Essential Australian Management Law (Australian Essentials Series)

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ESSENTIAL MANAGEMENT LAW Second Edition

CP

Cavendish Publishing (Australia) Pty Limited

Sydney • London

Titles in the series: Essential Administrative Law Essential Australian Law Essential Company Law Essential Constitutional law Essential Contract Law Essential Criminal Law Essential Equity and Trusts Essential Evidence Essential Family Law Essential International Trade Law Essential Management Law Essential Professional Conduct: Legal Accounting Essential Professional Conduct: Legal Ethics Essential Tort Law

ESSENTIAL MANAGEMENT LAW Second Edition

Michael A Adams, BA (Hons), LLM, FCIS, MACE, Professor, Faculty of Law, University of Technology, Sydney General Editor Professor David Barker Dean of the Faculty of Law, University of Technology, Sydney

CP

Cavendish Publishing (Australia) Pty Limited

Sydney • London

Second edition first published 2001 by Cavendish Publishing (Australia) Pty Limited, 3/303 Barrenjoey Road, Newport, New South Wales 2106 Telephone: (02) 9999 2777 Facsimile: (02) 9999 3688 Email: [email protected] Cavendish Publishing Limited, The Glass House, Wharton Street, London WC1X 9PX, United Kingdom Telephone: +44 (0)20 7278 8000 Facsimile: +44 (0)20 7278 8080 Email: [email protected] Website: www.cavendishpublishing.com © Adams, MA 2001 First edition 1997 Second edition 2001 All rights reserved. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, photocopying, recording or otherwise, without the prior permission of the publisher and copyright owner. Any person who infringes the above in relation to this publication may be liable to criminal prosecution and civil claims for damages. National Library of Australia Cataloguing in Publication Data Adams, Michael Essential management law – 2nd ed Includes index 1 Commercial law – Australia 2 Corporation law – Australia I Title II Title: Management law (Series: Essential series) 346.9407 ISBN 1 876213 16 7 Printed and bound in Great Britain

Foreword This book is part of the Cavendish Essential Series. The books in the series constitute a unique publishing venture for Australia in that they are intended as a helpful revision aid for the hard-pressed student. They are not intended to be a substitute for the more detailed textbooks which are already listed in the current Cavendish catalogue. Each book follows a prescribed format consisting of a checklist covering each of the areas in the chapter, and an expanded treatment of ‘Essential’ issues looking at examination topics in depth. The authors are all Australian law academics who bring to their subjects a wealth of experience in academic and legal practice. Professor David Barker General Editor Dean of the Faculty of Law, University of Technology, Sydney

v

Preface Before one can start studying management law, there are some fundamental questions that have to be asked, such as: ‘Why do managers need to study law?’ There is no simple answer, but it is true that law is the basis of our society. All business managers have legal responsibilities and obligations. The failure to comply with these laws may result in a civil liability or a criminal prosecution, or perhaps even both! Awareness of the potential risks and pitfalls is essential to all business managers. In fact, a good knowledge of the law can enable a manager to act in a preemptive or proactive way and thus give an efficient response to common problems. No one expects business managers to attempt to become lawyers, but there is a clear need to be able to communicate effectively with the legal profession. A fundamental grounding in management law will bring to a manager’s attention the most common legal issues and how they may be resolved. To gain a real insight into how to use the law, it is paramount to understand the framework of Australian law and the many sources of law which directly affect managers’ decisions. Throughout this book, both cases and legislation support all principles of law. It is worth noting that these are only examples and the law is a dynamic subject which regularly changes. The cases or statutes can become quickly out of date or surpassed by new cases or amendments to legislation (just look at the amount of tax law that exists in Australia!). However, the main principles tend to be consistent and the courts merely refine the principles to changing circumstances. Keeping up to date with the changes is a great problem for everyone, and access to a reporting service such as Butterworths Current Law Reporter and Legislation is very useful and can save the day. Many specialist areas of law have their own looseleaf services. These services involve the subscriber being sent updated pages every few weeks by the law publishers, such as Butterworths, CCH Australia, Time Base and LBC Information Services. Many of the law publishers produce CD-ROMs and also update their legal materials on the internet. Once it has been agreed that managers should learn about the law, the next question must be: ‘What laws need to be studied?’

vii

ESSENTIAL MANAGEMENT LAW

This will be a subjective question, but, from my experiences of teaching and practising management law, there are some common topics which managers regularly come into contact with during their business lives. One key area that is not covered by this book is taxation. The role of personal tax and corporate tax may always affect the outcome of any decision and careful professional advice should be sought first. The main topics included in this book are: • Australian legal system covering the framework of Australian law the classification of laws and the court system. • Alternative business structures covering all types of businesses from sole traders to companies; focusing on the basic principles of corporations law. • Contract law covers the main elements that are common to all businesses before, during and after a contract is made. • Consumer protection covers a number of laws including the tort of negligence and the Trade Practices Act. • Employment law is a wide topic which every manager must have a basic grasp of, to include the contract of employment from before an interview until retirement. • Intellectual property covers the legal protection of business ideas by copyright, trademarks and other available legal devices. Within a short book it is not possible to cover all the topics in any depth, but it is possible to essentially pick over the bones of the most relevant areas of law and agree on achievable aims. These can be summarised as: • to understand the fundamental legal responsibilities imposed upon all business managers; • to develop an ability to effectively communicate with lawyers by understanding the technical jargon; and

viii

PREFACE

• to obtain an awareness of the current legal issues and potential legal risks faced by business managers. For a more detailed analysis of these areas, I would recommend reviewing any one of the following textbooks: Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH Australia. Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services. Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths. At the end of each chapter, there is a further reading section, which includes references to these leading textbooks and other useful specialist books, articles and internet sites. Michael A Adams February 2001

ix

Acknowledgments Essential Management Law is derived from a variety of sources and inspirations since 1989. The materials were first developed for a Kuring-gai College of Advanced Education (Sydney, Australia) undergraduate subject entitled ‘Law and the Manager ’. In 1990, Kuring-gai College became a campus of the University of Technology, Sydney and the subject was continued by the Faculty of Law. At the same time, the Australian Institute of Management and the Centre for Management Studies (now called the Executive Development Unit) at UTS commissioned a three day course in management law. The original materials of this book have been exposed to undergraduate business students, postgraduate law students and managers studying professional management. Thus, these materials have been evolving over the last 10 years and have been aided by the input of other staff, such as Dr David Meltz (UTS) and Michael Flynn (ANU), as well as the many students who added so much value to my learning. I would like to extend a particular thank you for the research assistance by Jeremy Green at UTS. However, the biggest inspiration for the book and my life is my wonderful wife, Melissa, and my delightful daughters, Lucy and Jessica. This book is finally dedicated to my mother in England, Jean, and my late father, John.

xi

Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Table of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1 Australian Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

2 Alternative Business Structures . . . . . . . . . . . . . . . . . . . . . . . . . .21

3 Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

4 Consumer Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

5 Employment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

6 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

xiii

Table of Cases AMP v Chaplin (1978) 52 ALJR 407; (1978) 27 LJMC 207 ANZ Bank case, See R v Portus— AWA Ltd v Deloitte, Haskins and Sells (1992) 7 ACLR 759; (1992) 10 ACLC 933 Adami v Maison de Luxe Ltd (1924) 35 CLR 143 Agriculturist Insurance Co, Re (1870) LR 5 Ch App 725 (Baird’s case) Airfix Footwear Ltd v Cope (1978) IRC 1210 Ankar Pty Ltd v Natwest Finance (Australia) Ltd (1987) 61 ALJR 245 Ansell Rubber Pty Ltd v Allied Rubber Industries Ltd [1967] VR 37 Ansett v Wardley (1980) 28 ALR 449; (1980) 142 CLR 237 Apple Computer Inc v Computer Edge Pty Ltd (Wombat Case) (1986) 60 AILR 313 Argyll v Argyll [1965] 1 All ER 611 Associated Newspapers v Bancks (1951) 83 CLR 322 Australian Iron & Steel Pty Ltd v Najdovska (1988) 12 NSWLR 587 Australian National Airlines v Robinson [1977] VR 87 Australian Telecommunications v Hart (1982) 43 ALR 165 Autodesk v Dyason (1992) 2 AIPC 90-855 Bali Brassiere Co Inc’s Trade Mark, Re; Berli Ltd’s Application, Re (1968) 42 ALJR 310 (Bali Bra case) Balmain New Ferry v Robertson (1906) 4 CLR 322

65, 66

15, 33 72, 75 23 66 43 , 44 73, 76, 93 81 89 93 43 81 77 75 89

95 46

xv


BHP v Federation of Iron Workers Association (1976) AILR 255 Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 Bollinger v Costa Brava Wines [1961] 1 WLR 277 British Broadcasting Corporation v Ioannou [1975] 1 QB 781 Buckley v Tutty (1971) 125 CLR 3533 Burnie Port Authority v General Jones Ltd (1994) 179 CLR 520 Cadbury-Schweppes v Pub Squash (1981) 32 ALR 387 Central London Property Trust v High Trees Ltd [1947] KB 130 Chan v Zacharia (1984) 154 CLR 178 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Coco v Clark Ltd (1969) RPC 41 Codelfa Construction Pty Ltd v State Rail Authority NSW (1982) 41 ALR 367 Colgate Palmolive Pty Ltd v Rexona Pty Ltd (1981) 58 FLR 391 Collier v Sunday Referee Publishing [1940] 2 KB 647 Commonwealth of Australia v John Fairfax (1980) 147 CLR 39 Corporations Act (NSW v Commonwealth), Re (1990) 169 CLR 482; 90 ALR 355 Csomore v Public Service Board of New South Wales (1986) 10 NSWLR 587 Dao v Australian Postal Commission (1987) 162 CLR 317 Darlington Futures v Delco Australia Pty Ltd (1986) 68 ALR 385 Department of Health (Vic) v Arumugam [1988] VR 319

xvi

75 72 92 68 77 56

92 41 24 42 902 44 57 77 89, 93 2, 27 77

79 46 81

TABLE

Dietrich v Dare (1980) 30 ALR 407; 54 ALJR 388 Donoghue v Stevenson [1932] AC 562 Drake Personnel v Beddison [1979] VR 13 E v Australian Red Cross Society (1991) 105 ALR 53; (1991) 27 FCR 310; (1992) ATPR 41-085 Eastman Photographic v Kodak Cycle Co (1998) 15 RPC 105 ESSO Petroleum Co Ltd v Mardon [1976] 2 WLR 583 Faccenda Chicken v Fowler [1986] 1 All ER 617 Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd [1981] 1 NSWLR 196 Forrest v John Mills Pty Ltd (1970) 121 CLR 149 Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590; (1995) 127 ALR 543 Fraser v Thames Television [1983] 2 WLR 913

OF

CASES

67 9, 55 74

57 96 41 76 92 79 15, 36, 57 93

Gambotto v WPC Ltd (1995) 16 ACSR 1; (1995) 182 CLR 432; (1995) 127 ALR 417; (1995) 13 ACLC 342 34 Gapes v Commercial Bank (1980) 37 ALR 20 77 Given v CV Holland (Holdings) Pty Ltd (1977) 29 FLR 212 58 Green v Bestobell (Industries) Ltd [1982] WAR 1; (1981) 1 ACLC 1 34, 35, 75, 76 Hadley v Baxendale (1854) 9 Exch 341 Hartnell v Sharp Corporation of Australia Pty Ltd (1975) 5 ALR 493; [1975] 1 ATPR 40-003 Hawkins v Clayton [1988] 62 ALJR 240; (1988) 164 CLR 539 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Hill v Water Resources Commission (1985) 14 IR 158

48 58 25 56 81

xvii


Hivac Ltd v Park Royal Scientific Instruments [1946] Ch 169 Hochster v De La Tour (1853) 2 E & B 678 Holly Hobbie Trade Mark, Re [1984] 1 All ER 426; [1984] 1 WLR 189 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; 1 All ER 474 Hospital Products v United States Surgical Corporation (1984) 58 ALJR 587; (1984) 156 CLR 41 Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 Impact Datascape Pty Ltd v MacIntosh (1991) 3 ACLR 49 Initial Services v Putterill [1967] 3 All ER 145 Interstate Parcel Pty Ltd (Angus & Robertson Books) v Time-Life (1977) 15 ALR 353

76 45 96 44

25, 34 41

40 76 90

Jarvis v Swan Tours [1973] 3 WLR 954

48

Keech v Sandford (1726) 25 ER 223 King Features Syndicate v Kleeman [1941] AC 416 (Popeye case) Kinsela v Caldwell (1975) 132 CLR 458

34

L’Estrange v Graucob [1934] 2 KB 394 Lavers v Foothills Water Co (1881) 28 SASR 584 Laws v London Chronicle Ltd [1959] 2 All ER 285; [1959] 1 WLR 514 Leaf v International Galleries Ltd [1950] 2 KB 86 Liebeck v McDonalds Corporation (1994) Lister v Romford Ice & Cold Storage Ltd [1975] AC 555

xviii

91 24 46 44 73, 75 41 10 64, 73, 75

TABLE

McDonalds v McWilliams (1980) 49 FLR 455; (1980) 28 ALR 236 (Big Mac case) McLean v Tedman (1984) 155 CLR 306 Mabo v Queensland (No 2) (1992) 175 CLR 482 Macrea Knitting Mills v Lowes (1936) 55 CLR 725 Mallard v Bunge Pty Ltd (1981) 23 AILR 10 Mallinson v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 Mersey Docks and Harbour Board v Coggins and Griffiths Ltd [1947] AC 1 Miller v Fiona’s Clothes Horse of Centrepoint Pty Ltd (1989) ATPR 40-973 Mirror Newspapers v Queensland Newspapers [1982] Qld R 305 Moorcock, The (1889) 14 PD 64 Moorgate Tobacco v Philip Morris (1984) 56 ALR 193 (Golden Lights case) NRMA v Parker (1986) ACLC 609; (1993) 11 ACSR 370 National Safety Council, Re (1991) New South Wales v Commonwealth of Australia (1990) 169 CLR 482; 90 ALR 355 Nordenfelt v Maxim-Nordenfelt Gun Co [1894] AC 535 O’Callaghan v Commissioner of Main Roads [1983] 3 NSWLR 89 Orr v University of Tasmania [1956] Tas SR 155 Ottoman Bank v Chakarian [1930] AC 277 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 3 All ER 16; [1971] 2 QB 711 Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1993) 44 FCR 485

OF

CASES

57 79 2 97 68 75, 77 66 47, 58 89 44 87, 92–94

30 33 2, 27 74

81 73 78

31 52

xix


Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 Passive Smoking Case, Re (1991) Percival v Wright [1902] 2 Ch 421 Polkinghorne v Holland & Whitington (1934) 51 CLR 143; (1934) 40 ALR 353 Pupazzoni v Fremantle Fishermen’s Co-operative (1981) AILR 168 R v Byrnes; R v Hopwood (1995) 17 ACSR 551; (1995) 130 ALR 529 R v Portus ex p ANZ Banking Group Ltd (1972) 127 CLR 353 R v Walker (1858) 6 WR 505 Ready Mix Concrete (South East) Ltd v Minister for Pensions and National Insurance [1968] 2 QB 497 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 Robb v Green [1895] 2 QB 315 Rylands v Fletcher (1868) LR 3 HL 330 Salomon v Salomon & Co Ltd [1897] AC 22 Samuel Taylor Pty Ltd v Registrar of Trade Marks (1959) 102 CLR 650 Schular (L) AG v Wickman Machine Tools Sales Ltd [1973] 2 WLR 683 Sellars & Poseidon Ltd v Adelaide Petroleum NL (1994) Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 Sharah v Healey [1982] 2 NSWLR 233 Sheiban v Hall (1989) (unreported) Smith & Fawcett Ltd, Re [1942] Ch 304; 1 All ER 542 State Bank of South Australia v Marcus Clark (1996) 19 ACSR 606

xx

56 15 32 23 78

35 67 65

66 34 75 56, 61 26 95 43 60 56 74 82 33, 34 33–35

TABLE

Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405 Stoneman v Lyons (1975) 133 CLR 550 Sydney City Council v West (1965) 114 CLR 481 Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 Thorpe v South Australia Football League (1974) 10 SASR 17 Timber Engineering v Anderson [1980] 2 NSWLR 488 United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 University of NSW v Angus & Robertson (1975) 6 ALR 193 Vabu Pty Ltd v Federal Commissioner of Taxation (1996) 96 ATC 4898; (1996) 33 ATR 537 Watkin, Re (1999) 163 ALR 270; [1999] HCA 27 Walford v Miles [1992] 2 WLR 174 Walton Stores Ltd v Maher (1988) 76 ALR 513; (1988) 164 CLR 387 Warnink v Townsend [1979] AC 731 (Advocaat case) White & Carter (Councils) Ltd v McGregor [1962] AC 413 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; (1987) 70 ALR 251; 11 ACLR 715; 5 ACLC 421 Wik Peoples v Queensland (1996) 187 CLR 1 Williams v Printers Trade Services (1984) 26 AILR 10-170; (1984) 7 IR 82 Wilson & Clyde Coal Co Ltd v English [1938] AC 57

OF

CASES

36 64 46

57 46 71 31, 73, 75, 76

23, 25 91

64 14, 27 42 41, 42 87, 92 45

34 2 73 79

xxi


Zaravinos v Dairy Farmers Co-op Ltd (1985) 7 FCR 195 Zuijs v Wirth Bros Pty Ltd (1955) 93 CLR 561

xxii

55 66

1 Australian Legal System

You should be familiar with the following areas: • • • • • •

The framework of Australian law The classifications of business laws The classification of legal actions and processes The choice of remedies and sanctions The court system The dispute resolution system

Introduction It is absolutely essential that the above areas be understood before commencing on any substantive topics of law, such as contract or trade practices.

Framework of Australian law Australian law, historically, has been based upon the adoption of the English statutory and common law. However, since 1901, the federation of the Commonwealth of Australia has resulted in the development of a separate body of law being formed. The legal system of Australia is still based upon a common law system, with its roots derived from the English system of the rule of law. That is, laws must conform to a minimum standard of fairness in content and procedure. Professor Dicey, during the 19th century, formulated that the law has absolute supremacy over governments. Official actions must be done in accordance with the law and no person can be punished unless there is a breach of the law. For this to work the laws must be published, public and available. Naturally, all people are to be equal before the law and the rights of citizens must be enforceable through

1


the courts. The rule of law is also connected to the concept of the separation of powers within the constitution. The legislature, the executive and the judiciary should be kept apart to enable the rule of law to operate effectively. New laws should only be introduced after a full examination of the problems that have arisen. Only then should either the State/Territory or federal parliaments make laws in accordance with the Australian Constitution. The Constitution, at present, is in fact contained within one section (s 9) of an English Act of Parliament entitled the Commonwealth of Australia Act 1900. However, for practical and logistical reasons, the judiciary today develop many of the laws. The doctrine of precedent requires that the superior courts bind the lower courts. Thus, a case on specific points of law and facts may be appealed through many courts. The final decision is not only binding on the parties involved but also on others in a similar position. A large number of Australian cases contain questions relating to the State/Territory or federal jurisdiction. This was clearly illustrated in the case of Re Corporations Act (NSW v Commonwealth) (1990), where the purported Commonwealth company laws were challenged in the High Court of Australia. The High Court held (by six justices agreeing and one dissenting) that the Commonwealth did not have the power to incorporate companies under the Constitution. This virtually had the affect of invalidating the legislation and resulted in many peculiar amendments becoming necessary. It is essential that managers are aware of the various jurisdictional problems that can arise and the problems that can arise if the wrong laws are applied. The High Court cases of Mabo v Queensland (1992) and the Wik People v Queensland (1996) illustrates how judges can actually make the law rather than just interpret it. Politicians have tried passing legislation like the Native Titles Act 1993 (Cth) to solve some of these judicial developments. These decisions are still causing a great deal of debate within the wider community, as well as in the business community.

Classification of business laws and processes There are a variety of ways to classify business law; all have their merits and the terminology employed by the classification is of great legal importance. Many managers can be confused by the peculiar language used by lawyers or can allow their own background knowledge to mislead them.

2

AUSTRALIAN LEGAL SYSTEM

The major classifications include: • sources of law; • legal subjects; • civil and criminal classifications. Sources of law classification The first classification relates to the various sources of law. This explains where the rules and regulations are derived from and often have more than one definition to each term. • Common law This has two distinct meanings. Common law usually means the same as case law, that is laws developed by judges over time and is referring to a system of law. However, common law can also have a technical meaning, in that it is a specific type of law developed from the UK in 1066. Common law subjects include contract and the law of tort and common law remedies include damages. • Equity In its simplest form, equity means fairness and justice and relates to a system of law that was developed to redress the problems of the common law in the UK in the 14th century. It was a distinct area of law, with different courts and different remedies, but in the last 100 years has been amalgamated with the common law. Equity is based on a series of principles known as ‘maxims’. Equitable subjects include trust law and fiduciaries and equitable remedies include injunctions and account of profits. • Legislation This has a wide definition to cover Acts of parliament, which are also called statutes. It is worth remembering that Australia has six States, two Territories and the Commonwealth and all these, have parliaments that can pass legislation. The Australian Constitution generally dictates which parliament can pass which type of laws and in recent times the powers of the Commonwealth Parliament have grown at the expense of State/Territory rights to make laws. This is particularly evident in the area of industrial relations and employment law.

3


• Delegated legislation Each parliament in Australia does not have the time or the technical expertise to debate all points in respect of any new legislation. Thus, it has become essential that each parliament passes an ‘enabling act’ which authorises other bodies to make delegated laws. Examples include local authorities passing local by-laws or statutory authorities like the Australian Securities and Investments Commission passing corporate regulations. These regulations and by-laws are now generally required to have a ‘sunset clause’ inserted requiring them to be reviewed every few years for their value and validity. It is sometimes very hard for managers (and even lawyers) to keep up with all the new regulations being produced by government departments and authorities! • International treaties Australia is a signatory to a number of international treaties that require Australia to amend its legislation to come inline with the international guidelines. International treaties do not have a direct legal impact on Australia, but the governments are under an obligation to comply with all treaties, even if it overrides individual State rights. Examples include treaties that cover copyright, shipping, human rights and the environment. Legal subjects classification This is not an exhaustive list of legal subjects, but it does represent the most frequently used subject headings that managers are likely to come in contact with: • Tort Formally defined as ‘a civil wrong with the common law remedy of unliquidated damages’. It is a general heading for a number of civil (rather than criminal) legal actions, that include negligence, deceit (fraud), defamation (libel and slander) and trespass (person and property). A breach of a tort can give rise to damages that are set by the court and could be $1 nominal damages or multimillions of dollars, depending upon the damage caused or suffered. The tort of negligence is now the biggest type of civil action in Australia.

4


• Contract In its simplest form it is a legally binding agreement between two parties. Contracts define the legal relationship between two parties and usually require one party to perform a service or produce and deliver a product in exchange for consideration (value, such as cash). However, contracts may be very simple (oral statements) or require hundreds of pages of carefully drafted terms and conditions. It is essential that all managers have a fundamental understanding of the law of contract. • Crime Most criminal offences are laid out in the Commonwealth Crimes Act 1914 (and there are State/Territory equivalents) and the Criminal Code Act 1995 (Cth). They range from serious crimes, such as murder, to minor offences, such as parking tickets. Whitecollar crime (fraud and crime within the workplace) has become a multimillion dollar problem. Managers should be aware of who can investigate (who has jurisdiction in your office, such as the federal police, the State police, the Australian Securities and Investments Commission or the Australian Taxation Office) and who may prosecute a particular criminal offence. • Trade practices This is probably the most important area of commercial law in Australia and involves the Trade Practices Act 1974 (Cth) and its State equivalents for how businesses may operate. In particular it regulates consumer contracts, advertising and competition laws. A serious breach can result in a multimillion dollar fine for a company and personal liability for its officers, as well as civil actions for compensation. The Australian Competition and Consumer Commission has been extremely vigilant to enforce trade practices issues relating to the new Goods and Services Tax (GST). • Agency The relationship between a principal and agent is important in business and in law. The agent is acting on behalf of the principal to arrange a contract with a third party and the agents have a number of powers and rights to make this occur. The agent may also be an employee acting on the instructions of a company that is the principal. When dealing with agents, the third party should always know what authority the agent has to be able to bind the principal. 5


• Environmental In the last ten years there has been a major growth in environmental laws that cover a number of areas, such as buildings requirements, air pollution, green-house effect and hazardous waste. • Intellectual property The goodwill of a business is often linked to its intangible assets, such as branding, copyright, patents, trademarks and common law confidentiality. Intellectual property covers all the areas that protect business ideas, whether they need to be registered or not. • Employment All managers will have to employ employees and contractors at some point and the law covers common law contract principles, to union awards and statutory minimum terms in industrial legislation, such as the Workplace Relations Act 1996 (Cth) and its State equivalents. Within the area of employment law, there are a number of specialist areas that have grown in their own right, such as discrimination law and occupational safety. • Corporate law This involves the rules and regulation that control how companies are legally able to operate and in particular the duties and responsibilities of company officers, such as directors, executives and the company secretary for both public and proprietary companies. There are other law subjects, but they tend to be very specialist and only relate to a particular industry, such as health law or maritime law. For a general overview of any law topic, the starting place should be Halsbury’s Laws of Australia, published by Butterworths, which is the legal encyclopedia. Alternatively, Laws of Australia, published by LBC, is also a valuable legal encyclopedia. Civil and criminal classification Most of the legal subjects classified above can also be classified into civil or criminal law. The consequences of a subject being defined as civil or criminal have an impact on who can bring the legal action (plaintiff or prosecutor) and what remedies or sanctions may be sought.

6


The following table helps to distinguish between the two types: Civil law subjects

Civil and criminal

Criminal

Contract

Trade practices

Crimes

Tort

Environmental

Occupational

Employment

Corporate law

health and

Agency

Intellectual property

safety

Workers’

Discrimination

compensation

Some subjects are purely civil and some are purely criminal, but most have both civil and criminal elements. Contract and tort are primarily civil subjects and crimes are obviously criminal. However, within a topic like employment law, the actual contract is civil, but an accident at work may result in a criminal prosecution for occupational health and safety, and a civil claim for workers’ compensation. The defendant may dispute all legal actions and there are various defences established by the law. The easiest way to defend an action is to show that the prosecution (in a criminal case) or the plaintiff (in a civil case) has not proved all the elements of the action. The proof required in a civil case is based upon the concept of proving the law on the balance of probabilities. Whereas, in a criminal case the prosecution must be able to prove the law beyond reasonable doubt and often to a judge and jury rather than just a judge. A further point worth noting is that civil actions must be commenced within a specified time. In contract, actions must be brought within six years of the breach (by virtue of the Limitation Act 1969 (NSW or State equivalent)) or 12 years if it is under a deed. Equity does not impose a fixed time limit on commencing actions, but a doctrine of laches (based on the equitable maxim that ‘delay defeats equity’) has developed. Thus, if an equitable action is not brought within a reasonable time, an equitable remedy may be denied. The actual method of classification is not actually that important, but it is essential to be aware of the differences because it may directly affect the type of actions and remedies that can be followed by a manager.

7


Legal actions and processes The majority of business legal actions can be illustrated as follows: • • • •

prosecutions; suing for a breach of contract; suing for a breach of tortious duty; suing for a breach of statutory duty.

Prosecutions

Prosecutions are the name of the legal actions used to enforce a criminal offence. The police prosecutor, the Director of Public Prosecutions or a government agency or regulator (such as the Australian Competition and Consumer Commission), usually brings them to court. Prosecutions can either be brought under the common law or by a general criminal statute or a specific statute. • Examples of general criminal statutes include: Crimes Act 1914 (Cth), Crimes Act 1900 (NSW or other State/Territory), Criminal Code Act 1995 (which is bringing all the States in line). • Specific statute: for example, a false representations as to goods and services under s 53 of the Trade Practices Act 1974 (Cth) or the offence of insider trading under s 1002G of the Corporations Law. White-collar crime is a growing concern and the prosecuting authorities, such as the Director of Public Prosecutions, the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission, are all taking a hard line. In 1994 three federal public servants were jailed for up to four years (with a nonparole period of 18 months) for defrauding the Commonwealth of $1.67 million. In 1995 it was stated that crimes against businesses were believed to be costing $7 billion a year by the Australian Institute of Criminology. A further KPMG survey in 1999 claimed that frauds against companies were accounting for up to $21 billion a year. Plaintiff sues for a breach of contract

If a term in a contract (see Chapter 3) is broken and the innocent party wishes to enforce the contract, the plaintiff may sue for breach of contract. Depending upon how serious the breach is or what type of term has been broken, the plaintiff may claim damages or refuse to complete the contractual obligations (discharge of the contract). The damages are calculated on the actual losses incurred or the amount of

8


damages it takes to place the innocent party in the position as if the contract had been completed. Plaintiff sues under a specific tort

The most common example of a tort being enforced is a plaintiff suing for the tort of negligence. The plaintiff must prove a number of elements to the action and these include that a duty of care was owed to you, that there has been a breach of that duty, there is an actionable loss that was foreseeable and that it was proximate. These principles were originally established in House of Lords case of Donoghue v Stevenson (1932) and have been applied many times since by the Australian courts. Plaintiff claims a breach of statutory duty

An Act of Parliament may impose a statutory duty on a person, business or government department and if the duty is not followed a legal action may be pursued. An example is where a plaintiff commences an action for misleading or deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth). The court may award damages, injunctions or any other remedies that are specified under the statute. Remedies As well as being familiar with the different types of actions that can be brought by a business manager, it is also logical to know the choice of remedies that are available. The plaintiff is normally required to specify the type of remedy that is required if the litigation is successful. The court normally retains the discretion to award an appropriate remedy. Damages There are various types of damages that a court can award: • Liquidated The amount of damages to be awarded in the event of a contractual breach is agreed upon in advance by the parties involved. The agreed liquidated sum has to be a genuine calculation, representative of the expected loss and not a penalty clause (which may result in one of the parties not being able to breach the contract).

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• Unliquidated The court sets the damages on the evidence provided as to actual loss or under the contractual or tortious principles developed by the courts over time. Some unliquidated damages are determined by statute indicating the level of damages, for example, in workers’ compensation claims. • Nominal The court awards a small amount of damages ($1) to represent that there has been a breach of the law, but does not try to compensate the party for any real losses. • Compensatory The court awards damages to put the plaintiff in the position as if the tort had not occurred or as if the contract had not been breached. • Punitive The court may decide to award an additional amount of damages to punish the defendant on the facts of the case. In recent times, the amount of damages being ordered by the courts has seemed to be amazing. For example, the spilt cup of McDonalds’ hot coffee in the US in 1994 resulted in the plaintiff being awarded $3.6 million. On appeal, the damages were reduced to $480,000: Liebeck v McDonalds Corporation (1994). Even more alarming was the Exxon Valdez oil spill in March 1989 which resulted in US $387 million in damages plus US $9 billion in punitive damages, on top of the US $2 billion to clean up the spill, awarded in 1994. Injunctions These are discretionary court orders to prevent a party from continuing with a particular activity. They may be awarded interlocutory, until the time of a full trial or be issued as final injunctions until the court order is completed. It is contempt of court not to comply with an injunction and could result in a manager being imprisoned.

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Specific performance This is a discretionary court order to require a person to comply with an existing legal obligation. The court will not order specific performance if the plaintiff could easily be compensated with monetary damages or if it is impossible to enforce. Thus, an employee would not be ordered back to work, as it would be impossible for the court to actually enforce such an order. Account of profits If a director, company officer or agent makes a financial profit out of their position (a breach of fiduciary duty), the court may order that those profits have to be transferred to the legal owner, such as the company or principal. Constructive trust The court may impose a trust on a party so that they hold property (money, goods, etc) on behalf of the real owner. Thus, if a bank holds company money but in the personal name of a director of that company, the court could order the bank to hold the funds as a constructive trustee and transfer the money to the company’s bank account. Declarations A court may be asked to interpret a contract or a statutory right of the parties and this declaration helps the parties determine questions of law. The parties can then resolve the factual issue outside the court, while having certainty on the legal issues provided in the declaration. Rescission This is an equitable remedy, which is used to return property to one party, so as to place the parties in the position as if there had never been a transaction.

The court system and dispute resolution All managers have to have a solid understanding of the Australian court system, the involvement of lawyers and what are the available 11


alternatives. This next section briefly outlines the main issues that managers in all States should be aware of. Please note that some of the names are different in each State and this is purely a matter of history. The court system Lawyers

The word ‘lawyer’ has become a generic term for members of the legal profession, including solicitors, barristers, patent attorneys, academics, in-house corporate, regulators and government/public servant lawyers. The broad distinction is drawn between solicitors and barristers in many States, but others have amalgamated the title. In reality there is always likely to be a split profession by way of functions carried out by lawyers. • Solicitors Solicitors must have a law degree (LLB) or satisfy the Legal Practitioners Admission Board Examinations. This is followed by a vocational training course (which in NSW incorporates a formal practical legal training program) at a College of Law or a designated university (such as ANU, Newcastle, and UTS). Once admitted to a State/Territory Supreme Court and the Law Society, a solicitor is allowed to have a limited practising certificate. This has recently be changed for NSW by the Legal Professions Act 1993 (NSW) which came into operation on 1 July 1994. Solicitors may practice alone or in partnerships, usually called ‘firms’. They deal directly with the public and act as an agent for barristers. Although they have rights of audience in all courts, it is normal that they only appear in the ‘inferior courts’ rather than the superior courts. Solicitors vary from general practitioners in country or suburban practices to the very specialist solicitors in the large city based national firms. • Barristers Barristers also have a law degree or have satisfied the Legal Practitioners Admission Board Examinations and then complete a readership course. The Bar Council and the Supreme Court for each State/Territory then admit barristers to practice alone. Senior barristers earn the title ‘Queen’s Counsel’ in some states, but in New South Wales (NSW) this title has been replaced with the ‘Senior Counsel’. Barristers have rights of audience in all courts

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and mostly act as advocates. They also specialise in a particular legal area and write opinions of various legal developments. At the moment, only solicitors (rather than the client who actually pays the bill) can instruct barristers. An exception can arise when a corporation or another professional, for example, an accountant is the client and instructs the barrister. There have been a number of proposals to rationalise the admittance of lawyers into all States/Territories and to combine the educational component for solicitors and barristers. The State courts Where a civil or criminal action is brought will depend upon the appropriate jurisdiction of the court or tribunal. There are three levels within the court system, depending upon the amount of money involved or the seriousness of the offence. • Summary courts In the Australian Capital Territory (ACT), Victoria, Queensland (Qld) and South Australia (SA), these courts are called the magistrates’ court, whereas in New South Wales they are the local courts. They handle a mixture of civil and criminal matters. The civil jurisdiction is usually determined by a monetary limit, which varies from the ACT court of up to $50,000 and in NSW up to $40,000 maximum. Criminal matters are dealt with in two ways. First, as a preliminary hearing called committal proceedings for serious cases to determine if there is a case to answer for the defendant. Alternatively, magistrates, who may impose fines or limited imprisonment, try summary offences. • Intermediate courts In NSW, Qld, SA and Western Australia (WA), these are called district courts and county courts in Victoria. They have a civil financial jurisdiction of up to $750,000 and a criminal jurisdiction for cases that are heard in front of a judge and jury. The criminal cases are on indictable offences, such as theft. Not all States and Territories have this level of court, such as the ACT, Tasmania or the Northern Territory. • Superior courts The Supreme Courts have unlimited jurisdiction in civil and criminal matters. The courts have a split function, as both a court

13


of first instance (original jurisdiction) and as an appellate court (hearing appeals from magistrates’ court/local court/district court). In NSW, Qld and Victoria, points of law have a further appeal process to a separate Court of Appeal (as happens in the United Kingdom and Canada). Some points of law that are deemed to be of public importance can then be appealed to the High Court of Australia, but special leave (permission) must be granted first. The special courts created by the Commonwealth under the Constitution then make the court system even more confusing. These courts are called the Federal Courts of Australia. The Federal courts The Federal Court of Australia was only created in 1976 by virtue of the Federal Court of Australia Act 1976 (Cth). It did contain two parts, called the General and Industrial Divisions. However, from 30 March 1994, a separate Industrial Relations Court of Australia was established with its own judges and thus there is only one part to the Federal Court. The general division includes areas such as bankruptcy and review of federal administrative decisions. A single Federal Court judge may hear a case with original jurisdiction. Three judges constitute a full court and can carry out all appellate work of the Federal Court. Appeals may come from the Federal Court, Supreme Court of the ACT or the State Supreme Courts on matters of bankruptcy, patents, trademarks and taxation. Cross-vesting legislation has enabled many cases to be heard in the State/Territory Supreme Courts, on behalf of the federal civil jurisdiction. This only came into place in 1988 after the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) and equivalent State/Territory Acts. The High Court has questioned the constitutional validity of the cross-vesting legislation in Re Watkin (1999). In 2000, a federal magistrates’ court was established to help resolve many of the family law issues without recourse to the Federal Court. High Court of Australia Seven justices sit as the final court in Australia, the High Court of Australia. This was created by s 71 of the Australian Constitution. The court has an original jurisdiction for offences against the Commonwealth or where the States/Territory or Commonwealth is a party to the action. The majority of the High Court’s work is as the

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final court of appeal from the States/Territory Supreme Courts or the full court of the Federal Court. Special leave must be granted for appeals and this requires the points of law to be of public importance. The High Court is the guardian and the interpreter of the Constitution. Appeals originally went from the High Court of Australia to the Judicial Committee of the Privy Council in London. This avenue was finally removed by s 11 of the Australia Act 1986 (Cth). In reality, the number of appeals to the Privy Council had dropped since 1968 when they were removed from the federal jurisdiction and from the High Court of Australia in 1975. Dispute resolution The cost of litigation has become so high that businesses are actively looking for alternatives to litigation. The Re Passive Smoking Case (1991) was quoted as costing the parties $6.7 million for an action under s 52 of the Trade Practices Act 1974 (Cth) for injunctive relief against a misleading advertisement. Another example involved the NRMA issuing a prospectus and the Federal Court found that it breached the law after spending $13 million in Fraser v NRMA (1995). A further illustration has to be the long-running negligence claim in the Re AWA case (1995) between its directors and auditors for $50 million. The case has involved 13 Queen’s Counsel and barristers, 78 sitting days, six parties to the action, four judgments and $30 million in legal costs. These sort of actions would obviously be out of the reach of most individuals and how many businesses would wish to spend even $100,000 on a case they might lose? Alternative methods have existed for a long time, but are now beginning to gain in popularity with businesses and individuals. • Arbitration The most common alternative is formal commercial arbitration. This method can result in an arbitrator making a final decision that is binding on the parties. Arbitration can be used to resolve a problem a lot quicker, cheaper and with relative privacy when compared to a traditional court action. However, arbitration has often become bogged down in legal detail and is now subject to statutory intervention in the Commercial Arbitration Acts. There has been a growth of alternative (or sometimes called ‘additional’) dispute resolution (ADR) techniques, other than arbitration, to attempt to solve the many different types of business problems, without reference to a court or formal arbitration. In the United

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States, these techniques have grown and are now simply called dispute resolution. Organisations have been established throughout Australia to develop and maximise on the use of ADR. The Australian Commercial Dispute Centre, with its head office in Sydney has operated since 1986 to provide both the facilities and expertise to provide ADR for Australian businesses. The central concept of ADR is a willingness to negotiate, to compromise and to really want to settle the dispute. A saying by the former US President, JF Kennedy is: ... let us never negotiate out of fear, but let us never fear to negotiate.

This is especially important if an on-going business relationship is going to exist after the dispute is settled (particularly common with industrial relations or supply contracts). It becomes paramount to develop a win-win situation, rather than the traditional win-lose situation that litigation normally results in. Business managers that are involved with ADR must fully appreciate and know both their own legal rights and the other party’s, just in case the process does break down and litigation becomes the only course of action available. One is also in a stronger bargaining position if the legal fall back position is clear in one’s own mind. The variety of ADR techniques should be voluntarily agreed to between the parties before entering an agreement or at the outset of a dispute. It is possible to make use of the techniques binding in a contract, but the courts will not allow their jurisdiction to be undermined. The judicial approach has been to encourage ADR and only if it does not settle the dispute, should the court become involved. • Negotiation This is a very informal technique between the parties and will work if the parties really want to settle the dispute. No one can be forced to negotiate and often the parties are not on an equal footing to negotiate. • Facilitation A dispute resolution organisation may provide the independent facilities to help the parties negotiate on a more equal basis. The facilitator will have a low key role and just try and help the parties negotiate their own agreement. 16


• Mediation This involves a mediator taking a more active role in the negotiations and possibly setting some basic principles for the parties to follow. The mediator does not control the outcome, but can actively encourage a settlement. An example of the mediator’s role can be summed up in four stages: (1) Ground rules: The mediator can set the basic ground rules, such as the ‘three Cs’, that is, that the mediation will have co-operation, confidentiality and courtesy, at all times. (2) Defining the problem: The mediator should be able to determine what are the actual legal and factual problems that need settlement and what common ground exists between the parties. One technique to gain this position is known as ‘shuttle diplomacy’ and involves talking to both parties independently. (3) Seeking solutions: This can involve the mediator putting forward ideas or having a more general option generating, brainstorming session with all the parties being involved. (4) Implementation and review: Once a settlement has been reached, it is important to lay down future dispute resolution mechanisms to avoid the conflict in the future and review the implementation of any final decisions. • Independent expert appraisal The parties may jointly appoint a ‘fact-finder’ to assess the technical issues (especially common in the construction and engineering industry) and submit a report for both parties to commence negotiations or mediation on. • Case presentation This is sometimes called ‘mini-trial’, as it requires both parties to present a case in front of senior executives from both parties, who act as judges. Once the presentation is made, the senior executive judges normally negotiate an appropriate settlement. This has been popular with very large American organisations.

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• Conciliation In Europe, the term conciliator is akin to the Australian mediator, but domestically a conciliator can be granted more powers to force a settlement on the parties during the mediation process. The label does not matter, but the powers and rights granted by the parties to the conciliator at the beginning of the process can make the difference. • Rent-a-judge A number of very high profile judges have retired from the bench and have become freelance judges for commercial settlements. The benefit of a retired judge is that they have expert knowledge of the relevant law and a capacity to absorb a lot of technical detail. The major benefits are the quicker access to a rent-a-judge and the confidentiality of not being recorded in the law reports.

Conclusion and references There are a number of fundamental points that all managers should be aware of in respect of their legal knowledge. These can be summarised as: • • • • • • •

What laws directly impact on managers? How are the different laws applied? What are the key civil and criminal laws? What are the key cases and legislation that impact upon managers? What are the different types of lawyers? How are the State and federal courts classified? What alternatives are available for resolving commercial disputes?

Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH Australia, pp 1–112 Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 3– 51 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths, pp 55–96 18


Selected further readings Adams, M, ‘Australian alternative dispute resolution – an overview’ (1993) 22 April, unpublished paper presented at the College of Law, Ohio State University, US Buckley, R, ‘Dispute resolution initiatives in financial services in the US: lessons for Australia’ (1994) 68 ALJ 304 Butterworths, Concise Legal and Business Dictionary, 1997, Sydney: Butterworths Byrt, W, Business and Government in Australia, 1990, Sydney: MacMillan CCH, CCH Macquarie Dictionary of Law, 1996, Sydney: CCH Australia Coady, C and Sampford, C, Business Ethics and the Law, 1993, Federation Fisse, B, Howard’s Criminal Law, 1990, Sydney: LBC Gillies, P, Business Law, 2nd edn, 2000, Sydney: Federation Lane, P, A Manual of Australian Constitutional Law, 1995, Sydney: LBC Merrills, J, International Dispute Settlement, 1991, Sydney: Grotius Turner, P, ‘Litigation Madness’ (1994) 46 J Corporate Management 444 Stickels, G, ‘Settling disputes cheaper and faster’ (1995) Business Review Weekly, 6 February, 42 Zines, L, The High Court and the Constitution, 1997, Sydney: Butterworths Useful internet site Australasian Legal Information Institute

www.austlii.edu.au

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2 Alternative Business Structures You should be familiar with the following areas: • • • • • • • • •

Overview of alternative business structures Sole traders Partnerships Trusts Joint ventures Companies (corporations) Review of the corporations law Brief history of Australian corporate law Corporate officers

Introduction Business managers should be fully aware of the choices available for business structures and especially how the Corporations Law is operating. All managers operate within a business organisational structure. These range from the sole trader with a few employees to the multinational corporations. Managers need to be aware of their own organisational structure, especially when dealing with other businesses.

Overview of alternative business structures The main organisational structures for businesses are sole traders, partnerships, trusts, joint ventures and companies. Generally, these structures are mutually exclusive, but often one business may evolve through a variety of different structures as the business grows. All of the structures have advantages and drawbacks. Thus, before entering

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into a new business structure, one should consider a number of common factors. These might include: • • • • • • • • • •

ease and expense of setting up; stability and permanency; ownership of assets; legal actions; transferability of the business; limitation of liability (security); ability to raise funds; management and control; taxation; freedom from external regulations.

Any one of these factors may be the major reason why a particular business has adopted a specific business structure. Each structure has advantages and disadvantages and these may change over time, depending upon the growth in the business. Sole traders This is a one person business, where the person is willing to take all the risks, but in return reaps all the profits (and is also fully liable for all the debts incurred). The main advantages relate to freedom; flexibility; ease and low costs of setting up; there is also a great amount of control that is retained by the proprietor of the business. Unfortunately, there are many drawbacks, which include unlimited liability (business debts are mixed with personal assets); lack of resources (finances and skills); and normally limited growth. Sole traders are governed by the ordinary laws of Australia and are not treated in a special way because they are in business. Partnerships Partnerships are very common and are usually referred to as ‘firms’. Partnerships are a formally recognised legal relationship and are governed by legislation, based upon the English codifying statute the Partnership Act 1890 (UK). Partnerships must fall within the statutory definition as per s 1 of the Partnership Act 1892 (NSW or State equivalent): the relationship which exists between persons carrying on a business in common with a view to a profit. 22

ALTERNATIVE BUSINESS STRUCTURES

The law relating to partnerships is a rather unusual mixture of trust law, agency law and contract law. The partnership legislation expressly states that the common law and equitable principles should co-exist with the legislation. This form of business structure is very easy and cheap to establish and can be created by either a formal agreement (partnership deed/agreement) or even by the parties’ conduct. Partnerships have a great deal of flexibility and secrecy, as they are not required to make public disclosures. However, partnerships have many drawbacks relating to liability. The partners are all joint and severally liable for the debts of the firm and have unlimited liability. It is quite difficult to transfer a partner’s personal share of a partnership. All partners are deemed to be agents of the firm and of the partners, in a business context. Finally, there is limited growth as the maximum number of partners is fixed at 20 (unless it is a professional partnership, such as solicitors or accountants). In the High Court decision of Re UDC (1985), the court examined the concept of joint ventures and the liabilities imposed upon deemed partners/joint venturers. An agreement existed between UDC, B and SPL to develop some land and to share the profits. UDC provided the finance and SPL owned the land. A substantial profit was made and B did not receive any of it because a further loan had been taken out on the land by UDC and SPL. The High Court held that the three were acting as partners and thus there had been a breach of the fiduciary duties and B was entitled to some of the profits. Although there are different types of partners, general/active partners and sleeping/silent partners, at common law they are all agents of the firm and may be involved in its management. This principle was laid down in the case of Re Baird’s (1870) and is now enshrined in the Partnership Act 1892. This means that every partner is an agent of the firm and the other partners, provided that the transaction is in the usual course of business, are liable for the actions of each individual partner. There is a further requirement that the third party is unaware of the lack of authority or that the person is not in fact a partner of the firm. Liability can be imposed by either contract or tort on all of the partners by virtue of ss 9–10 of the Partnership Act 1892 (NSW or State equivalent). This was clearly illustrated in the case of Polkinghorne v Holland & Whitington (1934) where P was a client of the solicitors H & W. H senior normally dealt with P, but on occasions H junior gave her advice on investments. P was advised on some questionable transactions and lost a considerable amount of money and H junior

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disappeared. The firm of solicitors were sued for the losses and the court held that the advice was in the usual course of H & W’s business as solicitors and the partners were liable for H junior’s fraud. All partners owe fiduciary duties, that is, they are not to make secret profits or allow conflicts of interests to arise between their personal affairs and the partnership. These are now re-enforced by statute. The common law rules of fiduciaries are also applied. The High Court had to consider the duties of a two doctor partnership in Chan v Zacharia (1984). The doctors were dissolving their practice and C took the lease of the premises. The court held that the opportunity of the renewal of the lease belonged to the partnership and as such C could only hold it on a constructive trust for both of them, as beneficiaries. Trusts Trusts are an equitable relationship, where a person has the legal title of property vested in them on behalf of another person (the equitable owner or beneficiary). Professor Underhill defined trusts as: A legally enforceable equitable obligation binding a person (trustee) to deal with specific property (trust property) for the benefit of persons (beneficiaries) or for the advancement of certain purposes (charities).

There are many different types of trusts, including fixed trusts, discretionary trusts, unit trusts and constructive trusts. Expressly creating a trust simply requires the ‘three certainties’: • intention to create – clear words; • specifically defined property; • identifiable beneficiaries. This last certainty was questioned in Kinsela v Caldwell (1975) where all the beneficiaries at the time the trust became operative had died. The High Court held that as the trust referred to the next-of-kin of the beneficiaries there was clearly an ascertainable class of beneficiaries. Trustees are bound by the trust deed or will that created the trust. Also legislation, the Trustee Act 1925 (NSW or State equivalent), has been passed to define duties and powers of trustees where they are not covered in the instrument that created the trust. Trustees are also fiduciaries and as such are bound by the normal common law duties not to make a secret profit or allow a conflict of interests. Trustees may be sued for negligence if they do not carry out their function to the

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appropriate level. In Hawkins v Clayton (1988), the High Court held that the solicitors, as trustees, were negligent for waiting six years to tell the beneficiaries about the property left to them. Many of the tax advantages that trading trusts used to obtain have been removed by the legislature. Joint ventures Joint ventures are sometimes called syndicates or consortiums and are terms employed for avoiding the legal relationship of a partnership. They are agreements by contract to engage in an ad hoc profit project by combining resources, but without binding the other venturers. Examples include the exploration of minerals and the exploitation of new technology. A close relationship may develop and the joint venturers may still be deemed to be partners as in the Re UDC case (1985) and thus are fiduciaries. However, if the joint venture is purely a commercial transaction and dealt with at arm’s length, no presumption of partnership or fiduciaries will be applied. This was held by the High Court in Re Hospital Products (1984). HP was the distributor of USA made surgical appliances for Australia during 1978–79. HP stopped its distribution and copied the products, selling them in Australia as their own. The American designers gained an injunction in 1980 to stop HP and claimed an account of profits for the period. The court held that there was no fiduciary relationship and only damages for breach of contract were appropriate. Companies (corporations) Businesses for a variety of reasons will incorporate into a separate legal entity called a company. Companies have been in existence since the 14th century as either chartered or statutory companies. The most common type (99% of all companies) are registered companies, first created under the Joint Stock Companies Act 1844 (UK). Modern day Australian companies are now registered with the Australian Securities and Investments Commission, are given an Australian Company Number and are governed by the Corporations Law. There were over 1.2 million registered companies in Australia in 2000, but only 8,000 were public and as few as 1,300 listed on the Australian Stock Exchange.

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The major advantages of incorporation are limited liability of its shareholders; the ability to raise capital; ease of transfer of ownership; and stability. However, there are drawbacks with the formality of incorporation; the loss of control between management and shareholders; loss of privacy; and the strict requirements of the Corporations Law. One of the main reasons for creating a company has been the legal principle of separate legal entity. This was laid down in Salomon v Salomon & Co Ltd (1897) where S, a secured creditor (who owned 20,001 of the 20,007 shares in the company) sued his own company for a debt over all the other unsecured creditors. The House of Lords held that the company was a separate legal person from S and he was entitled to sue it. This fundamental principle is now contained in s 124 of the Corporations Law. This means that a company can: • • • •

sue and be sued in its own name; own property in its own name; have perpetual succession; and may have company’s own signature (corporate name and ACN on a common seal).

The main types of companies are the public company and the proprietary company. Both types of company can be limited by shares, but only the public company can raise capital from the public. The minimum number of members for a limited (usually abbreviated as ‘Ltd’) company is one. After 9 December 1995, the First Corporate Law Simplification Act 1995 came into operation and for proprietary companies (usually abbreviated as ‘Pty Ltd’), only one shareholder and director is required. However, many of the fundamental principles of company law are likely to change as a result of the Corporations Law Simplification Task Force. This task force was established in October 1993 by the Federal Attorney General: it is now controlled by the Federal Treasurer and is called the Corporate Law Economic Reform Program (CLERP).

Review of corporations law Company law has been in a state of flux for the last few years. Finally, the dawn of a new era has begun. Keeping abreast of the changes in substantive law and administrative practicalities has become a difficult task for lawyers, accountants and in fact the whole business

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community. This section of Chapter 2 will attempt to give an outline of the major changes in company law or, as it should now be correctly called, corporations law. Many of the basic principles of corporate law have been maintained. However, the administration of Australian corporate law will never be the same! From 1 January 1991, the co-operative scheme between all States and Territories was replaced by an unusual system of Commonwealth and State application laws. Technically, from a legal point of view these are State laws, but they are treated for all practical purposes as a federal law. This was clearly the intention of the Commonwealth Attorney General when he said during the second reading of the Bill in 1990: … for the first time in the nation’s history a single and truly national regulatory regime that can guarantee a sound and well regulated environment for corporate activity.

Brief history The ‘federalising’ of Australian corporate law has not been an easy task. The many shortcomings of the previous co-operative scheme were highlighted and resulted in the Commonwealth Parliament passing the Corporations Act 1989 (Cth). It was clearly believed that the Commonwealth had the constitutional power to do this by virtue of s 51(xx) of the Commonwealth of Australia Constitution Act 1900 (UK). On 8 February 1990, the High Court of Australia in New South Wales v Commonwealth of Australia (1990) held that the legislation was basically unconstitutional in a six to one judgment. The Commonwealth arranged a meeting of Attorneys General from all States and Territories in Alice Springs. In June 1990, the States all agreed to a document called the ‘Future Corporate Regulation in Australia’. The new Corporations Law, as it was to be known, amalgamated the previous: • • • •

Companies Code; Companies (Acquisition of Shares) Code; Securities Industry Code; Futures Industry Code.

There have already been 23 separate amending Acts since the original law was passed and there are many more proposals for change in the next few years. The uncertain constitutional basis after Re Watkin

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(1999) in the High Court has led to a possible referral of powers from the states to the Commonwealth under s 51(xxxvii) of the Australian Constitution. It is hoped that the new basis of the Corporations Law could commence in 2001 with a five year sunset clause for review. Corporations law At first glance, it may sound like the new Corporations Law is very similar to the old co-operative scheme in structure. However, there are some very distinguishing features: • • • •

characteristics of Commonwealth law; ASIC sole administrating authority; ASIC accountable to the Commonwealth only; Ministerial Council reconstituted with the Federal Attorney General as chair plus four votes. All the other States and Territories have only one vote each.

A major function of the covering provisions is to convert the legislation into the law for the ACT. It also deals with points of interpretation, the applied laws, legislation’s administration, fees and taxes and questions of jurisdiction. This means that all the substantial provisions of company law are in fact really contained in just s 82 of the Corporations Act 1989 (Cth). This states: The Corporations Law is as follows: Chapter 1

Introductory

Section 1

This Law may be referred to as the Corporations Law

Section 2

The Australian Securities Commission has general administration of the Corporations Law.

Then follow 1,493 sections on corporate law. Many of the sections have been re-written in ‘plain English’, others changed substantially and other sections have been kept intact. The Corporate Law Economic Reform Program is trying to re-write the law in a clearer way. The buyback provisions alone have been reduced from 15,000 words to only 2,000 words (which represents an 85% reduction). One major benefit of the new legislation arose from the government’s wish to help small business. In Part 1.5 of the

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Corporations Law, a ‘Small Business Guide’ was drafted which outlines the main duties and responsibilities for small proprietary companies. The definition of small business in s 45A is a company that has a turnover less than $10 million, assets less than $5 million or fewer than 50 full-time employees. This covers approximately 750,000 Australian companies. The Small Business Guide has cross-references to the main sections of the Corporations Law and to the relevant Australian Securities and Investments Commission forms and regulations. Australian Securities and Investments Commission The Australian Securities and Investments Commission (‘ASIC’ as it is usually called) has replaced the National Companies & Securities Commission and all the State based Corporate Affairs Commissions. The ASIC is a national body with a head office in both Sydney and Melbourne, plus regional offices in every capital city and other business centres. Finally, the key to a national system was the introduction of the National Corporate Database, located at Morwell, Victoria and known as Hartnell House, after the first chairman of the ASIC. Regional offices are responsible for the administration and enforcement of the Corporations Law. Business centres are to be used for registrations, lodgements of documents, incorporation and on-line searches of company extracts. All fees are to be made payable to the Commonwealth and then re-distributed to the States and Territories later. All existing companies have been allocated an Australian Company Number (usually called an ‘ACN’) that has nine digits. It was a legal requirement for all companies from 1 January 1991 to use their ACN on the company’s common seal and all public documents. The ASIC has the sole responsibility for the investigation, information gathering and enforcement of the Corporations Law. The organisation’s budget is approximately $130 million and its decisions are subject to Commonwealth administrative law. A key role of the ASIC relates to enforcement and this can be a mixture of civil, criminal and civil penalty provisions. The ASIC traditionally was accountable to the Federal Attorney General, but after the Federal election in March 1996, the new Government transferred the responsibility to the Commonwealth Treasury Department. Both the ASIC and the Treasury Department have very useful internet sites, which are referenced at the end of this chapter. The ASIC also provides an

29


information telephone service for the price of a local telephone call on 1300-300-630 and most forms are available from their website: www.ASIC.gov.au.

Corporate officers Corporations cannot make decisions without the support of humans. Thus, the level of decision making will depend upon the Corporations Law, the company’s constitution (traditionally called the memorandum and articles of association) and any delegated powers from the board or shareholders. This is sometimes known as the ‘organ theory’, as each decision making unit of a company is akin to a separate organ and can be compared with the separation of powers in parliament. The members/shareholders are not meant to interfere with management or the board of directors of a company. This principle was established in NRMA v Parker (1986). If the members are dissatisfied with the directors they can either sell their shares or remove the directors at the company’s next annual general meeting. Unfortunately, since December 1995, proprietary companies (which make up 98% of all companies) are not required to have an annual general meeting. Company officers have been reviewed many times by the courts and the legislature. In times of economic difficulty and a large number of insolvencies, creditors have been looking to the directors and other professional advisers for financial security. This is known as the ‘deep-pocket syndrome’ because of the insurance cover they maintain. Definitional issues Corporate officers are defined in s 9 of the Corporations Law as: • a director; • a secretary; • a person who makes decisions that affect the whole business (executives) in accordance with whose instructions or wishes the directors are accustomed to act (‘shadow’ officers); • external administrators such as receivers, administrators and liquidators.

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Section 9 is called the ‘Dictionary’ and defines all key words used throughout the Corporations Law. Employees

The meaning of employee in corporate law is not well defined. It normally relates only to managers under a contract of employment and they are subject to a common law duty of fidelity. This was illustrated in the case of Timber Engineering v Anderson (1980), where an employee set up a business in direct competition with his employer. A was required to account for profits that his business made at the expense of his employer’s business. Employees are not specifically included in the s 9 definition of an officer, but can be those who make significant decisions (executives) or those who are included in some of the specific officer’s duties under the Corporations Law. For example, both officers and employees have a statutory duty to not misuse their position (s 182) or misuse information (s 183). Executive officers

Executives are the most senior employees of the company and are normally the managing director or chief executive officer (CEO). They are bound by a number of legal duties because of their position. Executives are in fact a mixture of employee, director and agent of the company. The s 9 definition looks at their function and impact rather than their title. Company secretaries

Company secretaries are a legal requirement for every public company by virtue of s 204A of the Corporations Law. The secretary is known as the chief administrative position of the company since the case of Re Panorama Developments (1971). The company secretary has the implied authority to enter into all administrative contracts rather than managerial or commercial contracts. Generally, secretaries are bound by the same statutory duties as directors. They can be held personally liable for failing to lodge the company’s annual returns (by s 188) and over 25,000 annually are served with penalty notices and 3,000 receive a criminal conviction. Directors

Of all the different types of corporate officers, it is directors that have received the most attention by the media, the public and the ASIC. Directors are specifically defined in s 9 as:

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... a person appointed to the position of director ...

Every company in Australia must appoint a director by s 201A of the Corporations Law. If the company is registered as public, whether it is listed on the Australian Stock Exchange (ASX) or not, it must have at least three directors and one shareholder/member. However, a proprietary company only needs to have one director and one shareholder (who may be the same person). Fundamental duties The officers’ duties (which are most commonly called the ‘directors’ duties’) have to be fully understood by all managers because of the potential civil and criminal liabilities that can arise. The duties discussed below are owed to the company rather than to the individual shareholders. This principle was established in the UK case of Percival v Wright (1902) and generally there are few exceptions. If the company enters into financial difficulties, the law would expect the officers also to owe a duty to creditors. Also, if the company is a very small family business, akin to a partnership, the directors should fully disclose information to all shareholders and directors. The three main duties are: • common law duty; • equitable fiduciary duty; • statutory duty. These duties co-exist and need to be defined, as well as asking the question: Why is there so much overlap between the duties?

The answer is in the fact that different people will enforce different duties, for different reasons and will expect different outcomes. Who can enforce the officers’ duties?

• • • •

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The company itself; the Australian Securities and Investments Commission; the shareholders; the creditors.


What outcomes would they expect?

The ASIC would be interested in protecting the public by enforcing the criminal and civil penalty provisions of the Corporations Law. The ASIC may also be able to assist shareholders in recovering damages from officers to compensate them for their financial losses. Whereas the shareholders or the company may wish to obtain an injunction to prevent a director from breaching their duties or may wish to claim damages for their negligence. In the State Bank of South Australia v Marcus Clark (1996), the court held liable MC, as the former managing director of the bank, for $81 million in damages. MC was held liable for a breach of his statutory duty, a breach of common law duty of negligence and for a breach of his equitable fiduciary duty for allowing a conflict of interest to arise. Each of the duties needs to be explained separately. Common law duties

This duty has been traditionally very low, when compared to other professional groups (such as lawyers, accountants and doctors) and was laid down in Re Smith & Fawcett Ltd (1942) by Lord Greene MR as: To act bona fide for the benefit of the company as a whole and not for any collateral purpose.

This was further developed in a number of UK cases, where the standard of care was stated to be purely subjective. This meant that officers simply said they were acting honestly and did not know or understand their role. However, some recent cases have challenged this concept. In Re National Safety Council (1991), the chairperson of the Victorian National Safety Council was held to be liable for the debts of the company ($97 million) and a higher standard of care were imposed. This case was then followed by Re AWA (1992), where the judge held executive directors owe a higher duty than non-executive directors. However, the NSW Court of Appeal in its 1995 decision on the same case amended this decision with a judgment that was 250 pages long! The courts certainly now require a higher standard of care than previously for all company officers. Officers can be sued for the tort of negligence, the tort of deceit (if there is a fraud involved) and for breach of contract for not acting honestly or with care. In the State Bank of South Australia v Marcus Clark (1996) case, the managing director failed to obtain an independent valuation for a major asset the bank was about to purchase. The court held that a reasonable executive would have obtained a valuation before purchasing such an asset.

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Equitable fiduciary duty

Fiduciary duties are hard to define, but there has been some guidance from the High Court in Re Hospital Products (1984). The following duties occur because company officers are deemed to be fiduciaries and thus able to take an unfair advantage of their position to the detriment of the company. The duties can be summarised as: • Act honestly Officers are expected to act honestly in all their dealings with and on behalf of the company. This was established in Re Smith & Fawcett Ltd (1942). • Confidentiality Officers of a company are expected to keep all company information confidential. This was fully explained in State Bank of South Australia v Marcus Clark (1996) where the managing director disclosed details of a large transaction to a family member prior to it being public knowledge. • Conflicts of interest It is essential that officers do not allow their personal interests to override the company’s best interests. This was originally established in the UK case of Keech v Sandford (1726) and has been followed in many UK officers’ cases such as Regal (Hastings) Ltd v Gulliver (1942). In Australia, the principle was applied in Green v Bestobell (Industries) Ltd (1982) where G (as a manager of Bestobell) made a tender bid for the company and for his own personal business interests. The principle was also applied in the State Bank of South Australia v Marcus Clark (1996) case when MC did not disclose that his wife had a financial interest in the asset being purchased by the bank. • Proper purpose rule This is a general test which can be used to determine whether there has been a breach of this duty and was established by the High Court in Whitehouse v Carlton Hotel (1982). This same test was approved in 1995 by the High Court in Gambotto v WCP Ltd (1995). The court prevented 99.7% of the company from altering its articles of association because it affected the rights of a minority shareholder. The alteration was held not to be for a proper purpose, even though the company would have been in a better commercial position.

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Statutory duties The statutory duties have developed from the common law and equity principles. The statutory duties were intended to give certainty to the law and also to impose a standard of criminality onto company officers. The key provisions are ss 180–85 of the Corporations Law, which are entitled ‘Duties of Officer of Corporation’. These sections contain their own definition of an officer that does not include an employee. Overview of the Corporations Law: • Section 180

officers required to exercise reasonable care and diligence

• Section 181

officers required to act honestly

• Section 182

officers must not make improper use of their company position

• Section 183

officers must not make improper use of company information

This section was previously known as s 232 and was amended in 1992 to decriminalise its consequences and to make the standard of care objective for the courts and the regulators to enforce. All events after 1 February 1993 are deemed to be civil penalty provisions. The statutory provisions in ss 180–84 are additional to the existing common law and equitable duties by s 185 of the Corporations Law. It is also worth noting that the provision in s 183 is much wider than that of the insider trading section in s 1002G of the Corporations Law. Section 183 is applied to all companies and covers both officers and all employees. This provision was used to hold a manager liable for passing information in respect of a company tender in the case of Green v Bestobell (Industries) Ltd (1982). Officers have also been held liable for improper use of their position even though they believed that it was in the company’s best interests. For examples of this principle see the High Court case of R v Byrnes (1994) and the State Bank of South Australia v Marcus Clark (1996) case. Another major change occurred with the decriminalising of the statutory duties of company officers (as outlined by ss 180–83), which replaced criminal sanctions with a civil penalty provision. Civil penalty provisions are found in Part 9.4B of the Corporations Law and are applied instead of the normal criminal provisions in s 1311 and Sched 3 of the Corporations Law. The ASIC can apply to the court if

35


they believe that a contravention should lead to a civil penalty order. The court then applies the civil standard of proof and can impose a court declaration, a punitive damages award to the Commonwealth (up to $200,000) and order compensation to be paid to the company. Additionally, by s 1317EA, a civil penalty order can be issued which prohibits an officer for five years from taking part in management of company. After 13 March 2000, officers have a statutory defence to actions relating to negligence or s 180 (reasonable care and diligence) called the business judgment rule in s 180(2) of the Corporations Law. This defence requires the officer to show that they made the decision in good faith for a proper purpose, they do not have a material personal interest in the subject matter and reasonably informed themselves to make a rational decision. If there are any contraventions of s 184 which involved dishonesty or the intent to defraud members or creditors, the Director of Public Prosecutions can bring criminal proceedings against the officer. The maximum penalty for this offence is up to five years’ imprisonment and/or a fine of $200,000. There are many other duties imposed upon directors under the Corporations Law which involve areas such as loans to directors, disclosures in contracts, and various registers of holdings. The use of the misleading conduct provisions in s 995 of the Corporations Law (which is very similar in its wording to s 52 of the Trade Practices Act 1974 (Cth)) have also received a lot of publicity through the aborted attempt to float the NRMA for $2 billion in Fraser v NRMA (1995). Finally, one of the most important areas of corporate law has been the concept of insolvent trading. Originally, all officers could be held personally liable for company debts if the company continued to trade while it was unable to pay its debts. This was contained in the old s 592 and illustrated by cases such as Statewide Tobacco Services Ltd v Morley (1990). This case involved a non-executive director, who was the widow of the company’s founder. Her son ran up large company debts and was then personally declared bankrupt. Mrs Morley was held to have delegated her responsibilities to her son director and was thus liable for the debts. This particular insolvent trading section has since been repealed and replaced by a positive duty on directors not to trade insolvently by virtue of s 588G of the Corporations Law. The section does not cover all officers now, but focuses just on directors. This is probably one of the most important provisions any director should be made aware of at the time of their appointment. There are some

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defences to trading while insolvently and these are contained in s 588H. One of the additional points of the new insolvent trading rules is that holding companies can even be held liable for the actions of their subsidiaries by s 588V of the Corporations Law.

Conclusion and references There are a number of key points that all managers should be aware of in respect of their own business structure and of dealing with other businesses. These can be summarised as: • What are the key elements in determining a particular type of business structure? • What are the advantages and disadvantages of the common business structures? • What types of laws and regulations govern most businesses? • How does the Corporations Law operate? • How are officers defined? • What duties are imposed upon company officers? • What legal actions can be brought against corporate officers? Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH Australia, pp 660–830 Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 681–795 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths, pp 499–690 Selected references and further readings Baxt, R, Fletcher, K and Fridman, S, Afterman and Baxt’s Cases and Materials on Corporations and Associations, 8th edn, 1999, Sydney: Butterworths Burnett, B, Australian Corporations Law Guide, 2001, Sydney: CCH Australia

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Butterworths, Australian Corporations Legislation, 2001 Fletcher, K, The Law of Partnership in Australia and NZ, 1996, Sydney: LBC Ford, H, Austin, R and Ramsay, I, Principles of Corporations Law, 2001, Sydney: Butterworths Gooley, J, Corporations and Associations Law, 1999, Sydney: Butterworths Graw, S, An Outline of the Law of Partnership, 1994, Sydney: LBC Hanrahan, P, Ramsay, I and Stapledon, G, Commercial Applications of Company Law, 2nd edn, 2001, Sydney: CCH Australia Lipton, P and Herzberg, A, Understanding Company Law, 2000, Sydney: LBC Redmond, P, Companies and Securities Law: Commentary and Materials, 3rd edn, 2000, Sydney: LBC Renton, N, Guide for Voluntary Associations, 1994, Sydney: LBC Tomasic, R and Bottomley, S, Corporations Law in Australia, 1995, Sydney: Federation Useful internet sites Australian Securities and Investment Commission

www.asic.gov.au

Australian Stock Exchange

www.asx.com.au

Australasian Legal Information Institute Centre for Corporate and Securities Research

cclsr.unimelb.edu.au

Chartered Secretaries Australia Corporate Governance

www.treasury.gov.au

Institute of Chartered Accountants

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www.CSAust.com www.wp.com/CORPGOV/

Federal Treasury Department

Non-Profit Corporations and Associations

www.austlii.edu.au

www.icaa.org.au

www.qut.edu.au/bus/ponc/ponc.html

3 Contract Law

You should be familiar with the following areas: • • • • • • • • • • •

The key contractual issues Overview Negotiations Terms Consequences of breaching contracts Breach of contract Exclusion clauses Remedies in contract law Common law remedies Equitable remedies Statutory remedies

Introduction Contract law has to be the backbone of all businesses. It is the legal relationship that enables business to function. In the majority of cases, contracts are made without the parties ever having any problems. However, as soon as something goes wrong with the agreement, for example, goods are not delivered on time or the services provided are not up to standard, it is the law of contract which holds the key. It is necessary to quickly review the basic elements and current legal pitfalls of contract issues. Specifically, this chapter focuses on the consequences of a breach of contract and the choice of remedies that are available to settle the dispute.

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The key contractual issues Overview Contract was simply defined by Sir Fred Pollock as: A promise or agreement which the law will enforce.

Contract has always been based upon two simple concepts of bargain and consent. With the benefit of time and judges/parliament interfering, these principles have been developed to represent six basic elements, which are found in every contract: • • • • • •

agreement (offer/acceptance); consideration (value); intention to bind; capacity; format; legality.

If one of the elements is not found, then the courts are unwilling to enforce the contract and it is deemed to be an agreement. Many of the common law principles of contract still exist, but statutory intervention has grown rapidly with the Trade Practices Act 1974 (Cth), Sale of Goods Acts (each State/Territory has its own) and in NSW the Contract Review Act 1980 (NSW). Negotiations One of the many problem areas of contract law has related to what happens in the period leading up to the actual contract coming into existence. It has long been established that a contract comes into force at the time of unconditional acceptance, as long as the other elements have been met. However, many promises made during the time of the negotiations may not form part of the contract. This in turn means they are generally not legally enforceable. Contract law has tried to resolve this problem in a variety of ways. The case of Impact Datascape Pty Ltd v MacIntosh (1991) illustrates the court’s approach by not worrying about the normal offer/acceptance routine, but concentrating on the reality of the situation. On the facts there was clearly a contract by conduct, even though it lacked the formality. The parties’ actions went far beyond mere intentions to

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contract. The court held even if a contract had not been formed, the plaintiff could have succeeded on the growing ground of estoppel. Traditionally, all the statements made by the parties prior to a contract have been mere non-contractual representations. These cannot be enforced under contract law because they occurred before the contract was made. Another way of looking at it is that the statements are not terms in the contract and you can only sue on the basis of the terms. The action for a false representation is called a misrepresentation, which has always been difficult to succeed in and the main remedy of rescission is easily lost. A famous example is the painting by Constable sold as an original and five years later discovered to be a fraud. The court held that a misrepresentation had occurred but the delay defeated the remedy of rescission, as laid out in Leaf v International Galleries Ltd (1950). However, some legal actions for misrepresentation have been successful, such as in ESSO v Mardon (1976). In this case, a petrol service station owner was misled as to the amount of petrol required for a three year lease for the petroleum company. The main elements that have to be proved are: • • • •

actual statement of fact; statement made before contract finalised; statement was an inducing factor; statement addressed to the person entering the contract.

The ACT and SA have both attempted to correct the common law position by the Misrepresentation Acts 1977 (ACT), 1972 (SA). Also, the courts are allowing joint actions for fraudulent misrepresentation and actions under the misleading or deceptive conduct provisions of s 52 of the Trade Practices Act 1974 (Cth). Alternatively, the courts have been developing an old doctrine of estoppel. This had first been used in a case in 1877, Hughes v Metropolitan Railway Co (1877), but was formally developed in Central London Property Trust v High Trees Ltd (1947) that parties in a contractual relationship could not go back on their word if a subsequent promise had been made. However, the doctrine of estoppel was applied after a contract was made and not during negotiations until the High Court of Australia decision of Walton Stores Ltd v Maher (1988). The Walton Stores case developed the principle of estoppel far beyond its original application in the High Trees case. The case involved the negotiation of a lease for a shop in a new shopping centre. Special alterations had to be made before the site was suitable

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and the costs borne by the lessor. The potential lessee did not communicate that they had decided not to lease the space and knew that the lessors were continuing work in preparation of the lease for W. There was no pre-existing legal relationship and the court still held that W was estopped from denying the promises that had been made. Damages were awarded to the lessors because of the detriment caused by the failure to inform M that they were pulling out of the unsigned lease. This case has changed the whole complexion of pre-contractual negotiations and promises that are made at such meetings. There have been cases since Walton which continue to define the exact position. There is still a difference between estoppel by convention once in a contract and estoppel by conduct during pre-contractual negotiations. A valid contract can be made at the time of an unconditional acceptance and this would normally include an oral or faxed communication. The contract will be formed at the time and place of the receipt of the acceptance. ‘Heads of agreement’ or contracts to contract can be a legal minefield. Generally, they are not legally enforceable unless there is a duty to negotiate in good faith or a fiduciary duty. The NSW Court of Appeal upheld the principle of a contract to contract in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991), but on the facts rejected the contract. The UK House of Lords in Walford v Miles (1992) held that there is no such thing as a contract to contract. Terms Linked into the question of representations and terms is the ability to distinguish between the two. If determined as a term, then ask the question: What type is it? The tests for distinguishing terms from representations are as follows: • • • • •

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time that statement is made; intention of the parties’ minds; later written documents; relative knowledge of the parties; degree of precision of the statement.

CONTRACT LAW

Why is it so important to tell the difference?

The reason is that, as discussed above, the action for terms is breach of contract, whereas for false representations the action is the complicated one of misrepresentation. Assuming the statements made by the parties are deemed to be terms, they have to be further classified as either conditions or warranties. The breach of one of the terms has a dramatic effect on the contract and if the party gets it wrong dire consequences can follow. Conditions

These are the major terms of a contract that define the parties’ rights, liabilities and obligations. If these are broken the contract can be repudiated and damages can be claimed. This was illustrated in Associated Newspapers v Bancks (1951) where the ‘Ginger Meggs’ character was guaranteed to be on the front page of a comic for 10 years. Due to a re-organisation, the cartoon was shown on page three for three weeks. The court held that this was a breach of condition and the whole contract could be discharged. Alternatively, the innocent party may elect to just take damages. Warranties

These are all the other terms and if they are broken only damages can be claimed and not the repudiation of the whole contract. The High Court has indicated that it prefers to treat terms as warranties rather than conditions if it can, so as to encourage performance rather than the avoidance of contractual obligations. This principle was explained in the High Court case of Ankar Pty Ltd v Natwest Finance (Australia) Ltd (1987). The courts have developed a series of tests to help determine whether a term is a condition or a warranty. They include: • Contractual provision consequence Does the breach under the wording of the contract automatically terminate the contract? • Term indicator or label Contracts describe their terms as conditions or warranties, but this is only an indication. The courts may ignore the labels as in Schular v Wickman Machine Tools Ltd (1973) where a German manufacturer with an UK agent had a 20 term contract, requiring as a condition that the agent must visit the six largest customers at least once a

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week. The court held that, even though called a condition, in fact it was only a warranty. • Statutory or custom rules Goods that are sold have implied conditions relating to their description, merchantable quality and fitness for the purpose by virtue of the Sale of Goods legislation. Also, it is the custom that time is of the essence in commercial contracts. • Judicial test (sometimes called ‘innominate’ or ‘intermediate’ terms) The Re Hong Kong Fir Shipping case (1962) stated that, if the other tests could not determine the type of term, the court simply asks, ‘does the breach deprive the innocent party of a substantial benefit under the contract?’ This has been indirectly applied in Australia via the Re Ankar case (1987). These different tests can be used to determine whether a term is a condition or a warranty. Remember the consequences for a breach of the different terms is very important. Implied terms

Terms in a contract are normally expressed and ideally put into writing. However, the courts are sometimes requested to imply a term into a contract. The court will only do this on a completely objective basis and if essential to give business efficacy to the contract. This was stated in Lavers v Foothills Water Co (1981) where there was no express term to terminate a contract of employment and the court implied that reasonable notice to terminate could be implied. There are many sources from which terms can be implied, such as custom, trade practices, statute, parties’ previous conduct and on the court’s own direction. The courts have not always been willing to interfere with a contract, but sometimes it is essential to give it business common sense (such as the business efficacy test from the Re Moorcock case (1889)). The High Court examined the implying of terms in Codelfa Construction Pty Ltd v State Rail Authority NSW (1982). In this case, the eastern suburbs railway in Sydney was being constructed and the contractor had an injunction imposed upon it for nuisance by working a three shift, six days a week basis of construction. The SRA had immunity from such actions and the contractors claimed a similar term should be implied into the contract. An arbitrator, the Supreme Court of NSW and the NSW Court of Appeal all agreed. But the High

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Court held that there was no implied term as it was not an obvious provision and had been overlooked by the parties. Courts should only imply terms if it is necessary to make the contract operate; it is reasonable and equitable; it is obvious; capable of clear expression; and is not contradicted by an express term. These are just some of the major issues that are still developing in contract law. Many of the problems are now connected to the greater use of multiple actions, such as using a breach of action, with a negligence claim and a s 52 Trade Practices Act action. These are discussed in more detail in Chapter 4 under Consumer Protection. Once the terms have been established and a breach occurs, then it is paramount to know the consequences.

Consequences of breaching contracts Breach of contract If a term in a contract is broken, the consequences for both parties can be dramatic. Where the term is a condition, the innocent party may elect to terminate the contract. This is called a repudiatory breach. Repudiation can be explicit by immediately informing the other party that you are terminating the contract. Sometimes, the repudiation may be implicit, by the conduct of a party being inconsistent with the terms of the contract, for example, selling goods on to a third party. Both actions cause an actual breach of contract. It is possible to anticipate a breach of contract and not wait until the actual breach occurs. This occurred in the old case of Hochster v De La Tour (1853) where H was appointed as a courier on 11 May to commence on 1 June. The employer changed its mind and refused the appointment. The court held that H could sue immediately and not wait until the breach actually occurred on 1 June. Where a condition is broken, the innocent party may decide not to treat the contract as discharged but that only a warranty has been broken. This has the consequence that the contract is still performed, with damages being awarded for the breach of contract. In some cases, the innocent party has decided to ignore the breach and continue with the contract anyway and claim damages at the end of the performance of the contract. This happened in White & Carter Ltd v McGregor (1961) where M signed a three year advertising contract. On the same day, he changed his mind and tried to pull out of the contract. The advertisers completely fulfilled their part of the bargain for three years without

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payment and then sued for full damages. The House of Lords held (three judges, with two judges dissenting) that W and C were entitled to ignore the breach and should succeed in the claim of damages. The court did comment that it would be better to have damages immediately than to complete performance over this length of time. This would be especially true under the present economic conditions with so many insolvencies. Exclusion clauses Many contracting parties insert a term into the contract that attempts to either exclude or at least limit the potential liability of the party. These are commonly called exclusion clauses, disclaimers, exemption clauses or limitation clauses. The courts have generally tried to construe such terms against the party relying upon it (this is known as the contra proferentem rule) but they are lawful. Both the common law and statute have had a lot to say about exclusion clauses. The term must be incorporated into the contract. This is easy if the contract is signed because it is binding even if unread. See the case of L’Estrange v Graucob (1934) where a sales agreement on a vending machine had a valid exclusion clause, even though unread by the store owner. Often, clauses are incorporated by a clear notice, such as in car parks. These have to be clearly seen before entering the contract, as in Thornton v Shoe Lane Parking Ltd (1971) where the sign was inside an automatic car-park and thus too late. However, where there are regular previous dealings, a notice may still be incorporated into the contract, if there is actual knowledge and some form of consent, as in Balmain New Ferry v Robertson (1906). Most exclusion clauses are a matter of construction, for example: Do they cover the actual breach that occurred? Were they reasonable and sufficient? The High Court examined this in Sydney City Council v West (1965) where a car was parked in the ‘Domain’ parking station and a ticket was given to W. W placed the ticket in his pocket without reading it and later returned to the car park to discover the car was missing. The exclusion clause on the ticket referred to be held not to cover the situation. In fact, it expressly required the Council to deliver the vehicle, which did not occur. Another example occurred in Darlington Futures v Delco Australia Pty Ltd (1986) where the court held that the construction of a clause should be paramount and there is little difference between a total exclusion clause and a limitation clause of say $100, as is common.

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Statutory intervention is slowly occurring in this area of contract law. In respect of the implied terms from the sale of goods law under the Trade Practices Act 1974 and the Sale of Goods Acts, both cannot be excluded if one party is a defined consumer. Also, in NSW, s 7 of the Contracts Review Act 1980 (NSW) gives the court the discretion to strike down an exclusion clause if it is considered to be harsh or unjust. If a retailer attempts to give a representation that the conditions of sale of goods are excluded, criminal liability could be imposed by virtue of s 53(g) of the Trade Practices Act 1974 (Cth). An example may be a retailer trying to use a ‘No Refund’ sign. Such a disclaimer or sign may also be declared misleading or deceptive under s 52 of the Trade Practices Act 1974 and the retailer may be held criminally liable under s 53(g), as in Miller v Fiona’s Clothes Horse (1991).

Remedies in contract law Where a contract has been broken, the innocent party has a choice of remedies that may be claimed. These can be divided into three basic groups: • common law; • equitable; • statutory. Common law remedies The most important common law remedy is damages and it is awarded most frequently for breaches of contract. Damages may be granted for a breach of a condition or a warranty. The two major types of damages are liquidated and unliquidated. Liquidated

The contract specifies a fixed sum to be paid if the contract is broken. This is calculated in advance based upon a bona fide assessment of potential loss, rather than actual loss. If the amount is extravagant, the court may hold it to be a ‘penalty clause’. This becomes unenforceable and the court will grant its own amount.

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Unliquidated

Calculated by the court on set principles to enable the innocent party, as far as is possible, to be returned to the position as if the contract had been performed. The court assesses both the consequences of the breach and how the damages should be quantified. The major legal principle to be applied is called remoteness of damage. This was established in Hadley v Baxendale (1854) which states damages should be those that naturally flow from the breach in the normal course of events and those that are in the reasonable contemplation of the parties at the time of the contract. For the actual quantum of damages, it is not intended to enrich, but to compensate the innocent party. Normally general damages are awarded. If there has been no actual loss, the court may grant nominal damages and in special circumstances may award exemplary damages. Inconvenience and discomfort have been included in calculating damages, such as a terrible skiing holiday in Jarvis v Swan Tours (1973). Difficulty in actually calculating damages is no defence. Equitable remedies Equitable remedies are a lot more flexible than common law damages. However, they are not available as of a right, they are discretionary to the court. If damages is the better remedy, they should be awarded. Also, ‘delay defeats equity’, so time may be an important factor. Specific performance

This is an order (called a decree) to a party to fulfil their obligation under the contract. Injunctions

An order to restrain a party from breaching a contractual term. Often used to enforce a negative pledge in a contract, such as a promise not to work for a competitor. Rescission

An action to restore the parties to their pre-contractual positions, just as if the contract had never occurred. Quantum meruit damages

Damages awarded for the work that has been done when a contract has not been fully completed. It simply means ‘as much as is deserved’.

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Mareva injunctions

Orders to prevent the removal of assets out of the court’s jurisdiction. Anton Piller orders

A special ex parte (only the applicant appears) hearing for the court to order that evidence to a case should be protected because it is likely to be destroyed and damages would not remedy the situation. If granted, it authorises lawyers to enter premises, inspect and remove documents and records. Statutory remedies Many statutes now expressly state the remedies that can be granted by the court for breach of that statute. The Trade Practices Act 1974 (Cth) states that injunctions, damages, corrective advertising and many other remedies are available, including re-writing the contract if necessary. Similarly, the Contract Review Act 1980 (NSW) enables a contract declared to be unjust, unfair or unconscionable to re-examine by the court. Limitations on actions in contract exist, in that they must be brought within a fixed period of time, which is normally six years from the breach of contract.

Conclusion and references Managers should be particularly concerned with contractual matters from the time of commencing negotiations to the final performance of a contract by payment or delivery. Some major issues to consider are: • Has a formal contract been established? • What are the terms and conditions of the contract? • Are there any legal actions that can arise prior to the contract commencing? • If there is a breach of contract, what rights do I have? • What are the available remedies for a breach of contract? Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH Australia, pp 250–381

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Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 51–212 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths, pp 96–292 Selected references and further reading Allan, D and Hiscock, M, Law of Contract in Australia, 1992, Sydney: CCH Caffrey, B, Guidebook to Contract Law in Australia, 1991, Sydney: CCH Carter, J, Outline of Contract Law in Australia, 1994, Sydney: Butterworths Graw, S, An Introduction to the Law of Contract, 1998, Sydney: LBC Hocker, P, Dufty, A and Heffey, P, Contract, 1998, Sydney: LBC Starke, J, Seddon, N and Ellinghaus, M, Law of Contract, 1992, Sydney: Butterworths Swanton, J, ‘Contract law – agreements to “negotiate”’ (1992) 66 ALJ 744 Useful internet site Australasian Legal Information Institute

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www.austlii.edu.au

4 Consumer Protection

You should be familiar with the following areas: • • • • • • • •

Overview of the consumer protection laws Impact of the Trade Practices Act 1974 Contracts for the supply of goods Contracts for the supply of services Manufacturers’ liability Tort of negligence Unfair practices Sanctions, remedies and compliance

Introduction Since the late 1960s and early 1970s, there has been a clear growth in consumer protection. This is going to continue to grow with the suggested introduction of true product liability laws. That is, if a consumer product injures a consumer the manufacturer will automatically be liable (in law, called strict liability). In fact, the major change in consumer protection has been the introduction of the Trade Practices Act 1974 (TPA) (Cth). This single statute has had a dramatic affect upon the business environment and also binds the Commonwealth. It is interesting to note that many of the provisions introduced to aid consumers have become used by businesses to gain competitive advantage over other competitors.

Overview of consumer protection laws Before one can understand how the TPA 1974 (Cth) operates, it is important to understand that there are a variety of consumer

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protection laws. A manager must be aware of the types of laws and their associated risks, as well as the jurisdictional questions that often arise in this area. Consumer protection provisions are a mixture of the following laws: • • • •

contract; sale of goods law, under the Sale of Goods Acts (State laws); trade practices, under TPA 1974 (Federal laws); specific consumer legislation, such as: Dangerous Goods Acts, Weight and Measures Acts; • tort of negligence actions. The laws have grown out of the relative inequality of bargaining positions between the consumer and the seller-manufacturerdistributor-importer. The other major reason for the need for these laws to be developed is that they originally only covered goods. Services are now included in many of the new consumer laws. The TPA 1974 was introduced by the Commonwealth to deal with many issues. Part V of the Act is headed ‘Consumer Protection’ and is the area this session will concentrate on. One important note is that the TPA 1974 has constitutional restraints and this is only being corrected by State/Territory Fair Trading Acts. Section 51(xx) of the Constitution gives federal authority in respect of foreign, trading or financial corporations. Thus, the TPA 1974 has a basic requirement that it involves a corporation with overseas or interstate trade. A non-corporate body or one that is purely intrastate is also excluded from the Act. There are some special exceptions relating to individuals using the postal or telecommunications facilities (as these are controlled by the Commonwealth). An interesting case, Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1993), occurred where an UK company faxed and telephoned an Australian company from the UK, with potentially misleading information. The Federal Court held that the misleading conduct had occurred at the time and place of the receiver (that is, Australia). Many of the provisions relating to consumers require a person to be a ‘consumer’. This is defined in s 4B for both goods and services, as a person acquiring goods-services under $40,000 or of the kind ordinarily used for personal, domestic or household consumption. A person can be disqualified as a consumer if the person holds out that they are in business to resupply or transform them in the course of business. The key provisions can be summarised as follows:

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CONSUMER PROTECTION

• Part IVA of the TPA 1974 is headed ‘Unconscionable Conduct’; • Part V of the TPA 1974 is divided into four divisions: ❍ Division 1 – ‘Unfair Practices’ ❍ Division 1A – ‘Product Safety’; ❍ Division 2 – ‘Consumer Transactions’ ❍ Division 2A – ‘Manufacturers’ and Importers’ Liability’; • Part VA – ‘Liability of Manufacturers for Defective Goods’. The contract between a corporation and a consumer is subject to the supply of product information and minimum standards of product safety. There are procedures for testing products, the making of complaints and even if necessary the recall of products all under Div 1A of the TPA 1974. Most contracts for the supply of goods and/or services have a number of minimum terms implied into them. These terms are fundamental to the whole contract and retailers cannot exclude them from the consumers. Divisions 2 and 2A deal with the implying of certain terms, which are very similar to the terms used in the Sale of Goods Act. The new product liability laws (defective products) are based on a European Union Directive, which imposes strict liability on manufacturers if goods are defective and cause injury. The key liability provision is s 75AD of the TPA 1974. It is hard to calculate the cost or the effectiveness of these new product liability provisions, but insurance premiums have gone up!

Impact of the Trade Practices Act 1974 The TPA 1974 impacts on the business environment in a number of different ways. The following are some of the common examples. Contracts for the supply of goods Contracts for the supply of goods have the following terms implied into them by the TPA 1974. These can be summarised as follows: Title (s 69)

The seller of the goods must have the legal title or authority to sell the goods.

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Description (s 70)

The goods must comply with the contractual description of the goods. Fitness for purpose (s 71)

If the goods are sold in the course of business and the buyer relies upon the skill of the seller, the goods must be suitable for their specified purpose. Merchantable quality (ss 66 and 71)

Goods sold in the course of business must be of a minimum standard, in respect of the goods’ price, description and other factors. Sample (s 72)

Relates to goods sold by sample. When the bulk is delivered, it must correspond with the quality of the sample and there must be time to examine the goods and reject them if necessary. These implied terms are non-excludable for consumers by s 68. If they are broken, the remedy is not under the TPA 1974, but as for a normal breach of contract. Business to business contracts may have a limited exclusion clause by s 68A. This allows the liability to be limited to the replacement or repair of goods and subject to an overriding test of fairness. Contracts for the supply of services Contracts for the supply of services, irrespective of whether they are supplied with or without goods, also have a number of implied terms by the TPA 1974. These can be summarised as: Warranty of due care and skill (s 74)

A person providing the service must exercise due care and skill. Warranty of goods with services (s 74)

The goods supplied with the service will be fit for that specific purpose. Manufacturers’ liability There are many occasions where the consumer may wish to bring an action against the manufacturer or the importer of the goods. This is now possible by an amendment to the TPA 1974, entitled ‘Division 2A Actions against Manufacturers and Importers of Goods’. This division

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CONSUMER PROTECTION

enables the consumer, where there is an interposing party, to hold the manufacturer liable directly. The actual terms implied on manufacturers are very similar to those in Div 2: • • • •

description (s 74C); merchantable quality (s 74D); unsuitable purpose (s 74B); sample (s 74E).

In Zaravinos v Dairy Farmers Co-op Ltd (1985), the judge held that this division must relate to consumer goods only. An action for a breach of the conditions must be commenced within three years. Section 74K states any attempt to avoid these provisions are void. If they are not consumer goods, the limitation on liability is the cost of repairing or replacing the goods. Where the manufacturer is overseas, the TPA 1974 deems the importer to be the manufacturer by virtue of s 74A(4). This is just for the purposes of Div 2A. If there is a contract between the consumer and the retailer, then Div 2 will be applied. If the real fault of the goods relates to the manufacturer or importer, the seller may claim an indemnity by s 74H. Tort of negligence actions These provisions of the TPA 1974 and the State Sale of Goods Acts were introduced to try and provide a code on product liability. The alternative action has always been the common law tort of negligence. The basic elements of the tort were laid down in the famous UK case of Donoghue v Stevenson (1932) involving the snail in the bottle of ginger beer. The House of Lords required that the following elements had to be proved: • duty of care – this is sometimes called the ‘neighbour test’ after the Law Lord, Lord Atkins; • breach of that duty; and • actionable loss. As the tort of negligence developed, two further elements are taken into account by the courts and they are: • foreseeability of harm; • public policy.

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Some of the principles of negligence were aided by the rule in Rylands v Fletcher (1868), that related to bringing unnatural things on to land, which was a form of strict liability. However, in a 1994 High Court decision, Burnie Port Authority v General Jones Ltd (1994), this concept has been challenged. Originally, negligent misstatements (professional negligence) were not recognised as causes for actions. However, in the leading case of Hedley Byrne Ltd v Heller & Partners Ltd (1964), a bank failure to give an accurate credit reference resulting in loss, gave rise to an action in negligence. In Australia, the leading High Court case is Shaddock & Associates Pty Ltd v Parramatta City Council (1981). Unfair practices The other major area consumers and businesses become involved in the TPA 1974 is for malpractices. This area is controlled under Part V, Div 1 and is entitled ‘Unfair Practices’. The division is split into some general provisions and some very specific malpractices. This division is aimed at stopping corporations from misleading consumers. Both civil and criminal remedies are provided under the statute. Section 52 is the most litigated section in the act and it is very general, thus only a civil provision. Section 53 deals with false representations and is a lot more specific for both goods and services. These sections have criminal penalties. Other sections have been introduced to stop practices such as bait advertising (s 66) and false jobs offered by employment agencies (s 53B). The court also has the statutory power in ss 51AA and 51AB of the TPA 1974 to declare that a contract is unconscionable and award an appropriate remedy. It is necessary to look at just two of the sections in more detail, as they can be used both for and against businesses. The main commercial sections are ss 52 and 53 of the TPA 1974. Section 52 of the TPA 1974 A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

Section 52 is a ‘catch all’ provision and has been extended to cover future events (that is, predictions) by s 51A. The conduct must be capable of being misleading rather than actually misleading. This was illustrated in Parkdale Custom Furniture Pty Ltd v Puxu Pty Ltd (1982) where the High Court discussed the operation of s 52. The facts involved a lounge suite, designed by Puxu, and called the ‘Contour’ range. The defendants copied the basic design and called it ‘Rawhide’

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CONSUMER PROTECTION

and included a one and a half inch label on the lounge. Puxu claimed an injunction and damages for a breach of s 52. The court held (3:1) that there had not been a breach. The conduct as a whole was not misleading, as a person who took reasonable care to check would have found the label. Also, the court felt that the designers should have registered it under the Designs Act 1906 (Cth). Another example is the Re Taco Bell case (1982) where a Mexican food restaurant situated in Bondi since 1976 was able to stop the US franchise chain of the same name opening up in 1981. There was likely to be confusion between the two restaurants. A key recent example of this section relates to the misleading advertisements of the NRMA in respect of their 1995 proposed float and prospectus. The case is Fraser v NRMA (1995) and involved nearly $2 billion. The NRMA later floated the insurance business in 2000 after complying with all the relevant laws. Unsubstantiated advertising claims have been subject to many s 52 actions. There is a fine line between mere exaggeration and misleading conduct. A toothpaste manufacturer stopped a competitor stating that it prevented tooth decay as it had not been proved in Colgate Palmolive Pty Ltd v Rexona Pty Ltd (1981). The courts have not been willing to allow s 52 to be used to protect general business ideas. A remedy will be refused unless there has been or is likely to be public confusion. In the Re Big Mac case (1980), a two litre cask of wine advertised as a ‘big mac’ would not cause confusion with a hamburger. Whereas the Australian Society of Accountants were able to stop another accounting body from using ‘CPA’ in the case Re CPA (1987). A further example of the use of this section occurred in E v Australian Red Cross Society (1991) where a claim for breach of s 52 related to blood given in 1984 that contained HIV. E now suffered AIDS and claimed a breach of the TPA 1974. The court held that the Red Cross was generally not a trading corporation, but the activities of the NSW division made it one for the Act. But there were neither representation ever made nor was the Red Cross involved in trade or commerce. Finally, the claim was held to be outside the time period of the statute (for Div 1, TPA 1974 it is six years). In the telecommunications war between Telstra and Optus (Cable & Wireless), the parties constantly used s 52 to support their claims and counter-claims. The most recent example has been the use of ‘freestyle’ advertisements by Optus, showing ‘free’ weekend calls. The Australian Competition and Consumer Commission brought an action to stop the misleading advertising.

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Section 53

This section has many parts to it and thus it is only possible to examine some common examples. A false representation that is in breach of s 53 is a criminal offence and damages or an injunction can be awarded by the court. Section 53(a)

False representations as to standards, such as those relating to quality, grade, composition, style or history. In the Re Sharp case (1975), a microwave was advertised as complying with the Standards Association of Australia, but it had not been tested. The court imposed a $100,000 fine ($10k x 10 charges). Section 53(aa)

False representations as to services. Section 53(e)

False representations as to the price of goods. Section 53(eb)

False representations of the origins of goods. Section 53(g)

False or misleading representations concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy. In Miller v Fiona’s Clothes Horse (1989), a ‘No Refund’ sign resulted in a fine of $15,000 for the retailer. These sections were designed by the legislature to protect consumers. It is interesting to note that many of the civil actions are made by competing companies rather than by true consumers. Trade practices laws are being used in conjunction with other actions, such as breach of contract, misrepresentations and torts of negligence. The word ‘false’ is used throughout s 53. It is taken to mean ‘contrary to fact’ and does not require the person making the statement to know that it is false. In Given v CV Holland (Holdings) Pty Ltd (1977), a motor vehicle was displayed with an odometer wound back from 69,012 miles to 23,700 miles. The dealer was still held liable under s 53(a).

Sanctions, remedies and compliance The previous Trade Practices Commission (TPC) received approximately 52,000 complaints a year and normally can resolve approximately 49,000. The remainder are formally investigated and

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CONSUMER PROTECTION

can result in 20 serious prosecutions. The TPA 1974 has a range of sanctions that can be used to enforce the law. From November 1995, the TPC and the Prices Surveillance Authority merged to form a new Federal regulatory agency, called the Australian Competition and Consumer Commission (usually known by its initials ‘ACCC’ and pronounced the ‘A, triple C’). It is interesting to note that the TPA 1974 is an unusual piece of legislation, which is bound in a constitutional struggle. The Commonwealth is limited in its powers to regulate business. Thus, the TPA 1974 relies upon the Commonwealth’s constitutional power to legislate on foreign companies, trading and financial companies formed within the Commonwealth and various communication powers. Thus, if the party involved in unfair practices is not a company and is not involved in interstate or overseas business, the Commonwealth has to rely upon the State/Territory Fair Trading Acts. The Commission is chaired by Professor Allan Fels and is a high profile federal agency, which enforces the TPA 1974. The ACCC is involved with giving advice, monitoring the operation of the Act, recommending reforms and also becomes directly involved in the prosecution of companies in breach of the TPA 1974. The contravention of Part V of the TPA 1974 (which covers many key sections except s 52) commits an offence under s 79(1)(f) with an individual fine of $40,000. A corporation can be held liable under s 79(1)(g) to a fine of up to $200,000. Legal actions must be brought within a three year time period. Penalties for breaches of Part IV of the TPA 1974 (which involve anti-competitive behaviour) have been increased to $10 m for a corporation and $500,000 for an individual. These new powers came to light very recently when the air freight industry was found to be in breach of the TPA 1974 price fixing laws and a fine of $6.5 m was imposed by the court in 1994. TNT was fined $4 m and eight senior executives of the companies received total fines of $425,000. The former general manager of TNT, Mr Brown, received a personal fine of $75,000. Another example was the AMP Society that was made to pay up to $50 m for their selling of an 80:20 stable insurance policy, which was far riskier than investors were made aware of at the time of sale. This was an out of court settlement, which the ACCC likes to organise beyond the courts. The civil remedies include: • damages (s 82); • injunctions (s 80);

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• disclosure order (s 80A); and • remedial order (s 87). In a leading High Court decision, a contravention of s 52 of the TPA 1974 led the court to award damages for the loss of an opportunity to obtain a commercial advantage based on that statement. The case, Sellars & Poseidon Ltd v Adelaide Petroleum NL (1994), related to two parallel negotiations for a contract with two companies. The court held that damages could be awarded for the loss of a commercial opportunity under contract, tort or a contravention of s 52, if proved on a balance of probabilities standard.

Conclusion and references Managers are required to comply with a range of commercial laws and there are both personal and corporate consequences for breaching these laws. Some of the key questions are: • What is the range of laws that protects consumers? • How do the State Sale of Goods Acts and Fair Trading Acts relate to the federal Trade Practices Act? • How is the TPA 1974 organised and who can enforce these laws? • What is the impact of the unfair trading practices and implied terms? • What are the consequences for breaching the TPA 1974? Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH Australia, pp 462–660 Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 221–391 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths, pp 690–757, 849–94

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Selected references and further reading Beerworth, E, Product Liability, 1989, Sydney: Federation Clark, E and Livermore, J, Australian Marketing Law, 1994, Sydney: LBC Duns, J & Davison, M, Trade Practices & Consumer Protection, 1997, Sydney: Butterworths Fisher, L, ‘The demise of the rule in Rylands v Fletcher’ (1994) 68 ALJ 463 Goldring, J, Maher, L and McKeough, J, Consumer Protection Law, 1993, Sydney: Federation Hurley, A and Wiffen, G; Outline of Trade Practices Law, 1999, Sydney: Butterworths Kellam, J, A Practical Guide to Australian Product Liability, 1992, Sydney: CCH Layton, L and Steinwall, R, Trade Practices Act 1974, 2001, Sydney: Butterworths Miller, R, Annotated Trade Practices Act, 2001, Sydney: LBC Useful internet sites Australasian Legal Information Institute Australian Competition and Consumer Commission

www.austlii.edu.au www. accc.gov.au

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5 Employment Law

You should be familiar with the following areas: • • • • • • • • • • • •

The employer/employee relationship Rationale Distinguishing tests The contract of employment Duration Termination Post-employment restrictions Responsibilities of employers and employees Employees’ responsibilities Employers’ responsibilities and obligations Health and safety laws Discrimination laws

Introduction Employment law is a huge area of law that is so important to understand for all business managers. All managers are expected to control a number of employees. The laws relating to employment are exceptionally complex because they are derived from so many sources and are likely to change at any time. This is especially true with the implementation of the federal Workplace Relations Act 1996 (Cth), which replaces the former Industrial Relations Act 1988 (Cth). Traditional common law, ordinary contract law, specific legislation and the union binding agreements, called awards and enterprise agreements govern the area of employment law. There are many individual areas within employment law that could be studied, but it is only realistic to examine the role of the employer/employee, the

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responsibilities of the parties under the contract of employment and finally the broad anti-discrimination laws.

The employer/employee relationship Many of the laws are laid down in the common law and under the Workplace Relations Act 1996 (Cth), which replaced the Industrial Relations Act 1988 (Cth) and the other specific statutes, such as the Public Service Act 1922 (Cth) and Public Service Reform Act 1984 (Cth). Rationale It thus becomes of paramount importance to distinguish between those working under a contract of employment (that is, employees) and independent contractors hired by a contract for services (that is, contractors). The main reasons for distinguishing the two are: Liability

Employers are vicariously liable for the actions and torts committed by their employees. In Lister v Romford Ice & Cold Storage Ltd (1975), an employee, L junior, while driving a truck ran over his father, L senior, who was also an employee of R Ltd. The father sued the employer for vicarious liability and succeeded. Unusually, the employer’s insurance company then sued the employee, L junior, for indemnification of losses caused by his negligence. Actions are now limited in NSW by the Employees Liability Act 1991 (NSW). The employer is generally not liable for independent contractors, as in Stoneman v Lyons (1975), where a wall that was built by a contractor fell down. Taxation

Employees are required to have their remuneration deducted at source (that is, the PAYE system), whereas contractors are paid gross. It is often the Australian Taxation Office that brings cases of individuals wrongly being classified as employees or contractors. The High Court in 1997 refused to hear an appeal relating to a courier business in the Re Vabu case (1997) which maintained the tests for distinguishing contractors from employees.

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EMPLOYMENT LAW

Statutory rights

Statutory rights exist under the awards created by the unions and are enforceable by virtue of the previous Industrial Relations Act 1988 (Cth), Workplace Relations Act 1996 (Cth) or the equivalent State/Territory legislation. Common law duties

Standards and duties of care are usually higher to employees than independent contractors, both at common law and by statutes, such as the old Factories Act 1962 (NSW or State equivalent) and the Occupational Health and Safety Act 1983/2000 (NSW or State equivalent). Distinguishing tests The courts have developed a whole series of tests for determining whether an individual is an employee or a contractor. For the vast majority of cases, this is not an issue, but there have been cases when this is fundamental to the action. The three main judicial tests are the control test, the organisation/integration test and the multiple test. All have merit and a specific function. Control test

This was developed and expressed originally by Baron Bramwell in the case of R v Walker (1858) in 1858 as: … it seems to me that the difference between the relations of master and servant and of principal and agent is this: A principal has the right to direct what the agent is to do, but a master has not only that right, but also the right to say how it is to be done.

The control test can be simply stated as: Does the employer exercise control over how, when and where the work is to be carried out? In the High Court’s leading decision, AMP v Chaplin (1978), it was stated to be the first test to be applied in every case. A problem with this test is that it only covers manual and semi-skilled workers, because after that point the employer cannot tell the employee how to carry out the specified duties. Organisation/integration test

This is a practical test which looks at the question of whether the person is part and parcel of the business or merely an accessory to it. Another way of viewing the test is to ask whether the person is in

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business on their own account. This was discussed and developed in the case of Airfix Footwear Ltd v Cope (1978). Multiple test

The High Court has accepted that there is really no one single factor that determines the employment status of a person. It is necessary to weigh up a series of factors. This was discussed in Zuijs v Wirth Bros Pty Ltd (1955) where a trapeze artist was held to be an employee of the circus, even though the control test could not be applied. In the UK, this test was fully developed in the Re Ready Mixed Concrete case (1968). This case involved a cement truck driver who bought the cement mixer from the company and wore a uniform and colours of the company, but was responsible for his own insurances and had the power to delegate the driving. The court said there was no one decisive factor and the following should be taken into account: • • • • • • • • • • • • • •

nature of the task and skill required; freedom of actions; who gives the orders?; power to hire and fire; who can delegate function?; amount and manner of payment; who pays for health/injury premiums?; mode of taxation; provision of tools; whether hours are defined; expressed intention of the parties; who has overall right of control?; degree of financial risk; inconsistency with employment relationship.

The court held that the person was an independent contractor and was responsible for paying his own taxation and National Insurance (medicare levy). In Australia, AMP v Chaplin (1978) followed a very similar line, balancing up the variety of factors. It was held that a sales agent was not entitled to long service leave. Some unusual situations arise where an employer loans an employee to another person, with special equipment. This occurred in Mersey Docks and Harbour Board v Coggins and Griffiths Ltd (1947) where an employee of the harbour

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EMPLOYMENT LAW

authority was ‘lent’, along with a crane, to a firm of stevedores (that is, wharf loaders involved in the loading and unloading of cargo vessels). The crane driver caused an accident and it was a question of who was vicariously liable, the normal employer or the firm hiring the equipment. The court held prima facie it is the general employer that retains the ultimate control, but this could be rebutted in exceptional circumstances.

The contract of employment The rules that relate to contract are just the same in employment. The advertisement is the invitation to treat; at the interview an offer is made and then the prospective employee may accept, creating a binding contract. Acceptance of the offer is deemed to be the time when the contract becomes enforceable. This was illustrated in Dietrich v Dare (1980) where a disabled person applied for a job as a house painter. The potential employer required his own house painted as a test of his ability. The applicant fell off the ladder causing a back injury which resulted in his not being able to work. If D is deemed an employee, he would be entitled to worker’s compensation. The High Court held that he was not an employee as the contract of employment had not been reached. The potential employer had made the offer conditional on the test, which had not been satisfied. The other elements of a contract are also present including intention to contract, capacity and consideration in the form of remuneration. The terms of the contract ideally should be expressed in a written contract. Many other terms may be derived from awards, customs, trade practices and legislation. The previous Industrial Relations Act 1988 (Cth) and now the Workplace Relations Act 1996 (Cth) specifically state that ‘industrial matters’ shall include any custom or usage of an industry whether general or in a particular locality. It is interesting to note that in Re ANZ Bank case (1972), the practice of bank check-off for union subscriptions was not a term between the employer and the employee. The bank’s role was that of a normal creditor-debtor and remained outside the legislation. Where the terms are written the court may interpret the terms and give them substance. If the terms are only oral or implied, the court must consider all the evidence to determine what would be included in a written contract if there had been one. There is no legal requirement to

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have a written contract and many employers only give letters of engagement, with a commencement date and basic remuneration. Duration Contracts of employment run for either a fixed period or for an indefinite time. It is essential to separate the two types of employment contract because of the ability to terminate the contract. Fixed period

The contract should be completed as specified and should not be terminated at an earlier stage. This was illustrated in Mallard v Bunge Pty Ltd (1981) where M was employed as a construction engineer for the period of a particular project. M was dismissed at an earlier stage based on an implied term relating to early termination for incompetence. The court held that this was wrongful dismissal and M could not be terminated until the end of the project. He was entitled to be paid to the end of the fixed term. Indefinite period

If a contract contains a term that enables the employment contract to be terminated by notice, it will be deemed to be a contract of an indefinite period. Thus, in Re British Broadcasting Corporation (1975), a person, X, was employed by the BBC as a short-term employee. X was given three months’ notice of termination of the job and the court held that X was, in fact, on an indefinite period contract and not a fixed term, as argued. Termination Employment contracts are like all contracts in that they can be discharged in a variety of ways. These include actual performance (as in a fixed term contract), agreement between the parties (giving notice), a term in the contract (summary dismissal for misconduct) or by the operation of law, such as frustration (imprisonment of employee). However, it is important to note that the rules of contract and the realities of industrial practices are very different. Additionally, awards or legislation may include terms containing procedures for termination. The previous Industrial Relations Act 1988 (Cth) and now the Workplace Relations Act 1996 (Cth) contain specific provisions that deal with the termination of all employees. The purpose of the

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provisions is to give effect to the 1982 International Labour Organisation Termination of Employment Convention, which Australia signed. The unfair dismissal law applies to any employee whose employment has been terminated by an employer. Various regulations have been passed to exclude casual employees, probationary employees and people employed on fixed term contracts. If an employee resigns, then the legislation cannot be applied. However, where an employer forces an employee to resign by putting undue pressure on them, it may be deemed a ‘constructive dismissal’. This means that the court may treat the termination like a dismissal rather than a resignation. Where an employee has an adequate alternative remedy, such as seeking redress under a State’s unfair dismissal laws, then the federal provisions should not be applied. These unfair dismissals laws are constantly under review due to the demand for court time and the need of business to be able to dismiss employees. Unfair dismissal

The law of unfair dismissal is constantly being developed by the courts and by amendments to the federal and State legislation. This is a general guide to the important issues, but all managers should take special care and obtain legal advice prior to dismissals. Termination is now only lawful if a number of steps are taken. The basic steps required are: Step 1: Step 2: Step 3: Step 4: Step 5: Step 6:

Prescribed period of notice given; Valid reason for termination provided; The employee was given an opportunity to defend any allegations; Show that the termination was not ‘harsh, unjust or unreasonable’; The termination was not automatically unfair; An order for reinstatement/compensation or validation of the dismissal.

Each of these steps must be explained in more detail to fully appreciate what is expected of employers to terminate employees. It should be noted that ‘good’ employers have had such systems in place for some time and many other countries have required employers to follow similar procedures to dismiss employees. There is evidence that Australian employers have been below the world standard for dealing with the termination of employees, especially for incompetence. 69


• Notice period For the termination of an employee this is now prescribed by the legislation and must be given or the employer agrees to make a payment in lieu of the notice period. The exception is where the employee has committed a ‘serious misconduct’ which entitles the employer to summarily dismiss the employee without notice. A serious dismissal is one in which it is unreasonable for an employer to continue to employ a person during the notice period. • Valid reasons Valid reasons must exist for the dismissal of the employee and they must relate to one of three grounds: (1) employee’s conduct; (2) employee’s performance; (3) operational requirement (restructuring of the employer or technology). The employer must be able to provide the Industrial Relations Commission (previously there was an Industrial Relations Court, but this has been transferred to the Federal Court) with written reasons as to why the employee was dismissed and that all procedures were followed. For example, if there has been some misconduct (petty theft), that the employee was properly warned and informed of the consequences. • Natural justice This is a concept where a person has the right to be heard and the right to have a decision made free from bias. The new unfair dismissal laws now require an employee to be given an opportunity to defend any allegations (or reasons) made by the employer regarding the grounds for dismissal. If more than 15 employees are to be terminated because of economic or technological changes, the law requires that the Commonwealth Employment Service (or equivalent) is notified of the changes and that the union should be consulted. • Unfair dismissals These relate to the fact that the legislation states that the termination is not valid if, taking into account all the circumstances, it is ‘harsh, unjust or unreasonable’. The employer may provide a reason, but the court may determine the proper

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procedures were not followed which would make the termination unfair. One such reason could be not allowing the employees to defend themselves. The court is likely to take a liberal view of fairness because of the inequality of bargaining positions between the employer and an individual employee. • Automatically unfair Automatically unfair dismissal arises by way of the operation of the legislation, which states that certain grounds are always unfair. These reasons include: (1) temporary absence from work due to an illness or injury; (2) union membership or the participation in union activities; (3) discrimination by race, colour, sex, sexual preference, age, physical or mental disability, marital status, and pregnancy. The ex-employee or union can make application for unfair dismissal to the Industrial Relations Commission within 14 days of the employee receiving written notice of the termination. The court, before considering the case on its merits, must refer the matter to the court for conciliation. If there is no conciliation, the court will make a determination and may make any order it thinks fit. This would normally be to declare that the termination is valid, or order compensation or reinstatement for contravention of the legislation. It is interesting to note that if the court hears the case, the onus is on the employer to demonstrate that the termination was lawful and that it was for a valid reason and not harsh, unjust or unreasonable. This area of law is going to be filled with case law and many examples will come to light. At least 1,000 claims were lodged in the first three months of the legislation being passed. There has been a constant backlog of claims in this area. Notice

The most common form of termination is where either party gives notice, as per the terms in the contract or award or statute. Employees may resign by giving notice. A rule of thumb is that a period equal to the payment period is sufficient notice (where there is no express provision). Also, unless an award so states, there is no right to a reference. However, for the employer giving notice to the employee, it is not as easy. There should ideally be an express term, but if not the employer must give ‘reasonable time’. Justice Jacobs discussed this in some detail in Thorpe v South Australia Football League (1974), where he

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said, ‘it depends upon the circumstances of each particular case and there is no rule of thumb’. On the individual facts, T had been given three months’ notice to terminate an indefinite contract as the general manager of the SA football league after seven years’ service. The court held that this constituted wrongful dismissal (breach of employment contract) and six months would have been more reasonable. In determining reasonable time, the following non-exhaustive list of factors should be considered: • • • • • • •

job status; qualifications; length of service; future prospects; age; degree of job mobility; and industry practices.

Summary dismissal

Summary dismissal occurs when the employee breaks the contract (a condition) which entitles the employer to instantly terminate the contract. The employer must be certain that the employee has broken the contract. If not, the employee will be entitled to sue for wrongful dismissal and will normally be entitled to damages for loss of remuneration. If it is also a breach of an award or legislation, it is called an unfair dismissal. The High Court accepted this basic principle in Blyth Chemicals Ltd v Bushnell (1933) where B, the manager of a chemical sprays plant, set up his own business in chemicals. There was no direct competition and the enterprise was fully disclosed. BC summarily dismissed B for the implied term of fidelity and to avoid conflicts of interest. The court held that although this is a good ground to dismiss, B had not actually competed and a mere uneasiness as to future conduct was insufficient grounds to dismiss and damages were awarded. Reasons for summary dismissal include: • Refusal to obey reasonable and lawful instructions This was held in Adami v Maison de Luxe Ltd (1924) where an employee manager refused to work on Saturdays, as instructed. Willful disobedience was held to be a valid ground for summary dismissal.

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However, if the employer’s instructions are unlawful or unreasonable, they can be refused, as in Laws v London Chronicle Ltd (1959). Here, a managing director ordered a personal assistant to a director to stay in the boardroom rather than follow the director out of the room during an argument. The UK Court of Appeal held this to be an unreasonable order in the heat of the moment and especially then to dismiss the personal assistant. • Misconduct This covers many possible grounds, such as theft (both chattels and information) or receiving secret commissions. In Ansell Rubber Pty Ltd v Allied Rubber Industries Ltd (1967), two employees of Ansell, G and A, were employed to design a glove-making machine. They set up a company in direct competition and G remained with Ansell, supplying their new company with all the information. An injunction was taken out against the competitor and G was summarily dismissed. A similar result occurred in Timber Engineering Ltd v Anderson (1980) where a manager set up a business in direct competition with the employer. The court awarded the remedy of an account of profits against the employee. Immorality has been a ground of misconduct, in Orr v University of Tasmania (1956), where a professor seduced a number of students in respect of their grades. • Incompetence One of the hardest grounds to summarily dismiss is incompetence. It has been successful on occasions such as the truck driver running over his father in Lister v Romford Ice & Cold Storage Ltd (1957). Often, the courts have in fact blamed the employer for failing to provide adequate supervision, as in Williams v Printers Trade Services (1984) where a printer made costly mistakes and was fired. The Federal Court held that proper notice should have been given (one week under the award) and there had been inadequate supervision of the employee. Post-employment restrictions Contracts of employment may contain terms, which are called postemployment restrictions or restraint of trade clauses or restrictive covenants. Prima facie such terms are void at common law because they are prohibiting competition. However, under special

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circumstances, the courts have been willing to uphold them. The original tests were laid down in a case called Nordenfelt v MaximNordenfelt Gun Co (1894). This test requires the party enforcing the restriction to show that it: • is reasonable in the public’s interest; and • is reasonable between the parties, taking into account: (1) the duration; (2) the geographic area; (3) how restrictive the terms are (what is actually covered by the restriction). The courts have been only willing to stop employees from working for competitors if trade secrets or goodwill are being unfairly used. In Drake Personnel v Beddison (1979), the court held that B could not be stopped from setting up a recruitment agency one month later and just one mile away from the previous employer. B had signed an agreement that he would not engage in similar business for 12 months within a 25 mile radius of DP which was held to be too restrictive. Also, the customer list that B took from DP was predominantly public information and only 30% of it related to DP clients. The postemployment restrictive clauses have been most successful if trade secrets are taken or with professional practices based on goodwill, such as a solicitor in Sharah v Healey (1982).

Responsibilities of employers and employees Both the employer and employee owe certain responsibilities and obligations to each other. They may be express terms in the contract, stated in an award or under statute, but most often are just implied into the contract. Many of the following responsibilities have been developed by the common law and are thus subject to the intervention of statutes and awards. Employees’ responsibilities Lawful and reasonable instructions

The employer may give instructions to the employee and they should be complied with if they are both lawful and reasonable. Failure to comply is a breach of contract and the employer in certain

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circumstances may summarily dismiss the employee. In Adami v Maison de Luxe Ltd (1924), a music hall manager was asked to work Saturdays and he refused, believing it to be outside his contract and that the employer knew he worked as a bookie. The court held the instructions to be reasonable and the employee had breached the contract for wilful disobedience. However, if the employer asks an employee to carry out an illegal function, the employee may refuse, as in an unsafe work practice in BHP v Federation of Ironworkers Association (1976). Also, a similar result occurred where unreasonable orders were given to a personal assistant to a director by the managing director in Laws v London Chronicle Ltd (1959). This principle has also been taken as part of the maxim ‘no work as directed, no pay’, which was derived from Mallinson’s case (1920) in the High Court. Although challenged in a banking case over pay deductions during a work to rule (refusing to clear cheques), a unique award entitled the employees to be paid even if the work was not done. These types of award clauses have now been changed. Obedience has even been applied to what are suitable clothes to be worn at work. In Australian Telecommunications v Hart (1982), it was held to be unreasonable to wear a caftan and thongs to work. Fidelity

A basic concept of good faith reflects the special nature of the relationship. Although this is derived from the concepts of master and servant, it is still applied today in many ways. The most obvious examples of this principle include an employee setting up a business in direct competition to the employer, as in Timber Engineering v Anderson (1980). Other examples include a manager removing a client list on termination of employment, as in Robb v Green (1895). There have been cases of an executive director (employee) tendering for a contract against the employer in Green v Bestobell Industries (1982). Competence

The employee is expected to exercise reasonable skill and care in respect to the function the person is employed to execute. A failure to exercise such care occurred with the truck driver who ran over his father in the court yard of their employer’s premises, as in Lister’s case (1957). It is not common for employers to sue their employees under the tort of negligence. The courts would also take into account whether the employer has provided sufficient training and supervision to carry out the required function to the appropriate standard. A failure of

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ability may result in either a summary dismissal or more realistically the employee being given notice. Personal service

The idea of personal service is very similar to the duty of fidelity and is derived from the master-servant relationship. Employees, without the employer’s consent, cannot delegate their function and must not wilfully obstruct the employer’s business. A ‘work to rule’ ban (removal of all goodwill) can in fact be deemed a breach of the contract of employment. One particular problem occurs with what is called the ‘double master dilemma’; that is, where a union and an employer give conflicting instructions. The courts have nearly always supported the employer, but do require the employer to be reasonable, especially in heated circumstances. The employer may even be able to restrain an employee from carrying out a second job, if consent of the main employer is not granted. This was established in Hivac Ltd v Park Royal Scientific Instruments (1946) and followed in the Timber Engineering v Anderson (1980) case. Confidentiality

Employees gain access to a wide variety of confidential information. All information that an employee receives may be divided into either general business information or confidential to the employer information. The employer may insert into the contract of employment an express term relating to confidentiality during the course of employment and even post employment. However, the courts have been willing to imply a term relating to confidentiality. In Ansell Rubber v Allied Rubber (1967), it was expressed as, the employee must not use any information to the detriment of the employer. A breach of confidentiality especially occurs where there is a conflict of interests, as in competing tenders in Green v Bestobell Industries (1982). A possible exception would be the disclosure of information to an authority relating to a crime, a fraud or a breach of the trade practice provisions, as in Initial Services v Putterill (1967). Here, the employee revealed the existence of an illegal price maintenance system for the industrial laundry business. Where the information is not secretive, the court will not interfere and will certainly refuse an injunction, as in Faccenda Chicken v Fowler (1986). Here, the manager designed routes for the delivery of frozen chickens. He then set up a business, after leaving the employment, delivering chickens on the same route (half an hour earlier than the employer!). The court held this not to be

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confidential information. NSW public servants now have a limited right to whistleblow under the Protected Disclosures Act 1995 (NSW). Employers’ responsibilities and obligations The employer is also under a variety of responsibilities and obligations to its employees. These include the following: Provide work

At common law, it is not generally recognised that an employer has to provide work. Justice Asquith in Collier v Sunday Referee Publishing (1940) summed up the position as, ‘I may pay my cook regularly, but choose to eat out, she cannot complain’. This principle has been followed in Australian National Airlines v Robinson (1977). There are some important exceptions where the employer is obliged to provide some work. Examples include piece-workers and skilled professionals who require publicity and exposure, for example, rugby league players in Buckley v Tutty (1971). Pay wages

Remuneration is the consideration that supports the contract. If consideration is not paid the employer has broken the contract and the employee may treat the obligations as discharged and sue for the outstanding wages. The basic principle that the employer will pay for the work that has been done as instructed was established by the High Court in Mallinson v Scottish Australian Investment Co Ltd (1920). The court stated: ... that an employer does not have to pay, if an employee does not follow lawful and reasonable instructions of the employer.

The maxim, ‘no work as directed, no pay’ was firmly established. It has been attacked and undermined by various cases and awards, but has been followed in most cases, such as Csomore v Public Service Board (1986) where the employer instructed cheques to be cleared, the employee refused and part of his wages were withheld. The court held this to be correct, unless the right is waived or there is an express provision in an award (as in Gapes v Commercial Bank (1979)). The Australian Bank Employees’ award is now altered to reflect this legal position.

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Indemnification

If an employee incurs an expense in the course of employment, there is normally an implied term that the employer will indemnify the employee. This is a derivative term of the concept of expense accounts. The courts have stated that the reimbursement of all reasonable expenses can be expected. In Pupazzoni v Fremantle Fishermen’s Cooperative (1981), a general manager entertained clients and submitted claims to the board. The contract of employment stated that the employer may approve the expenses or not, and they had decided to refuse. The court would only imply the term if the contract had been silent on this point. Managerial duties

This is a wide heading to cover a series of inter-related duties imposed upon all employers. Many of the common law provisions are now enshrined into legislation, such as the Occupational Health and Safety Acts, workers’ compensation legislation and other specific legislation, and the anti-discrimination legislation. Other managerial duties include: • • • •

supply of reasonably competent staff; provision of safe plant and equipment; adequate supervision and training; and to know and apply the discrimination laws.

Health and safety laws The basic duty at common law is that the employer should eliminate all unreasonable hazards from the employee, as in Ottoman Bank v Chakarian (1930) which involved an Armenian working in a Turkish bank at the outbreak of war. It is a question of fact and based upon the reasonable employer assessing the degree of risk involved. In Australia (in 1989/90) approximately 500 people died of work-related accidents and 600,000 suffered injuries which required more than five days off work. In dollar terms this amounts to at least $9.7 billion, of which $4.8 billion is direct workers’ compensation. The Federal Worksafe Australia and the State equivalents (such as NSW WorkCover Authority) are extremely concerned about the growth in accidents and related costs. The two sides to health and safety laws are prevention (by way of the criminal occupational safety legislation) and compensation (by way

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of the workers compensation legislation). Every case that goes to the NSW Compensation Court has an average legal cost of $12,000. The average penalty for a breach of the laws is only $2,683. The maximum fine for a breach of OHS in some States is only $50,000 and even in NSW can it reach $250,000. The various governments are looking at a 1995 report by the Industry Commission entitled ‘Work, Health and Safety’. Premiums are sure to rise and it is predicted that the standard cover for workers, compensation will be 2.5% of the wages bill (that is, 40% increase on previous years). One of the most important principles is that there should be a safe system of work. This was stated in Wilson & Clyde Coal v English (1938) where a coal miner was crushed to death because the employer had not placed sufficient props in the mine. This principle has even been applied to the collecting of garbage down both sides of a street, in McLean v Tedman (1984). The duties are a continuous obligation and, if breached may result in a breach of contract or the tort of negligence or a breach of statute. In Forrest v John Mills Pty Ltd (1970), the court examined both a common law action and a breach of statute. F was the manager of a printing company, and dropped a spanner in a machine. F tried to squeeze his arm through while the machine was still operating, causing a serious injury. A claim was made for a statutory breach of the Factories Act 1962 (NSW) and for common law damages. The court held that there was an absolute duty under the act to fence the machine and this had not happened, thus the employer was responsible. However, the common law damages were reduced by 60% because of F’s contributory negligence. Discrimination laws Since 1977, both Commonwealth and State/Territory Parliaments have been developing anti-discrimination laws. The aim of such legislation is to bring an end to intolerance, prejudice and discrimination in our community. This is a tall order and over a decade later the laws are still being passed and the discrimination seems to continue. The laws that relate to discrimination and equal opportunity apply to many areas such as accommodation, provision of goods, services, membership of unions, registered clubs and most aspects of employment. One major problem that has existed has been a jurisdictional conflict between the State legislation and the federal laws. This was highlighted in the High Court decision of Dao v Australian Postal Commission (1987) where two Vietnamese women were employed on a

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temporary basis with Australia Post. They were denied a permanent job because they were under the minimum weight and height standards. They claimed both race and sex discrimination under the NSW Anti-Discrimination Act 1977 and the Equal Opportunity Tribunal claimed jurisdiction. However, the High Court determined that Australia Post is a Commonwealth instrumentality and as such governed by federal legislation. In 1984 the NSW Anti-Discrimination Board became an agent for the federal Human Rights and Equal Opportunity Commission, to prevent mix ups in jurisdictions from occurring. The Human Rights Commission also has responsibilities under the International Treaties and acts as a guardian of all human rights issues. The International Labour Organisation Convention No 111 ‘Discrimination (Employment and Occupation)’ defines discrimination as: … including any distinction, exclusion or preference made on the basis of race, colour, sex, political opinion, national extraction or social origin.

Not all these grounds are as yet recognised by Australian antidiscrimination laws, but recent amendments now cover more grounds, such as age discrimination. The major legislation in this area is: Federal

• Racial Discrimination Act 1975 (Cth); • Sex Discrimination Act 1984 (Cth); • Human Rights and Equal Opportunity Commission Act 1986 (Cth); • Affirmative Action (Equal Employment Opportunity for Women) Act 1986 (Cth); • Disability Discrimination Act 1992 (Cth). State/Territory:

• Anti-Discrimination Act 1977 (NSW); • Equal Opportunity Act 1984 (Vic); • Discrimination Act 1991 (ACT); The major grounds for discrimination relating to employment are as follows:

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• race, colour, national or ethnic origin or that of a relative or associate; • sex, marital status, pregnancy, sexual harassment (most complaints); • impairments, physical or mental; • religious beliefs; • political beliefs; • sexual preference; • criminal record. Within employment, these grounds relate to recruitment, advertisements, conditions, promotion, training and termination. The parties are referred to as the ‘discriminator’ and the ‘aggrieved party’. Some specific examples include s 14(1) of the Sex Discrimination Act 1976, which makes it unlawful for an employer to discriminate in determining who should be offered employment. This principle is extended by s 14(2) to cover the terms of employment, opportunities and dismissal. The courts have interpreted this to mean that the employer has a responsibility to have an environment free of sexual harassment in the case of Hill v Water Resources Commission (1985). Sexual harassment is treated as a separate action under s 28 of the Sex Discrimination Act 1976. It is interesting to note that under the NSW Anti-Discrimination Act there is no separate provision for sexual harassment and it required a judge to extend the principle of sex discrimination to cover harassment. This was laid down in O’Callaghan v Commissioner of Main Roads (1984). Some cases have had a dramatic effect upon employment processes. In Ansett v Wardley (1980), W applied to be a trainee pilot and was not selected because she wanted children. The court held that W had been discriminated against and was entitled to be re-employed as a trainee pilot and received damages for the loss of income as a pilot. Not all cases have been successful and proof is important. In Department of Health (Vic) v Arumugam (1987), two doctors went for a job as a hospital superintendent. Dr D, from Ireland, gained the job over Dr A, from India. A claim of racial discrimination was made and the hospital could show that objective criteria were used. One of the most important cases relating to the hiring and retrenchment policies of a very large employer is Australian Iron & Steel v Najdovska (1988). In this case, N and 33 other women claimed sex discrimination on being hired last after men and being the first to be retrenched. The court held

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that the hiring practices were discriminatory, but the retrenchment was based on LIFO (‘last-in-first-out’) principles and this was valid. A large damages settlement was paid by AIS. Advertisements that appear to be discriminatory are in breach of the legislation. Section 86 of the Sex Discrimination Act 1976 states that a person shall not publish or display an advertisement that indicates or could be reasonably understood as indicating an intention to do an act which is unlawful by reason of s 14 (sex discrimination). The employer does not have to be actually discriminating, it is sufficient to appear to have the intention. In Sheiban v Hall (1989), Dr S interviewed three receptionists over several years and asked very personal questions. At first, the court said that there could not be sexual harassment or discrimination because they were all appointed. But on appeal, the court said that both actual harassment had taken place and that the applicants felt that they were reasonably suffering discrimination. There is also a general community confusion over the affirmative action and equal opportunity legislation in Australia. At the moment, the Affirmative Action Agency requires all employers with more than 100 employees to file an annual report with it. There are approximately 3,000 companies that have to comply and all this information is available on CD-ROM. Unfortunately the Agency does not have any sanctions against companies except that they are named in the Federal Parliament. The EEO legislation has resulted in compensation of up to $40,000.

Conclusion and references Managers have always been expected to know the legal requirements of employment law irrespective of whether the employer has a human resources department or not. The key questions are as follows: • Can you distinguish between an employee and a contractor? • Why is it important to know the difference between contractors and employees? • What are the basic terms of a contract of employment? • What common law duties are owed by the employee and the employer? • What are the managerial duties?

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• How do health and safety laws and discrimination laws impact on a manager? Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH, p 545 Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 977–1018 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths Selected references and further reading Brooks, A, Occupational Health and Safety in Australia, 1993, Sydney: CCH CCH editors, Termination of Employment: The New Federal Law, 1994, Sydney: CCH. Creighton, B and Stewart, A, Labour Law: An Introduction, 2nd edn, 2000, Sydney: Federation Macken, J, McCarry, G and Sappideen, C, The Law of Employment, 1997, Sydney: LBC McCallum, R and Pittard, M, Australian Labour Law, 1995, Sydney: Butterworths McCarry, G, Aspects of Public Sector Employment Law, 1988, Sydney: LBC Moorhouse, P and Punch, P, Termination of Employment, 1994, Sydney: CCH Punch, P, Australian Industrial Law, 1997, Sydney: CCH Rozen, P, Industrial Law, 1998, Sydney: Butterworths Wallace-Bruce, N, Outline of Employment Law, 1999, Sydney: Butterworths

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Useful internet sites Australasian Legal Information Institute National Employment Lawyers Association National Occupational Health and Safety Commission

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www.austlii.edu.au www.nela.org www.nohsc.gov.au

6 Intellectual Property

You should be familiar with the following areas: • • • • • • • •

Overview of protecting ideas Non-registrable intellectual property Copyright Common law protection Registrable intellectual property Trade and service marks Industrial design Patents

Introduction Intellectual property, as an area of law, has existed for many centuries. However, it is only in relatively modern times that its importance has become apparent to business managers and has become studied in depth. It tends to be a little difficult because it deals with intangibles. The topic is also referred to as ‘industrial property’, which reflects its background with the industrial revolution. Within the constraints of a single chapter, it is not possible to look at all the provisions of intellectual property. What is realistic is to gain an appreciation of the choice of methods to protect ideas for the benefit of the employer, inventor, author or designer. There is an excellent internet site that is maintained by the Australian Industrial Property Organisation (IP Australia), which contains all the latest information on intellectual property.

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Overview of protecting ideas First, it is essential to gain an overview of how to protect ideas and what can actually be legally protected. This can be followed by a brief examination of copyright and trade marks. It is also worth noting the operation of industrial designs and patents. Statutes govern all of these intellectual property rights, but there are also some limited common law rights (called the torts of passing off and confidentiality). Australia, in respect of intellectual property, does not have laws in isolation from the rest of the world. Many ideas need protecting internationally and thus Australia is a member of the World Intellectual Property Organisation, which has developed various treaties to protect industrial ideas. The 1994 General Agreement on Tariffs and Trade (GATT) resulted in Australia signing the Trade Related aspects of Intellectual Property rights (known as ‘TRIPS’) in Uruguay. This has changed a number of Australian intellectual property rights relating to copyright, trade marks, industrial design and patents. To protect ideas one must not think along a single basic type of protection. Intellectual property concerns a bundle of rights. For convenience, they may be grouped into copyright, designs, patents, trade marks and common law torts of passing off and confidentiality. The law confers a monopolistic right on the inventor or creator for a limited period, so as to compensate for the cost of creativity and development. This has been refined since 1883, when the first international treaty (Berne Convention 1883) was signed to give protection worldwide by reciprocal rights. The main international copyright treaty is now the Universal Copyright Convention 1952. More recently the GATT/TRIPS agreement in 1994 has changed the world’s view on intellectual property rights. International pressure in respect of intellectual property rights has caused China to introduce laws that could result in executions for piracy. The Business Software Alliance has stated that 90% of the software being used in China is illegal. Compact disc and software piracy in China alone was costing US companies an estimated $1.13 billion in 1994. The legal rights under intellectual property have tended to be governed by Commonwealth legislation. Many of the original statutes were imported from the UK and are inherently complex. There have been many proposals to re-write these laws, but for the moment Parliament seems to merely amend them (which makes them even more complicated). The exceptions to this are the Patents Act 1990

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(Cth) and the Trade Marks Act 1995 (Cth). There have been a number of proposals to try and make the laws ‘technologically neutral’ rather than just amending them as advancements in technology occur. However, Australia has to keep its laws in line with our major trading partners. Concerns over the intellectual property use of the Olympic Games 2000 occurred in recent years. In 1995 a pub called the ‘Olympic Hotel’ in Sydney was challenged and was required to change its name. The major protection provisions are: • copyright under the Copyright Act 1968 (Cth) as amended; • common law protection including: ❍ tort of passing-off as established in the Re Advocaat case (Warnink v Townsend) (1979); ❍ breach of confidentiality as in the Re Golden Lights case (Moorgate Tobacco v Philip Morris) (1984); • designs under the Designs Act 1906 (Cth); • patents under the Patents Act 1990 (Cth); • trade marks under the Trade Marks Act 1995 (Cth). The actual choice of rights will depend upon many factors. Copyright and the common law both have the benefit that they do not have to be registered, whereas all the other rights do have to be registered to gain protection. Patents may only be granted in a limited context, but they give a great deal of protection while the patent is enforceable. It is not unusual for a company to try to protect its ideas using a variety of different intellectual property rights. One area where this is becoming increasingly valuable is character merchandising, such as with Batman, Jurassic Park and the Flintstones. A 1995 survey by chartered accountants firm Ernst & Young has discovered that 44% of the top 100 Australian listed companies have identifiable intangible assets on their financial statements. This is to be compared by a similar survey in 1989 where only 20% of the top 150 companies had intangible assets on their books. This shows a significant growth in the recognition of brand names, trade marks, patents and licences.

Non-registrable intellectual property There are a few ways in which a business can protect its ideas without having to formally register them or pay a fee for the legal privilege. The two main ways are the use of copyright or a reliance on the

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common law concepts of ‘passing-off’ or ‘the obligation of confidentiality’. Copyright This is a very important topic that few managers seem to really understand. It can be an easy and cheap method to control the intellectual property of a business and protect valuable ideas. Overview of copyright

Copyright and trade marks are probably the most frequently used method managers use to protect ideas. The Copyright Act 1968 (Cth), as amended, basically covers all literary, dramatic, musical and artistic works. It also covers films, radio, television, and published editions and, since 1984, computer programs. Where the idea is used to produce goods, such as wallpaper or material, the design would be registered under the Designs Act 1906 (Cth). The basic requirements for copyright recognition are: • copyright symbol © on published work; • date of first publication; • name of copyright owner. Legal rights

Copyright, in s 31 of the Copyright Act 1968, gives an exclusive right over literary, dramatic or musical works to do the following: • • • • • •

reproduce the work; publish; perform; broadcast; transmit to cable; make adaptations.

Further, there is copyright in artistic works to reproduce in a material form, publish or broadcast. Copyright subsists in ‘unpublished original works’, if the person is a qualified person (meaning an Australian citizen or resident). If the work is to be published, it should be first published in Australia.

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Originality is obviously a key concept for the enforceability of copyright infringements. It is not the actual idea, but the material expression of the idea. This was discussed in John Fairfax Ltd v Australian Consolidated Press Ltd (1960) where the Daily Telegraph (DT) was stopped from copying the births and deaths notices from the Sydney Morning Herald. But the DT then used the same source, altered the entry of dates, abbreviations and adjectives used. The court held this not to be a breach of copyright. Copy is taken to be literal, that is a precise transcription of the work. Originality has a surprisingly low standard. One does not have to be Shakespeare to have copyright, in fact these words are covered by copyright and even the layout of football pools are covered. Copyright works

Literary works are widely defined in the Act to include tables and compilations. Examinations and catalogues have been held to contain copyright. In Mirror Newspapers v Queensland Newspapers (1982), the list of ‘bingo’ numbers in the paper were held to be literary works for copyright purposes. The most basic test to determine originality and the literary quality of a work is to ask the question: ‘What is worth copying is prima facie worth protecting.’ The court did not accept, however, that a literary work could exist in just one word, such as Exxon. Computer programs have caused many problems in respect of copyright. The leading decision, Apple Computer Inc v Computer Edge Pty Ltd (1986) (this case is often known as the Wombat case), resulted in the Commonwealth Parliament amending the legislation before the High Court gave its judgment. The court actually held that there was copyright in the source code, but not in the object code. The reason for this was that the electrical impulses in the chips were not in a material form that can be perceived by the human senses. This is a basic requirement of copyright. Parliament introduced the Copyright Amendment Act 1984 (Cth) and redefined literary work to include computer programs, in all languages, codes and notations of set instructions. A further Act called the Circuits Layout Act 1988 (Cth) was passed to solve other problems that had arisen. This has now been further developed by the High Court in the case of Autodesk v Dyason (1992). This case gives a broad interpretation to the meaning of the words ‘computer program’, as used in the Copyright Act 1968. The case involved the mimicking of an

89


anti-pirating device for a CAD/CAM program. Although there was no actual copying it was tantamount to ‘reverse engineering’. Duration of copyright

Section 33 of the Copyright Act 1968 deals with the length of time copyright affords protection. The basic rule for unpublished works is the life of the author plus 50 years. If the work is published, broadcast, performed in public or records offered for sale, it is 50 years from that event. Photographs, sound recordings and films are 50 years after first publication or indefinite if unpublished. Publication requires the supply of sufficient quantities to satisfy public demand for the work. It is a question of fact for the court to decide in the circumstances. Copyright ownership

Generally, the author is the owner of the copyright, by virtue of s 35(2) of the Copyright Act 1968 (Cth). There are some important exceptions to this rule, which managers should be aware of, in respect of ownership by an employer. Where the work is created in the course of employment, it will be deemed to belong to the employer (by s 35(6)). The owner can make an express agreement, which assigns the ownership of the copyright to a particular person. There is also a rule for newspaper proprietors and journalists. If a person is commissioned, for consideration, to photograph, draw or paint a portrait or engraving, the commissioner is the copyright owner. Infringement

Infringement of copyright is governed by s 36 and occurs if a person, other than the owner, without a licence or consent of the owner, does any act comprised within the copyright or authorises someone else to do the act. This includes the importation for sale, hire, exhibition or distribution of the work without consent. This obviously covers the duplication of articles, books, records and films. One major problem area has been parallel importation and the courts have not been willing to imply a licence for this situation. In Interstate Parcel Pty Ltd (Angus & Robertson Books) v Time-Life (1977), cookbooks were legally bought in the USA, where Time Inc owned the copyright. The books were imported to Australia, where Time-Life, the Australian exclusive licensee, tried to stop the infringement. The court granted an injunction to stop the sale and future importation of the books. Another problem has been ‘reverse engineering’ or the three dimensional reproduction of the copyright in drawings etc. This has

90


been held to be an infringement in the Re Popeye case (1941) where copies of Popeye dolls were being made and sold based upon drawings covered by copyright. The reproductions must be so close that it is obvious to a reasonably intelligent person that they are from a particular source. Photocopying has caused particular problems, as it is an easy way to breach copyright. The real problem is the authorisation of infringement, for example, the provider of a photocopy machine in a library, as in University of NSW v Angus & Robertson (1975) being held liable for breaches of copyright. Special amendments have been made to the legislation in respect of educational institutions. Records must be kept and compensation is paid to the copyright owner through the Copyright Agency Limited (which is known as CAL). Defences

Fair dealing is one of the main defences in ss 40–42 of the Copyright Act 1968. An article from a periodical or a reasonable proportion of a work or adaptation is allowed to be copied for the purpose of research and study for fair dealing. This would not count as an infringement. Other defences are for the purposes of criticism and review, as long as there is sufficient acknowledgment. Further copyrights are included in sound recordings (s 85), films (s 86), television and sound broadcasts (s 87) and published editions (s 88). These are additional to the other rights already referred to above. Remedies for infringement

There are wide ranges of remedies that can be granted by the court against a person infringing copyright. These include: • • • • • •

injunctions; awards of damages/account of profits; delivery of offending material to owner; prevent importation of material; punitive damages for deliberate infringing; criminal consequences for knowingly copying works for sale, hire, exhibition, importation or prejudicially affecting the copyright owner’s rights. Fine: after first conviction, up to six months, imprisonment. The making or possessing of plates for copying results in a fine of $150 per article or in the case of a film $1,500 per film, for the first offence. The performance of a literary, dramatic or musical work in public results in a fine.

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Common law protection Where there is not sufficient evidence for a breach of copyright, such as the idea is not in a material form, the common law may be able to give an alternative protection. The main actions are either the tort of passing-off or a breach of confidentiality. Tort of passing-off

This was developed to prevent people from producing goods that were deceptively similar or tried to a show a connection to an established supplier. The classic case of Bollinger v Costa Brava Wines (1961) illustrates the point. Spanish champagne was imported into the UK and the French champagne producers brought an action to stop this wine being called champagne. In Fletcher Challenge Ltd v Fletcher Challenge Pty Ltd (1981), the famous New Zealand company was able to stop a company using its name as FC had a well known reputation in Australia, even though it had not as yet been in commercial trading. The main elements of the tort are from the Advocaat case (1979) and can be summarised as: • plaintiff reputation; • defendant’s representations; • likelihood of damage. It has been argued that even if there is no passing-off, there should be an action of unfair competition. This was rejected by the House of Lords sitting as the Privy Council in Cadbury-Schweppes v Pub Squash (1981) and more recently by the High Court in the Re Golden Lights case (1984). Companies now also have the benefit of statutory actions associated with s 52 of the Trade Practices Act 1974 (Cth). Obligation of confidentiality

A special obligation may be imposed upon individuals, so as to stop a breach of confidence. This action has its roots in the case of Coco v Clark Ltd (1969). The court stated that there are three requirements: • the information must be inherently confidential per se; • it is imparted in circumstances that give rise to an obligation of confidence; • unauthorised use of information must cause a detriment to the party.

92


The basic principles were fully adopted by the High Court in the Re Golden Lights case (1984). It was suggested that the principles go beyond confidence and may include an obligation of conscience! Confidential information normally means: • trade secrets, as in Ansell Rubber v Allied Rubber (1967); • some personal secrets, as in Argyll v Argyll (1965); and • government secrets. This is much wider than copyright, as it can cover ideas that are not in the public domain or in a material form. The law of confidentiality in Fraser v Thames Television (1983) for the television show called ‘Rock Follies’ covered the idea. The circumstances that impose an obligation may also occur from: • • • •

other statutes (such as s 232 of the Corporations Law); by contract; by being a fiduciary; or by other circumstances of the donor expressly prohibiting such actions.

Detrimental affect of the unauthorised use of confidential information is usually obvious. The major defence against an action for an injunction or damages is that the information is in the public domain or it is in the public interest. Disclosure of personal secrets may be allowed for the country’s security or to stop a breach of the law. Government secrets must be shown to be not disclosed as to protect the public interest. This principle was upheld in the case of Commonwealth of Australia v John Fairfax (1980).

Registrable intellectual property There are a number of intellectual property rights that can only be obtained if the owners have registered them with the relevant government department. Although this can be an expensive process, the benefits relate to an increase in the rights that are awarded and better remedies of enforcement. The Australian Industrial Property Organisation (AIPO) incorporates the Patents, Trade Marks and Designs Offices on behalf of the Commonwealth. The AIPO

93


administers the legislation, maintains the registers and the examination processes. Trade and service marks A manufacturer, distributor or supplier of goods or services may devise a mark to connect the goods/services with a person. It is possible to register a trade mark under the Trade Marks Act 1995 (Cth), which repealed the Trade Marks Act 1955 (Cth). The Trade Marks Office commenced in July 1906 and is thus over 90 years old. Out of the original 750 marks registered on the first day of business, 64 are still registered. Examples of original trade marks include Bovril, Cascade, Schweppes Ginger Ale, Keen’s curry powder and Arnott’s Sao biscuits. Definitions are very important and many trade marks exist which are not formally registered and could be protected under the tort of passing-off. Section 17 of the Trade Marks Act 1955 defines a trade mark as: ... a sign used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person.

A sign is defined in s 6 as: ... including any combination of any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent.

Registered trade marks are territorial in respect of a category of goods and services. The Registrar of Trade Marks at the AIPO maintains the Register of Trade Marks. Each mark must be registered in respect of a particular class of goods or services. The Registrar of Trade Marks may impose limitations upon the use of certain marks. Specific words are regulated, such as patent, royal, universities and no mark should be scandalous, contrary to the law or cause deception or confusion. An application to register a trade mark is made to the Registrar, by the proprietor of the mark. It is necessary to prove exclusive use of the mark by either prior use or authorship of the mark and there must be the intention to use it on goods or services. In the Re Golden Lights case (1984) the High Court examined the use of a mark that was known overseas, but had little reputation in Australia. The court held that on

94


the facts there had only been preliminary negotiations about if the mark was to be used and thus it should be refused from the Register. Previously there were four separate registers (known as Parts A, B, C and D), but after 1 January 1996 a single register was established. • Part 7 – Registration of trade marks The trade mark must be capable of distinguishing the applicant’s goods or services to be registered by s 41 of the Trade Marks Act 1955. In the Re Bali Bra case (1968), the court did not disqualify the name ‘Bali’; even though it is an island name, no one would think that is where they are manufactured. This covers a wide range of distinctive marks, includes the shape of bottles and the half coloured half transparent capsules for medicines. An interesting case example of a mark occurred in Samuel Taylor Pty Ltd v Registrar of Trade Marks (1959) where the registered trade mark ‘mortein’ was to be linked with ‘pressure pak’ for an insecticide. The Registrar refused it unless a disclaimer was lodged so that the words ‘pressure pak’ were not exclusive. ST refused and the High Court held that there was no registration as the words merely described the goods. • Part 15 – Collective trade marks This enables unincorporated associations to register the name of the association. • Part 16 – Certification trade marks The registration of those marks that are associated with features or characteristics of the goods/services. Association quality standards, such as ‘SAA – Standards Association of Australia’ or the ‘wool mark’ are examples of this type of mark. It still has to be distinctive like the Part 17 trade mark, but owned by an association which licences its members to use it. If the mark is infringed, the correct remedy is an injunction, not the normal damages. • Part 17 – Defensive trade marks Where a trade mark has already been registered for some categories of goods and services, the owner may wish to prevent the trade mark being registered for other categories. This Part 17 registration prevents the mark from being used in respect of other categories of goods or services. Owners can object to a similar mark being used for other goods and services not actually specified, if it is likely that it will deceive or cause public confusion. Part ‘D’

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registers the mark for other categories that may have the mark applied to them at a later stage. In Eastman Photographic v Kodak Cycle Co (1898), Kodak was a registered trade mark for cameras, including a bicycle camera. Eastman could stop ‘kodak bicycles’ being produced. Once on the Register of Trade Marks, the owner is given a certificate. This lasts for 10 years, with the right to renew indefinitely in successive 10 year periods. While on the registers, the owners have the exclusive right to use the marks; a statutory monopoly is created, which prohibits the use of marks substantially the same. If a person’s intention is to deliberately defraud a mark or to forge a registered trade mark, a criminal offence is committed under Part 12 of the Trade Marks Act 1955. The owner of the mark may gain an injunction and an account of profits and/or damages for any losses by someone misusing the mark. However, the proprietor may license others to use the mark (registered users) but the owner is not meant to traffic in the mark. This was illustrated in the Re Holly Hobbie case (1984). This needs to be compared with the concept of character merchandising. Industrial design The law recognises the commercial value of mass produced goods and has developed statutory rules to cover two situations or intellectual levels. The lower level relates to a form of copyright that is applied to mass produced goods and was called ‘industrial design’. The most sophisticated level of rights are patents, which require a new manner of manufacture. Industrial designs have changed their name to designs and are governed by the Designs Act 1906 (Cth) as amended. Designs are defined in s 4 as: … features of shape, configuration, pattern or ornamentation applicable to an article, being features that, in the finished article, can be judged by the eye, but does not include a method or principle of construction.

Such designs are given protection under the Designs Act 1906 if they are registered on the Register of Designs, administered by the AIPO. The owner of the design may apply for registration. The author is normally the owner, unless it is in the course of employment or an agreement is made on the payment of consideration. Applications for registration must be accompanied by ‘representations’ of the articles, which includes statements as to any

96


parts that have a ‘monopoly’ feature about them. Also, a statement of novelty is required. A separate application is made for each article. The Registrar has discretion to register the design if it is thought to be new or original. A ‘priority date’ is given at the time of lodging the application and a certificate is issued later. The public can challenge the originality of the design within the first 11 months of registration at the Designs Office. This usually relates to the fact that the design was already published in Australia before the priority date or it is not new or original. A court can also determine the originality of the design, where the registrar refuses to grant an application. In Macrae Knitting Mills v Lowes (1936), a swimming costume had unusual straps, but the Registrar refused to register it as a design. The High Court held that the design was neither new nor original and the Registrar was correct to refuse to accept it. Normally, at least 50 units of the article will be produced for it to be registered as a design. There is an overlap with copyright. Copyright will give protection, but if the artistic work has been used in commercial dealings for articles it should be registered. An example would be a painting that is turned into a wallpaper design. The effect of the registration is to grant a monopoly over the design for up to 16 years. Section 30 deals with the infringement of designs. Any person, without the consent of the owner, who: • applies design or imitation to specified articles; • deals commercially in such articles; or • imports into Australia infringing designs for commercial purposes, is liable under the Designs Act 1906. The remedies for the owner of the design are normally an injunction, damages or account of profits. Patents Where a person invents something new, which is to be of utility to the community, the person will be granted a ‘letters patent’ for a specified period. This law is based on the Statute of Monopolies 1623 (UK) and was one of the few exceptions to a monopoly being allowed. The Patents Act 1990 (Cth) and the Patents Office, administered by the AIPO, regulate patents in Australia. The invention must relate in some way to a manner of new manufacture. The invention has to be novel, that is, not previously known or used publicly. It also must have practical utility, that is, it must be useful for its own sake. Generally,

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improvements to existing technology are not patentable, but there are exceptions. Patents will not be granted for mere ideas. There are two types of patent that can be applied for by an applicant. Petty patent lasts for one year and a further extension of six years may be granted. The standard patent used to last for only 16 years, but one could apply to the court for an extension, if it has not been fully exploited. Patents of additions are sometimes granted for improvements that an inventor has developed on to the original patent. Under the TRIPS agreement, from 1 January 1996, all patents will last for 20 years. The Industry Commission has predicted that this will cost Australia approximately $3.8 billion over the next 30 years. A special type of lawyer handles both the applications for patents and any legal actions that arise from patents. These lawyers are known as ‘patent attorneys’. Approximately 36,000 applications are made each year to the Commissioner of Patents. About 7,500 of the applications are only provisional registrations and approximately 16,000 proceed to a grant of a patent. The fee for a standard patent is just over $1,000 and ball park legal costs are $8,000.

Conclusion and references Intellectual property is important to managers and their businesses. The goodwill and intangible parts of a business can be extremely valuable and need to be protected. Ideas need to be legally protected from the very beginning. Managers should ask the following questions: • What is the bundle of legal rights that make up intellectual property? • What are the non-registrable rights? • How can copyright be applied to protect ideas? • When should the common law be used to protect ideas? • What are the registrable rights and when should they be used? • When would you apply for a trade mark, a design or a patent? Textbook references Latimer, P, Australian Business Law, 20th edn, 2001, Sydney: CCH, pp 152–82

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Turner, C, Australian Commercial Law, 23rd edn, 2001, Sydney: LBC Information Services, pp 848–930 Vermeesch, R and Lindgren, K, Business Law of Australia, 10th edn, 2001, Sydney: Butterworths, pp 396–450 Selected references and further reading Betts, I, ‘A note on the new Trade Marks Act’ (1996) 48 Australian Company Secretary 277 Blakeney, M and McKeough, J, Intellectual Property, 1987, Sydney: LBC Editors, ‘What’s in a name and what’s a logo worth?’ (1995) 19 May, Sydney Morning Herald 38 Field, N, ‘Patent changes could cost $3.8bn in 30 years’ (1996) 3 June, Australian Financial Review 5 Gaze, B, Copyright Protection of Computer Programs, 1989, Sydney: Federation Harvey, C, ‘1906s mark of quality today’s sign of shame’ (1996) 29/30 June, Weekend Australian 3 McKeough, J and Stewart, A, Intellectual Property in Australia, 1991, Sydney: Butterworths Ricketson, S, Intellectual Property: Cases, Materials & Commentary, 1994, Sydney: Sydney: Butterworths Sharpe, D (ed), Protecting Intellectual Property in Asia-Pacific, 1989, Sydney: Longman Professional Simpson, S, The Visual Artist and the Law, 1989, Sydney: LBC Useful internet sites Australasian Legal Information Institute Australian Industrial Property Organisation Copyright Agency Limited World Intellectual Property Organisation

www.austlii.edu.au www.ipaustralia.gov.au www.cal.com.au www.wipo.org

99

Index Account of profits Actions, legal breach of contract breach of statutory duty plaintiff, actions by contract tort prosecutions statutory, breach of tort Agency Alternative dispute resolution arbitration case presentation conciliation facilitation generally independent expert appraisal litigation costs mediation mini-trial negotiation rent-a-judge techniques Anton Piller orders Arbitration Barristers Breach of contract Breach of statutory duty Business laws, classification Business structures companies corporations

11 8–9 8–9 9 8–9 9 8 9 9 5 15–18 15–16 17 18 16–17 15 17 15 17 17 16 18 16 49 15–16 12–13 8–9, 45–46 9 2–3 21–38 25–26 25–26

exclusivity firms generally incorporation joint ventures overview sole traders trusts Case presentation Civil law Common law Companies Company secretaries, corporate officers Conciliation Conditions Confidentiality copyright employment law Constitution Constructive trust Consumer protection compliance contracts for supply of goods description of goods fitness for purpose generally goods, supply of manufacturers’ liability merchantable quality negligence actions overview of law remedies sample, sale by

21 22–24 21 25–26 25 21–22 22 24–25 17 6–7 3 25–26 31 18 43 34 92–93 76–77 2 11 51–61 58–60 53–54 54 54 51 53–54 54–55 54 55–56 51–53 58–60 54

101


sanctions services, supply of title to goods Trade Practices Act 1974 goods, supply of manufacturers’ liability negligence actions services, supply of unfair practices unfair practices Contract law conditions definition equitable remedies estoppel exclusion clauses generally Heads of agreement implied terms injunctions innominate terms intermediate terms liquidated damages misrepresentation negotiations overview quantum meruit damages remedies Anton Piller orders common law equitable injunctions liquidated damages Mareva injunctions quantum meruit damages rescission specific performance statutory

102

58–60 54–55 54 53–58 53–54 54–55 55–56 54–55 56–58 56–58 5, 39–50 43 40 48–49 41–42 46–47 39 42 44–45 48 44 44 47 41 40–41 40 48 47–49 49 47–48 48–49 48 47 48 48 48 48 49

unliquidated damages rescission specific performance summary terms warranties Control test Copyright, See, also, Intellectual property law common law protection confidentiality passing-off computer programs confidentiality defences duration fair dealing importance infringement legal rights literary works originality overview ownership passing-off reverse engineering works Corporate law Corporate officers company secretaries confidentiality conflicts of interest definitional issues directors duties common law confidentiality conflicts of interest directors duties equitable generally honestly, acting proper purpose rule statutory

47–48 48 48 49 42–43 43–44 65

92–93 92–93 92 89 92–93 91 90 91 88 90–91 88 89 89 88 90 92 90–91 89–90 6 30–37 31 34 34 30–31 31–32 32–37 33 34 34 32 34 32–33 34 34 35–37

INDEX

employees honestly, acting need for proper purpose rule statutory duties summary Corporation law Australian Securities and Investments Commission corporate officers See, also, Corporate officers Corporations Law generally history Court system, barristers dispute resolution See, also, Alternative dispute resolution Federal courts generally High Court of Australia intermediate courts lawyers solicitors State courts intermediate courts summary courts superior courts summary courts superior courts Crime Damages, amount assessment compensatory liquidated nominal punitive quantum meruit types unliquidated

31 34 30 34 35–37 37 26–37

29–30 30–37

28–29 26–27 27–28 12–13 15–18

14 11–12 14–15 13 12–13 12 13–14 13 13 13–14 13 13–14 5

10 10 10 9, 47 10 10 48 9–10 10, 47–48

Declarations Delegated legislation Design rights Directors Discrimination Dismissal, notice, on summary unfair Dispute resolution See, also, Alternative dispute resolution

11 4 96–97 31–32 79–82 71–72 72–73 69–71 15–18

Employees, corporate officers 31 executive officers 31 Employment law 6, 63–84 common law duties of employer 65 competence 75–76 confidentiality 76–77 contract of employment 67–73 duration 68 elements 67 notice of termination 71–72 post-employment restrictions 73–74 summary dismissal 72–73 termination 68–74 unfair dismissal 69–71 control test 65 discrimination 79–82 employees’ responsibilities 74–76 competence 75–76 confidentiality 76–77 fidelity 75 lawful and reasonable instructions 74–75 personal service 76 employer/employee relationship 64–67 indemnification 78 managerial duties 78

103


provision of work by responsibilities wages, payment of fidelity generally health and safety indemnification integration test lawful and reasonable instructions liability managerial duties multiple test notice of termination organisation test personal service post-employment restrictions provision of work by employer statutory rights summary dismissal taxation tests for employment, control test integration test multiple test organisation test unfair dismissal wages, payment of Environmental law Equity intellectual property law Estoppel Exclusion clauses Executive officers, employees Facilitation Federal courts Fitness for purpose Framework of Australian law actions, legal

104

77 77–79 77 75 63–64 78–79 78 65–66 74–75 64 78 66–67 71–72 65–66 76 73–74 77 65 72–73 64 65 65–66 66–67 65–66 69–71 77 6 3 6 41–42 46–47 31 16–17 14 54 1–2 8–9

agency alternative dispute resolution, See Alternative dispute resolution breach of contract breach of statutory duty civil law common law basis Constitution contract corporate law courts, See Court system crime criminal law dispute resolution See, also, Alternative dispute resolution employment law environmental law Federal jurisdiction historical development introduction of new laws legal subjects classification partnerships prosecutions remedies See, also, Damages; Remedies rule of law sources of law, See Sources of law State/Territory jurisdiction summary tort trade practices

5

8–9 9 6–7 1 2 5 6

5 6–7 15–18

6 6 2 1 2 4–5 22–24 8 9

1–2

2 18 4 5

Health and safety High Court of Australia

78–79 14–15

Implied terms breach of contract

44–45 45–46

INDEX

Incorporation Independent expert appraisal Industrial design Infringement, copyright Injunctions Mareva Innominate terms Integration test Intellectual property copyright, See Copyright design rights generally industrial design non-registrable overview patents registrable summary trade and service marks Intermediate courts Intermediate terms Joint ventures

25–26 17 96–97 90–91 10, 48 48 44 65–66 6, 85–98

96–97 85 96–97 87–88 86–87 97–98 93–98 98 94–95 13 44 25

Lawyers barristers generally solicitors Legislation delegated Liquidated damages

12–13 12–13 12 12 3 4 9, 47

Mareva injunctions Mediation Merchantable quality Mini-trial Misrepresentation Multiple test

48 17 54 17 41 66–67

Negligence actions, consumer protection Negotiation

55–56 16

Partnerships Passing-off Patents Proper purpose rule Prosecutions Punitive damages

22–24 92 97–98 34 8 10

Quantum meruit damages

48

Remedies account of profits Anton Piller orders constructive trust consumer protection contract law Anton Piller orders common law equitable injunctions liquidated damages Mareva injunctions quantum meruit damages rescission specific performance statutory unliquidated damages damages, See Damages declarations injunctions Mareva injunctions quantum meruit damages rescission specific performance statutory Rent-a-judge Rescission Rule of law

9–11 11 49 11 58–60 47–49 49 47–48 48–49 48 47 48 48 48 48 49 47–48

11 10, 48 48 48 11, 48 11, 48 49 18 11, 48 1–2

105


Sample, sale by Sole traders Solicitors Sources of law, common law delegated legislation equity international treaties legislation Specific performance State courts intermediate courts summary courts superior courts Statutory, breach of Structures, business, See Business structures

106

54 22 12 3 4 3 4 3 11, 48 13–14 13 13 13–14 9

Summary courts Summary dismissal Superior courts Tort plaintiff suing under specific Trade practices Trade and service marks Trusts Unfair dismissal Unfair practices Unliquidated damages Wages, payment of

13 72–73 13–14 4 9 5 94–95 24–25 69–71 56–58 10, 47–48 77

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