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LAW00150

Introduction to Business Law


Written and revised by: Warwick Fisher
Reviewed by: Angela Jones

Study Guide
Fifth edition

CRICOS Provider: 01241G

2015 Southern Cross University


Southern Cross University
Military Road
East Lismore NSW 2480
No part of this publication may be reproduced, stored in a retrieval system or transmitted in
any form or by means electronic, mechanical, photocopying, recording or otherwise without
the prior written permission of the publisher.
Copyright material indicated in this work has been copied under Part VB of the Copyright Act
1968.

Fifth edition 2013, reformatted version 2015

Contents
Unit overview...............................................................................................................................................................................7
Welcome to Introduction to Business Law.................................................................................................7
Using this guide..............................................................................................................................................7
About the writer and unit assessor.......................................................................................................................................9
About the reviewer.....................................................................................................................................................................9
Topic 1 The Australian legal system....................................................................................................................................11
What well do in this topic......................................................................................................................... 11
Law in Australia.......................................................................................................................................... 12
Law in commerce........................................................................................................................................ 13
Business, law and ethics............................................................................................................................. 13
Risk management........................................................................................................................................ 13
Summary...................................................................................................................................................... 14
Topic 2 Making the contract
Part 1 (offer and acceptance)................................................................................................................................................15
What well do in this topic......................................................................................................................... 15
What is a contract?...................................................................................................................................... 15
Contractual remedies................................................................................................................................. 15
Rules regarding an offer............................................................................................................................. 16
The fate of the offer including acceptance............................................................................................... 16
Summary...................................................................................................................................................... 17
Topic 3 Making the contract
Part 2 (intention and consideration)...................................................................................................................................19
What well do in this topic......................................................................................................................... 19
Intention involving social agreements..................................................................................................... 19
Intention regarding commercial agreements.......................................................................................... 20
Letters of comfort, support or intent........................................................................................................ 20
The nature of consideration....................................................................................................................... 20
Rules regarding consideration................................................................................................................... 20
Promissory estoppel.................................................................................................................................... 22
The law regarding capacity to contract..................................................................................................... 22
Summary...................................................................................................................................................... 23
Topic 4 Express terms............................................................................................................................................................. 25
What well do in this topic......................................................................................................................... 25
Establishing the express terms of the contract written terms............................................................ 25
Establishing the express terms of the contract oral statements and other representations........... 26
Exemption clauses....................................................................................................................................... 27
Unenforceable or invalid contracts (or terms within contracts).......................................................... 27
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LAW00150 Introduction to Business Law


The importance of a term........................................................................................................................... 28
Summary...................................................................................................................................................... 28
Topic 5 Implied terms............................................................................................................................................................. 29
What well do in this topic......................................................................................................................... 29
Special terms implied by courts................................................................................................................ 29
Terms implied by courts based on the facts............................................................................................ 29
Terms implied by sale of goods legislation.............................................................................................. 30
Summary...................................................................................................................................................... 31
Topic 6 Remedies in contract law........................................................................................................................................33
What well do in this topic......................................................................................................................... 33
Terminating the contract........................................................................................................................... 33
Recovery of the contract price................................................................................................................... 34
Damages....................................................................................................................................................... 34
Equitable remedies...................................................................................................................................... 34
Rescission..................................................................................................................................................... 35
Summary...................................................................................................................................................... 36
Topic 7 Liability for defective products.............................................................................................................................37
What well do in this topic......................................................................................................................... 37
Liability for negligence (common law).................................................................................................... 37
Liability under Australian Consumer Law (ACL).................................................................................. 39
Summary...................................................................................................................................................... 40
Topic 8 Misrepresentation and unfair commercial conduct......................................................................................41
What well do in this topic......................................................................................................................... 41
Common law misrepresentation............................................................................................................... 41
Misleading and deceptive conduct under the Australian Consumer Law (ACL).............................. 43
Unconscionable conduct............................................................................................................................ 44
Summary...................................................................................................................................................... 45
Topic 9 Consumers rights and the supply of goods and services...........................................................................47
What well do in this topic......................................................................................................................... 47
Consumers rights against the supplier of goods.................................................................................... 47
Consumers rights against the manufacturer of goods.......................................................................... 48
Consumers rights against the suppliers of services............................................................................... 49
Summary...................................................................................................................................................... 49
Topic 10 Agency.........................................................................................................................................................................51
What well do in this topic......................................................................................................................... 51
What is an agent?........................................................................................................................................ 51
How is an agency created?......................................................................................................................... 52
The agents authority and duties................................................................................................................ 52
Who can sue whom?................................................................................................................................... 53
Summary...................................................................................................................................................... 54

Unit overview
Welcome to Introduction to Business Law
Undertaking this unit will be a very different experience for most of you.
Legal studies require a different approach to that of the other units you have studied so far. The language in
your textbook will be different to that in other books, and legal rules and principles may at first daze and
confuse. But fear not. The textbook I have chosen for this unit, from a vast array, makes the areas of law
covered in this unit most accessible.
One of the greatest challenges facing both you as a student and we as teachers is how to cope with the huge
breadth of content required in this unit. Because this is the only law unit most of you will study in your
degree, we aim to introduce you to a large number of important and sometimes disparate legal topics
starting with an introduction to Australias legal system and concluding with agency law. Many of these
topics, in a normal law degree, would warrant a full sessions study yet, here, we cover these various topics
in just a few weeks.
Because of this, you will not be expected to understand the unit content to the same extent as a student
undertaking a degree in law or legal studies. The units assessment requirements reflect the major aim of
the unit to introduce you to the important basic legal principles that govern Australian commerce and
business. Having been unit assessor for this unit for ten years I am satisfied that students who pass this unit
are aware of a number of important legal issues and are better equipped for their careers as a result.
Another challenge will be learning how to answer legal problem questions. The examination will feature
some legal problems that, at first glance, seem very confusing but if you apply the approach I will teach you
later in the session, you will quickly learn the skill of answering legal problem questions.

Using this guide


Before we examine the first topic in this unit I would like to explain how to use this Study Guide to ensure
you get the most from your studies.
This Study Guide is designed, as the name suggests, to guide you through the subject matter of the unit in a
systematic and structured way, using features such as hierarchical headings, margin notes and bold font to
highlight key concepts and terms. Please note that I am not duplicating the textbook, rather, highlighting
the important things on which you need to focus. The Study Guide, in other words, is a companion and
guide to the textbook.
This study guide, unlike those in many other units, will not contain any activities and feedback because
there are excellent questions at the end of each textbook chapter to engage your interest. For each topic you
will be invited to discuss some of these questions in MySCU where your online tutor (me or one of our
excellent team) will give you feedback.
Therefore, the only thing you are required to do as you proceed through the Study Guide is to read the
required parts of the textbook when you are advised to do so. You will see the following symbol followed
by page numbers:

LAW00150 Introduction to Business Law

Textbook
When you see this instruction, read the material mentioned. Textbook refers to the prescribed
textbook: Sweeney, B, OReilly, J and Coleman, A, Law in Commerce (LexisNexis Butterworths,
5th ed, 2013).

Throughout the Study Guide you will find reference to cases, always in italics. It is important to read the
small commentary in the textbook on any case mentioned in the Study Guide. I am confident that you will
find that they make study much more interesting.

Summary
Summary of important points/ideas/thoughts usually appears at the end of a topic.

Dont be overwhelmed by all the cases and legislation


discussed in the Study Guide and textbook
As lawyers, it is important that we draw your attention to all the relevant law. As teachers, however, we
understand that you are not preparing for a law career but, instead, are Business students simply needing a
broad overview of the law as it relates to your discipline. Therefore you can rest assured that all assessment
tasks will be set with that in mind. Most important, the exam will only require you to understand the most
important features of the various topics and not the minute details. And remember, you have an Open Book
exam so you are allowed to take in your Study Guide and textbook as well as other notes and documents. So
relaxreeelax. A little bit, at least.

One important final word about this unit


There are a large number of topics to study in this unit. It is vital that you follow the Suggested Study
Timetable in the Unit Information Guide to ensure that you dont run out of time before you complete all
the required topics.
And one more thing; You will note that the Study Guide often only mentions certain cases from the textbook
while apparently ignoring others. This does not mean that you should ignore those other cases. All I am
attempting in the Study Guide is to present to you a broad picture of each topic. It is the textbook where you
need turn for all the detail.
Good luck everyone,
Warwick

About the writer and unit assessor


Warwick Fisher has been a lecturer in Southern Cross Universitys School of Law and Justice since 2001
and holds a Bachelor of Education (major in Economics) from James Cook University and a Bachelor of
Legal Studies from Macquarie University. He is currently undertaking research on rural land sharing
communities.
Warwick also teaches Contract Law and Land Law. Prior to his move to the School of Law and Justice, he
had lectured in the College of Indigenous Australian Peoples for nine years where he taught Community
Administration and Human Rights.
Warwicks main non-academic interests include tennis, croquet, cycling, swimming, listening to classical
music, reading, watching movies and playing with his granddaughter. He lives on a sort of Buddhist
community near Lismore. He came 21,320th in the 2004 City to Surf which is very impressive. No, really.

About the reviewer


Angela Jones has a BA (Hon) from Maquarie University, a LLB (Hon) from the Australian National
University and a Master of Adult Education from University of Technology, Sydney.
Angela left the big city and work in community legal centres for a life in northern NSW. She has worked with
the School of Law and Justice since 2004. In her spare time, she keeps out of mischief by reading philosophy
and neuroscience.

LAW00150 Introduction to Business Law

Topic 1
The Australian legal system
What well do in this topic
This topic will provide a useful and important examination of the Australian legal system. You are part of
this system, one predominantly influenced by Australias English heritage. This topic broadly aims to show
you how our system of government works. Apart from its significance as part of your study in this unit,
everyone who lives in Australia would benefit greatly from understanding our legal system. Lamentably,
civics education is largely ignored in our secondary curriculum, which is why this topic takes on greater
significance for you.
When we use the term government in relation to Australia, most people will think of the Australian
Government led by Julia Gillard or the NSW Government of Barry OFarrell (at the time of writing)
for example. When used this way, we mean that the Government is the political party (or parties) that
commands a majority in the Lower House of the Parliament while the Opposition tries to gain a majority
in the next election so that it can become the Government.
Government, however, has a broader meaning. It refers to the way in which our nation is governed overall. It
embraces the three arms of government parliament, executive and judiciary. Among other things, this
topic explains how these three arms of government operate.
In this topic you will also learn about the meaning of law, the development of our legal system (from its
English origins), the different types of law, the Constitution and the court system. Thats quite a lot of territory
to cover in one topic but rest assured that our objective is simply for you to gain a broad understanding of
the legal system.
Having introduced you to the Australian legal system we then consider the various institutions within that
system. The Commonwealth, the various states and territories each have what is referred to as jurisdiction
(power) in particular matters. A person charged with offences under the Corporations Act 2002 (Cth) will
come under Commonwealth (or federal) jurisdiction while a person charged with assault in NSW comes
under that states jurisdiction.
Each jurisdiction has its own court structure and hierarchy, and decisions of a lower court may, in certain
situations, be appealed all the way to the High Court. You can see how the Victorian court hierarchy works
in the diagram on p14 of your textbook. All states have very similar names for the various courts. In NSW,
for example, the Magistrates Court is called the Local Court and the Victorian County Court is the same
as the NSW District Court.
You will note that I have slightly changed the order of headings from the textbook to assist your understanding
of the main points.

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LAW00150 Introduction to Business Law

Law in Australia

Textbook
1.31.24

Background
The English claimed sovereignty over New South Wales (hence, Australia) in 1788. Because the English
falsely claimed the land on the basis of terra nullius (land belonging to no-one) they applied the doctrine of
reception whereby the laws of England became the laws of New South Wales.
As a result, we inherited the English common law, equity law and statute law. Gradually, throughout the
nineteenth century, the English Parliament enacted laws that gave the fledgling colonies greater autonomy.

The Constitution
In 1900, the United Kingdom Parliament passed the Commonwealth of Australia Constitution Act 1900
(UK) creating a Federal Commonwealth, a system of government where power is shared between the
Commonwealth and the states. It came into effect on 1 January 1901.
The Constitution is a far-reaching charter (statement) of principles (rules) explaining how the various
institutions of government will work. Apart from the division of powers (referred to as Federalism)
between the Commonwealth and the states, the other important principles relate to the separation of
powers between the parliament, the executive and the judiciary.
The primary reason that Australia has had such a stable history since Federation is the strength and
robustness of the Constitution. It is clear in its central meaning and is difficult, though not impossible, to
alter. There have been various occasions when one institution has overstepped its constitutional powers
only to be foiled by the application of the Constitution.
You will observe that the Commonwealth and the states have been able to work effectively from time to time,
for example, with the development of both the Corporations Act 2001 (Cth) and the Trade Practices Act 1974
(Cth) renamed the Competition and Consumer Act 2010 (Cth).

Parliamentary law v judge-made law


There are, broadly speaking, two sources of domestic (Australian) law. First, there is Parliament where
statutes (Acts of Parliament) are created. The second source of law is the law made by judges your textbook
describes the way judges make law applying the rules of precedent in both common law cases and in equity.
As your textbook points out, statute law will override judge-made law wherever there is a conflict due to the
constitutional principle known as the sovereignty of parliament.
Because it is up to the judiciary to decide legal issues brought before it, the courts rely on precedent for
judge-made law. But, how do they interpret statute laws, given that these laws were created in a different
institution? Your textbook describes the various approaches taken by the courts over the years the literal
rule, the golden rule and the purpose approach.

Topic 1 The Australian legal system

Law in commerce

Textbook
1.251.28

Contracts, torts and statutory obligations


The law of contracts aims to help bring certainty and confidence to commercial agreements. Imagine a
commerce system unsupported by contract law where people could go back on their word any time they
liked? The law of contracts is there to enforce contracts or to provide a remedy when a party breaches the
contract by not fulfilling their side of the bargain.
Apart from contract law our commercial world is also subject to tort law. This is the area of law concerned
with people who suffer hurt arising from anothers failure to apply minimum standards of behaviour. The
law of torts may provide assistance to someone who has suffered loss as a result, for example, of anothers
negligence or dishonesty.
Of great significance for both commerce generally and this unit in particular are the many statutory
obligations arising from numerous parliamentary laws (state and Commonwealth) which greatly add to or
modify the common law of contracts and torts.
And, while we will limit ourselves to the area of Agency (in our final topic) you need to be aware of the many
types of business relationships and organisations that exist within the Australian commercial framework.

Business, law and ethics

Textbook
1.291.39

Ethical behaviour, or the lack of it, has been a significant feature of commerce and business over the past
three decades. The recent global financial crisis has been the most recent manifestation of unethical
behaviour but look back at past problems both outside and within Australia and you will quickly learn just
how damaging to the individual, the economy and society can be the belief that greed is good or my needs
at any cost.
So, an understanding of both the importance of ethics and its role in business is a key part of this unit. You
will be assessed on ethics in your first assignment but I want you to keep thinking about its significance
right through to the completion of the unit.
Acting ethically, however, is not always easy as you will learn when you read the textbook.

Risk management

Textbook
1.401.43

Risk management is a term that has gained widespread currency in commerce. This is where organisations
seek to direct and control their activities in a way most likely to protect them against potentially costly

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litigation (legal action) in the future. Given the human and financial costs involved where attention has not
been paid to risk management, it now informs most corporate decisions.

Summary
You will be pleased to know that most of the remaining topics dont have the same breadth as Topic 1. Yet
Im sure you found learning in some detail about the numerous areas of our legal system both rewarding
and useful. Many of you will be vaguely familiar with some of the terms and institutions we have discussed
because they are frequently referred to in the media, including TV crime shows. Now I expect youll become
a leading authority on all these areas among family and friends.

Topic 2
Making the contract
Part 1 (offer and acceptance)
What well do in this topic
We are now going to examine the first step towards the creation of a contract. A contract implies a meeting
of the minds between the parties and comprises offer and acceptance. If the offeror (the person making
the offer) has made a clear offer that has been accepted by the offeree (the person to whom the offer is
made), then we say that there has been genuine agreement. It sounds straightforward enough, but there are
numerous issues that need to be considered before you can recognise a true meeting of the minds.

What is a contract?

Textbook
4.24.6

A contract is a legally binding agreement that will be enforced by the courts. We often enter agreements but
not all are legally binding. There are four elements that have to be present in the agreement before it will be
legally binding, or, in other words, a contract. These essential elements are shown in Figure 4.2 and the first
two, offer and acceptance are examined in this topic.
When a contract is in dispute before the courts it is often difficult to ascertain the parties intention. Make
sure you understand the difference between a subjective test and an objective (reasonable person) test
discussed on p150 of your textbook. If you understand the reasonable person test it will make everything
that follows regarding contract law that much easier.

Contractual remedies

Textbook
4.74.13

Well be taking a much closer look at remedies in Topic 6. A remedy is the thing that solves a legal problem
in much the same way that aspirin is a remedy for a headache. At this point in your studies just think about
some of the key types of remedy available to the innocent party. If the breach has been serious, the innocent
party can choose to terminate the contract. Where the breach involves everyday goods the courts will
normally award damages, a money amount which intends to place the innocent party in the same position
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they would have been in had the contract been properly performed. If, on the other hand the subject of the
contract happened to be something extremely rare or unique, the courts may award specific performance
and the breaching party is required to perform their obligations by selling the good or item to the other
party as promised. Finally, for your benefit as you delve into contract law, the textbook explains the remedy
known as injunction, a court order requiring a person to stop doing something.

Rules regarding an offer

Textbook
4.144.23

This is, I think, most straightforward and requires little more than common sense. Start by making sure you
understand who is the offeror and who is the offeree; thats important.
An offer may be described as the indication by one person to another of his/her willingness to enter into
a contract with the other on certain terms. Read Harvey v Facey [1893] AC 552 and if you think about it,
Facey (the defendant) had not made an offer to Harvey (the plaintiff) but had simply supplied him with
information. As I said earlier, common sense.
So, make sure you can distinguish between an offer and the:
supply of information (Harvey v Facey); and an
advertisement (Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256) it can be an offer; or an
invitation to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) [1953] 1
QB 401).
Also be clear about who is making the offer in an:
auction of goods (Harris v Nickerson (1873) LR 8 QB 286); or
internet transaction.

The fate of the offer including acceptance

Textbook
4.244.56

Look closely at Figure 4.4; it says it all. Once the offer has been made it can meet any one of several fates only
one of which, agreement, means that we can tick the first two essential elements.
Withdrawing the offer is the right of the offeror provided it meets certain requirements. It cannot be
withdrawn, for example, once the offeree has communicated acceptance. Whilst you should read all the
cases to understand the rules regarding withdrawal and acceptance of offers, I would strongly encourage
you to pay particular attention to Byrne v Van Tienhoven & Co (1880) LR 5 CPD 342.
If the offeree accepts the offer we say that there is genuine agreement but, again, the offeree must comply
with a number of rules to ensure the acceptance is effective. Students sometimes get slightly confused about
the postal rule and the rules regarding acceptance via the internet. Make sure you understand these as well
as the other rules regarding acceptance.
Rejection of the offer simply involves the offeree saying, no thanks or something similar; hopefully
something polite. A counter-offer also means rejection of the original offer (Hyde v Wrench (1840) 3 Beav
334; 49 ER 132). Asking for clarification is not a counter-offer. (Stevenson Jacques v McLean (1880) 5 QBD
346)

Topic 2 Making the contractPart 1 (offer and acceptance)


An offer can lapse for a number of reasons. The passage of a reasonable time will see the offer lapse; it
doesnt last forever. Death can be fatal, but not in all circumstances. (Fong v Cilli (1968) 11 FLR 495. Again,
its common sense.

Summary
There cannot be a valid contract unless there is clear agreement as to the terms by both the offeror and the
offeree. The courts settle disputes concerning agreement by applying rules relating to offer and acceptance.
Provided there has been a true meeting of minds (and the other essential elements are present) there may
be a contract.

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Topic 3
Making the contract
Part 2 (intention and consideration)
What well do in this topic
This topic considers the third and fourth essential elements for the creation of a contract. These are intention
to contract (intention to enter into legal relations) and consideration.
Generally, in the case of business or commerce agreements, it makes sense that the parties intend to create
legal relations. It would be a sick economy indeed where people could place orders worth millions of dollars
and have goods sent to them, only to then say that they werent serious and didnt really want to purchase
them.
Where it gets a tad messy is where friends and family make agreements. If we reapply the example in the
above paragraph to social, domestic or voluntary agreements, it would be a sad society where parents,
children or friends ended up in court because they failed to deliver on their promises. What if, for example,
your daughter assured you that if you purchased a CD she simply had to have, she would tidy her room that
same night? Should you sue her because she went to the movies with a friend instead of tidying her room?
Then we will examine the fourth essential element of a contract. Without both parties providing
consideration (with a few exceptions explained below), a contract is unenforceable. We will consider the
nature of consideration, and the rules relating to it, and briefly examine the doctrine of promissory estoppel.
Finally we will ponder the question of capacity; who has the legal right to create contractual relations? Can
someone under the age of 18, for instance, be bound by a contract? Or, what if they were mentally disabled
or drunk at the time?
There is plenty of information to cover here so, lets get started.

Intention involving social agreements

Textbook
5.3

The courts will presume that parties to social or domestic agreements do not intend to be legally bound
as Mrs. Balfour found out to her great cost in Balfour v Balfour [1919] 2 KB 571. The courts will, however,
see things differently if there is clear evidence of intention as was the case in Todd v Nicol [1957] SASR 72.
Where the court considered factors such as the cost to the Todds and the lack of provision for a return trip.

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Intention regarding commercial agreements

Textbook
5.45.5

Here the courts take the opposite view to that discussed above, presuming that the parties do intend their
agreements to be legally binding (Carbolic Smoke Ball Co [1893] 1 QB 256) and that clear words are needed
if one party wishes to rebut that presumption. In Rose and Frank v Crompton & Bros [1923] 2 KB 261 words
to that effect were found in, what is sometimes referred to as, an honour clause.

Letters of comfort, support or intent

Textbook
5.65.9

These are interesting (okay, maybe to a lawyer) because they dont seem on the surface, to be one thing or
another. They are normally written by someone who doesnt wish to give a formal guarantee while the
recipient wants it to be binding. Kleinwort Benson v Malaysia Mining Corporation Bhd [1988] 1 WLR 799 is
a good example and demonstrates the view taken by the courts.

The nature of consideration

Textbook
5.105.14

Consideration is defined generally as the price, detriment or forbearance for which the promise of the
other party is bought. Heres a simple example. If you and I agree that I will sell you my car for $5000,
my consideration is the car and yours is $5000. It is important that you get the terminology right; in this
example I am the promisor and you are the promisee. Thus, you, the promisee has to provide consideration
in exchange for my promise.
Unfortunately it can get more complicated as will be explained shortly. Broadly speaking, consideration can
be an amount of money, an act, a promise to do something or a promise not to do something. To be enforced,
an agreement must be supported by consideration by both parties except in the case of a formal contract (a
deed) or where the equitable doctrine of promissory estoppel applies. We will look at promissory estoppel
later; its terrific fun trust me, Im a lawyer.

Rules regarding consideration

Textbook
5.155.33

Topic 3 Making the contractPart 2 (intention and consideration)


There are a number of rules developed over many centuries that you need to understand when looking at
the question of consideration. These rules are:
Only parties to the contract can sue for a breach. A party seeking to enforce a contract must be able
to show that they furnished consideration. In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915]
AC 847, the plaintiff failed to provide consideration; hence there was no contract with the defendant. In
Coulls v Bagots Executor & Trustee (1967) 119 CLR 460 the court held that only one party needs to provide
consideration where there are two or more promises. Trident General Insurance v McNiece Bros (1988) 165
CLR 107 indicates that there may be some exceptions to this rule.
Consideration can be present or future, but not past. In Roscorla v Thomas (1973) 47 ALJR 586 the
defendants promise that the horse was sound was made after the purchase and so the buyer didnt buy the
horse relying on that promise but on past consideration. The courts have, however, developed an exception
to this rule. The decision in Re: Caseys Patents: Stewart v Casey [1892] 1 Ch 104 recognises that there can be
an implied understanding that someone will be paid for their work.
Consideration may be of nominal value. Courts dont generally concern themselves with the fairness of
consideration. They do, however, insist on seeing something offered as consideration that is of some legal
value. In our example above, if instead of agreeing to exchange my car for $5,000 I had agreed to exchange
it for a biro pen, the court would accept that there had been consideration of some legal value. (Thomas v
Thomas (1842) 2 QB 85)
Consideration must be sufficient. This follows on (logically, in my view) from the previous rule. While it
need not be adequate, it must be sufficient and you need to look at the following situations and hopefully
understand where the consideration is sufficient or otherwise.
Illusory promises are not consideration. In White v Bluett (1853) 23 LJ Ex 36 the court held that a
sons promise not to bore his father was illusory yet in Dunton v Dunton (1892) 18 VLR 114 the court
found that by keeping her promise to act in a sober manner, the wife had provided consideration. Go
figure.
Giving up a legal claim. Sometimes called a forbearance to sue, the courts recognise it as
consideration. Read both the textbooks example and Wigan v Edwards (1973) 47 ALJR 586.
Renegotiating contracts. A renegotiated contract will only be binding where something new has
been provided by the offeree. (Mitchell v Pacific Dawn [2003] QSC 86) But what happens where one
party simply promises to perform an existing contract? This will not be sufficient as the plaintiff
found out in Stilk v Myrick (1809) 170 ER 1168. Compare this case with Hartley v Ponsonby (1857) 119
ER 1471 can you see why the courts came to a different conclusion?
The rule in Stilk v Myrick seems harsh, to say the least. Over the last hundred years the courts have
shown an inclination to soften their position and now look for other types of consideration where the
promise is simply to perform an existing contract. In Williams v Roffey Bros & Nicholls [1991] 1 QB 1
it was held that a practical benefit to the promissor was sufficient consideration.
Renegotiating a debt. If you want to understand just how slow can be the evolution of the common
law look no further than this situation where the recognised legal principle dates back to Pinnels case
(1602) 77 ER 237. This rule still applies as you will see in Foakes v Beer [18815] All ER Rep 106. Make
sure you understand both this rule and its exceptions.
Performing a public duty. Do you have to pay a policeman to get his assistance when you are being
robbed? Or an ambulance officer if you lie battered and bruised after a car accident? The answer is no;
if a policeman or any public official is merely doing their duty, they cannot use that as consideration.

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Promissory estoppel

Textbook
5.345.43

Wed probably all agree that the rule in Foakes v Beer is harsh and that Mrs Beer was very mean to do that
to Dr Foakes. But the common law was very clear consideration must be provided by anyone seeking to
enforce an agreement. To stop people making promises and then changing their minds (blowing hot and
cold), the courts will, in situations where it would be unjust (inequitable/unconscionable) for the person
who made a promise not to be held to it, apply promissory estoppel.
At this point you should read Central London Property Trust v High Trees House [1947] KB 130 and Waltons
Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 to understand how the doctrine has developed and now
been accepted as law in Australia.
Promissory estoppel, therefore, operates to enforce certain promises that are not supported by any
consideration. The following features all need to be present for promissory estoppel to operate:
The promise or representation created an assumption in the mind of the promisee.
The promisor must be responsible for the assumption, which must be clear and unambiguous.
The promisee relied on the promise by undertaking an act or acts or refraining from undertaking an
act or acts.
The promisor knew or intended the promisee to rely on the promise.
The promisee suffered a material detriment on the basis of the promise.
And, most important,
The promissor acted unconscionably.
Issues that you need to consider as you study promissory estoppel include:
What is necessary to create the assumption? and
What is meant by detriment?
Warning: after learning about promissory estoppel many students start seeing it everywhere. It is, in fact,
rare for all the features found in Waltons v Maher to be present. Treat promissory estoppel with caution.

The law regarding capacity to contract

Textbook
5.445.50

This topic (and Chapter 5) concludes with a very brief look at the parties to a contract from the viewpoint
of their capacity. We know only a party to a contract can sue or be sued but what other limits are imposed
by law?
Minors (anyone under the age of 18 in Australia) have limited capacity irrespective of the jurisdiction; NSW
is under statute law while the other states either operate under common law or a mix of common and statute
law. Other limitations on capacity to contract involve those with mental disabilities (or intoxicated persons),
agents, partnerships and corporations.

Topic 3 Making the contractPart 2 (intention and consideration)

Summary
Agreements, as such, do not create contracts. To be contractual, the parties must intend to be legally bound.
Intention is the third essential element (after offer and acceptance). To assist in resolving disputes where
the intention of the parties is unclear, the courts presume that parties do not intend to be bound in social
or domestic agreements, but presume that parties do intend to enter a legal relationship in commercial
agreements. These presumptions merely serve as a starting point and the courts will allow a party to rebut
the presumption by producing evidence of an intention to the contrary.
Consideration, the price for which the promise of the other party is bought, is the fourth elements of an
enforceable contract and subject to strict rules. Unlike the other elements, however, consideration is not
necessary in all cases. Some agreements will be enforced because of their form (a deed) whereas in other
situations it would be unconscionable to allow a party to go back on their agreement.

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Topic 4
Express terms
What well do in this topic
Leading up to the formation of a contract the parties will make numerous statements not all of which are
intended to be part of the contract. In this topic we will look at these statements and representations.
The terms of a contact will ultimately determine its validity and the rights and liabilities created. Some
of these terms will be expressed while some will be implied. They are equally important. In this topic we
consider express terms. Express terms might be terms to which both parties expressly agree or they might
be terms specifically designed by one party to restrict its liability. We often refer to these latter terms as
exemption or exclusion clauses.
Before anything else, closely examine the diagram at 6.1 as it will help you see where we will now be heading.
Note that the arrow on the top right should extend down to the words exemption clauses a rare error in
this textbook.

Establishing the express terms of the


contract written terms

Textbook
6.26.19

How courts approach different types of evidence


Generally speaking the courts favour contracts where all the terms are clearly laid out in writing.
Unfortunately commerce, and life generally, is rarely this clear-cut as the high number of contractual
disputes demonstrates. Lets now consider the numerous pitfalls along the contractual path.

Terms cannot be introduced after contract formation


Sometimes a party attempts to introduce a term after the formation of the contract, for instance, where
it is contained inside the packaging (and can only be read by purchasing then opening). (Hardchrome
Engineering v Kambrook [2000] VSC 359), also Thornton v Shoe Lane Parking [1971] 1 All ER 686 and Olley
v Marlborough Court [1949] 1 All ER 127.

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As a rule you sign it, youre stuck with it


Keep in mind the general rule that a person will normally be bound by the contracts terms if they sign it, as
the unfortunate Mrs LEstrange found to her great cost in LEstrange v Graucob [1934] 2 KB 394. There are
a number of exceptions to the general rule (what a surprise). These involve:
where the document doesnt appear to be a contract. (DJ Hill v Walter H Wright [1971] VR 749);
an oral promise to the contrary leading to estoppel. (State Rail Authority v Heath Outdoor (1986) 7
NSWLR 170);
misrepresentation of the document. (Curtis v Chemical Cleaning and Dyeing [1951] 1 KB 805); and
conditions precedent.

Unsigned documents
What about terms in contracts where there is no requirement to sign a document? These are extremely
common as you will realise when you read the textbook example on pages 234 and 235. Whether or not those
terms will be contractual normally depends on reasonable notice. If the other party is given reasonable
notice of the term, it will most probably apply. (Parker v South Eastern Railway Co 2 CPD 416) Reasonable
notice depends upon facts such as:
whether the document appears contractual. (Oceanic Sun Line v Fay (1988) 165 CLR 197);
whether it contains unusual terms. (Interfoto Picture Library v Stiletto Visual Programmes ([1988] 1
All ER 348); and
whether there are any conflicting statements or promises. (Couchman v Hill [1947] 1 KB 554).

Incorporating terms by notice


You find these situations everywhere. On your railway or plane ticket and when you purchase things on the
Internet. Even though you may not read the terms and conditions, generally, you are bound by them.

Establishing the express terms of the contract


oral statements and other representations

Textbook
6.206.31

I hope that by now you have accepted the idea that a contract doesnt have to be in writing. It is often an oral
(spoken) contract and sometimes it is part oral and part written.

Statements must be promissory


Sometimes many things are said in the lead-up to the contract. Are they all contractual? Probably not, as
you will see when you look at the example and associated diagram on p239.

The reasonable bystander test


Once called the reasonable man test, until feminists pointed out that there is no such creature (ouch), it
is applied by the courts when determining the nature of the statements made during negotiations. Read
Lord Dennings excellent explanation in Oscar Chess v Williams [1957] 1 All ER 325 on page 240 to fully
understand the way the test is applied. A promissory statement doesnt require the words I promise. It
simply requires the person making the statement to have promised it was true (Hospital Products v USSC

Topic 4 Express terms


(1984) 156 CLR 41). In applying the test the courts consider a number of questions, none of which are taken
in isolation. These are:
Was the representation included in a written document? (Van Den Esschert v Chappell [1960] WAR
114)
How much time lapsed between the statement and the contract?
How important was the statement to the deal as a whole?
What words were used?
Did either party have special knowledge? (Oscar Chess v Williams and Ross v Allis-Chalmers Australia
(1980) 55 ALJR 8)

Collateral warranties (collateral contracts) and the parol evidence rule


A collateral contract sits side by side with the main contract, the consideration for which is entering into
the main contract. Make sure you understand the list of requirements. (JJ Savage & Sons v Blakney (1970)
119 CLR 435) The parole evidence rule attempts to assist courts in dealing with extrinsic oral statements
where the contract appears to be wholly in writing. (Hope v RCA Photophone of Australia (1937) 59 CLR 348
and Bacchus Marsh Concentrated Milk v Joseph Nathan & Co (1919) 26 CLR 410)

Exemption clauses

Textbook
6.326.38

With a few notable exceptions (eg consumer contracts) the parties are free to assume whatever obligations
they decide. Remember, contracts, in their purest form, are the purest expression of laissez faire economics.
Exemption clauses, as unpalatable as we may view them, are often included in contracts by a party seeking
to limit their liability. Check out the examples of exemption clauses on p249.
As you will note, the courts dont like them anymore than we punters and have developed a number of rules
they apply in determining the clauses validity or otherwise. These are:
The general rule.
The ambiguity rule. (Photo Production v Securicor Transport [1980] 1 All ER 556)
The negligence rule. (White v John Warwick & Co [1953] 2 All ER 1021)
Presumption against fundamental breach. (Photo Production v Securicor)
The four corners rule. (Sydney Corporation v West (1965) 114 CLR 481)
The deviation rule. (Thomas National Transport (Melbourne) v May & Baker (1966) 115 CLR353)

Unenforceable or invalid contracts


(or terms within contracts)

Textbook
6.396.41

Contracts (or some terms within) can be unenforceable because they are illegal. They may be illegal due to
a particular statute or at common law. Most recently, the Australian Consumer Law has made unfair terms
void.

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Terms in restraint of trade are also void unless the courts consider the term to be reasonable (Peters (WA) v
Petersville [2001] HCA 45).

The importance of a term

Textbook
6.42

Not all terms are of equal importance. A breach of a term will have different consequences and remedies
depending on its importance. Make sure you understand diagram 6.7.

Summary
In this topic we have been examining the express terms of the contract. These terms can be written or spoken
although the courts place greater importance on written terms in their decisions in many situations. Those
pesky exemption clauses are a particular type of express term to which the courts apply a number of rules in
determining their validity or otherwise. The validity of a contract may also be affected if it is illegal, unfair
or in restraint of trade. The remedy for a breach of a term will depend on the importance of the term to the
contract.

Topic 5
Implied terms
What well do in this topic
In Topic 4 we examined the express terms of the contract; written or oral terms that the parties have agreed
upon. In addition to express terms a contract may contain terms that the courts will read into it, that is to
say, imply into the contract. There may also be terms implied by legislation. In Topic 5 we will examine these
implied terms, those that have not been agreed to but are equally significant when relevant.
A good starting point is the diagram Figure 7.1 as it shows the three categories of implied terms: those special
terms implied by the courts, those implied based on the facts of the case and those implied by statute law.

Special terms implied by courts

Textbook
7.27.9

These are:
Implied term of cooperation.
Implied term of good faith. (Burger King Corp v Hungry Jacks [2001] NSWCA187)
Terms implied into specific types of contracts. Included in this category are those involving:
Professional persons and their clients.
Work and materials. (Reg Glass v Rivers Locking Systems (1968) 120 CLR 516 and Helicopter Sales
(Aust) v Rotor-Work (1974) 132 CLR 1)
Other service contracts. (Costa Vraca v Berrigan Weed & Pest Control [1998] FCA 693)
Hire contracts. (White v John Warwick (Topic 4)
Employment contracts.
Landlord and tenant contracts.

Terms implied by courts based on the facts

Textbook
7.107.13

Sometimes the parties neglect to insert a term either because it was so obvious they overlooked it or each
party assumed that it applied. In these cases the courts will imply the term provided it reflects the true
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intention of the parties. This will, obviously, mean that the implied term cannot conflict with the express
terms.
These could include:
Terms implied on the basis of a course of past dealings. (Henry Kendall & Sons v William Lillico &
Sons [1968] 2 All ER 444)
Terms implied as a result of custom or trade. (British Crane Hire v Ipswich Plant Hire [1974] 2 WLR
856)
Terms implied in order to make the contract effective. (The Moorcock (1889) 14 PD 64 and Codelfa
Construction v State Rail Authority of New South Wales (1982) 149 CLR 337)

Terms implied by sale of goods legislation

Textbook
7.147.39

Given the importance of trade to our economic system it is not surprising to learn that courts and, more
recently, parliaments have tried to develop mercantile law that both supports trade and simultaneously
protects consumers from shonky dealers. Read the about the history of mercantile law on pages 278279
before proceeding with this sub-topic.
An exploration of relevant Australian legislation will be confined to the Australian Consumer Law (in Topic
9) and the Goods Act 1958 (Vic) (VGA) in this topic. Note that all states have similar provisions and you will
find them referred to in the Appendix to Chapter 7 on page 297. I need to point out that this section (the
VGA) is merely meant to introduce you to statutory implied terms. Of much greater significance are the
terms implied into consumer contracts for goods and services (referred to as guarantees) under the ACL.
We will dedicate Topic 9 to this.
A list of the implied terms under the VGA can be found at 7.16; we will consider the more significant of these.
Note that these terms can be excluded by the use of an appropriately worded exemption clause. Focus on the
implied terms relating to the following:
Correspondence with description. As well as paragraph 7.17 you need to read paragraphs 7.307.33
(Varley v Whipp [1900] 1 QB 513, Beale v Taylor [1967] 1 WLR 1193, Re Moore and Landauer [1921]
2KB 519, Harlingdon & Leinster Enterprises v Christopher Hull Fine Art [1990] 1 All ER 737 and
Ashington Piggeries v Christopher Hill [1971] 1 All ER 847)
Fitness for purpose. As well as paragraph 7.18 you need to read paragraphs 7.267.29 (David Jones
v Willis (1934) 52 CLR 110, Atkinson v Hastings Deering (Qld) (1985) ATPR 40625, Griffiths v Peter
Conway [1939] 1 All ER 685, Godley v Perry [1960] 1 All ER 36 and Teheran-Europe v ST Belton
(Tractors) [1968] 2 All ER 886)
Merchantable quality. As well as paragraph 7.19 you need to read paragraphs 7.237.25 (Frank v
Grosvenor Motor Auctions [1960] VR 607, BS Brown & Sons v Craiks [1970] 1 WLR 752, H Beecham &
Co v Francis Howard & Co [1921] VLR 428, Bartlett v Sidney Marcus [1965] 2 All ER 753 and Grant v
Australian Knitting Mills [1935] AC 85)
Correspondence with samples. Read paragraphs 7.20 and 7.33.

Excluding or limiting liability


Note that the seller does have the right to exclude liability for a breach of the implied terms provided they
meet all the requirements examined in the previous topic (Topic 4) regarding exemption clauses.

Topic 5 Implied terms

Remedies for a breach of an implied term


Note, also, that the main remedies for a breach of an implied term are damages (money) and termination
of the contract though the latter is limited to goods prior to acceptance. Once the goods have been accepted
the buyer will normally be limited to damages.

Other matters to consider


Parties are left to decide the terms of their contracts themselves, including the price, method of delivery and
payment. The sale of goods legislation only kicks in where the contract is silent as to any of the necessary
terms. Make sure you understand the legislative intent relating to price (ANZ Banking Group v Frost [1989]
VR 695), delivery and payment, acceptance, passing of property and passing of risk.

Summary
Implied terms are those that have not been expressed (in writing or spoken) but will be read-in to the
contract in one of three ways. They may be implied by the courts in a general sense (for all contracts) or
they may be implied by the courts based on the particular facts of the case before them. Finally, they may be
implied by legislation. In this topic we have looked at sale of goods legislation (applied in all states). This was
just by way of introduction. Later on, in Topic 9, we will examine the extremely powerful and far-reaching
Commonwealth legislation in the form of the Australian Consumer Law which contains many implied
terms in the form of guarantees.

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Topic 6
Remedies in contract law
What well do in this topic
A remedy is the thing that solves a legal problem in much the same way that aspirin is a remedy for a
headache (but not a hangover, or so I am told). In this topic we will explore the various remedies available
to the innocent party when a contract has been breached.
The innocent party may have the opportunity to get out of the contract subject to certain requirements
by terminating the contract or rescission. You will learn that the main common law remedy is damages
whereas equity does not award damages but offers numerous alternative forms of relief when common law
remedies are insufficient. We now discuss these remedies in more detail.

Terminating the contract

Textbook
8.28.22

There are numerous ways in which the contract can be terminated and the parties discharged from future
obligations. These are:
Termination by performance. Obviously, if both parties perform their obligations the contract is
terminated. Part performance will not allow discharge but substantial performance will normally
suffice (Hoenig v Isaacs [1952] 2 All ER 176 to be discussed shortly) subject to damages for any
shortcomings in performance.
Termination by agreement.
Termination by a term of the contract. This usually involves a condition precedent or a condition
subsequent. A common example of the former is a contract to purchase a house subject to bank
finance if the finance doesnt eventuate the parties agree to terminate.
Termination by frustration. Make sure you understand the situations in which an intervening event,
not contemplated, nor the fault of either party makes performance of the original contract impossible.
(Taylor v Caldwell (1863) 3 B & S 826, Codelfa Constructions (back in Topic 7) and Davis Contractors v
Fareham Urban District Council [1956] AC 696)
Termination for breach of a condition. As we discussed earlier in Topic 4, terms can be classified
as conditions, intermediate or warranties. Only a breach of a condition or a serious intermediate
term allows the innocent party to terminate the contract. (Associated Newspapers v Bancks (1951) 83
CLR 322, L Schuler AG v Wickman Machine Tool Sales [1974] AC 235, Bunge Corporation New York v
Tradax Exports SA Panama [1981] 1 WLR 711, Bettini v Gye [1874] All ER Rep 242 and Hong Kong Fir
Shipping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26)
Termination for an anticipatory breach. This can be a common occurrence in commerce and
business. (National Engineering v Chilco Enterprises [2001] NSWCA 291) Paragraphs 8.208.22 will
help you understand the processes and consequences of termination. (Foran v Wright (1989) 168 CLR
385)

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Recovery of the contract price

Textbook
8.238.24

Suing for the contract price at common law can be advantageous. (Hoenig v Isaacs) Sale of good legislation
also enables the seller to sue for the contract price where goods have passed from the seller to the buyer.

Damages

Textbook
8.258.37

Before digging deeply into this area, note that the aim of damages (a common law remedy) is to compensate
the innocent party and not to punish the defaulting party. (Addis v Gramophone Co [1909] AC 488) In
determining damages the courts consider the following:
Damages will only be awarded for losses caused by the breach. (Reg Glass v Rivers Locking Systems
(1968) 120 CLR 516)
The plaintiff must mitigate their losses.
Damages must not be too remote. Read the authors textbook example and also Kofos v C Czarnikow
[1969] 1 AC 350, Hadley v Baxendale (1854) 9 Exch 341 and Victoria Laundry v Newman Industries
[1949] 1 All ER 997. Make sure you understand the rule in Hadley v Baxendale which contains the
two limbs. Once you understand these, you understand remoteness.
The amount of damages may include the following losses:
Expectation losses including reliance losses. (Commonwealth v Amann Aviation (1991) 174 CLR
64)
Personal injuries provided they were caused by the breach and were not too remote.
Disappointment, distress and discomfort. These have limited application but, where
appropriate, they will be awarded. (Jarvis v Swans Tours [1973] 1 QB 233 and Baltic Shipping v
Dillon (1993) 111 ALR 289).

Equitable remedies

Textbook
8.388.42

Sometimes damages will not produce a fair result for the innocent party. Equity has developed several
remedies that take into account the uniqueness of the particular situation.
Specific performance, an order compelling someone to carry out their contractual obligations, will be
awarded where the subject matter is rare or unique. (Dougan v Ley (1946) 71 CLR 142) But it will not be
ordered to enforce a contract for personal services. (Lumley v Wagner [184360] All ER Rep 368)
Injunction, another discretionary remedy, is an order restraining a person from doing something. In the
above case Wagner was stopped from performing at Gyes theatre.

Topic 6 Remedies in contract law


Restitution will be ordered where the defendant has gained a benefit at the expense of the plaintiff in
circumstances where it would be unjust for them to be enriched as a result. (Pavey & Mathews v Paul (1987)
162 CLR 221)
Quantum meruit may be awarded in partially performed contracts where the contract was terminated by
the defendant but not where it was terminated by the plaintiff. (Sumpter v Hedges [1898] 1 QB 673)

Rescission

Textbook
8.438.62

Rescission is significantly different to termination even though both are options available to the innocent
party, in certain circumstances, where a breach has occurred. Whereas termination discharges the parties
from future obligations, rescission results in the contract being declared void ab initio (from the beginning)
and the parties are returned to the position they would have been in had there never been a contract, where
possible.

Rescission in equity
Equity will allow rescission in the following situations:
Misrepresentation irrespective of whether it was fraudulent, negligent or innocent. It is important to
note that a misrepresentation initially makes the contract voidable (capable of being rescinded).
Unconscionable conduct. This occurs where one party takes advantage of the others vulnerability.
You should now turn to page132 of the textbook and read Commercial Bank of Australia v Amadio
(1956) 99 CLR 362 a classic case of unconscionable conduct as was Blomley v Ryan (1956) 99 CLR
362. Arent there some lovely people out there?
Duress. This occurs where the contract is entered into because of some coercion or threat of force
either to a person or their goods or their economic wellbeing. (North Ocean Shipping Co v Hyundai
Construction Co [1979] QB 705)
Undue influence. Involving the unfair use of their dominant relationship with a weaker party to
influence the making of a contract, it can fall into one of two categories:
Presumption of undue influence in special relationships. The courts presume that undue
influence applies in a range of special relations such as doctor-patient, solicitor-client and religious
leader-disciple (OSullivan v Management Agency & Music [1984] 3 WLR 448). UI may also be
presumed in fiduciary (confidential) relationships. (Lloyds Bank v Bundy [1974] 3 WLR 501)
Actual undue influence. Unlike presumed undue influence involving special relationships, the
person wishing to rescind the contract has to establish that it had occurred.
Mistake. In certain circumstances a contract can be set aside where there has been a mistake of fact.
There are several categories of mistake:
Common. Where both parties make the same mistake.
Unilateral. Where one party is mistaken and the other party is aware of the mistake. This often
involves fraud or some other equally dishonest behaviour. (Taylor v Johnson (1983) 151 CLR 422
and Cundy v Lindsay (1878) 3 App Cas 459)
Non est factum (it is not my deed). This will only happen in rare cases. (Petelin v Cullen (1975) 132
CLR 352)
It is important for you to understand the general rules of rescission found at paragraphs 8.558.60. (Academy
of Health & Fitness v Power [1973] VR 254 and Car & Universal Finance Co v Caldwell [1965] 1 QB 525)

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Statutory rescission
While the textbook, and this Study Guide, dedicate very little space to this sub-topic it is quite significant as
a remedy for a breach of contract or where conduct has been contrary to the requirements of the Australian
Consumer Law or a number of state laws such as the Contracts Review Act 1980 (NSW). (Perpetual Trustee
Co v Khoshaba [2006] NSWCA 41)

Summary
The underlying rationale in contract law is that people should be left to form whatever contracts they desire.
The courts are there to settle disputes and where a breach has occurred, provide a remedy for the innocent
party. We have studied all the remedies available in both common law and equity. We have also looked
briefly at the remedies available under statute law but will consider them in much greater detail later in the
unit.

Topic 7
Liability for defective products
What well do in this topic
We have spent several weeks examining the law of contracts. Now we are going to look at another really
interesting area of the law, negligence. You hear the term often and have heard countless stories of people
winning huge payments for injuries they have received as a result of anothers negligence. Its not only a
huge area of the law, generally, but something everyone contemplating a career in commerce or business
needs to understand.
In this topic you will learn about the law in relation to defective products. This will include an examination
of the obligations owed to manufacturers and importers of goods under both common law and statute.

Liability for negligence (common law)

Textbook
2.12.39

Negligence is a tort, the area of law involved with civil wrongs. The history of negligence is fascinating.
Read the early pages in this section and you will discover how a bit of dead snail in a bottle (Donoghue v
Stevenson [1932] AC 562) would, 70 years later, form the precedent for a successful action against McDonalds
for burns arising from a spilt cup of coffee. In the late 20th century compensation awards in negligence cases
had spiralled so out of control that most states legislated severe restrictions on the amounts awarded by the
courts. In this section we will examine common law negligence, which still has great relevance to commerce
and business.
There are three steps in determining whether or not a cause of action (law suit) will succeed in the courts.

Duty of care (the first step)


What do you think is meant by duty of care? If you think about it as you read the textbook, youll quickly
get it. Make sure you understand the following:
The duty of care owed by manufacturers to consumers. (Donoghue v Stevenson and Grant v
Australian Knitting Mills (1933) 50 CLR 387; [1936] AC 85)
Duty of care owed by manufacturers to innocent bystanders.
Duty of care owed by distributors of products. (McPhersons v Eaton) [2005] NSWCA 435)
Duty of care owed by service providers.
Duty of care owed by property owners. (Australian Safeway Stores v Zaluzna (1987) 162 CLR 479)
Duty of care owed by road users.

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Duty of care failing to act. (Modbury Triangle Shopping Centre v Anzil ([2000] HCA 61 and Club
Italia (Geelong) Inc v Ritchie [2001] 3 VR 447)
Duty of care mental harm. (Jaensch v Coffey (1984) 1 55 CLR 549, Tame v New South Wales [2002]
HCA 35 and Annetts v Australian Stations [2002] HCA 35)
Duty of care does it apply to pure economic loss? For many years the courts would not award
damages for pure economic loss. In recent times this has changed (Caltex Oil (Australia) v The Dredge
Willemstad (1976) 136 CLR 529 and Hill v Van Erp (1997) 188 CLR 159) and now pure economic loss
will be compensated subject to the salient features test arising from Perre v Apand (1999) 198 CLR
180.

What standard of care is owed? (the second step)


Even if a duty of care is owed it doesnt end the matter. We next need to know whether or not the defendant
has provided an appropriate standard of care. The courts apply the reasonable person test remember the
objective test? A good starting point is to think about the competing risks, the consequences and the costs
what will be reasonable under the circumstances of the case?
Make sure you read and understand the general principles outlined on pages 61 and 62. Not that it is easy
to balance everything as you will observe in Romeo v Conservation Commission of the Northern Territory
(1998) 192 CLR 431.
Other things to understand when considering the standard of care include:
Standard of care and the design of goods. (ODwyer v Leo Buring [1966] WAR 67 and Raspora v JCL
Marine [1977] 1 Lloyds Rep 645)
Standard of care and the production of goods. (Grant v Australian Knitting Mills [1935] AC 85 and
Adelaide Chemical & Fertilizer Co v Carlyle (1940) 64 CLR 514)
Standard of care and the proper labelling of products.
Standard of care and the distributor/retailer.
Standard of care and the delivery of professional services.
Standard of care and the delivery of recreational and other services. (Woods v Multi-Sport Holdings
(2002) 76 ALJR 483) and (Harris v Bulldogs Rugby League Club [2006] NSWCA 53 (New South Wales
Court of Appeal)) Eels for me.
Note that there are special rules relating to dangerous recreational activities where a significant risk of
physical harm is involved.
Inherent risks.
Unexplained accidents. The doctrine of res ipsa loquitur means that even where there is no evidence
establishing the cause of the accident, liability may still fall to the party responsible for providing
proper care.

Causation, remoteness and amount of damages (the third step)


Causation
Finally, to obtain damages, the plaintiff must establish that the negligence (established in the first two steps)
caused the damage. This centres on the but for test ie; but for the defendants negligence the plaintiff would
not have suffered loss. Courts also need to determine the scope of liability and, if the but for requirement
isnt met, are there exceptional circumstances that might result in the defendant still being liable? (Adeels
Palace v Moubarak; Adeels Palace v Bou Najem [2009] HCA 48, Strong v Woolworths Ltd [2012] HCA 5 (High
Court) March v Stramare (1991) 171 CLR 506 and Chapel v Hart (1998) 72 ALJR 1344)

Remoteness
The loss must not be too remote even where caused by the defendant. (Overseas Tankship (UK) v The Miller
Steamship Co (The Wagon Mound (No 2) [1966] 2 All ER 709)

Topic 7 Liability for defective products

Assessing damages
The courts try to estimate the amount of compensation necessary to put the injured party in as close as
possible a position as to that where there had been no negligent act. This could include:
Medical and hospital expenses;
Loss of earnings (real and potential);
Loss of enjoyment of life; and
Pain and suffering.
The courts may award punitive damages in certain cases where the defendant has acted in such a manner
that they are to be punished and/or as a warning to others engaged in the same business.

Defences
Defences open to the defendant arise where there has been contributory negligence or where the plaintiff
assumed the risk. (Moore v Woodforth [2003] NSWCA 9)

Liability for another persons acts


This can occur where an employee (for example) is found to be negligent. Sometimes the employer may also
be vicariously liable. (Hollis v Vabou [2001] HCA 44) In some circumstances they will also be liable for the
negligent acts of subcontractors. (Burnie Port Authority v General Jones (1994) 179 CLR 520)

Liability under Australian Consumer Law (ACL)

Textbook
2.402.51

As well as remedies available in the common law tort of negligence, the Australian Consumer Law (ACL)
also imposes liability on manufacturers for the safety of their products. The ACL covers a large range of
consumer related areas, many beyond the scope of this unit. In this topic we are focusing on Parts 35 of
the ACL, those parts that provide compensation for persons injured by unsafe goods.
Heres the big difference between the tort of negligence and the ACL. With the former, the behaviour of
the producer is central to the case whereas, under the ACL, the focus is on the objective nature of the
product. If you think about it for a few moments, you may realise that it is going to be a lot easier to prove
that a product is defective rather than proving that the behaviour of the producer was negligent. If you buy a
bed and it collapses as soon as you lie on it, wouldnt you prefer to seek damages under the ACL rather than
proving negligence under the common law?
Make sure you understand the various elements of a breach, found at paragraph 2.41 of the textbook. Statute
law is not as interesting as, say, common law contracts because, under statute law, it really just boils down
to definitions. Hence, you need to know:
What is a manufacturer (s7)?
What are goods and supply?
What is a safety defect in relation to goods (s9)?
What types of loss are covered (s141)? (Thomas v Southcorp Australia [2004] VSC 34)
Other factors to consider include:
Damage must be caused by the defect.
There are a number of defences (s142). (Graham Barclay Oysters v Ryan [2000] FCA 1099)
A manufacturer cannot exclude liability irrespective of what they might claim on the label or in
advertising (s150).

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There are numerous other relevant matters to note (paragraph 2.49) including the time limit for commencing
an action.
Now, before you put a tick in the Topic 7 box and slap yourself on the back, make sure you have a good
look at Figures 2.2 and 2.3 at the very end of the chapter. Figure 2.2 neatly lays out everything you need
to understand regarding the ACL Parts 35. Figure 2.3 provides you with a neat comparison of the key
elements in both common law negligence and the ACL.

Summary
In this topic you have learned about the law regarding defective products. This law comes from two sources,
common law (the tort of negligence) and statute law, particularly the ACL. While both are available for a
consumer of goods who suffers damage, it would seem that it is much easier to prove and cheaper to take
action under the ACL.

Topic 8
Misrepresentation and unfair
commercial conduct
What well do in this topic
Through studying Topics 18 you have not only learned about the two sources of Australian law (statute
and common law) but you have also seen how relevant they both are in the areas of contracts and defective
products. In this topic we will look at another area of law affected by both statute and common law, that of
misrepresentation and commercial misconduct.
First we shall examine the laws governing misrepresentation, looking closely at the liability imposed for
fraud, negligence and misleading and deceptive conduct.
Finally we will look at the law governing unconscionable or unfair business conduct. By the time you reach
the end of this topic you will not only understand the law but you will know a lot about the rotten behaviour
of some people in commerce.

Common law misrepresentation

Textbook
3.13.20

Fraudulent misrepresentation
Lets start with fraudulent misrepresentation, another tort (civil wrong) which is sometimes called deceit.
You can see all the crucial steps in the diagram on page 97. Make sure you understand the numerous points
related to each step.

Step 1 was the representation a false statement of fact?


A misrepresentation will, more often than not, be an express statement but note that it can also be by
conduct. Questions needing consideration are:
Was it a statement of fact or opinion? (Smith v Land & House Property Corporation (1884) 28 Ch D
7)
Was it a fact or a mere puff?
Does silence count? Under common law, silence is normally okay (one of the areas addressed under
the ACL) (Lockhart v Osman [1981] VR 57)
Was the representation false? (Krakowski v Eurolynx Properties (1995) 183 CLR 563)

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Step 2 Did the representation induce the plaintiff to act in some way?
It will not be a misrepresentation unless it induces the other party to act in a certain way (usually by entering
a contract). (Holmes v Jones (1907) 4 CLR 1692, Redgrave v Hurd (1881) 20 Ch D 1 and Peek v Gurney (1873)
LR 6 HL 377)

Step 3 did the representor (the defendant) know the misrepresentation was false?
This addresses the question of fraud. There has to be more than a negligent or innocent misrepresentation;
the representor must have either known it was false or was reckless as to its truth.

Step 4 did the misrepresentation cause the plaintiff to suffer a loss?


There must be a causal connection between the fraud and the loss.

Negligent misrepresentation
Okay, so fraud is deceitful behaviour. What is involved in a negligent misrepresentation? You will already
have a good idea because you have just examined negligence in the previous topic and those same three
amigos are involved: duty of care, standard of care and remoteness (and causation, so, four amigos). Lets
look at these more closely.

Step 1 when is a duty of care owed?


The idea that a duty of care was owed for mere representations is relatively modern. Today it is a wellestablished cause of action. Points to keep in mind are:
A duty of care can be owed when giving advice or supplying information.
(L Shaddock & Associates v Parramatta City Council (1981) 55 ALJR 713 and the comments by Mason
J in Mutual Life & Citizens Assurance v Evatt (1968) 122 CLR 556)
But the representee must reasonably rely on the advice or information. (Tepko v Water Board (2001)
206 CLR 1 and Esso Petroleum v Mardon [1976] 2 WLR 583)
Auditors are a special case they will owe a duty of care to the company that employs them to
undertake the audit but it is much more difficult to extend that duty to shareholders, investors and
lenders. (Esanda Finance Corporation v Peat Marwick Hungerfords (1997) 71 ALJR 448 and R Lowe
Lippman Figdor & Franck v AGC (Advances) (1992) 2 VR 671)
Disclaimers may work provided they are appropriately worded. (Hedley Byrne & Co v Heller &
Partners [1964] AC 465)
Generally speaking a duty of care will be contingent on a number of factors which are listed on page 112.

Step 2 what standard of care is owed?


A reasonable standard of care in Australia will generally be measured against the industrys professional
opinion.

Step 3 remoteness of damage


If the duty of care has been established and the necessary standard of care has been breached the injured
party may succeed provided the damage is not too remote. Damage is too remote if the defendant could not
reasonably foresee the loss. (Kenny & Good v MGICA (1999) 73 ALJR 901)

Topic 8 Misrepresentation and unfair commercial conduct

Misleading and deceptive conduct under


the Australian Consumer Law (ACL)

Textbook
3.213.42

As you know, the ACL was introduced in 2010 and aims to strengthen consumers rights in a number of
areas. We have already examined the parts relating to defective products in the previous topic. Another key
provision relates to misleading or deceptive conduct. (Common law, think, misrepresentation whereas ACL,
think, misleading and deceptive conduct).
Section 18 is the crucial part and it is very broad in scope. Start with the diagram on page 115 and then you
can build from there as you consider the following points:

Conduct of directors, employees and agents


A firm (or corporation) is responsible for the conduct of its directors, employees and agents (provided the
agent has authority well look at that in Topic 10).

Conduct must be in trade or commerce


Make sure you understand whats covered and whats not. Unfortunately, politicians can say what they like
in their speeches and get away with it.

When is conduct misleading or deceptive


Some conduct not covered in common law misrepresentation is now covered under the ACL. Lets start
by noting that the conduct can either mislead or deceive or is likely to mislead or deceive. In other words,
it goes much further than the misrepresentation requirement that the other party must be induced into
the contract. Equally significant is the fact that the misrepresentation is not restricted to express words or
conduct. Under s18 the representation may be:
A half-truth. (Collins Marrickville v Henjo Investments (1987) ATPR 40782) and Yorke v Ross Lucas
(1983) ATPR 40401)
Silence. (Demagogue v Ramensky (1992) 110 ALR 608, Forwood Products v Gibbett [2002] FCA 298)
and Metalcorp Recyclers v Metal Manufacturers [2003] NSWCA 213)
Opinions in certain circumstances. (RAIA Insurance Brokers v FAI General Insurance (1993) ATPR
41225)
Promises or predictions in certain circumstances. (Wheeler Grace & Pierucci v Wright (1989) ATPR
40940 and Futuretronics International v Gadzhis (1990) ATPR 41049)

Exclusion clauses and disclaimers


We have already noted in Topics 4 and 7 that the common law allows the use of disclaimers and exclusion
clauses. Section 18, however, makes it a lot tougher for those seeking to rely on them. (Bateman v Slatyer
(1987) ATPR 40762)

Remedies for breach of s18


Damages are only awarded where the misrepresentation caused the loss. The onus is on the injured party to
prove the link. Note that the misleading and deceptive conduct doesnt have to be the only cause of the loss.

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Note also that reliance on the misleading or deceptive statement by another party may or may not be
necessary.
There are a number of remedies available to the injured party these are much more extensive than those
offered in the common law areas of contract and tort. These are:
Damages. As with common law actions, an injured party can be awarded compensation to place
them in the same position as they would have been had there not been a breach of s18. There are caps
(limits) placed on certain professionals. Damages can be apportioned, as with common law, where
there has been contributory negligence. The ACL allows damages to be awarded against the individual
director, employee or agent for their misleading or deceptive conduct. (Sweetman v Bradfield
Management Services (1994) ATPR 41290 and Dalton v Lawson Hill Estate [2005] FCAFC 169)
Declaration that the contract is void. Under s243 the court may set aside the whole or part of the
contract. (Accounting Systems 2000 (Developments) v CCH Australia (1993) ATPR 41269)
The court may also vary the terms of the contract under s243. (Mr. Figgins v Centrepoint Freeholds
(1981) 36 ALR 23)
The court may grant an injunction (ss232234).
Criminal penalties. These will be imposed for certain misrepresentations under s18.
Two other pieces of legislation are exceedingly important for corporations; the Australian Securities and
Investments Commission Act 2001 (Cth) and the Corporations Act 2001 (Cth). The former, in particular,
covers much the same area as s18 of the ACL but we have focused on the ACL because it covers all other
entities as well as corporations.

Unconscionable conduct

Textbook
3.433.50

There are times when there may be no misrepresentation but someone has acted very badly. Very badly
indeed. Unconscionable means unfair, unscrupulous or unjust and it doesnt sound nice. To get a quick
understanding of the common law response to unconscionable conduct, read Commercial Bank of Australia
v Amadio (1983) 57 ALJR 358 on page 132. The crucial requirement is that the dominant party took advantage
of the vulnerability or special disadvantage of the weaker party. (Astvilla v Director of Consumer Affairs
Victoria [2006] VSC 289)

Unconscionable business-to-consumer transactions


Under s21 of the ACL consumers are further protected from unconscionable conduct. Make sure you
understand the factors that s21(2) sets out to assist in determining whether or not the transaction is
unconscionable. As with the common law, it is necessary to prove that the defendant took advantage of the
plaintiffs special disadvantage. (ACCC v Radio Rentals [2005] FCA 1133)

Unconscionable business-to-business transactions


Under s22 of the ACL small businesses are protected from unfair and unreasonable conduct by larger
businesses. Make sure you understand the factors that s22 sets out on pages 136 & 137 as indicators of
unconscionable conduct. (Coggin v Telstar Finance Company (Q) [2006] FCA 191)

Topic 8 Misrepresentation and unfair commercial conduct

Remedies and sanctions under the ACL


As with common law misrepresentation, the ACL provides far greater remedies for unconscionable
behaviour than the common law where the remedies are restricted to damages and/or rescission. Under
the ACL remedies include:
damages;
injunctions;
set aside or declare contracts void;
mandatory education programs;
adverse publicity;
disqualification from managing; and
criminal penalties.

Other unfair conduct


The ACL also prohibits a number of specific activities such as:
Bait advertising advertising a product at a special price, only to tell customers that they have all
been sold.
Harassment continual product pushing in the face of the customers refusal to purchase.
Referral selling where the purchaser of a product collects a commission when they introduce new
purchasers to the seller.
Pyramid selling multi-level schemes where participants receive benefits by recruiting other
participants (read, suckers).
Though I want you to be aware of these provisions, you are not expected to study them.

Summary
Well, wasnt that a lot of information to absorb? Please keep in mind that you will not be assessed on all the
minute detail discussed above, but I do want you to understand the broad principles and all the larger steps/
factors/elements of the common law and ACL regarding misrepresentations and commercial misconduct.
And I dont wish to hear about any of you acting unconscionably.

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Topic 9
Consumers rights and the
supply of goods and services
What well do in this topic
In this topic we focus on the legislation that protects consumers when they purchase goods and services.
Again, we will concentrate on the ACL.
We will examine the provisions that require sellers to provide certain guarantees plus those that require
manufacturers to provide certain guarantees. None of these guarantees can be excluded or limited.
If you read the introduction to Chapter 9 you will note that whilst, in the past, consumers needed to sue in
contract law, nowadays the most likely action is for breach of a statutory guarantee.

Consumers rights against the supplier of goods

Textbook
9.29.21

The buyer needs to be a consumer as defined by the ACL to receive the statutory guarantees. Make sure you
understand the definition of a consumer at paragraph 9.3 as this is very important. (Crago v Multiquip (1998)
ATPR 41620 and Atkinson v Hastings Deering (Qld) (1985) ATPR 40625)

Statutory guarantees relating to supply of goods


At paragraph 9.4 you will find a list of the guarantees relating to the supply of goods found in ss5459.
Guarantee of acceptable quality (s54). (Grant v Australian Knitting Mills [1935] AC 85)
Guarantee of fitness for any disclosed purpose (s55). Carpet Call v Chan (1987) ATPR 46025)
Guarantee that goods correspond with description (s56). (Beale v Taylor [1967] WLR 1193)
Guarantee that goods correspond with sample (s57).
With few exceptions provided by s64A these guarantees cannot be excluded, restricted or modified. Liability
may be limited where the goods are not normally bought for personal use. To gain an understanding
of the operation of s64 read the textbook examples at the top of page 360. Note also that the limitation, if
allowed under the ACL, must be fair and reasonable.

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Remedies
You will find an explanation of the remedies for breaches of the statutory guarantees at the top of page 362.
These fall into two categories: major failures (s260) and not a major failure. Ensure you understand what
is meant under the ACL by major failure.
One of the main remedies available to the consumer is to reject the goods (s262(2)). This is an important
consumer right but you need to understand its limitations and the provisions regarding rejection. With
minor breaches the supplier has the option of remedying the failure by replacing the good or providing a
refund. Goods received as a gift have the same rights.

Retailers right of indemnity against the manufacturer


Where a supplier (a shop, for example) incurs damages/costs as a result of a failure to comply with the above
statutory guarantees and that failure is due to the manufacturer, the supplier is entitled to be indemnified
for those damages/costs (s274).

Consumers rights against the manufacturer of goods

Textbook
9.229.24

The obligations on manufacturers are much the same as those upon suppliers of goods. Make sure you
understand the definition of a manufacturer (s7) on page 364. Note, also, the circumstances when a
consumer can sue the manufacturer. This occurs when:
The goods are not of acceptable quality (s271(1)). (Graham Barclay Oysters v Ryan [2000] FCA 1099
and Medtel v Courtney [2003 FCAFC 151)
The goods do not correspond with the description (s271(3)).
The manufacturer fails to provide repair facilities (s58) and spare parts (s271(5)).
The manufacturer fails to comply with an express warranty (eg money back if goods returned
within 30 days).

Defences available to the manufacturer


Among the available defences are:
if the problem was caused by someone else;
if the reason for the unacceptability of the goods is the price and the supplier has sold them above
the recommended retail price; and
if notice was given before purchase that there would be no provision for repair or spare parts.

Remedies
The manufacturer may provide a warranty to repair or replace goods which are of unacceptable quality or
do not match description. Thus, damages will be unavailable to the consumer. In other situations, where
damages do apply, there are limitations if the consumer paid an unusually high price.

Topic 9 Consumers rights and the supply of goods and services

Consumers rights against the suppliers of services

Textbook
9.259.38

Section 3(3) of the ACL defines a consumer of services. Make sure you understand it. Make sure you
understand the meaning of services (see paragraph 9.27) and those services not covered by the ACL (see
paragraph 9.28).

Distinguishing between services and sales of goods


Given the different definitions, guarantees and remedies it is important to be able to tell the difference
between the supply of services and a good. (E v Australian Red Cross Society (1992) ATPR 41156))

Statutory guarantees relating to the supply of services


The two significant guarantees are:
A guarantee of due care and skill(s60). (Read v Nerey Nominees [1979] VR 47)
A guarantee as to fitness for a particular purpose (s61).
Note that these guarantees cannot be excluded although the service provider can limit liability where the
service is not of a type normally acquired for personal, household or domestic use.

Remedies
As with those available to the consumer in relation to the sale of goods, the remedies depend on whether
the breach is a major failure or not (s268). Make sure you understand what constitutes a major failure and
understand the remedies listed in the table on page 371.

Summary
This is an area of law that affects us all and, as such, is of great importance. In Topic 9 you have learned
about consumers rights under the ACL in relation to the supplier of goods, the manufacturer of goods and
the supplier of services. The ACL provides a number of guarantees to the consumer, most of which cannot
be limited or excluded by the other party. In our final topic we will look at something completely different,
the law of agency.

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Topic 10
Agency
What well do in this topic
In this topic we consider the law of agency. What is an agent? In general terms an agent is a person who
represents their principal in business dealings. Because of their legal position they have the right to bind the
principal by entering into contracts on their behalf. Clearly, it is an important position and it is unsurprising
that the law has developed a number of rules regarding this role.
The first thing we shall do in this topic is consider who and what is an agent. There are limits on an agents
role and these will be the main focus of the topic.

What is an agent?

Textbook
10.110.16

The primary (but not only) function of the agent is to make contracts on behalf of the principal. It
is important to understand the difference between an agent (see example at bottom of page 377) and a
franchisee. (International Harvester Co of Australia v Carrigans Hazeldene Pastoral (1958) 100 CLR 644)

Indicators of an agency relationship


In determining whether an agency exists the courts look at the following:
Who gets the profits?
Is there a commission paid?
Does the agent have an obligation to account to the principal for sales?
For a general understanding of this point read Potter v Customs and Excise Commissioners [1985] STC 45.

Functions of an agent
An agent may do other things and does not necessarily enter into contracts on the principals behalf. An
agency may exist if the agent has authority, among other things, to:
Receive moneys on behalf of the principal and issue a valid receipt. (Petersen v Maloney (1951) 25
ALJR 566)
Pay moneys on behalf of the principal.
Make representations for which the principal will be responsible.
Receive representations on behalf of the principal.

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Some common commercial relationships and agency


Before we look at various commercial agency relationships note that there are sometimes, special agents
(yes, including 007) who have the power to act as agents in special circumstances. These include mercantile
agents, stock brokers and solicitors. Common agency relationships involve the following:
employer/employee;
independent contractor;
bailor/bailee;
partnership; and
supplier/buyer.

How is an agency created?

Textbook
10.1710.22

The agency relationship can be created by a deed (provided the deed clearly expresses the extent of the
agency), by agreement (oral or written) or by operation of the law. It can also be created by implied
agreement by the conduct of the parties. (Norwich Fire Insurance Society v Brennans (Horsham) [1981]
VR 981)
An agency may be created by estoppel (remember Topic 3 and promissory estoppel?) wherein a principal
may be stopped from denying the agency in cases where the agents authority has ceased but the third party
is unaware of that fact. (Pole v Leask [186173] All ER Rep 535)
Other ways an agency may be created include cases of necessity (Sachs v Miklos [1948] 1 All ER 67) and
cohabitation.

The agents authority and duties

Textbook
10.2310.35 & 10.4310.50

A principal will be bound by the actions of their agent where the agent acts:
Within actual authority. This can be express or implied. Express actual authority will be determined
by applying the ordinary principals regarding the construction of the contract. Implied actual
authority occurs when the express authority doesnt cover everything and the agent may act provided
there is no conflict with an express power. Implied authority may be based on:
Custom or trade usage.
A course of past dealings. (Hely-Hutchinson v Brayhead [1967] 3 All ER 98)
A need to make the agency agreement more effective. (ANZ Bank v Ateliers de Construction
Electriques de Charleroi (1966) 39 ALJR 414)
Within apparent or ostensible authority. Ostensible authority means that there appears to be
authority. Read Lord Dennings quote at the top of page 391 for a good explanation of the difference
between actual and ostensible authority. (Freeman & Lockyer v Buckhurst Park Properties (Mangal)
[1964] 1 All ER 630, Heperu v Morgan Brooks [2007] NSWSC 1438 and First Energy (UK) v Hungarian
International Bank [1923] 2 Lloyds Rep 194)

Topic 10 Agency

Ratification of agents unauthorised acts


Even where the agent acts outside their actual or ostensible authority the principal will be liable if they ratify
the agents actions. And once ratified, he cannot change his mind. The rules regarding ratification are listed
in detail at paragraph 10.35. (Keighly, Maxsted & Co v Durant [19003] All ER Rep 40)

Duties of an agent or principal


These can be found on pages 402 and 403.
An agents duties fall into two categories: general and fiduciary. Make sure you understand these. The
principals duties are also straightforward.

Termination of agency
Finally, there are numerous ways the relationship may be terminated and these can be found at paragraph
10.50.

Who can sue whom?

Textbook
10.3610.42

As with all other contracts and arrangements, those involving agents sometimes result in litigation. The
third party can sue the agent in some circumstances and the principal in others. There are some situations
where the principal may sue the third party. You need to understand the different circumstances involved.

Third party sues the agent


Check out Figure 10.3 for an excellent description of the relevant situations. Generally, the third party can
sue the principal when the agent has acted with authority or when the principal has ratified the agents
unauthorised actions. Figure 10.4 presents a very clear flow chart regarding this.

Principal can sue the third party


It follows logically that the principal can sue the third party where the agent has acted within their actual
authority (but not ostensible) or where the principal has ratified the agents unauthorised actions.

Third party sues the agent


Generally speaking an agent cannot sue or be sued unless:
the principal did not exist at the time of making the contract;
the agent executed a deed or bill of exchange in their own name;
custom or trade usage makes the agent liable; and
the terms of the contract make the agent liable.
The principal is undisclosed. Read paragraph 10.42 regarding the undisclosed principal rule. (Said v
Butt [1920] 3 KB 497)
Where the agent has acted without authority (eg where engaged in fraud) the third party may be able to sue
the agent for either misrepresentation or breach of warranty of authority (see paragraph 10.41 and (Collen
v Wright [184360] All ER Rep 146)

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Summary
The commercial world abounds with contracts involving agents. You have learned what constitutes an
agency and the ways in which they can be created. You have learned about the limits to agents authority as
well as the duties of both the agent and their principal. And, finally, you have learned about the legal rights
of third parties, agents and principals.
And thats it. You have now completed your introduction to the legal system and I expect you to achieve
great success in your chosen career as a result of your studies in this little unit. Good luck.