Professional Documents
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Alex Wan - Corporations and Contract Law-Lawbook Co. (2018)
Alex Wan - Corporations and Contract Law-Lawbook Co. (2018)
Alex Wan - Corporations and Contract Law-Lawbook Co. (2018)
CONTRACT LAW
Thomson Reuters (Professional) Australia Limited
19 Harris Street Pyrmont NSW 2009
Tel: (02) 8587 7000 Fax: (02) 8587 7100
LTA.Service@thomsonreuters.com
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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
v
TABLE OF CONTENTS
Publisher’s Note v
Table of Cases ix
Table of Statutes xxix
Index 515
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
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
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
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
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 s 49: 8.750
s 151(1)(i): 14.40
Administrative Decisions (Judicial Review) s 232: 8.910
Act 1977: 1.340 s 236: 7.550, 8.640, 8.910
Australia Act 1986: 1.350 s 237(1)(b): 8.910
s 237(2): 8.910
Australian Charities and Not-for-profits s 243: 7.550, 8.910
Commission Act 2012 Sch 2 Ch 2: 8.750
s 25-5(5): 12.20, 13.50
Sch 2 Ch 2, Pt 2-3: 7.1140
Australian Securities and Investments Sch 2 Ch 3, Div 1: 8.750
Commission Act 2001: 20.05 Sch 2 Ch 5: 8.910
ss 12DA to 12DC: 8.760 Sch 2 Pt 4: 8.750
s 50: 20.05
Corporations Act 2001: 11.15, 11.30, 11.35,
Commonwealth of Australia Constitution Act 11.45, 11.80, 11.90, 11.150, 11.160,
1901: 1.140, 1.320, 1.340 11.200, 12.05, 12.40, 12.50, 12.65,
s 109: 1.150 12.75, 12.105, 13.05, 13.10, 13.15,
s 122: 1.150 13.20, 13.35, 13.40, 13.50, 13.75,
13.180, 14.175, 15.05, 15.10, 15.25,
Competition and Consumer Act 2010: 1.340, 15.35, 15.55, 15.60, 16.135, 16.245,
7.720, 8.195, 8.200, 8.210, 8.220, 8.740, 16.250, 17.40, 17.85, 17.90, 17.155,
19.125 17.375, 18.90, 18.115, 18.125, 18.140,
s 2A(1): 8.810 18.142, 18.150, 18.155, 18.200, 19.10,
s 4(2)(a): 8.790 19.180, 20.05, 20.80, 20.120, 20.135,
s 6: 8.780 20.152, 20.160, 20.165, 20.170, 20.175,
s 131A: 8.760 20.180, 20.185
Schedule 2, Australian Consumer Law :
s 9: 12.15, 12.20, 12.25, 12.45, 13.175,
7.540, 8.190, 8.640, 8.740, 8.750,
14.245, 15.10, 15.15, 15.20, 17.55,
8.780, 8.910, 8.920
18.65, 18.90, 18.95, 19.15, 19.55
s 4(2): 8.790
s 45A: 12.100
s 18: 7.540, 7.550, 7.560, 8.190, 8.640,
s 45A(2): 12.100
8.760, 8.770, 8.780, 8.790, 8.800,
s 45A(4): 12.100
8.810, 8.820, 8.830, 8.840, 8.860,
8.880, 8.890, 8.900 s 45A(5): 12.100
s 18(1): 8.760, 8.770 s 45A(6): 12.100
s 18(2): 8.760 s 45B: 12.20
s 29: 8.190, 8.750 s 50AA: 17.55
ss 29 to 38: 8.750 s 57A: 11.15, 12.05
s 30: 8.190, 8.750 s 79: 16.255, 20.130
s 31: 8.190, 8.750 s 95A: 19.50
s 32: 8.750 s 95A(1): 19.50
s 33: 8.190, 8.750 s 95A(2): 19.50
s 34: 8.190, 8.750 s 112: 11.20, 13.50
s 35: 8.750 s 112(1): 12.10, 12.45
s 36: 8.750 s 112(2): 12.30, 13.30
s 37: 8.190, 8.750 s 112(3): 12.30
ss 39 to 43: 8.750 s 112(4): 12.30
ss 44 to 46: 8.750 s 113: 12.45, 12.55
ss 47 to 48: 8.750 s 113(1): 12.45
xxix
Corporations and Contract Law
xxx
Table of Statutes
xxxi
Corporations and Contract Law
xxxii
Table of Statutes
xxxiii
Corporations and Contract Law
xxxiv
Table of Statutes
xxxv
Corporations and Contract Law
xxxvi
PART 1
CONTRACT LAW
1 An introduction to the Australian legal
system
2 An introduction to contract
3 The offer
4 Acceptance
5 Intention to be bound
6 Consideration
7 Contents of a contract
8 Misrepresentation
9 Discharging a contract
10 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
4
Chapter 1 An introduction to the Australian legal system [1.20]
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”.
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]
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.
8
Chapter 1 An introduction to the Australian legal system [1.80]
1.4 EQUITY
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.
There are a number of “equitable maxims” that indicate the principles upon which
equitable remedies are granted. Some of the more important are:
1. Equity acts on the conscience (that is, it tries to ensure that fairness is done).
10
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
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
12
Chapter 1 An introduction to the Australian legal system [1.130]
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
24
Chapter 1 An introduction to the Australian legal system [1.330]
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.
1.11 TRIBUNALS
27
[1.360] Corporations and Contract Law
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
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]
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
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? ..................................................................................... [3.40]
Definition .................................................................................................... [3.40]
Offers and a mere supplying of information ............................................ [3.60]
To whom may offers be made ................................................................. [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 ............................................................. [3.160]
Offers to the world at large .................................................................... [3.160]
Distinguishing invitations to treat from offers to the world at large ...... [3.180]
The terminology used ............................................................................. [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
34
Chapter 3 The offer [3.20]
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
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].
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]
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”.
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.
37
[3.80] Corporations and Contract Law
38
Chapter 3 The offer [3.120]
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.)
39
[3.130] Corporations and Contract Law
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.
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:
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?
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]
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
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.
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.
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.
46
Chapter 3 The offer [3.340]
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.
47
[3.340] Corporations and Contract Law
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:
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.
48
Chapter 3 The offer [3.390]
[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”.
49
[3.390] Corporations and Contract Law
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.
3.10 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.
50
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:
51
[3.460] Corporations and Contract Law
[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”.
52
Chapter 3 The offer [3.530]
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
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.
54
Chapter 3 The offer [3.600]
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.
55
[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:
56
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
Corporations and Contract Law
58
Chapter 4 Acceptance [4.30]
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.
59
[4.40] Corporations and Contract Law
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.
60
Chapter 4 Acceptance [4.80]
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.
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.
62
Chapter 4 Acceptance [4.110]
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:
63
[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.
64
Chapter 4 Acceptance [4.130]
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
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:
66
Chapter 4 Acceptance [4.180]
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.
67
[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.
68
Chapter 4 Acceptance [4.210]
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.
69
[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.
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.
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:
71
[4.270] Corporations and Contract Law
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).
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:
[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.
73
[4.320] Corporations and Contract Law
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.
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.
74
Chapter 4 Acceptance [4.370]
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.
75
[4.380] Corporations and Contract Law
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.
76
Chapter 4 Acceptance [4.430]
[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:
77
[4.430] Corporations and Contract Law
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.
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
78
Chapter 4 Acceptance [4.490]
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.
[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.
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.
80
Chapter 4 Acceptance [4.510]
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.
81
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]
83
[5.10] Corporations and Contract Law
84
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)
85
[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.
87
[5.70] Corporations and Contract Law
cont.
The Australian courts took basically the same view. See, for example:
88
Chapter 5 Intention to be bound [5.130]
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.
[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
89
[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:
[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:
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.
90
Chapter 5 Intention to be bound [5.200]
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:
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
91
[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.
92
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?”
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.
93
[5.260] Corporations and Contract Law
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?”
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:
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:
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?”
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:
[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
96
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.
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:
97
[5.390] Corporations and Contract Law
cont.
[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.
98
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]
99
[6.10] Corporations and Contract Law
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:
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.
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.
101
[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.
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).
102
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.
103
[6.130] Corporations and Contract Law
104
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.)
105
[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.
106
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.
107
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
Corporations and Contract Law
110
Chapter 7 Contents of a contract [7.10]
111
[7.10] Corporations and Contract Law
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.
112
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.
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]).
114
Chapter 7 Contents of a contract [7.90]
[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:
115
[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.
[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
116
Chapter 7 Contents of a contract [7.160]
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:
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
117
[7.160] Corporations and Contract Law
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] Rectification is not readily ordered and the following conditions must be
met:
(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
118
Chapter 7 Contents of a contract [7.210]
(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:
[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
Chapter 7 Contents of a contract [7.210]
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]).
121
[7.220] Corporations and Contract Law
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.
122
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
[7.250] Corporations and Contract Law
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:
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.
124
Chapter 7 Contents of a contract [7.310]
125
[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.
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.
126
Chapter 7 Contents of a contract [7.380]
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:
[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:
[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:
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[7.390] Corporations and Contract Law
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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Chapter 7 Contents of a contract [7.410]
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:
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.
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[7.410] Corporations and Contract Law
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
130
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:
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[7.460] Corporations and Contract Law
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
132
Chapter 7 Contents of a contract [7.510]
cont.
133
[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.
134
Chapter 7 Contents of a contract [7.570]
[7.560] Section 18 of the Australian Consumer Law is dealt with in more detail at
[12.10] below.
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.
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[7.570] Corporations and Contract Law
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:
136
Chapter 7 Contents of a contract [7.620]
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:
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.
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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[7.620] Corporations and Contract Law
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 charter-
party – 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.
138
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.
139
[7.660] Corporations and Contract Law
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.
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].
140
Chapter 7 Contents of a contract [7.690]
141
[7.690] Corporations and Contract Law
142
Chapter 7 Contents of a contract [7.740]
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.
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):
143
[7.740] Corporations and Contract Law
cont.
[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:
[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
Chapter 7 Contents of a contract [7.770]
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
[7.770] Corporations and Contract Law
[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
146
Chapter 7 Contents of a contract [7.830]
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).
147
[7.830] Corporations and Contract Law
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.
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:
148
Chapter 7 Contents of a contract [7.880]
149
[7.880] Corporations and Contract Law
The High Court subsequently approved and applied the reasoning in Gallie v Lee
in:
[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) 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);
150
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.
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
Chapter 7 Contents of a contract [7.940]
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
153
[7.940] Corporations and Contract Law
cont.
[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.
154
Chapter 7 Contents of a contract [7.1010]
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.
[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”.
155
[7.1020] Corporations and Contract Law
[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.
156
Chapter 7 Contents of a contract [7.1060]
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.
157
[7.1060] Corporations and Contract Law
[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.
158
Chapter 7 Contents of a contract [7.1110]
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.
159
[7.1120] Corporations and Contract Law
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.
160
Chapter 7 Contents of a contract [7.1150]
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.
161
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
Corporations and Contract Law
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]
164
Chapter 8 Misrepresentation [8.30]
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
165
[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.
166
Chapter 8 Misrepresentation [8.90]
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.
167
[8.90] Corporations and Contract Law
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.
168
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.
[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.
170
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.
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.
172
Chapter 8 Misrepresentation [8.210]
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):
[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
Chapter 8 Misrepresentation [8.250]
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.
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:
175
[8.260] Corporations and Contract Law
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
Chapter 8 Misrepresentation [8.300]
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:
[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].
177
[8.310] Corporations and Contract Law
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.
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.
178
Chapter 8 Misrepresentation [8.340]
179
[8.340] Corporations and Contract Law
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.
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.
180
Chapter 8 Misrepresentation [8.440]
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.
181
[8.440] Corporations and Contract Law
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:
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.
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:
[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]
185
[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
Chapter 8 Misrepresentation [8.600]
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:
[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.
187
[8.610] Corporations and Contract Law
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.
188
Chapter 8 Misrepresentation [8.650]
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.
189
[8.650] Corporations and Contract Law
(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.
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
Chapter 8 Misrepresentation [8.720]
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:
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.
191
[8.730] Corporations and Contract Law
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
Chapter 8 Misrepresentation [8.740]
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).
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
[8.740] Corporations and Contract Law
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.
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).
194
Chapter 8 Misrepresentation [8.780]
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.
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.
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
Chapter 8 Misrepresentation [8.820]
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).
198
Chapter 8 Misrepresentation [8.870]
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.
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.
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
200
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.
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).
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.
202
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]
203
[9.10] Corporations and Contract 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.
204
Chapter 9 Discharging a contract [9.70]
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.
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.
205
[9.70] Corporations and Contract Law
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).
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:
[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:
[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].
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).
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.
209
[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:
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.
210
Chapter 9 Discharging a contract [9.230]
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]
211
[9.240] Corporations and Contract Law
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:
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.
212
Chapter 9 Discharging a contract [9.290]
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.
213
[9.290] Corporations and Contract Law
[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:
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
Chapter 9 Discharging a contract [9.370]
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:
215
[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:
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:
216
Chapter 9 Discharging a contract [9.460]
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:
217
[9.460] Corporations and Contract Law
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:
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
Chapter 9 Discharging a contract [9.510]
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.
220
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.
221
[9.570] Corporations and Contract Law
[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:
222
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).
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.
224
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
Corporations and Contract Law
226
Chapter 10 Remedies [10.30]
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
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”.
228
Chapter 10 Remedies [10.80]
[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:
229
[10.80] Corporations and Contract Law
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.
230
Chapter 10 Remedies [10.140]
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
[10.150] Corporations and Contract Law
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:
[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:
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.
232
Chapter 10 Remedies [10.200]
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.
233
[10.200] Corporations and Contract Law
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
234
Chapter 10 Remedies [10.230]
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”.
235
[10.230] Corporations and Contract Law
[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:
236
Chapter 10 Remedies [10.310]
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”.
237
[10.310] Corporations and Contract Law
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:
[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
Chapter 10 Remedies [10.350]
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).
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:
240
Chapter 10 Remedies [10.390]
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.
241
[10.390] Corporations and Contract Law
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]).
242
Chapter 10 Remedies [10.430]
(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.
243
[10.430] Corporations and Contract Law
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
Chapter 10 Remedies [10.470]
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
[10.470] Corporations and Contract Law
(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”.
246
Chapter 10 Remedies [10.500]
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:
10.8 DEPOSITS
247
[10.500] Corporations and Contract Law
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.
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.
248
Chapter 10 Remedies [10.550]
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].)
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.
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.
[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.
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.
251
[10.610] Corporations and Contract Law
[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.
[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.)
252
Chapter 10 Remedies [10.670]
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).
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
253
[10.670] Corporations and Contract Law
cont.
[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.
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Chapter 10 Remedies [10.710]
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
256
PART 2
CORPORATIONS
LAW
11 Registration and its effects
12 Types of companies
13 Constitution and replaceable rules
14 The company’s relations with outsiders
15 Directors
16 Good faith and proper purpose
17 Conflicts of interest and disclosure
18 Duties of care, skill and diligence
19 Directors of insolvent companies
20 Remedies and penalties for breach of duty
257
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]
259
[11.05] Corporations and Contract Law
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.
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
262
Chapter 11 Registration and its effects [11.25]
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).
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/.
265
[11.40] Corporations and Contract Law
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]
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
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.
Lee was killed when his aeroplane crashed while engaged in aerial top-
dressing. 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
268
Chapter 11 Registration and its effects [11.65]
[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.
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.
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.
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.
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.
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]
275
[11.155] Corporations and Contract Law
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.
276
Chapter 11 Registration and its effects [11.180]
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
278
Chapter 11 Registration and its effects [11.195]
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.
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.
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
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.
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:
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
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.
284
Chapter 12 Types of companies [12.15]
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
286
Chapter 12 Types of companies [12.20]
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.
287
[12.20] Corporations and Contract Law
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
Chapter 12 Types of companies [12.30]
• 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 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
290
Chapter 12 Types of companies [12.50]
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.
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).
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.
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).
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.
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
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.
301
[13.15] Corporations and Contract Law
302
Chapter 13 Constitution and replaceable rules [13.30]
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.
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] Companies may adopt a constitution in any one of the following three
ways:
• 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:
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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.
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Chapter 13 Constitution and replaceable rules [13.75]
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.
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[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]
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
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[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.
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Chapter 13 Constitution and replaceable rules [13.100]
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.
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[13.105] Corporations and Contract Law
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.
312
Chapter 13 Constitution and replaceable rules [13.130]
313
[13.132] Corporations and Contract Law
[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.
314
Chapter 13 Constitution and replaceable rules [13.155]
315
[13.155] Corporations and Contract Law
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.
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.
317
[13.175] Corporations and Contract Law
318
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]
319
[14.05] Corporations and Contract Law
• 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
Chapter 14 The company’s relations with outsiders [14.10]
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.
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
[14.10] Corporations and Contract Law
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”.
322
Chapter 14 The company’s relations with outsiders [14.30]
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.
323
[14.30] Corporations and Contract Law
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.
324
Chapter 14 The company’s relations with outsiders [14.40]
325
[14.40] Corporations and Contract Law
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.
326
Chapter 14 The company’s relations with outsiders [14.75]
mind and will of the company and their state of mind was the state of mind of the
company.
327
[14.80] Corporations and Contract Law
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.
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,
328
Chapter 14 The company’s relations with outsiders [14.90]
in the normal course of events, the information would have been received by the
branch.
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.
329
[14.95] Corporations and Contract Law
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
Chapter 14 The company’s relations with outsiders [14.130]
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.
[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.
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
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[14.130] Corporations and Contract Law
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
Chapter 14 The company’s relations with outsiders [14.145]
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.
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.
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.
334
Chapter 14 The company’s relations with outsiders [14.165]
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.
335
[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].
336
Chapter 14 The company’s relations with outsiders [14.185]
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.
338
Chapter 14 The company’s relations with outsiders [14.195]
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.
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
339
[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.
340
Chapter 14 The company’s relations with outsiders [14.210]
The representation arose because the board failed to prevent him from acting as if
he were the company’s managing director.
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
341
[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].
342
Chapter 14 The company’s relations with outsiders [14.220]
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.
344
Chapter 14 The company’s relations with outsiders [14.235]
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].
345
[14.235] Corporations and Contract Law
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.
346
Chapter 14 The company’s relations with outsiders [14.245]
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
[14.245] Corporations and Contract Law
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].
348
Chapter 14 The company’s relations with outsiders [14.260]
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.
349
[14.260] Corporations and Contract Law
• 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.
[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.
350
Chapter 14 The company’s relations with outsiders [14.290]
[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
351
[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.
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
Chapter 14 The company’s relations with outsiders [14.320]
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.
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.
354
Chapter 14 The company’s relations with outsiders [14.350]
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
355
[14.350] Corporations and Contract Law
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.
356
Chapter 14 The company’s relations with outsiders [14.360]
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.
357
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]
359
[15.05] Corporations and Contract Law
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.
360
Chapter 15 Directors [15.15]
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
[15.15] Corporations and Contract Law
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.
362
Chapter 15 Directors [15.30]
363
[15.30] Corporations and Contract Law
364
Chapter 15 Directors [15.35]
365
[15.35] Corporations and Contract Law
366
Chapter 15 Directors [15.55]
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.
367
[15.55] Corporations and Contract Law
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).
368
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]
369
[16.05] Corporations and Contract Law
• 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.
370
Chapter 16 Good faith and proper purpose [16.06]
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.
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.
371
[16.06] Corporations and Contract Law
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.
372
Chapter 16 Good faith and proper purpose [16.30]
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.
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:
373
[16.30] Corporations and Contract Law
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.
374
Chapter 16 Good faith and proper purpose [16.55]
375
[16.55] Corporations and Contract Law
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.
376
Chapter 16 Good faith and proper purpose [16.80]
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.
377
[16.80] Corporations and Contract Law
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.
378
Chapter 16 Good faith and proper purpose [16.100]
[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.
[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.
379
[16.100] Corporations and Contract Law
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.
380
Chapter 16 Good faith and proper purpose [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.
381
[16.135] Corporations and Contract Law
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
384
Chapter 16 Good faith and proper purpose [16.170]
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.
385
[16.170] Corporations and Contract Law
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.
386
Chapter 16 Good faith and proper purpose [16.190]
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.
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/.
387
[16.190] Corporations and Contract Law
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).
388
Chapter 16 Good faith and proper purpose [16.230]
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.
389
[16.230] Corporations and Contract Law
390
Chapter 16 Good faith and proper purpose [16.242]
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
[16.242] Corporations and Contract Law
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].
392
Chapter 16 Good faith and proper purpose [16.260]
393
[16.260] Corporations and Contract Law
394
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 ............................................................. [17.200]
Diversion of contract ............................................................................. [17.205]
Company consent where director takes up opportunity ...................... [17.235]
Company need not suffer loss ............................................................. [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
Corporations and Contract Law
396
Chapter 17 Conflicts of interest and disclosure [17.05]
• 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.
397
[17.10] Corporations and Contract Law
[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.
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.
398
Chapter 17 Conflicts of interest and disclosure [17.25]
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.
399
[17.25] Corporations and Contract Law
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.
[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
Chapter 17 Conflicts of interest and disclosure [17.45]
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.
401
[17.45] Corporations and Contract Law
402
Chapter 17 Conflicts of interest and disclosure [17.55]
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).
403
[17.60] Corporations and Contract Law
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.
404
Chapter 17 Conflicts of interest and disclosure [17.65]
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]
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.
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.
408
Chapter 17 Conflicts of interest and disclosure [17.100]
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.
409
[17.105] Corporations and Contract Law
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]
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.
411
[17.125] Corporations and Contract Law
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
412
Chapter 17 Conflicts of interest and disclosure [17.155]
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.
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.
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.
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]
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.
415
[17.180] Corporations and Contract Law
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.
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.
416
Chapter 17 Conflicts of interest and disclosure [17.210]
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
417
[17.210] Corporations and Contract Law
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.
418
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.
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.
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).
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.
420
Chapter 17 Conflicts of interest and disclosure [17.255]
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.
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].
422
Chapter 17 Conflicts of interest and disclosure [17.280]
423
[17.285] Corporations and Contract Law
424
Chapter 17 Conflicts of interest and disclosure [17.300]
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
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.
426
Chapter 17 Conflicts of interest and disclosure [17.320]
427
[17.325] Corporations and Contract Law
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]
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.
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.
[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.
430
Chapter 17 Conflicts of interest and disclosure [17.370]
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
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.
432
Chapter 17 Conflicts of interest and disclosure [17.390]
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.
433
[17.390] Corporations and Contract Law
authorise him to disregard the interests of the company in pursuing his own
interests.
434
Chapter 17 Conflicts of interest and disclosure [17.410]
Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd cont.
435
[17.415] Corporations and Contract Law
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]
437
[18.05] Corporations and Contract Law
• 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.
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.
440
Chapter 18 Duties of care, skill and diligence [18.20]
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.
442
Chapter 18 Duties of care, skill and diligence [18.35]
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:
• 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
444
Chapter 18 Duties of care, skill and diligence [18.50]
445
[18.50] Corporations and Contract Law
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].
446
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 flow of financial information to the board (including information about
cash reserves, actual segment performance and key transactions);
• the establishment and maintenance of systems for information flow to the
board;
• 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
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.
448
Chapter 18 Duties of care, skill and diligence [18.85]
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.
449
[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]
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.
451
[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).
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]
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 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]
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.
455
[18.120] Corporations and Contract Law
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.
456
Chapter 18 Duties of care, skill and diligence [18.142]
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.
457
[18.142] Corporations and Contract Law
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.
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]
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.
459
[18.150] Corporations and Contract Law
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]
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.
461
[18.160] Corporations and Contract Law
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.
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
[18.170] Corporations and Contract Law
464
Chapter 18 Duties of care, skill and diligence [18.185]
[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).
465
[18.185] Corporations and Contract Law
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.
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).
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
[18.205] Corporations and Contract Law
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.
468
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]
469
[19.05] Corporations and Contract Law
• 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
Chapter 19 Directors of insolvent companies [19.10]
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”.
471
[19.10] Corporations and Contract Law
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]
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.
473
[19.20] Corporations and Contract Law
474
Chapter 19 Directors of insolvent companies [19.50]
[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.
476
Chapter 19 Directors of insolvent companies [19.60]
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.
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 overdraft facility was frequently exceeded and the directors
negotiated with the bank to increase the limit on three occasions;
• the company’s bank sent monthly bank statements to the directors indicating
that the company was exceeding its overdraft limit;
• 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
Chapter 19 Directors of insolvent companies [19.80]
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.
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
[19.80] Corporations and Contract Law
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].
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]
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.
481
[19.100] Corporations and Contract Law
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).
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]
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.
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”.
484
Chapter 19 Directors of insolvent companies [19.140]
485
[19.140] Corporations and Contract Law
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
[19.150] Corporations and Contract Law
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.
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).
489
[19.175] Corporations and Contract Law
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
• 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]
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.
495
[20.25] Corporations and Contract Law
[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.
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
[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.
[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.
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).
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].
[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.
501
[20.112] Corporations and Contract Law
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
502
Chapter 20 Remedies and penalties for breach of duty [20.120]
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.
504
Chapter 20 Remedies and penalties for breach of duty [20.135]
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
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
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]
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
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.
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.
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.
512
Chapter 20 Remedies and penalties for breach of duty [20.190]
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 principles determining finality, [4.180]
telegram, by, [4.470]
telephone, by, [4.470]
telex, by, [4.470]
Acceptance time limit, [3.550]
communication of, [4.190], [4.330] express stipulation, [3.560]
by offeree, [4.200] implied, [3.570], [3.580]
silence, [4.220], [4.230] reasonable time, definition, [3.570],
stipulation of method, [4.290]-[4.320] [3.580], [3.610]
unauthorised person, by, [4.210] termination of offer on lapse of, [3.400],
waiver of right to, [4.240] [3.550]
conditional, [4.90], [4.100] unilateral contracts, [4.240]
categories of contract, [4.110] waiver of right to communication, [4.240]
finality of agreement, [4.120]-[4.180] what may be accepted, [4.80]
conduct constituting, [4.250], [4.280] who is capable of, [4.30]
counter-offer distinguished, [4.80]
cross-offer distinguished, [4.20]
Acceptor
deceased’s estate, [4.40]
communication of offer to, [3.260], [3.270],
definition, [4.10]
[4.30]
electronic means, [4.490]
motive immaterial, [3.280], [4.30]
email, by, [4.570]
essential contractual element, [2.50] who may be, [4.30]-[4.70]
fax, by, [4.570], [4.580]
knowledge of offer required, [3.280], Account of profits
[3.290], [4.30] breach of duty by director, [20.50]
mere knowledge, [3.300], [3.310]
language used, [3.30] Actual breach — see Breach
manner of, [4.190]-[4.490]
not stipulated, [4.330]
stipulated by offeror, [4.280]-[4.320] Administrative tribunals — see Tribunals
mere inquiries, [3.350], [3.360]
misdirected letters, [4.560] Advertisement
more than one person, by, [4.60], [4.70] invitation to treat, [3.100], [3.110]
motive immaterial, [4.30] offer, whether, [3.100], [3.110], [3.160]
non-offeree, by, [4.40], [4.50] offer to the world at large, [3.160]
post, by, [4.290], [4.340] puff, [3.220]–[3.250]
postal rule, [4.340]-[4.360], [4.370]
abnormal delay, [4.440]-[4.450]
Affirmation of contract
contemplation of parties,
misrepresentation, after, [8.670]
[4.370]-[4.390]
deemed time of acceptance, [4.440],
[4.450] Agency
effect of, [4.340], [4.440], [4.450] payment of consideration by agent, [6.50],
inconvenience or absurdity, [4.390] [6.60]
limits of, [4.470], [4.490] specific performance and, [10.650]
misdirected letters, [4.460]
negating effect of, [4.400]-[4.430] Agent
protracted, contentious dealings, agency relationship, nature of, [14.130]
[4.370], [4.380] assumptions in relation to dealings, [14.215]
revocation of posted acceptance, constitution, compliance with,
[4.510] [14.220]-[14.230]
response to offer, must be, [4.30] customary authority, [14.310]
revocation, [4.500] document duly executed,
posted acceptance, [4.510] [14.260]-[14.300]
reward offers, [4.60] fraud or forgery, effect of, [14.370]
silence, by, [4.220], [4.230] incorrectness, knowledge or suspicion
subject to formal contract, [4.90], [4.100] of, [14.360], [14.365]
categories of agreements, [4.110] limitations, [14.355]-[14.365]
finality of agreement, [4.120]-[4.180] person held out as agent, [14.240]
515
Corporations and Contract Law
B
Annual general meeting (AGM)
proprietary company, [15.45]
public company, [15.45]
516
Index
517
Corporations and Contract Law
Caveat emptor, [8.60], [8.100] relief under Competition and Consumer Act
2010 (Cth), [7.540]-[7.560]
Certificate three party, [7.440]-[7.470]
registration, of, [11.10] consideration for, [7.440]-[7.470]
share certificate — see Share certificate validity and binding nature, [7.390]
518
Index
519
Corporations and Contract Law
520
Index
521
Corporations and Contract Law
522
Index
523
Corporations and Contract Law
524
Index
525
Corporations and Contract Law
Exemption clauses
Competition and Consumer Act 2010 (Cth),
Election [8.200]-[8.220]
rescission for misrepresentation construction
fraudulent, [8.550], [8.600] coverage of breach as matter of,
innocent, [8.640] [7.1120]-[7.1140]
negligent, [8.620] strict, [7.990]-[7.1010]
contra proferentem rule, [7.1020]-[7.1040]
Employees courts’ attitude towards, [7.980]
directors’ duty of good faith, [16.115]- excluding terms,
[16.125] limiting clause, distinction, [7.1150]
entitlements, protection of, [19.180] United Kingdom, [7.1150]
526
Index
527
Corporations and Contract Law
I
General meeting of members
annual — see Annual general meeting
company organ, as, [15.05] Ignorance
overriding management decisions, [15.40]- misrepresentation, of, [8.390]-[8.400]
[15.50] offer, of, [3.270]
528
Index
529
Corporations and Contract Law
J
non-disclosure as misrepresentation,
[8.170]-[8.180]
Intention
offer, element of, [3.10], [3.20], [3.90] Jurisdiction
statement of, whether misrepresentation, appellate, [1.280]
[8.230], [8.280]-[8.300]
Federal Courts, [1.340]
test of, [5.20]
High Court, [1.320]
Supreme Courts, [1.310]
Intention to be bound
honour clauses, [5.370]
ambiguity, [5.380]-[5.400]
business or commercial agreements, [5.40], original, [1.280]
[5.270], [5.320]
honour clauses, [5.330]-[5.360] L
onus of proof, [5.320]
practical joke, [5.300], [5.310]
rebuttal of presumption, [5.280]-[5.310]
traditional presumption, [5.270] Land
collateral contracts, [7.480]-[7.490] contract for sale of,
domestic or social agreements, [5.40], [5.50] specific performance, [10.540], [10.580]
effect of former presumptions, [5.260]
family agreements, [5.90], [5.100],
Law — — see also Common law — — see
[5.210]-[5.230]
also Courts — — see also Equity —
husband and wife agreements,
[5.60]-[5.80], [5.170]-[5.200] — see also Statute law
onus of proof, [5.260] Australian law-making power, [1.20]
social agreements, [5.110], [5.120], Australian, origins of, [1.10], [1.20]
[5.240]-[5.250] conquered vs settled land, [1.20]
voluntary associations, [5.130], [5.140], definition, [1.10]
[5.150] enacted and unenacted compared, [1.10]
essential contractual element, [2.50], [5.10] English, [1.20]
express exclusion, [5.330]-[5.400] “received” into Australia, [1.20], [1.30]
former presumption as to, [5.40]
received law, [1.20]
business agreements, [5.270]-[5.320]
domestic or social agreements, parts, [1.30]
[5.50]-[5.260] sovereign bodies, [1.10]
honour clauses, [5.330]-[5.360] statements of, whether misrepresentation,
ambiguity, [5.380]-[5.400] [8.230], [8.310]
excluding jurisdiction of court, [5.370] terra nullius doctrine, [1.20]
onus of proof, [5.40]
terms as indication of, [7.10], [7.230]- Legal capacity
[7.380] company, [11.15], [13.65]
test of intention, [5.20], [5.30] objects clause of constitution, formerly
presumptions approach, [5.40] limited by, [13.65]
s 124 Corporations Act, [13.70]
Invalidity ultra vires doctrine, abolition of, [13.75]
parol evidence rule, [7.150]
Legal proceedings
Invitation to treat companies, by and against, [11.15]
advertisements, [3.100], [3.110] derivative actions — see Derivative actions
catalogue advertisements, [3.100] members, by — see also Members’
definition, [3.90] remedies
530
Index
531
Corporations and Contract Law
532
Index
533
Corporations and Contract Law
534
Index
535
Corporations and Contract Law
536
Index
Replaceable rules
Ratification alteration, [13.175]
implied terms, and, [7.180] limits on right, [13.180]
special resolution, [13.75], [13.175]
statutory requirements, [13.175]
Ratio decidendi, [1.220] application, [13.10]
distinguishing, and, [1.250] breach of, [13.10]
multi-judge decisions, [1.230] remedies, [13.75], [13.170]
choice to be governed by, [13.40]
Received law, [1.10], [1.20]-[1.30] company limited by guarantee, [13.25]
constitution
Rectification application where repealed, [13.10]
conditions for, [7.160]-[7.180] choice to use replaceable rules and/or,
evidence, [7.160]-[7.180] [13.40]
implied terms, and, [7.180] contractual effect, [13.80]
parol evidence rule, [7.160]-[7.180] company and directors, between,
[13.145]-[13.165]
Registered office separate contract of service, where,
proprietary company, [12.95] [13.150]
public company, [12.95] company and members, between,
[13.85]-[13.100]
provisions outside capacity as
Registration of company
members, [13.100]-[13.110]
certificate, [11.10]
company coming into existence on, [11.10] company and secretary, between,
constitution — see Constitution [13.145]
effects, [11.15] members, between, [13.125]-[13.140]
number of companies registered in Australia, remedies, [13.80], [13.170]
[12.05] disclosure of interest requirements, [17.375],
registrable Australian bodies, [12.05] [17.380]
replaceable rules — see Replaceable rules internal management, [13.05], [13.10]
nature of, [13.10]
no liability company, [13.30]
Rejection of offer pre-1998 companies, [13.10], [13.35]
communication of, [3.540] proprietary company, [12.65], [13.10]
counter-offer as, [3.330], [3.340] single director/shareholder, [12.65],
express or implied, [3.530] [13.20]
termination by, [3.400], [3.350] public company, [12.65], [13.10]
mandatory rules, [13.10]
Related party transactions repeal of Table A and B regulations, [13.35]
financial benefits, [17.40] section headings identifying, [13.10]
breach of statutory provisions, single director/shareholder company,
[17.75]-[17.80] [13.20]
examples, [17.50] table of, [13.15]
related party, [17.55]
shareholder approval, [17.45], [17.60] Representations
meeting, [17.65]
collateral contracts, becoming, [7.390]-
voting by interested related parties,
[7.400], [8.10]
[17.70]
when not required, [17.60] definition, [7.220]
intention, importance of, [7.230]-[7.260]
mere representations, [8.10]
Remedies for members — see Members’
remedies misrepresentation — — see
Misrepresentation
non-contractual, [8.10], [8.20]-[8.40]
Remoteness
puff distinguished, [8.20]-[8.40]
damages, [10.110]
terms distinguished, [7.220]-[7.380], [8.10]
contemplated consequences, [10.190]
foreseeability, [10.150]-[10.180]
natural consequence of breach, loss as, Repudiation
[10.150]-[10.180] revocation of acceptance, [4.510]
537
Corporations and Contract Law
S
misleading or deceptive conduct, [8.190],
[8.760]
misrepresentation, [8.60]
exceptions to general rule,
[8.70]-[8.180]
Salomon’s case
general rule, [8.60]
application, [11.45]
corporate groups, [11.45]
decision, [11.40] Sham companies
corporate veil, lifting, [11.70], [11.100],
[11.115], [11.120], [11.125]
Secretary
constitution, contractual effect of, [13.145]
contract, authority to make — see Shareholders — see Members
Contracts with company
customary authority, [14.340]-[14.350] Shares
directing mind and will of company, as, company limited by — see Company
[14.50]-[14.55] limited by shares
538
Index
539
Corporations and Contract Law
540
Index
U Voting
interested director, by
public company, [17.85]
W
Uberrimae fidei contracts
definition, [8.170]
non-disclosure as misrepresentation,
[8.170]-[8.180]
Waiver
Ultra vires communication of acceptance, right to,
abolition of doctrine, [13.75] [4.240]
subordinate legislation, [1.170]
War
Uncertainty frustration of contracts, [9.340],[9.580],
parol evidence rule, [7.50], [7.190]-[7.210] [9.600]
541