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Study Guide
Fifth edition
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
3
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.
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.
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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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).
Law in commerce
Textbook
1.251.28
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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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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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.
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)
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.
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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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.
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.
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.
Textbook
5.155.33
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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.
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.
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.
Textbook
6.26.19
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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).
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.
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)
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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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.
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.
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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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.
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.
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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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.
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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34
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.
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.
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36
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)
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)
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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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.
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.
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40
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.
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.
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:
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42
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)
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.
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)
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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.
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).
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.
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).
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)
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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50
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.
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
Termination of agency
Finally, there are numerous ways the relationship may be terminated and these can be found at paragraph
10.50.
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.
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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.