, [13.20] public company, [12.65], [13.45] lodgment with ASIC, [13.45], [14.150] single director/shareholder company, [13.20] statutory requirements, [13.45] Constructive notice doctrine of, [13.75], [14.150] Constructive trust breach of duty, where director, [20.90]-[20.115] Barnes v Addy test, [20.105], [20.110] “knowledge”, meaning, [20.115] Contra proferentem rule exemption clauses, [7.1020]-[7.1040] limitation and exclusion clauses compared, [7.1020]-[7.1040] Contract — — see also Electronic contracts bilateral, [2.20], [2.40] breach — — see Breach collateral — — see Collateral contracts definition, [2.10] discharge of — — see Discharge divisible, [15.70] elements of, [2.10], [2.40] entire, definition, [15.70] event foreseen, [9.510] freedom of, [7.1090]-[7.1090] exemption clauses and, [7.1090]-[7.1090] frustration of — — see Frustration illegal — — see Illegality performance of — — see Performance privity of — — see Privity of contract service, of — — see Contracts of service services, for — — see Contracts for services

severable, [15.70] standard form — — see Standard form contracts unilateral, [2.20], [2.30] void — — see Void contracts Contracts for services specific performance, [10.650] Contracts of service frustration, [9.250]-[9.260], [9.310]-[9.320] specific performance, [10.650] Contracts with company agent, through, [14.05], [14.90], [14.130] authority of agent, [14.10], [14.130], [14.145] actual, [14.135], [14.180]-[14.185] apparent, [14.140], [14.190]-[14.210] constructive notice, doctrine of, [14.150] Northside Developments case, [14.10], [14.170], [14.175] Turquand’s case, rule in, [14.90], [14.155]-[14.165] exceptions, [14.170]-[14.175] assumptions of regularity, [14.245] agent or officer, person held out as, [14.270] constitution, compliance with, [14.250]-[14.260] customary authority of officers, [14.310]-[14.350] document duly executed, [14.265]-[14.300] fraud or forgery, effect of, [14.370] incorrectness, knowledge or suspicion of, [14.360], [14.365] limitations, [14.355]-[14.365] officer, person held out as, [14.240] officer, person named in public documents as, [14.235] proper performance of duties, [14.245]-[14.255] warranting documents genuine, [14.305] common seal, [11.15], [14.90] execution of documents, [14.95] assumption of due execution, [14.125], [14.265]-[14.300] common seal, [11.15], [14.90] single director/shareholder company, by, [14.120] without common seal, [14.115] Northside Developments case, [14.10], [14.170], [14.175] Turquand’s case, rule in, [14.90], [14.155][14.165] exceptions, [14.170]-[14.175]

521

Corporations and Contract Law

Contractual intention — — see Intention Corporate governance ASX principles, [15.30] board of directors, [15.25], [15.30] roles and functions, [15.30] Corporate group best interests of whole group, acting in, [11.170], [11.175] consolidated financial statements, [11.160] corporate veil, lifting, [11.150] directors’ duties, [16.90]-[16.92] distinguishing separate entities, [11.180] holding company — see Holding company insolvent trading by subsidiary, [11.155] law reform proposals, [11.200] liquidation, pooling in, [11.180] Salomon’s case, application of, [11.45] subsidiary — see Subsidiary taxation consolidation, [11.165] tort liability, [11.80] Corporate opportunity director taking up, [17.200] company need not suffer loss, [17.260]-[17.265] conflict of interests, [17.200] consent of company, [17.235]-[17.245] diversion of contract, [17.205]-[17.230]

statute, by, [11.70], [11.75]-[11.95] taxation legislation, [11.95] corporate groups, [11.165] uncommercial transactions, [11.80] “veil of incorporation”, meaning, [11.70] Corporation — see also Company definition, [12.05] Royal Charter, [12.05] Corporations Act 2001 permitting or authorising contravention of, [16.245]-[16.250], [17.155], [18.140][18.150] Small Business Guide, [12.40] Counterclaim substantial performance cases, [9.100] Counter-offer acceptance distinguished, [3.330], [3.340], [4.80] battle of the forms, [3.380], [3.390] definition, [3.330] effect, [3.330], [3.340], [3.530] mere inquiry distinguished, [3.370] offeree, by, [3.330] precedence of terms, [3.380], [3.390] rejection of offer, as, [3.330], [3.530]

Corporate social responsibility directors’ duties, [16.135]

County Court, [1.300]

Corporate veil, lifting attributing mind and will of company, [11.145] avoidance of legal obligations, [11.115][11.130] common law, [11.100]-[11.145] company officer charges, [11.85] corporate groups, [11.150] benefit of whole group, [11.170]-[11.175] consolidated financial statements, [11.160] insolvent trading by subsidiary, [11.155] law reform proposals, [11.200] liquidation, pooling in, [11.180] subsidiaries as agents or partners, [11.185]-[11.195] taxation consolidation, [11.165] director’s breach of duty corporate groups, [11.170] involvement in, [11.135]-[11.140] financial assistance, [11.90] fraud, [11.105] insolvent trading, [11.75] subsidiary, by, [11.155] sham companies, [11.70], [11.100], [11.115], [11.120], [11.125]

Courts adjudication, steps in, [1.270] contract disputes, [2.10] terms indicating intention, [7.10], [7.230]-[7.260] administrative tribunals and, [1.170], [1.370] appellate jurisdiction, [1.280] High Court, [1.320] Supreme Courts, [1.310] County, [1.300] District, [1.300] exemption clauses, attitude towards, [7.980] Family, [1.340] Federal, [1.340] Federal Circuit Court, [1.340] hierarchies, [1.280] High, [1.320] Local, [1.290] Magistrates, [1.290] original jurisdiction, [1.280] Privy Council, [1.350] role, [1.270] specialist, [1.330] Supreme, [1.310] tribunals compared, [1.170], [1.370]

522

Index

Creditors deed of company arrangement — see Deed of company arrangement defrauding, [19.185] directors’ duty not to prejudice interests of, [16.130], [19.05] insolvent company directors prejudicing interests of creditors, [19.05] limited liability of company, impact of, [11.20] contract creditors, [11.30] finance creditors, [11.30] trade creditors, [11.30] meeting of — see Creditors’ meeting receiver, appointment of — see Receiver Criminal liability directors, of circumstances for imposing, [20.180], [20.190] law reform, [20.180], [20.190] Criminal offences absolute liability offences, [20.165] breach of Corporations Act, [20.160] conviction, consequences of, [20.170] Criminal Code, [20.165] criminal liability of company, [14.05], [14.36], [14.40], [14.45] directors’ duties, breach of, [16.255] fault elements, [20.165] mens rea, [14.05], [20.160] misleading and deceptive representations, [14.36] strict liability offences, [20.165] Criminal penalties civil penalties, relationship to, [20.155] Corporations Act, contravention of, [20.170] penalty notices, [20.175] reform proposals, [20.180], [20.190] whistleblower protection, [20.185] Cross-offer acceptance distinguished, [4.20] Crowd-sourced equity funding (CSF) fundraising, [12.80] Custom — — see Trade usage and custom

D Damages actual loss, [10.60], [10.200] agreed amount, [10.390]-[10.400] breach of duty by director, [20.35]

common law, and, [1.70] compensatory only, [10.50], [10.200][10.340] general rule, [10.200]-[10.210] condition, breach of, [7.580]-[7.590] contemplated consequences, [10.190] continuation of contract, [10.30] debt and, [10.350], [10.400] deceit, for, [8.570]-[8.580] deposits and, [10.500]-[10.530] disappointment or distress, for, [10.300][10.340] duty to mitigate, [10.350]-[10.370] election to sue for, [10.20] exemplary damages, [10.60] expectation damages, [10.210] foreseeability of loss or damage, [10.150][10.180] fraudulent misrepresentation, for, [8.410], [8.430] injured feelings, [10.380]-[10.400] intermediate or innominate term, breach of, [7.450]-[7.510] limits, [10.380]-[10.570] liquidated, [10.390]-[10.460] action to recover, [10.400] penalty distinguished, [10.410]-[10.460] loss of profits, [10.440] lost opportunity, [8.400]-[8.410] misleading or deceptive conduct, legislation, [8.600] mitigation of, [10.350]-[10.380] duty of plaintiff, [10.350]-[10.360] limitations on duty, [10.370] onus of proof, [10.380] natural consequence of breach, [10.150][10.180] negligent misrepresentation, for, [8.440], [8.450] nominal, [10.80]-[10.100] object of, [10.50] penalties, [10.410]-[10.460] liquidated damages distinguished, [10.410]-[10.460] penalty clause, [10.410], [10.420] rules getting around, [10.480]-[10.490] pre-agreed amount, [10.390]-[10.400] principles underlying award of, [10.110] remoteness, [10.120]-[10.190] contemplated consequences, [10.190] foreseeability, [10.150]-[10.180] underlying concept, [10.120]-[10.140] rules for awarding, [10.110] specific performance and, [10.560]-[10.580] substantial loss, [10.80] tort, in, [10.50] deceit, [8.570]-[8.580] negligent misrepresentation, [8.610] unliquidated, [10.390] election to sue for, [10.20] usual remedy for breach, [10.40] warranty, breach of, [7.600]-[7.610]

523

Corporations and Contract Law

De minimis rule, [9.80]-[9.90] Death acceptance by deceased’s estate, [4.40] frustration of contract, [9.250] termination of offer, [3.400] Debt/s “incurring a debt” definition, [19.20] timing, [19.25]-[19.45] insolvent company incurring — Insolvent trading liquidated damages as, [10.400] priority — see Priority of debts winding up, in — see Winding up

see

Deceit damages for, [8.570]-[8.580] Deed consideration, [2.50], [6.30] enforceability, [6.30] Delay frustration and, [9.290]-[9.330], [9.560] rescission, effect on right of misrepresentation, [8.680]-[8.710] Deposits forfeiture on breach, [10.500] nature of, [10.500] relief against forfeiture, [10.510]-[10.530] Destruction of subject matter frustration of contract, [9.250] Detriment consideration as, [6.100]-[6.120] Directors — see also Board of directors; Officers assumptions as to authority — see Agent board of — see Board of directors chair of directors — see Chair chief financial officer standard of care, [18.85]-[18.90] conflict of interests — see Conflict of interests constitution, contractual effect of, [13.145][13.165] remedies for breach, [13.170] separate contract of service, where, [13.150] contract, authority to make — see Contracts with company contract of service, [13.150] customary authority, [14.325], [14.330] de facto, [15.10], [15.15] definition, [15.10]

524

delegates, responsibility for actions of, [18.200] disqualification — see Disqualification of directors duties — see Directors’ duties executive, standard of care, [18.65] financial benefit to — see Financial benefit initial directors, [15.05] insider trading — see Insider trading insolvent companies, of — see Insolvent company insolvent trading — see Insolvent trading management power, [15.35] improper purpose, used for, [16.205]-[16.215] managing director, customary authority, [14.330] standard of care, [18.65] breach, [18.75]-[18.80] meetings — see Board of directors; Meetings nominee directors, duty of good faith, [16.55]-[16.85] non-executive, duty of care, skill and diligence, [18.35]-[18.55] standard of care, [18.35] number of, [15.05] oppressive or unfair conduct — see Oppressive or unfair conduct personal profits from acting as, [17.95][17.105] powers, delegation of, [18.200] proprietary company, [12.70] public company, [12.70] re-election, use of company funds to promote, [16.195] reliance on others, [18.175]-[18.190] remuneration, replaceable rules, contractual effect of, [13.145]-[13.165] remedies for breach, [13.170] separate contract of service, where, [13.150] safe harbour from civil liability, [19.140] shadow directors, [15.10], [15.20] trustee company, of best interests of beneficiaries, duty to act in, [16.40] Directors’ duties assumption as to proper performance of, [14.245]-[14.255] breach of — see Breach of directors’ duties care, skill and diligence, [18.05] attendance at board meetings, [18.155] attitudes and expectations, changes in, [18.10] breach, [18.120]-[18.150]

Index

Directors’ duties — cont consequences of, [18.205] business judgment rule, [18.05], [18.160]-[18.170] chair, [18.55] corporation’s circumstances, [18.20]-[18.25] delegates, responsibility for actions of, [18.200] director’s office and responsibilities, [18.30] multiple positions occupied simultaneously, [18.30] equitable duty of care, [18.15] executive directors and officers, [18.65]-[18.97] negligence, tort of, [18.15] non-executive directors, [18.35]-[18.55] reasonable person standard, [18.15] reliance on others, [18.175]-[18.190] standards of, [18.10], [18.15] conflict of interests, avoiding — see Conflict of interests delegates, responsibility for actions of, [18.200] disclosure of interests, [17.375] ASX, to, [17.415] common law, under, [17.385]-[17.405] constitution, under, [17.380] Corporations Act, under, [17.410], [17.415] other directors, to, [17.410] replaceable rules, under, [17.380] discretion, duty to retain, [16.260] financial affairs of company, familiarity and understanding of, [18.100]-[18.115] good faith in best interests of company, acting in, [16.05] beneficiaries of trust, [16.40] “best interests of company”, meaning, [16.10] breach, [16.05], [16.235]-[16.242] consequences of contravention, [16.255] company groups, [16.90]-[16.105] creditors’ interests, [16.130] criminal liability for breach, [16.255] different classes of shareholders, [16.50] employees’ interests, [16.115]-[16.125] individual shareholders, [16.15]-[16.35] nominee directors, [16.55]-[16.85] present and future shareholders, [16.10] social responsibility, [16.135] statutory duty, [16.235] subjective or objective nature, [16.06] insolvent trading — see Insolvent trading nominee directors, [16.55]-[16.85] company groups, [16.90]-[16.105] proper purposes, exercising powers for, [16.145] benefit of others, [16.220] breach of, [16.145], [16.235]-[16.242] criminal liability for breach, [16.255]

hostile takeovers, defensive measures for, [16.190]-[16.200] management powers, [16.205]-[16.215] re-election, use of company funds to promote, [16.195] share issues, [16.150]-[16.170] statutory duty, [16.235] transfer of shares, refusal to register, [16.230] safeguarding company’s interests, [18.120][18.135] Disability frustration of contract, 9.250] Discharge breach — see Breach definition, [9.10] frustration — see Frustration means of, [9.10] performance, by, [9.10]-[9.150] basis of, [9.20] de minimis rule, [9.80]-[9.90] exact performance requirement, [9.30] exceptions, [9.60]-[9.150] injustice, potential for, [9.40]-[9.50] obstruction of, [9.150] partial performance, [9.140] severable contracts, [9.70] substantial performance, [9.100]-[9.130] Disclaimers misrepresentation and, [8.200]-[8.220] Disclosing entities annual financial report, [15.130] continuous disclosure, listed disclosing entities, [15.140]-[15.144] Disclosure directors’ interests, [17.375] ASX, to, [17.415] common law, under, [17.385]-[17.405] constitution, under, [17.380] Corporations Act, under, [17.410], [17.415] other directors, to, [17.410] replaceable rules, under, [17.380] financial services — see Financial services Discretionary trust company as trustee, [11.25] Disqualification of directors civil penalty provisions, contravention of, [20.145]

525

Corporations and Contract Law

District Court, [1.300] Divisible contracts — see Severable contracts Documents assumptions in dealing with company due execution, [14.125], [14.265]-[14.300] warranting as genuine, [14.305] battle of the forms, [3.380], [3.390] execution of, [14.105] assumption of due execution, [14.125], [14.265]-[14.300] common seal, [11.15], [14.900] single director/shareholder company, by, [14.120] without common seal, [14.115] mistake as to nature of, exclusion clause, effect, [7.880]-[7.910] parol evidence rule, [7.20]-[7.210] signature, [7.780]-[7.850] standard form — see Standard form contracts Domestic or social agreements business agreements distinguished, [5.40] categories of agreements, [5.50] enforceability, [5.90], [5.100] traditional presumption as to intention, [5.40], [5.50] effect of former presumption, [5.260] family agreement, [5.90], [5.100], [5.210]-[5.230] husband and wife agreement, [5.60]-[5.80], [5.170]-[5.200] onus of proof, [5.260] rebutting, [5.170]-[5.240] social agreements, [5.110], [5.120], [5.240]-[5.250] voluntary associations, [5.130], [5.140], [5.150] Duties of directors — see Directors’ duties

E Election rescission for misrepresentation fraudulent, [8.550], [8.600] innocent, [8.640] negligent, [8.620] Employees directors’ duty of good faith, [16.115][16.125] entitlements, protection of, [19.180]

526

limited liability of company, impact of, [11.30] Employment contract — see Contracts of service Enemy contracts with, frustration, [9.340] illegality, [9.340] Entire agreement clause, [7.40] implied terms, and, [7.40], [7.770] parol evidence rule, [7.40] Entire contracts definition, [9.70] divisible contracts compared, [9.70] exact performance requirement, [9.70] Equity — see also Precedent; Rescission; Specific performance common law distinguished, [1.70], [1.90] consideration, and, [6.30] development, [1.80], [1.100] discretionary remedies, [1.90] fusion with common law, [1.110] maxims, [1.90], [6.30] origins, [1.70] received law, [1.30] Equity capital — see Share capital Estoppel — see Promissory estoppel Evidence parol evidence rule, [7.20]-[7.210] rectification, required for, [7.20] trade usage and custom, of, [7.100]-[7.120], [7.690]-[7.710] Exclusion clauses — see Exemption clauses Executive directors standard of care, [18.65] Exemption clauses Competition and Consumer Act 2010 (Cth), [8.200]-[8.220] construction coverage of breach as matter of, [7.1120]-[7.1140] strict, [7.990]-[7.1010] contra proferentem rule, [7.1020]-[7.1040] courts’ attitude towards, [7.980] excluding terms, limiting clause, distinction, [7.1150] United Kingdom, [7.1150]

Index

Exemption clauses — cont freedom of contract principle, [7.1090][7.1100] fundamental breach, and, [7.1080] Australian view, [7.1110] concept of fundamental breach, [7.1050]-[7.1070] construction, question of, [7.1120]-[7.1140] English view, [7.1080], [7.1090]-[7.1100] incorporation, proof, [7.930] implied clauses, [7.920]-[7.970] prior course of dealing, [7.920]-[7.970] interpretation of clauses, [7.980] contra proferentem rule, [7.1020]-[7.1040] natural and ordinary meaning, [7.980] strictly construed, [7.990]-[7.1010] limiting scope of, [7.980]-[7.1040] limiting terms, exclusion clause, distinction, [7.1150] United Kingdom, [7.1150] misrepresentation, effect of, [7.860]-[7.870] non est factum plea, [7.880]-[7.910] non-contractual documents, [7.830]-[7.850] apparently non-contractual, effect of signature, [7.830]-[7.850] prior course of dealing, implied by, [7.920][7.970] proferens, prior course of dealing, proof re, [7.920]-[7.970] scope of, limiting factors, [7.980]-[7.1040] signature, effect of, [7.780]-[7.810] exceptions to rule, [7.820]-[7.910] apparently non-contractual documents, [7.830]-[7.850] misrepresentation, [7.860]-[7.870] non est factum, [7.880]-[7.910] strict construction of, [7.990]-[7.1010] Expectation damages — see Damages Express terms — see Terms

F Family agreements — see Domestic or social agreements as misrepresentation, non-disclosure [8.170]-[8.180] Federal Courts, [1.340] Fiduciaries definition, [8.140] non-disclosure as [8.140]-[8.160]

misrepresentation,

Financial assistance corporate veil, lifting, [11.90] Financial benefit director of public company, to, [17.40] breach of statutory provisions, [17.75]-[17.80] examples, [17.50] related party, [17.55] shareholder approval, [17.45], [17.60] meeting, [17.65] voting by interested related parties, [17.70] when not required, [17.60] meaning, [17.50] Financial services civil penalty provisions, [20.120] Financial statements director’s familiarity and understanding of, [18.100]-[18.117] Forbearance consideration, as, [6.210] forbearance to sue, [6.210] past consideration, [6.130] Forgery assumptions of regularity, effect on, [14.370] contracts with company, [14.370] Fraud assumptions of regularity, effect on, [14.370] contracts with company, [14.370] corporate veil, lifting, [11.105]-[11.110] definition, [8.520] insolvent company, by director of, [19.185] Fraudulent misrepresentation classification, significance of, [8.510] damages, [8.570]-[8.580], [8.600] deceit, damages for, [8.570]-[8.580] definition, [8.520] honest belief as defence, [8.540] remedies, [8.550]-[8.590] rescission for, [8.550]-[8.570],[8.600] term of contract, [8.600] Frustration absolute impossibility, [9.250]-[9.260] absolute liability, [9.160]-[9.200] basis of doctrine, [9.160]-[9.200], [9.210] conscription, by, [9.250], [9.260] delay, [9.290]-[9.330], [9.560] destruction of subject matter, [9.250] discharge through, [9.160]-[9.620] effect of, [9.570]-[9.610] outstanding obligations, [9.570]-[9.610]

527

Corporations and Contract Law

Frustration — cont employment contract, [9.250], [9.310][9.320] exceptions, [9.430]-[9.560] foreseeable event, [9.490]-[9.510] performance not impossible, [9.440]-[9.450] self-induced events, [9.520]-[9.550] specific provision for event, [9.460]-[9.470] foreign laws, [9.340]-[9.350] foreseeable event, [9.490]-[9.510] futility, [9.390]-[9.420] illegality, supervening, [9.340]-[9.380] impossibility of performance, [9.160][9.200] absolute, [9.250]-[9.260] limits of, [9.240]-[9.560] radical difference, [9.210]-[9.230], [9.270]-[9.330] imprisonment, [9.250]-[9.260],[9.320] interruption, [9.290]-[9.330],[9.560] legislation, effect of, [9.620] non-frustrating events, [9.430] outstanding obligations, effect on, [9.570][9.610], [9.620] payments already made, effect on, [9.570], [9.620] quantum meruit, [9.570] radical difference, [9.210]-[9.230], [9.270][9.330] delay or interruption, [9.290]-[9.330] self-induced, [9.520]-[9.550] statute, effect of, [9.620] theoretical basis, [9.210] time of, [9.570] war, [9.340], [9.580] Fundraising crowd-sourced equity funding, [12.80] disclosure documents — see Disclosure documents issue of shares — see Issue of shares proprietary companies, [12.80] public companies, [12.80]

procedure — see also Meetings members resolutions — see Resolutions

of

Good faith third parties acting in, effect on remedies misrepresentation, [8.720] Goods advertisement for sale of, [3.100] display in shop window, [3.120] offer or invitation to treat, [3.120], [3.130], [3.140] offering for sale, [3.110] Gratuitous promise enforceability, [6.30] volunteer, [6.10], [6.20], [6.30]

H Hardship frustrating event, whether, [9.510] specific performance not awarded [10.590]-[10.610]

if,

HIH Royal Commission, [16.235] High Court, [1.320] Holding company directors’ duty of good faith, [16.90][16.105] insolvent trading by subsidiary, liability for, [11.155] Honour clauses ambiguity, [5.380]-[5.400] business agreements, [5.330]-[5.360] competition entries, [5.330], [5.340] effect on enforceability, [5.330] ouster of jurisdiction distinguished, [5.370]

Fundamental breach — — see Breach Futility frustration of contract, [9.390]-[9.400]

G General meeting of members annual — see Annual general meeting company organ, as, [15.05] overriding management decisions, [15.40][15.50]

528

Husband and wife agreements enforceability, [5.60]-[5.80] traditional presumption as to intention, [5.60] rebutting, [5.170]-[5.200]

I Ignorance misrepresentation, of, [8.390]-[8.400] offer, of, [3.270]

Index

Implied terms court, by, [7.730]-[7.770] custom, by, [7.690]-[7.710] definition, [7.680] entire agreement clauses, and, [7.40], [7.770] general law, by, [7.720] in fact, [7.730]-[7.770] officious bystander test, [7.730] rectification, and, [7.180] statute, by, [7.720] tests for, [7.680] trade usage, through, [7.690]-[7.710] Income tax — see Taxation Incorporation — see Registration of company Independent contractors — — see Contracts for services Information directors’ improper use of, [17.295] confidential information, [17.270]-[17.290], [17.300]-[17.315] fiduciary and statutory duties, [17.320]-[17.325] insolvency of company, [17.330]-[17.340] meaning of, [17.300]-[17.315] prospectus contents — see Disclosure documents supply of, distinguished from offer, [3.60], [3.70] Injunction breach of duty by director, [20.80]-[20.85] misleading or deceptive conduct, [8.910] statutory, [20.152] case, [20.153] Innocent misrepresentation classification, significance of, [8.510] definition, [8.630] remedies, [8.640] rescission for, [8.640] term of contract, [8.640] Innominate term breach, effect of, [7.620]-[7.650], [10.10] definition, [7.620] Insolvency definition, [19.50] examination in relation Examination indicators of, [19.50]

to

—

see

misuse of information about, [17.330][17.340] presumptions of, [19.55] proof of, [19.50] reasonable grounds for suspecting, [19.10], [19.60]-[19.70] winding up in — see Winding up Insolvent company creditors directors prejudicing interests of, [19.05] debts incurred by — see Insolvent trading directors duty not to prejudice creditors’ interests, [19.05] fraudulent conduct, [19.185] insolvent trading — see Insolvent trading unremitted tax, liability for, [19.175] employee entitlements, protection of, [19.180] receivership — see Receivership voluntary administration — see Voluntary administration winding up — see Winding up Insolvent trading breach of duty to prevent compensation, [19.150]-[19.160] consequences, [19.145] court relief, [19.165] compensation, [19.150] amount of, [19.155] persons receiving benefit of, [19.160] corporate veil, lifting, [11.75] defences, [19.80] absence from management, all reasonable steps to prevent, [19.135] delegation and reliance on others, [19.105]-[19.120] safe harbour from civil liability, [19.140] reasonable grounds to suspect solvency, [19.85]-[19.100] definition, [19.05] directors’ duty to prevent, [19.05], [19.10], [19.15] breach of, [19.145]-[19.150] incurring a debt, [19.20] failure to prevent, [19.75] insolvency at time of, [19.50] proof, [19.50] reasonable steps to prevent, [19.135] time of, [19.25]-[19.45] indicators of insolvency, [19.50] insolvency, definition, [19.50] liability of directors, [11.75], [19.10], [19.15] court relief, [19.165] defences, [19.80]-[19.135] National Insolvent Trading Program, [19.170] presumptions of insolvency, [19.55]

529

Corporations and Contract Law

Insolvent trading — cont proof of insolvency, [19.50] reasonable grounds for suspecting insolvency, [19.10], [19.60]-[19.70] subsidiary, by, [11.155] liability of holding company, [11.155] Insurance contracts contracts uberrimae fidei, [8.170]-[8.180] non-disclosure misrepresentation, as [8.170]-[8.180] Intention offer, element of, [3.10], [3.20], [3.90] statement of, whether misrepresentation, [8.230], [8.280]-[8.300] test of, [5.20] Intention to be bound ambiguity, [5.380]-[5.400] business or commercial agreements, [5.40], [5.270], [5.320] honour clauses, [5.330]-[5.360] onus of proof, [5.320] practical joke, [5.300], [5.310] rebuttal of presumption, [5.280]-[5.310] traditional presumption, [5.270] collateral contracts, [7.480]-[7.490] domestic or social agreements, [5.40], [5.50] effect of former presumptions, [5.260] family agreements, [5.90], [5.100], [5.210]-[5.230] husband and wife agreements, [5.60]-[5.80], [5.170]-[5.200] onus of proof, [5.260] social agreements, [5.110], [5.120], [5.240]-[5.250] voluntary associations, [5.130], [5.140], [5.150] essential contractual element, [2.50], [5.10] express exclusion, [5.330]-[5.400] former presumption as to, [5.40] business agreements, [5.270]-[5.320] domestic or social agreements, [5.50]-[5.260] honour clauses, [5.330]-[5.360] ambiguity, [5.380]-[5.400] excluding jurisdiction of court, [5.370] onus of proof, [5.40] terms as indication of, [7.10], [7.230][7.380] test of intention, [5.20], [5.30] presumptions approach, [5.40] Invalidity parol evidence rule, [7.150] Invitation to treat advertisements, [3.100], [3.110] catalogue advertisements, [3.100] definition, [3.90]

530

display of goods, [3.120], [3.130], [3.140] interpretation by courts, [3.150] newspaper advertisements, [3.100] offer distinguished, [3.90]-[3.290] intention element, [3.90] offer to world at large, distinguished, [3.160], [3.180] shop window displays, [3.120], [3.140]

J Jurisdiction appellate, [1.280] Federal Courts, [1.340] High Court, [1.320] Supreme Courts, [1.310] honour clauses, [5.370] original, [1.280]

L Land contract for sale of, specific performance, [10.540], [10.580] Law — — see also Common law — — see also Courts — — see also Equity — — see also Statute law Australian law-making power, [1.20] Australian, origins of, [1.10], [1.20] conquered vs settled land, [1.20] definition, [1.10] enacted and unenacted compared, [1.10] English, [1.20] “received” into Australia, [1.20], [1.30] received law, [1.20] parts, [1.30] sovereign bodies, [1.10] statements of, whether misrepresentation, [8.230], [8.310] terra nullius doctrine, [1.20] Legal capacity company, [11.15], [13.65] objects clause of constitution, formerly limited by, [13.65] s 124 Corporations Act, [13.70] ultra vires doctrine, abolition of, [13.75] Legal proceedings companies, by and against, [11.15] derivative actions — see Derivative actions members, by — see also Members’ remedies

Index

Legislation Australian position, [1.140], [1.150] federal and state powers, [1.150] parliament’s legislative power, [1.130], [1.140], [1.180] concurrent, [1.150] development, [1.130] exclusive, [1.150] passage of, [1.190] separation of powers, [1.160], [1.170] subordinate, [1.170] Limited liability closely held companies, [11.25] companies, of, [11.20] creditors, impact on, [11.20] contract creditors, [11.30] finance creditors, [11.30] trade creditors, [11.30] employees, impact on, [11.30] guarantee, company limited by — see Company limited by guarantee reasons for, [11.20] shares, company limited by — see Company limited by shares subsidiaries within corporate groups, [11.25] Limiting clauses — see Exemption clauses Liquidated damages action to recover, [10.400] debt, as, [10.400] definition, [10.390] penalties distinguished, [10.410]-[10.460] unliquidated damages distinguished, [10.390] Local Court, [1.290] Lost opportunity damages for, [8.570]-[8.580]

M Magistrates Court, [1.290] Federal Magistrates Court, [1.340] Management of company board of directors — see Board of directors directing mind and will of company, as, [14.35]-[14.45] disqualification from — see Disqualification of directors general meeting of members, overriding management decisions, [15.40]-[15.50] improper purpose, for, [16.205]-[16.215]

internal management, [13.05] constitution — see Constitution replaceable rules — see Replaceable rules misleading and deceptive representations, [14.36] ownership, separation from, [15.55] Managing directors customary authority, [14.330] standard of care, [18.65]-[18.70] breach, [18.75]-[18.80] Mareva injunction, [1.100] Meetings board of directors, attendance, [18.155] creditors — see Creditors’ meeting members — see Meetings of members Meetings of members — see also General meeting of members AGM, proprietary company, [12.85] public company, [12.85] resolutions — see Resolutions Members constitution contract between company and members, [13.85] contract between members, [13.125]-[13.140] enforcement by or against, [13.85]-[13.100] provisions outside capacity as members, [13.100]-[13.110] general meeting of — see General meeting of members interest in company property, [11.60] issue of shares to — see Issue of shares liability, [11.20] classification according to, [12.10] company limited by guarantee, [12.20] company limited by shares, [12.15] company limited by shares and guarantee, [12.35] unlimited company, [12.25] meetings — see Meetings of members minority shareholders oppression — see Oppressive or unfair conduct remedies — see Members’ remedies ownership of company, [15.55] personal rights, enforcement of — see Members’ remedies proprietary company, [12.55] public company, [12.55] remedies — see Members’ remedies

531

Corporations and Contract Law

Members — cont replaceable rules, enforcement by or against, [13.85]-[13.100] provisions outside capacity as members, [13.100] Corporations Act s 232 requirements, [13.110] shareholder approval financial benefit to director, [17.45], [17.60] approval meeting, [17.65] voting by interested related parties, [17.70] new issues, [16.150] theft of company property, [11.65] transfer of shares — see Transfer of shares Members’ meetings — see Meetings of members Memorandum of association — see also Constitution abolition of requirement, [13.40] constitution, part of, [13.40] Mining company no liability company, [12.30] Misleading or deceptive conduct Australian Consumer Law, [8.750], [8.760][8.890] application of, authority for, [8.780] application to party, [8.780] conduct must take place “in trade or commerce”, [8.790]-[8.810] constitutional powers and, [8.780] corporations power, [8.780] elements, [8.770] misleading or deceptive, definition, [8.820] prohibition in s 18, [8.760], [8.770] class of persons likely to be affected, [8.830] collateral contracts and, [7.540]-[7.560] Competition and Consumer Act 2010 (Cth), [8.190] conduct actual cause of error, [8.890] conduct capable of causing error, [8.840][8.870] damages, [8.910], [8.920] legislation, [8.740] definition, [8.820] Australian Consumer Law, [8.820] disclaimers and, [8.200]-[8.220] elements, [8.770] evidence that person misled, [8.880] excluded conduct, [8.790]-[8.810] Fair Trading Acts, [8.740] injunction, [8.910] intended audience, [8.830] objective test, [8.820] remedies, [8.910], [8.920]

532

silence constituting, [8.190], [8.760] trade or commerce, conduct in, [8.790][8.810] ASIC Act, [8.760] what constitutes, [8.820] Misrepresentation actionable, [8.10] addressee as party misled, [8.320]-[8.360] affirmation after, [8.670] categories of, [8.510]-[8.640] significance of classification, [8.510] communication indirect, [8.340]-[8.360] intended representee, to, [8.320]-[8.330] Competition and Consumer Act 2010 (Cth), [8.190] disclaimers, [8.200]-[8.220] concept of, [8.10] contracts uberrimae fidei, [8.170]-[8.180] corrected statements, [8.450]-[8.460] damages deceit, [8.570] negligent misrepresentation, [8.610]-[8.620] disclaimers, [8.200]-[8.220] elements of, [8.50] addressed to party misled, [8.320]-[8.360] false statement, [8.60]-[8.220] intended to induce contract, [8.370]-[8.500] statement of fact, [8.230]-[8.310] excluded statements, [8.230] intention, [8.280]-[8.300] law, [8.310] opinion, [8.240]-[8.250], [8.260]-[8.270] promise as to future, [8.280]-[8.300] exemption clauses, [7.860]-[7.870] false statement as element of, [8.60]-[8.220] fiduciary relationship, [8.140]-[8.160] fraudulent, [8.510], [8.520]-[8.540] remedies, [8.550]-[8.590],[8.600] term of contract, [8.600] half truths, [8.80]-[8.90] immaterial to contract, [8.470]-[8.490] indirect communication, [8.340]-[8.360] inducement of contract, [8.370] intention must be, [8.370]-[8.500] non-inducing statements, [8.380] sole inducement, need not be, [8.500] innocent, [8.510], [8.630] executed contracts, [8.730] remedies, [8.640] insurance contracts, non-disclosure in, [8.170] intended representee, communication to, [8.320]-[8.330] indirect, [8.340]-[8.360]

Index

Misrepresentation — cont intention, statements of, [8.230], [8.280][8.300] intention to induce contract, [8.370]-[8.500] knowledge of representation, [8.390][8.400] law, statements of, [8.230], [8.310] legislation, [8.740] Australian Capital Territory, [8.920] Australian Consumer Law, [8.740] Commonwealth, [8.740], [8.750]-[8.910] South Australia, [8.920] materiality, [8.470]-[8.490] mere representations, [8.10] misleading or deceptive conduct — — see Misleading or deceptive conduct negligent, [8.510], [8.610] remedies, [8.620] non-contractual representations, [8.10], [8.20]-[8.40] non-disclosure constituting, [8.70]-[8.180] non-inducing statements, [8.380]-[8.490] opinion, statements of, [8.230], [8.240][8.250] exceptions to exclusion, [8.260]-[8.270] puff distinguished, [8.20]-[8.40] representee communication to, [8.320]-[8.330] inaction by, [8.430]-[8.450] indirect, [8.340]-[8.360] knowledge of falsity, [8.410]-[8.420] unaware of representation, [8.390]-[8.400] rescission election as to, [8.550], [8.620], [8.640] fraudulent misrepresentation, [8.550]-[8.570] innocent misrepresentation, [8.640], [8.730] limitations, [8.650]-[8.730] negligent misrepresentation, [8.620] Seddon’s case, rule in, [8.730] silence, [8.60] Competition and Consumer Act, [8.190] distortion of positive representation, [8.80]-[8.90] exceptions to general rule, [8.70]-[8.180] fiduciary relationship, [8.150]-[8.160] general rule, [8.60] statement becoming untrue, [8.120]-[8.130] subsequent discovery that statement false, [8.100]-[8.110] statement of fact, [8.230] statements of intention, [8.280]-[8.300] third party involvement, [8.720] uberrimae fidei, [8.170]-[8.180]

Mitigation of damages duty of plaintiff, [10.350]-[10.360] limitations, [10.370] meaning, [10.350] onus of proof, [10.380] Money recovery of frustration of contract, [9.570]-[9.610] specific performance of contracts to pay, [10.560] Motive acceptor’s immaterial, [3.280], [3.290] consideration distinguished, [6.160]-[6.200] Mutuality element of contract, [2.50] specific performance and, [10.620]-[10.640]

N Name change of, special resolution to change constitution, [13.175] limited company, [12.15] omission of “Limited”, [12.20] no liability company, [12.30] proprietary company, [12.60] public company, [12.60] National Insolvent Trading Program, [19.170] Negligence directors’ duty of care, [18.05], [18.15] elements, [8.610] Negligent misrepresentation classification, significance of, [8.510] damages, [8.620] definition, [8.610] origins, [8.610] remedies, [8.620] rescission for, [8.620] No liability company calls on shares, [12.30] forfeiture where unpaid, [12.30] constitution, [13.50] forfeiture of shares, [12.30] mining purposes, [12.30] name, [12.30] registration, [12.30] replaceable rules, [13.30] winding up, [12.30]

533

Corporations and Contract Law

Non est factum conditions of successful plea, [7.880]-[7.910] exclusion clause, [7.880]-[7.910] Norman conquest, [1.40] Nominee directors conflicts of duty, [16.75]-[16.85] duty of good faith, [16.55] breach of duty, [16.75]-[16.80] company groups, [16.90]-[16.105] reasons for appointment, [16.55] representation of particular shareholder or creditor, [16.65]-[16.70]

O Obiter dicta, [1.220] Objects clause company constitution, [13.60], [13.75] ultra vires doctrine, abolition of, [13.75] Obstruction performance, of, [9.150] exact performance rule, exception, [9.60], [9.150] Offer acceptance of — — see Acceptance advertisements, [3.100], [3.110], [3.320] agreement to keep open, [3.450], [3.460] capability of acceptance, [3.50] catalogue advertisements, [3.100] communication requirement, [3.260][3.270] concluded bargain test, [3.10] counter-offer, [3.330]-[3.340], [4.80] battle of the forms, [3.380] effect, [3.330], [3.340], [3.530] mere inquiry distinguished, [3.370] death of party, termination of offer, [3.400] definition, [3.40] displays in shops, [3.120] effective when communicated, [3.260], [3.270] essential contractual element, [2.50] express, [3.40] identifiable, [3.10] implied, [3.10], [3.40] intention as element of, [3.10], [3.20], [3.90] interpretation by courts, [3.150] invitation to treat distinguished, [3.90][3.290] language used, [3.30] motive of acceptor immaterial, [3.280], [3.290] offeree, [3.80]

534

offeree’s response, [3.320] battle of the forms, [3.380], [3.390] counter-offer, [3.330], [3.340] mere inquiries, [3.350], [3.360] option, effect of, [3.430], [3.440] persons to whom made, [3.80] puff distinguished, [3.210] actionable misrepresentations, [3.220] rejection, [3.530] communication of, [3.540] counter-offer as, [3.330] express or implied, [3.530] termination by, [3.400], [3.530] revocation, [3.410], [3.420] absolute entitlement, [3.430], [3.440] communication of, [3.470]-[3.490] definition, [3.410] offeror’s entitlement, [3.430], [3.440] options, [3.430]-[3.460] termination by, [3.400] separately identifiable, [3.10] shop window displays, [3.120] special offers, [3.190] standing offers, [3.550] supply of information distinguished, [3.60], [3.70] termination, [3.400] lapse of time, by, [3.550]-[3.610] rejection, [3.530]-[3.540] revocation, [3.410]-[3.520] terminology, [3.190] time limit to accept, [3.550] express stipulation, [3.560] implied, [3.570], [3.580] modern application of rule, [3.590] reasonable time, definition, [3.570], [3.600], [3.6100] termination on lapse of, [3.400], [3.550] to whom offers may be made, [3.80] world at large, to, [3.160] distinguished from invitation to treat, [3.180] “prove me wrong” offers, [3.160], [3.170] reward offers, [3.160], [4.60] Offeree acceptance of offer — — see Acceptance counter-offer by, [3.330], [3.340] inquiry re modifying offer, [3.350], [3.360] rejection of offer, [3.320],[3.530]-[3.540] response of, [3.320]-[3.390] who may be, [3.80] Officers — see also Chief financial officer; Directors; Secretary assumptions as to authority — see Agent contract, authority to make — see Contracts with company customary authority, [14.320]-[14.350] definition, [14.240] duties — see Directors’ duties

Index

Officers — cont person held out as, [14.240] persons named in public documents as, [14.235] security interest in favour of, corporate veil, lifting, [11.85] standard of care, [18.65]-[18.97] Onus of proof intention to be bound, [5.40] business or commercial agreements, [5.320] domestic or social agreements, [5.260] Opinion misrepresentation, whether, [8.240]-[8.250] exceptions to general rule, [8.260]-[8.270]

[8.230],

Options creation of, [3.450]-[3.460] effect, [3.450]-[3.460] nominee, exercisable by, [4.40] right to revoke offer, effect on, [3.450][3.460]

uncertainty, [7.190]-[7.210] extrinsic evidence, [7.20] intention of parties, [7.10] written contracts, [7.20] Part performance accepted as valid discharge, [9.140] exact performance rule, exception, [9.60], [9.140] Parties two-party rule, [2.20] Partnership contract intention of parties, [4.120] specific performance, [10.650] Pecuniary penalty orders, [20.120], [20.140] Penalties

Ouster of jurisdiction honour clauses, [5.370]

Penalties civil — see Civil penalty provisions criminal — see Criminal penalties liquidated damages distinguished, [10.410][10.470] No Penalty Rule, [10.480]-[10.490] penalty clause in contract, [10.410], [10.420]

P

Per incuriam, [1.210]

Organic theory, [14.05], [14.10]

Parliament development, [1.130] doctrine of parliamentary sovereignty, [1.180] legislative power, [1.140], [1.180] concurrent, [1.150] development, [1.130] exclusive, [1.150] separation of powers, [1.160], [1.170] Parol evidence rule application, [7.30] collateral contracts, [7.390] effect, [7.20] entire agreement clauses, [7.40] exceptions, [7.50] ambiguity, [7.190]-[7.210] invalidity, [7.150] partly written, partly oral contracts, [7.60]-[7.90] rectification, order for, [7.160]-[7.180] suspension of operation, [7.130]-[7.140] trade usage and custom, [7.100]-[7.120]

Performance — see also Part performance; Specific performance — see also de minimis rule, [9.60], [9.80]-[9.90] discharge by, [9.10]-[9.150] exact, requirement for, [9.30] exceptions, [9.60]-[9.150] potential for injustice, [9.40]-[9.50] impossibility of — see Frustration obstruction of, [9.150] exact performance rule, exception, [9.60], [9.150] partial, [9.60], [9.140] severable contracts, [9.60], [9.70] substantial performance, [9.60], [9.100][9.130] Personal service contracts — see Contracts for services Post acceptance of offer by, [4.340]-[4.360] postal rule, [4.360]-[4.490] revocation, [4.510]

535

Corporations and Contract Law

Postal rule — see Acceptance Precedent application, [1.210] binding, [1.200], [1.240] cessation of effect, [1.260] changing, [1.260] definition, [1.200] distinguishing, [1.210], [1.250] doctrine of, [1.60], [1.200] failure to follow, [1.210] multi-judge decisions, [1.210], [1.230] obiter dictum, [1.220] obsolesence, [1.260] per incuriam decisions, [1.210] persuasive, [1.240] ratio decidendi, [1.210], [1.220] distinguishing, and, [1.250] multi-judge decisions, [1.230] stare decisis, [1.200] Presumptions intention to be bound, [5.40] Prior course of dealing exclusion clause implied by, [7.920]-[7.970] Privy Council, [1.350] Promise collateral contract, [7.420]-[7.430] consideration as price of, [6.10] future, as to, whether misrepresentation [8.230], [8.280]-[8.300] Property company’s power to own, [11.15] one-person company shareholder’s interest in, [11.60] theft of property, [11.65] return of breach of duty by director, [20.90]-[20.115] Proprietary company AGM, [12.85] auditors, [12.90] circulating resolution, [12.85] constitution, [12.65] single director/shareholder, [13.20] definition, [12.45] directors, [12.70] financial reports, [12.105] function, [12.50] large, [12.40], [12.100] membership, [12.55] — see also Members name, [12.60] one person — see Single director/ shareholder company popularity of, [12.50]

536

public company comparison, [12.40], [12.50]-[12.95] subsidiary, [12.40] raising funds, [12.80] crowd-sourced equity funding, [12.80] registered office, [12.95] replaceable rules, [12.65], [13.10] single director/shareholder, [12.65], [13.20] resolutions without meetings, [12.85] secretary, [12.75] small, [12.40], [12.100] advantages, [12.105] transfer of shares, [12.55] Prospectus — see Disclosure documents “Prove me wrong” offers, [3.160], [3.170] Public company AGM, [12.85] auditors, [12.90] constitution, [12.65], [13.45] constructive notice doctrine, [14.150] lodgment with ASIC, [13.45], [14.150] definition, [12.45] directors, [12.70] disclosure obligations, [12.50], [12.100] financial benefit to director — see Financial benefit financial reports, [12.105] function, [12.50] membership, [12.55] — see also Members name, [12.60] one person — see Single director/ shareholder company proprietary company comparison, [12.40], [12.50]-[12.95] subsidiary, as, [12.40] raising funds, [12.80] crowd-sourced equity funding, [12.80] registered office, [12.95] replaceable rules, [12.65], [13.10] secretary, [12.75] Puff actionable misrepresentation, whether, [3.220] advertising gimmicks, [3.250] definition, [3.210], [8.20] exaggerated promises, [3.230]-[3.240] misleading or deceptive, whether, [8.830] offer distinguished, [3.210] representation distinguished, [8.20]-[8.40]

Q Quantum meruit election to sue for, [10.20] frustrated contract, [9.570]

Index

R Ratification implied terms, and, [7.180] Ratio decidendi, [1.220] distinguishing, and, [1.250] multi-judge decisions, [1.230] Received law, [1.10], [1.20]-[1.30] Rectification conditions for, [7.160]-[7.180] evidence, [7.160]-[7.180] implied terms, and, [7.180] parol evidence rule, [7.160]-[7.180] Registered office proprietary company, [12.95] public company, [12.95] Registration of company certificate, [11.10] company coming into existence on, [11.10] constitution — see Constitution effects, [11.15] number of companies registered in Australia, [12.05] registrable Australian bodies, [12.05] replaceable rules — see Replaceable rules Rejection of offer communication of, [3.540] counter-offer as, [3.330], [3.340] express or implied, [3.530] termination by, [3.400], [3.350] Related party transactions financial benefits, [17.40] breach of statutory provisions, [17.75]-[17.80] examples, [17.50] related party, [17.55] shareholder approval, [17.45], [17.60] meeting, [17.65] voting by interested related parties, [17.70] when not required, [17.60] Remedies for members — see Members’ remedies Remoteness damages, [10.110] contemplated consequences, [10.190] foreseeability, [10.150]-[10.180] natural consequence of breach, loss as, [10.150]-[10.180]

underlying concept, [10.120]-[10.140] Replaceable rules alteration, [13.175] limits on right, [13.180] special resolution, [13.75], [13.175] statutory requirements, [13.175] application, [13.10] breach of, [13.10] remedies, [13.75], [13.170] choice to be governed by, [13.40] company limited by guarantee, [13.25] constitution application where repealed, [13.10] choice to use replaceable rules and/or, [13.40] contractual effect, [13.80] company and directors, between, [13.145]-[13.165] separate contract of service, where, [13.150] company and members, between, [13.85]-[13.100] provisions outside capacity as members, [13.100]-[13.110] company and secretary, between, [13.145] members, between, [13.125]-[13.140] remedies, [13.80], [13.170] disclosure of interest requirements, [17.375], [17.380] internal management, [13.05], [13.10] nature of, [13.10] no liability company, [13.30] pre-1998 companies, [13.10], [13.35] proprietary company, [12.65], [13.10] single director/shareholder, [12.65], [13.20] public company, [12.65], [13.10] mandatory rules, [13.10] repeal of Table A and B regulations, [13.35] section headings identifying, [13.10] single director/shareholder company, [13.20] table of, [13.15] Representations collateral contracts, becoming, [7.390][7.400], [8.10] definition, [7.220] intention, importance of, [7.230]-[7.260] mere representations, [8.10] misrepresentation — — see Misrepresentation non-contractual, [8.10], [8.20]-[8.40] puff distinguished, [8.20]-[8.40] terms distinguished, [7.220]-[7.380], [8.10] Repudiation revocation of acceptance, [4.510]

537

Corporations and Contract Law

Rescission definition, [8.550], [8.650] equitable remedy, [8.650] misrepresentation, for damages in tort and, [8.570], [8.620] election as to, [8.550], [8.620], [8.640] fraudulent, [8.550]-[8.590],[8.600] innocent, [8.640], [8.730] limitations, [8.650]-[8.730] affirmation of contract, [8.670] executed contracts, [8.730] lapse of time, [8.680]-[8.710] restitution, possibility of, [8.660] third party involvement, [8.720] negligent, [8.620] Seddon’s case, rule in, [8.730] object of, [8.660] Rescission of contract breach of duty, where director, [20.65]-[20.75] Resolutions special resolution, [13.175] alteration of constitution or replaceable rules, [13.80] Restitutio in integrum, [8.660] Revocation acceptance, [4.500] postal rule and, [4.510] definition, [3.410] offer, [3.410], [3.420] absolute entitlement, [3.430], [3.440] communication of, [3.470]-[3.490], [3.520] inconsistent act, by, [3.500], [3.510] method of communication, [3.500], [3.510] option, effect of, [3.450], [3.460] termination by, [3.400] rule, [3.520] time for, [3.410], [3.420]

S Salomon’s case application, [11.45] corporate groups, [11.45] decision, [11.40] Secretary constitution, contractual effect of, [13.145] contract, authority to make — see Contracts with company customary authority, [14.340]-[14.350] directing mind and will of company, as, [14.50]-[14.55]

538

proprietary company, [12.75] public company, [12.75] replaceable rules, contractual effect of, [13.145] sole director and no, [12.75] standard of care, [18.95]-[18.97] Seddon’s case, rule in, [8.730] Separate legal entity company, [11.05], [11.10], [11.15], [11.35], [11.40]-[11.65], [14.05] lifting the corporate veil — see Corporate veil, lifting Salomon’s case, [11.40] application, [11.45] corporate groups, [11.45] Separation of powers Australian system, [1.170] doctrine of, [1.160] Set-off substantial [9.130]

performance

cases,

[9.120]-

Severable contracts definition, [9.70] entire contracts, compared with, [9.70] exact performance rule, exception, [9.60], [9.70] Signature exclusion clause, effect of, [7.780]-[7.810] exceptions to rule, [7.820]-[7.910] apparently non-contractual documents, [7.830]-[7.850] misrepresentation, [7.860]-[7.870] non est factum, [7.870]-[7.910] Silence acceptance by, [4.220], [4.230] Competition and Consumer Act 2010 (Cth), [8.190] misleading or deceptive conduct, [8.190], [8.760] misrepresentation, [8.60] exceptions to general rule, [8.70]-[8.180] general rule, [8.60] Sham companies corporate veil, lifting, [11.70], [11.100], [11.115], [11.120], [11.125] Shareholders — see Members Shares company limited by — see Company limited by shares

Index

Shares — cont fully paid, [15.15] issue of — see Issue of shares partly paid, [15.15]

Standard of care directors, [18.10], [18.15]

Single director/shareholder company execution of documents, [14.120] replaceable rules not applicable, [12.65], [13.20] rules governing, [12.65], [13.20]

Stare decisis, [1.200]

Small Business Guide, [12.40] Sources of law, [1.120] Sovereign body, [1.10] Special offers offer or invitation to treat, [3.190]

Standing offer, [3.550]

Statements collateral contracts resulting from, [7.390], [8.10] misrepresentation — see Misrepresentation terms, incorporation as, [7.10], [7.220] untrue, [8.10] Statute law — — see also Legislation development, [1.120] parliament’s legislative power, [1.130], [1.140], [1.180] received law, [1.30]

Specific performance agency agreement, [10.650] apprenticeship, [10.650] collateral contracts, [7.530] consequences of order, [10.540], [10.710][10.720] contract of service, [10.650] damages and, [10.560]-[10.580] defective contracts, [10.700] definition, [10.540] discretion of court, [10.550] equitable remedy, [10.550] form of order, [10.540] hardship and, [10.590]-[10.610] land, contracts for, [10.540], [10.580] limits on availability contracts of service, [10.650] damages sufficient, [10.560]-[10.580] defective contracts, [10.700] mutuality, [10.620]-[10.640] superintendence, contracts requiring, [10.670]-[10.690] undue hardship, [10.590]-[10.610] money, obligation to pay, [10.560] mutual availability, [10.620]-[10.630] nature of, [10.550] partnership agreement, [10.650] plaintiff’s election, [10.710]-[10.720] procedural aspects, [10.710]-[10.720] sale of a business, [10.580] share-farming agreement, [10.650] superintendence, contracts requiring, [10.6600]-[10.680] unworkable relationships, [10.690]

Subordinate legislation, [1.170]

Standard form contracts battle of the forms, [3.380], [3.390] partly oral, parol evidence rule, [7.60]-[7.90]

Termination contract, of — see Discharge offer, of — see Offer

Subsidiary agent, as, [11.185]-[11.195] directors’ duty of good faith, [16.90][16.105] insolvent trading by, [11.155] liability of holding company, [11.155] limited liability, [11.25] partner, as, [11.185]-[11.195] Substantial performance doctrine of, [9.100]-[9.135] exact performance rule, exception, [9.60], [9.100]-[9.135] Supply of information offer distinguished, [3.60], [3.70] Supreme Court, [1.310]

T Taxation corporate groups, [11.165] corporate veil, lifting, [11.95] corporate groups, [11.165] unremitted tax, liability for, [19.175] Tender performance, of refusal of, [9.150]

539

Corporations and Contract Law

Terms classification, [7.570] essentiality, based on, [7.570] collateral contracts, [7.390]-[7.560] conditions, [7.570], [7.580]-[7.590], [7.620]-[7.650] precedent, [7.670] subsequent, [7.670] terms labelled as, [7.660] contractual intention, [7.10], [7.230][7.250] tests for, [7.230]-[7.380] courts’ role in ascertaining, [7.10] definition, [7.10] entire agreement clauses, [7.40] exemption clauses — see Exemption clauses express, [7.570] implied terms distinguished, [7.680] fraudulent misrepresentation, [8.600] fundamental, breach of, [7.1050]-[7.1070] exemption clauses and, [7.1080]-[7.1140] implied, [7.680] court, by, [7.730]-[7.770] requirements, [7.770] custom or usage, by, [7.690]-[7.710] defining of, [7.680] general law, by, [7.720] in fact, [7.730]-[7.770] officious bystander test, [7.730] statute, by, [7.720] innominate, [7.620]-[7.650] intermediate, [7.620]-[7.650] interpretation, business-like meaning, [7.250] limiting — see Exemption clauses also misrepresentation — see Misrepresentation fraudulent, [8.600] innocent, [8.630] negligent, [8.610] statement becoming term, [8.10] parol evidence rule, [7.10], [7.20]-[7.210] rectification of, [7.160]-[7.180] parol evidence rule, [7.160]-[7.180] representation or term, [7.390]-[7.400] importance in minds of parties, [7.330]-[7.380] intention, [7.10], [7.230]-[7.260] particular knowledge or skill, reliance on, [7.300]-[7.320] time, [7.260]-[7.280] written statements, [7.290] stipulations by parties, [7.660] subsequent conduct, and, [7.10] unfair, [8.750] warranties, [7.570], [7.600]-[7.610], [7.620]

540

Terra nullius doctrine, [1.20] Time acceptance of offer, for, [3.550] determination of reasonable, [3.600], [3.610] express stipulation, [3.560] implied limit, [3.670], [3.580] modern application of rule, [3.590] reasonable, definition, [3.570] standing offer, [3.550] termination of offer on lapse of, [3.400], [3.550] lapse of misrepresentation, [8.680]-[8.710] offer, termination of, [3.400], [3.550]-[3.610] rescission, effect on right of misrepresentation, [8.680]-[8.710] term/representation distinction, [7.260][7.280] Tort damages in, [8.570]-[8.580], [8.610], [10.50] deceit, [8.570]-[8.580] fraudulent misrepresentation, [8.570][8.580] negligence, [8.610] negligent misrepresentation, [8.610] Trade unions, [12.05] Trade usage and custom parol evidence rule, [7.100]-[7.120] terms implied through, [7.680], [7.690][7.710] Tribunals administrative, [1.170] civil and administrative tribunals, [1.360] courts compared, [1.170], [1.370] function, [1.360] quasi-judicial power, [1.170] Trustee company directors best interests of beneficiaries, duty to act in, [16.40] Trusts discretionary, company as trustee, [11.25] two-party rule, and [2.20] Turquand’s case rule in, [14.90], [14.155]-[14.165] exceptions, [14.170]-[14.175]

Index

U Uberrimae fidei contracts definition, [8.170] non-disclosure as misrepresentation, [8.170]-[8.180] Ultra vires abolition of doctrine, [13.75] subordinate legislation, [1.170] Uncertainty parol evidence rule, [7.50], [7.190]-[7.210] Uncommercial transactions corporate veil, lifting, [11.80] Unconscionable conduct Australian Consumer Law, [8.750] Commonwealth legislation, [8.750],

Voting interested director, by public company, [17.85]

W Waiver communication of acceptance, right to, [4.240] War frustration of contracts, [9.340],[9.580], [9.600] Warranties — see also Conditions breach, effect of, [7.600]-[7.610], [7.620], [10.10] conditions distinguished, [7.570] definition, [7.600]-[7.610] Whistleblower protection, [20.185]

Unfair contract terms Australian Consumer Law, [8.750] Unfair practices Australian Consumer Law, [8.750] Unilateral contracts acceptance, [4.240] consideration, [6.100] definition, [2.20]

Winding up company limited by guarantee, [12.20] company limited by shares, [12.15] corporate groups, pooling in, [11.180] no liability company, [12.30] pooling, corporate groups, [11.180] unlimited company, [12.25]

Volunteer equity, and, [6.30] gratuitous promise, [6.10], [6.20]

Words and phrases best interests of company, [16.10] body corporate, [12.05] business judgment, [18.165] company, [11.05] corporation, [12.05] director, [15.10] giving a financial benefit, [17.50] improper, [17.115] incurring a debt, [19.20] information, [17.300] insolvency, [19.50] insolvent trading, [19.05] officer, [14.240] proprietary company, [12.45] public company, [12.45] registrable Australian bodies, [12.05] related party, [17.55] replaceable rules, [13.10] special resolution, [13.175] veil of incorporation, [11.70]

Voluntary associations intention to be bound, [5.130], [5.140], [5.150]

Writing term/representation [7.280]

Unlimited company definition, [12.25] liability of members, [12.25] members, — see also Members liability, [12.25] registration, [12.25] winding up, [12.25]

V Veil of incorporation — see Corporate veil, lifting

distinction,

[7.260]-

541