Shu Lin has inherited an old, three story house from her grandmother. Upon her visit to the house, Shu Lin discovered that the house had deteriorated badly and was in need of extensive repairs.
In the basement, the big wooden beam holding the house up was infested with bugs. She also discovered that the bugs would eventually eat up the entire beam within one year’s time.
Shu Lin went to Timber Biz Ltd to purchase a new wooden beam for her basement. Shu Lin informed the salesman that the wooden beam was needed for her three story house and that it needed to be able to resist bugs that eat wood. The salesman told Shu Lin, “This is the strongest wood in the world. It is resistant to all types of bugs that eat wood.” And Shu Lin also enquired whether it was strong enough to support a three story house. The salesman once again assured her that it would.
The salesman informed Shu Lin that this was the last beam of its kind on stock and that there were no guarantees on this type of wooden beam. Shu Lin asked what that meant. The salesman said that if it broke for any reason, then Shu Lin would not be able to get her money back and additionally that Timber Biz Ltd would assume no liability for any damage that may occur.
Shu Lin took the large beam to the counter at which time there was a 1 metre x 1metre sign in front of the counter desk which stated, “Timber Biz Ltd assumes no liability for any defective goods.” Shu Lin paid $2,000 for the wooden beam.
A month after installation the beam broke and the house collapsed causing extensive damage. It was discovered that the beam was only strong enough to support a two story house.
Advise Shu Lin as to her common law and statutory law rights against Timber Biz Ltd and what are her likely remedies.
IS Timber Biz Ltd liable for a misrepresentation at common law or a breach of a term of the Contract?
Under the Oscar Chess test and Hanbury vs Nolan, whether a representation or promise made during negotiations becomes a term depends upon the intention of the Parties.
The intention is ascertained from the words and conduct of the Parties and from the context of the situation. In Hanbury vs Nolan, one of the dominant factors that made the statement an express term of the contract was that the statement was made immediately before bids were invited.
Application of facts to Law:
The facts here fall square into Hanbury and Nolan’s case. The statement was made immediately before the contract was concluded. Therefore there is an intention to made this statement a term.
Conclusion: Timber Biz is liable for a breach of a verbal express term that the beam was strong enough for a three storey house.
In the event the above argument is not accepted as a term , it is still possible to consider whether there is misrepresentation in this case.
Misrepresentation has the following elements: a) a false statement of fact b) inducement .
Application of facts to Law:
In this case there was a false statement that the beam could support a tree storey house and this induced Shu Lin to enter into a contract.
Conclusion: As a seller Timber should at least be negligent when they made that statement. Shu Lin should be entitled to voidable rights and this includes a refund of the price of the beam and have rights to sue for all damages related to damages to her house.
Has Timber engaged in misleading conduct under Specific Provisions of the ACL?
S33 ACL provides that a Business is not allowed to engage in misleading conduct regarding … the suitability for purpose of any goods…”
Application: Timber has misrepresented that the beam is suitable for a three story house when it was not.
Conclusion: Specific Prohibition S33 has been breached and criminal penalties up to AUD 1.1 million can be meted out against Timber. Shu Lin is entitled to be compensated under General remedies in Part 5-2 of the ACL.
Issue #4 :
Is the “exclusion, exemption “ clause effective?
Exclusion clauses can be defeated with the following techniques namely, Incorporation by reasonable notice (Thorton vs Shoe Lane Parking ) , Contra Proferentum (White vs John Warwick) , and ACL s23 Unfair Contract Terms.
From the facts , a 1x1 sq m notice is big enough a notice that the Incorporation technique cannot be used. Contra Proferentum can be used here to say that there was no defect in the beam. And thus this clause does not apply. It was just that the beam was not fit for the purpose. In the event Contra Proferentum argument fails then S23 of the ACL would apply because this clause is unfair and can be struck down as void.
Consumer Guarantee under s55 ACL: Fitness for purpose
The beam is not fit for the intended purpose of Shu Lin and Timber is not allowed to exclude this guarantee under s 64 of the ACL. Shu Lin can therefore sue for the return of the beam.
Vicky Xin migrated to Australia from Singapore a year ago and is living with her cousin, Ian Hong, and his parents, an elderly couple who do not understand English. Vicky Xin has been unemployed for most of the time since she arrived in Australia, but she has recently been offered to work as a courier for Melissa, a florist. The work requires Vicky Xin to deliver flowers and floral arrangements to customers according to order. However, under the terms of the work contract, Vicky Xin must have and use her own car to do the flower deliveries. Vicky Xin would be paid by the number and distance of the deliveries.
Vicky Xin is very keen to take on this job. She goes to a car dealer who has a car that would be suitable for doing flower deliveries. The car costs $19,000, money which Vicky Xin does not have. Vicky Xin therefore goes to the Ozzie Loans Bank and applies for a $19,000 loan. Ozzie Loans Bank informs Vicky Xin that it will not lend her any money unless a third party guarantees the loan. Vicky Xin requests Ian Hong to guarantee the loan but he turns her down, stating that he thinks she will default on the loan and he does not want to be liable for Vicky Xin’s loan under a guarantee.
Vicky Xin then goes to Ian Hong’s parents, Ming and Yanzhu, and tells them that she would like them to help her borrow money to buy the car. Both Ming and Yanzhu are very close to Vicky Xin. They are old and frail and have become dependent on Vicky Xin for physical and emotional support. Ming and Yanzhu are eager to help Vicky Xin and therefore readily agree to guarantee her loan from Ozzie Loans Bank. They sign the guarantee document at the Ozzie Loans Bank. However, the bank does not explain to Ming and Yanzhu that Vicky Xin’s income as a flower courier is uncertain and that they may have to pay the bank any sums outstanding on Vicky Xin’s loan if Vicky Xin defaults on repayment.
Vicky Xin buys the car using the loan money and commences work as the flower courier. Unfortunately, Vicky Xin is only receiving three or four delivery jobs per day and the income she makes is not enough to cover her car expenses and the principal and interest on her bank loan. Ozzie Loans Bank now seeks to enforce the guarantee against Ming and Yanzhu.
Using case law and statutory law, advise Ozzie Loans Bank as to its chances of successfully enforcing the guarantee and advise Ming and Yanzhu whether they have any defences to any action that Ozzie Loans Bank make take against them.
(Students are to take notice that in this Question , there are only two issues and students are therefore expected to write an comprehensive answer as opposed to a question with more issues)
Has the bank engaged in unconscionable conduct UC at common law?
Under common law, a contract will be void due to UC if one party has taken advantage of a special weakness or disadvantage of the other party. ( Commercial Bank of Australia vs Amadio, Bridgewater vs Leahy, Louth vs Diprose. )
The following are necessary elements needed to establish UC:
One of the parties has a special weakness or disadvantage
The other Party knows about or should have known about the special weakness or disadvantage
The other Party took advantage of the special weakness or disadvantage
Application of facts to Law:
In this case, the following elements are satisfied to establish UC:
The old couple has a special weakness or disadvantage
Ozzie Bank knows about or should have known about the special weakness or disadvantage
Ozzie Bank took advantage of the special weakness or disadvantage and made them sign the Guarantee.
A special weakness of the elderly couple that was taken advantage of by the Ozzie Loans Bank Officer may include, in the present case, : an inability to speak and understand English, old age and probably ignorant of important facts like Yanzhu ‘s lack of job security.
The bank was in a good position to advise the old couple on Yanzhu’s credit standing but they did not and wanted to push out loans.
Conclusion: Such a Guarantee is void due to Unconscionable conduct by Ozzie Bank
Issue # 2 Is Ozzie liable for Unconscionable conduct under ACL?
Applicable LAw; Under S 21 (1) (a) of the ACL, Ozzie Bank must not engage in unconscionable conduct in connection with the supply of Banking Services to the old couple.
Ozzie Bank has:
Engaged in conduct
The conduct was in banking
The conduct was in the banking services
The old couple is not a listed company
The conduct was unconscionable
ACL s22(1) has a list of factors to determine unconscionability, some applicable one are listed in the following:
The relative strength of the Bank and the old couple
The old couple has problem with English
The Bank unreasonably failed to disclose about Yanzhu poor credit rating
The old couple’s old age, emotional and physical frailty.
Ozzie Bank also failed to comply with ACCC’s advice on dealing with disadvantaged and vulnerable consumers and the old couple fits the description of vulnerable and disadvantaged. (It should be noted here that ACCC ‘s guideline are not law, but remain a useful guideline).
Ozzie Bank’s has poor chances of defending themselves.
If the court determines that unconscionable conduct has occurred, a variety of remedies may be ordered including:
compensation for loss or damage
having the contract declared void in whole or in part
having the contract or arrangement varied
a refund or performance of specified services
(Note to Students on ACL.
The following is a Useful reference guide if parts of the textbook on ACL seem confusing:
Part 2 consists of ten (10) multiple choice questions. For each question, write the correct answer out of the possible choices A, B, C and D. All your answers to the questions in this Part 2 must be written on one page in the examination booklet. Write “Part 2” at the top of this page. Your answer to each question must be on a separate line and all your answers must be numbered correctly from 1-10.
(10 × 2 = 20 marks)
Please note: Part 2 of the exam has been removed from this revision copy. However, the Part 2 questions are of a similar format to the first mid-semester multiple choice test, except that in this Part 2 the whole course was examinable.
1. Attend all online lectures
2. Get back to Ravi Chandran;s text book and make your own notes /mind maps.
3. Attend the 3 teacher explanation video
4. Still in a blur? Try Business Law simplified to understand some of the cases. Please do not look for cases more than 4 paragraphs long.
5. Test your knowledge against tutorial questions
There were many good answers , here a couple of them.
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Table of Content
Applicable Law 1
Applicable Law 2
Applicable Law 3
Applicable Law 4
The issue of this case is regarding the exemption Clause 14, which has the legal effect of excluding or limiting the liability of the party in breach who relies on the clause for protection. There are four factors in determining the validity of Clause 14: incorporation, construction, presence of unusual factors, and neutralization by UCTA. We will look into whether clause 14 is valid in this contract or not. And then give advice to Brandon.
Applicable law 1
There are two ways that exemption clause becomes incorporated into a contract: by signature or notice.When an exemption clause is given in a notice, the notice must be brought to the attention of the other party either before or at the time the contract is made. In Olley v. Malborough Court(1949), Olley lost her expensive coat in her hotel room and wanted to sue the hotel. However the hotel hoped rely on the exemption clause what was behind her door to avoid the responsibility. The court held the clause was not part of the contract as it was brought to her attention after the contract was made.
Since the time Brandon nodded his head and paid $100 to Mark after understanding the agreement what included Clause 14 “seller accepts no liability for any damage or harm and or injury arising from the use of bicycle after taking delivery”. It could be considered as theincorporation notice.
For the exclusion clause to be upheld, it must be reasonable visible. The agreement that Mark explained to his buyer was a large print agreement. Further, it also had a direct reference because Brandon received a copy from Mark.
So, this document is regarded simply as incorporation notice because Brandon and Mark made the contract after reading that agreement, which was different from the case of Olley v. Malborough Court(1949).
Once an exemption clause is incorporated, then it has to be construed or interpreted to see whether it clearly covers the loss or injury suffered by the innocent party. Obviously, the wider the clause, the more protection the party have. There are two rules of construction: Contra Proferentum Rule and Main Purpose rule.
If there is any ambiguity to the meaning of an exclusion clause, the clause will be construed “contra proferentem” that against the party who proposed the contract or clause.
In Houghton v. Trafalgar Insurance (1954), there was a lack of clarity in the exemption clause. The insurers’ policy caused ambiguity because stated “any load”. The court decided that the insurance company could not be escape from responsibility.
In this case, Clause 14 was not ambiguity. It clearly stated that “any damage” including “harm, injury and damage for using of the bicycle after sale”, Which was different from the case of Houghton v. Trafalgar Insurance (1954),
If there are any usual factors that may limit the effectiveness of the exemption clause such as a misrepresentation about the scope and extent of the clause by the party relying on it, then it will be invalid.
In Curtis v. Chemical Cleaning & Dyeing Co (1951), the court held that the defendant could not rely on the exclusion clause because the plaintiff signed the receipt due to misrepresentation.
It is known that after Brandon fractured his wrist, Kevin found the bike had been dangerously corroded for some time. But during the transaction time, Mark did not told Brandon the problem the bike had. He only explained Clause 14 covered accident due to negligence of the buyer in not maintaining the bike after delivery. Since when accident happened, it was the first time Brandon rode it, there was no responsibility for Brandon of not maintaining the bike, which meat there was a misrepresentation of Mark. Therefore, the misrepresentation could limit the effectiveness of the clause.
Mark could not rely on the exemption clause and was liable to this damage as the exemption clause was invalid because of the misrepresentation.
Applicable law 4
Even if an exemption clause seems to form part of he contract based on the 3 factors, it may be neutralized by Unfair Contract Terms Act (UCTA), which is mainly focused on protecting consumers entering into business transactions. In section 2(1), an exemption clause is void if it excludes liability for death or personal injury due to negligence.
In White v. John Warwick (1953), the court held that the exemption clause could not protect the defendant from being liable for negligence.
According to section 2(1) of the Under Contract Term Act, party in the breach cannot exclude their liability due to negligence that related to someone's injury or death. As we look into the case White v. John Warwick (1953), the plaintiff hired a bicycle under a contract with a term: nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired. Nevertheless, the plaintiff still could sue the defendant for breaching the contract, because of their negligence and caused an accident. Similarly, in this case, the dangerously corroded of brake wires caused Brandon lost control and ran into a drain. As a result of fractured his wires. For this reason, Mark breached the contract under the UTCA section 2(1) for negligence and cause Brandon's injury. Therefore, Brandon could claim injury and got the compensation.
Mark would be liable for the injury of Brandon because of section 2(1) in the UCTA and there is no section 2(2) in the UCTA of this case.
The exclusion clause was effective based on 2 factors: incorporated and construction. However, due to unusual factors and neutralized by UCTA, Mark was liable for Brandon’s injury. Brandon could sue Mark for compensation.
According to the law of contract, a contract contains four elements which is offer, acceptance, consideration, and intention to create legal relations, when these four elements is included during a transaction between the offeror and offeree a contract is formed. However, there is a section in a contract that excludes any kind of liability when there is a breach of contract and specify that a party is excluded from any kind of liability which is known as exemption clauses. Although this section did have some unfairness to the other party, there is also a change of law that will brought back the fairness and limits the liability that can be excluded. Exemption clauses can be valid and effective on four factors which are incorporation, construction, presence of unusual factors and neutralization by UCTA
In this case, between a deal of Mark the offeror and Brandon the offeree, an exemption clause had been made named Clause 14 which stated The seller accepts no liability for any damage, harm or injury arising from the use of the bicycle for any reason whatsoever. This means Mark will not be liable to Brandon whenever he is injured from using the bicycle after the sale has been made.
b) Factors Determining the Validity
Firstly, incorporation means that making the exemption clauses as part of the contract. There are two ways of incorporating the exemption clauses, either by signing or by notice. By signing a written contract that contains exemption clause, any exception is considered after the contract is signed, it does not matter whether the party that signed read or understand the contract. If the exemption clause is incorporated by a notice, the offeror has to inform the notice to the offeree before a contract is made.
For this case Mark did give him a draft and a notice about Clause 14 right before Brandon bought the bicycle, proving that Clause 14 is valid.
Secondly, after the exemption clause had been incorporated, the clause itself should be constructed in a proper and clear way for the other party to understand about the clauses. If the clause is not constructed properly there will be a contra proferentem or interpretation against the draftsman, when this happens the clause itself will be invalid.
In this case, Mark had explained to Brandon about the exemption clause about Clause 14 clearly. The Clause 14 sounds The seller accepts no liability for any damage, harm or injury arising from the use of the bicycle for any reason whatsoever. Thus, Clause 14 is also valid due to its clear construction of words.
Thirdly, the unusual factors, an example of unusual factor in an exemption clause would be a misrepresentation that is given to the offeree when a contract is formed, even a small misrepresentation in an exemption clause could render that clause to be invalid.
In the case between Mark and Brandon is that where clause 14 is written in the draft that mark will not be liable to Brandon if he suffers from an injury while using the bicycle for any kind of reason. However, there is a clear misrepresentation of the statement as Mark also explain verbally to Brandon that Clause 14 only covers accidents due to the negligence of the buyer for not maintaining the bicycle after taking delivery. Therefore, due to an unusual factor to in Clause 14, causing the clause itself will be invalid.
This unusual factor can be supported with the case of Curtis V Chemical Cleaning, whereas Chemical Cleaning told Curtis that the exemption clause will only covers any kind of risks except for certain risks of damages apply to the goods such as beads and sequins. But, when Curtis collected the goods, there was a stained. When Curtis sued Chemical Cleaning, they wanted to use the exemption clause to escape the liability towards Curtis. However, due to a misrepresentation happen in the exemption clause which has stated it will not cover the risk such as beads and sequins. In other words, damages caused by the stain will be covered by Chemical cleaning, making them could not rely on the exemption clause.
Neutralization by Unfair Contract Terms Act (UCTA)
Lastly, neutralization by the unfair contract terms act or UCTA. UCTA is usually an act that mainly focused on protecting the consumers when they are entering into a business transaction. UCTA is able to neutralize the exemption clauses even though the three factors had considered the clause as valid. There are two sections that covers exemption clauses in UCTA.
The first one is on section 2(1) which had stated that an exemption clause that excludes liability will be void if there is a death or personal injury due to negligence occurred. The second one is on section 2(2) that stated an exemption clause can exclude liability for other loss or damage due to negligence but only in a fair and reasonable circumstances.
For this case, Kevin the third party for this case found that the bicycle brakes had been corroded dangerously for some time, this means before the transaction between Mark and Brandon had been created, a problem had occurred due to Mark negligence of not maintaining the bicycle properly during it is still in his hand. Therefore, under UCTA section 2(1) Clause 14 is automatically void due to a negligence had been made beforehand and it had caused a personal injury. With UCTA section 2(2) it is unfair and unreasonable to exclude liability for damages due to negligence. This is because Mark should take responsible of maintaining the bicycle before he tries to sell it to Brandon, an excuse such as forgetting to maintain the bike would be unfair to the customers as it could cause a damage toward he/she. UCTA section 2(2) had also make Clause 14 invalid. With those two sections of UCTA showing that Clause 14 is invalid, this had proved that validation of Clause 14 will be neutralized by the UCTA, making the clause itself invalid.
To conclude, as Clause 14 is neutralized by UCTA as invalid, Mark will be liable to Brandon. Mark has to do two things to compensate Brandon, the first one would be giving back Brandon the money that he paid him for the bicycle which cost $100.00 and the second one is to pay the medical bill for Brandon’s injury.
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