These questions address a range of content from the examinable chapters (see Unit Guide). These questions may not cover every sub area of the prescribed reading, but provide an opportunity for students to practice identifying issues and answering questions.

Students should not make any assumptions about content that may or may not be on the exam based on topics/sub-topics appear, or do not appear, below.

Students are recommended to also answer the tutorial questions available in Moodle.

Students are encouraged to complete these preparation question and then discuss their answers within their informal study groups or with teacher during consulting.

1. SupaTV sold a faulty television to the ABC Advertising Company. ABC used the television set for making presentations to its clients. Unfortunately, when ABC was presenting to one of its biggest clients, a fault in the television set caused it to explode damaging ABC's business premises and destroying ABC's DVD player which was attached to the television set. Fortunately, no one was injured.  

Advise ABC of any action(s) against SupaTV.

2. Nutt & Bolt Pty Ltd operates a retail hardware store in Caulfield. Mr. Nutt and Ms Bolt are the directors. Nutt is the managing director. He manages the retail store, while Bolt looks after the accounts. Nutt and Bolt have agreed that all company transactions involving more than $1,000 will only be made with the approval of both directors.

Nutt leased a new Ford car in the company's name from H Cars Pty Ltd. The cost of the lease is greater than $1,000. Nutt did not tell Bolt about the transaction. Nutt used the vehicle for his own purposes and to drive to work each day.

H Cars is owned and operated by Nutt's brother-in-law who knew Nutt did not have authority to enter into transactions over $1,000. When the first account from H Cars arrived, Bolt refused to pay arguing that the company (Nutt & Bolt Pty Ltd) was not liable for the debt as Nutt did not have authority to enter into transactions over $1,000. H Cars insists that the company is liable.

Is the company (Nutt & Bolt Pty Ltd) liable for the debt under the Corporations Act?

3. Mary, Fred and Chris agree to start a restaurant in Melbourne. They write down the rules of their agreement. Including that they will share profits and the management of the restaurant. The business proves to be very popular with the local residents.

They buy items for their restaurant including a brand new Italian coffee machine that cost several thousand dollars. Mary and Chris want to put a clause in the agreement about what will happen to the coffee machine should the agreement end, but Fred persuades them that they do not need the clause.

After a year Fred says that he is tired of the restaurant and that he is going to leave. Mary and Chris tell him not to leave, but one night he leaves without telling them, taking the coffee machine with him.

a) Mary and Chris are furious when they find out what has happened. They want the coffee machine back and they want to make sure that Fred is no longer part of their business. What can they do with the partnership property?

b) Mary and Chris decided to let the coffee machine go to Fred as it was just not worth the trouble. In fact, that coffee machine had previously produced such a hot coffee that one of the customers received second degree burns on her lips while she only wanted to enjoy a short black. Do you think that Mary and Chris should be worried about whether the customer has a claim against for the partner’s wrongful acts?

4. Tartan Ltd was incorporated in 1999. Abigail, Banquo and Duncan are the directors. Tartan's constitution sets out the company's objects as being the importation and sale of Scottish cloth and clothing. While investigating Tartan's competitors, Banquo discovered that there was a fabric producer in Sydney producing cloth of equal quality to the imported cloth that Tartan was selling. Seeing an opportunity, he purchased several hundred yards of the cloth and sold it to several of Tartan's customers making a profit of $50,000 which he kept for himself.

Unfortunately, Tartan's business has not been very successful. The company's audit for the financial year ended 30 June 2000 revealed that the company had failed to make a trading profit. It further revealed that Tartan's liabilities were three times its assets, and that it had been unable to pay its suppliers for the last six months. However, these matters were barely discussed at the director's meeting which immediately followed the audit reports. Instead the directors resolved that the company borrow $2 million to purchase more tartan fabric. Four weeks after borrowing the $2 million, the company was put into liquidation.

Discuss the liability of the directors under the Corporations Act.

5. Will and Ben run a small plant nursery called Flowerpot Men. Will does not take an active role in the day to day management of the nursery and so Will and Ben have agreed that Will should only receive 25% of the profits whilst Ben will receive 75%. They have also agreed that Will should only be liable for 25% of the costs of the business. No one but Will and Ben is aware of this arrangement.

After being successful for quite a while the business collapsed and closed down. Ben has taken all the cash out of the bank and disappeared. Before leaving, Ben borrowed $10,000 from a finance company, Rip-Off Ltd, at very high interest rates. Ben told Rip-Off that he was authorised by Flowerpot Men to borrow the money for the purpose of expanding the business. This was not true. The money disappeared along with Ben. Rip-Off wants Will to repay the $10,000. Will claims that he is not responsible as the money was used for Ben's own purposes. Alternatively, Will claims that, if he is liable, his liability is limited to $2,500 (i.e. 25%).

In addition, Will was contacted a week later by a person who said he paid Ben $1,000 for a new sapling which had not been delivered and that Will should reimburse him. This was one of many complaints received by Will indicating that Ben was still taking orders from even though the business was closed.

a) Does a partnership exist between Will and Ben?

b) Advise Will about his liability to Rip-Off under the Partnership Act and what he should do to prevent any further liabilities from the business.

6. Farmco Ltd are a large farming business. They purchase a tractor from SCO Ltd for $37,000. The tractor is to be used on Farmco properties to tow a trailer. The contract for the sale of the tractor contains the following clauses;

a) The buyer agrees that SCO will not provide any refund on any of its vehicles returned-with faults after 7 days from purchase.

b) This written contract is the entire agreement between the parties.

Two weeks prior to signing the contract, Farmco were told by a SCO salesperson that the tractor would operate with Farmco's XP200 trailers. Farmco state that the only reason they are buying the tractor is to tow the XP200. After the tractor is delivered, Farmco discover that the tractor is not compatible with the XP200 trailers.

Advise the parties under common law (express and implied terms) and the ACL consumer guarantees.

7. Angela and Bill are in partnership selling clothes in a store near Caulfield station. Recently, James was shopping at the store and ·was served by Angela. He asked Angela whether the store sold wool-free jumpers. He told Angela he is very allergic to wool and proximity to wool may bring on an asthma attack. Angela told James that all the jumpers on the first rack are acrylic and polyester jumpers. James looked around the store and eventually, after haggling over the price, bought a jumper from the rack for $100.

Two days after wearing the jumper, James had a serious asthma attack and was in hospital for a week. His medical expenses are $4,000. Also, as a result of his hospitalisation, James was unable to work as a stunt man in a movie being filmed.   He would have earned $10,000 for his part in the film. After leaving hospital, James goes to the store and demands compensation for his expenses. Angela points to a prominent sign behind the cash register which states:

No refunds or exchanges. The store is not responsible for any defects in products and all statutory warranties are hereby excluded.

After a long and fruitless discussion, James leaves the store and pursues legal advice. Soon after this, the store closes down due to lack of business and Angela leaves the country. Bill, however, is still in Melbourne and readily contactable.

Advise the parties under the ACL consumer guarantees.

8. Elle is a partner in an accountancy firm. The partnership agreement states that all purchases require approval of all 4 partners. Elle visits Fred's Furniture Retail Store Pty Ltd and buys a new desk for $20,000, without discussing this with the other partners. Elle then hires ABC Transport Co Pty Ltd to take the desk to her office. The written contract between Elle and ABC Transport Co is very brief and only includes details of the goods to be carried and the destination as well the parties' names and the price. The contract also includes an exclusion clause on the back which 'exempts ABC from liability for all losses or damage to the goods occurring during transit'. The furniture is damaged owing to the carelessness of ABC Transport Co.

Advise the parties about liability for paying for the purchase of the desk under:

a) common law and

b) statute

9. GAL Pty Ltd is a business which sells commercial software. It has 4 shareholders: Alice, Buffy, Candice and Danielle. Alice, Candice and Danielle are also the directors of GAL.

Although it had begun as a small company, GAL's services became popular among customers. In 2002, it made large profits. However, in 2003, GAL did not perform so well, because competition had increased and the demand for its software decreased. Although GAL already had large bank loans, Alice and Candice decided at a directors' meeting to borrow an additional $2 million to upgrade GAL's computer equipment and to run an expensive advertising campaign to promote GAL's services. Danielle did not vote on the $2 million bank loan as she did not attend the meeting. (Danielle rarely attends directors' meetings or takes an interest in the affairs of GAL.)

GAL obtained the $2 million from Witch Bank in June 2004 and spent the money on new computers, which were purchased from Orange Electronics. Orange Electronics is owned by Alice, but this was not revealed to GAL's shareholders or to the other directors.

After 3 months, GAL had fallen behind in its debt repayments to its creditors so a liquidator was appointed. The liquidator seeks your advice on the following matters:

a) Are any of Alice, Buffy, Candice, or Danielle liable for the $2 million loan from Witch Bank under both common law and statue?

b) Can any action be taken against Alice in relation to the computer supply contract?

10. "Accurate Accounting" is the name of the partnership business set up by two accountants, Jodee and Rodney. But two years after being set up, the firm collapsed. Jodee did not come into work one day and was never seen again. The customers stopped coming in soon after. Rodney discovered soon after this that before leaving, Jodee borrowed $100,000 from a credit and finance company, Ex-Am Ltd, at very high interest rates. He told Ex-Am that he was authorised by Accurate Accounting to borrow the money for the purpose of expanding the business. This was not true. The money disappeared along with Jodee. Ex-Am wants Rodney to repay the $100,000. Rodney claims that he is not responsible as the money was used for Jodee's own purposes. Alternatively, Rodney claims that, if he is liable, his liability is limited to $50,000. This is because they had agreed that they would each be liable for half of the costs of the business. He does note, however, that they did not tell anyone about this agreement.

To add to his problems, Rodney has discovered that Jodee is still trading in the name of the business - somewhere - and Rodney is worried Jodee will incur further debts in the name of the firm.

a) What is Rodney's liability to Ex-Am? Examine under common law and statute?

b) What must Rodney do to prevent himself being liable for any liabilities incurred by Jodee?

11. MMC Pty Ltd operates a designer jeans tailoring business. Brittney and Christina are the executive directors. Brittney makes the jeans while Christina looks after the accounts. Brittney and Christina have agreed that all company transactions involving more than $2,000 will only be made with the approval of both directors.

Brittney leased a new car in the company's name from Zipper Cars Ltd. Brittney did not tell Christina about the transaction. Brittney uses the vehicle for her own purposes and to drive to work each day. When the first account from Zipper Cars arrives, Christina refuses to pay saying that the company is not liable for the debt.

Advise Christina whether this is correct. If the company were liable to pay the debt, could the company claim the lease expenses from Britney?

Brittney bought a considerable amount of denim cloth, for which MMC didn't have to pay until 90 days after delivery. Unfortunately, a fire destroyed MMC's storage rooms also destroying the new cloth. MMC had no insurance because Christina forgot to pay the insurance premiums that year. Christina told Brittney that she wasn't sure how the company could pay all its accounts. Brittney insisted that they had to keep trading. Therefore, she bought replacement cloth also on credit. It cost $30,000. However, due to change in fashion trading fell away completely. MMC Pty Ltd cannot pay its debts. A liquidator has been appointed.

Does the liquidator have an action against Brittney and/or Christina under the Corporations Act? Explain fully.

12. Titus purchased an electric coffee maker from Technosales Pty Ltd for $3,000 for his personal use. After two weeks, the coffee maker started to malfunction, even though Titus had been using it in accordance with the manufacturer's instructions. He phoned Technosales, who told him to return it to them. When he unplugged the electricity from the back of the coffee maker, he received a severe burn on his hand from an electric shock from the power cable.

When Titus returned the coffee maker to Technosales, they said that they would return the coffee maker to the manufacturer for repair. Titus, however, demanded a refund, which they refused. They referred him to the term, printed on the sales receipt, which said "No refunds shall be given for returned items".

Advise Titus of his legal rights against Technosales Pty Ltd. Examine whether the exclusion clause is effective under common law and statute.

13. Bonnie was the managing director of Pretender Ltd, a fashion company, which is now in liquidation. Firstly, although Pretender's constitution forbade it from having any dealings with George's Emporium, a year ago Bonnie and the company secretary purchased $100,000 worth of clothes from George's. Bonnie and the secretary had both signed the contract and affixed the company seal. However, the $100,000 was never paid. George's say Pretender has to pay this amount.

Bonnie's also made a contract for Pretender to pay $200,000 to have Pretender's offices and showroom renovated. However, a week before the contract was agreed, all of the company directors had been presented with the annual audit and financial statements. Due to a lack of time Bonnie had not read these statements. It was only after the contract was made and the renovations completed that Bonnie looked at the statements which revealed that Pretender was not capable of paying all of its debts. Now the renovation company wants to claim the debt from Bonnie personally.

Advise Bonnie as to her legal position.

14. XP  sell a laser printer cartridge to Tony, who is a longtime customer of XP. Tony bought the toner by telephone and when it arrived, there was a delivery docket attached to the box (this has always been XP's standard practice), the docket includes XP's standard terms, including that there is a 18% restocking fee for all returns. Tony realises he has ordered the incorrect toner and is furious when told of the restocking fee by XP.

Advise Tony whether he is contractually bound to pay this fee.

15. Alpha Pty Ltd purchases a machine from Beta Machines Ltd for delivery on 01 October. Beta are three weeks late delivering the machine and Alpha Pty Ltd is faced with the potential closure of its factory for three weeks until the machine arrives. One option is to hire a replacement, which would cost $5,000 in total, but as there is none available for a week, Alpha Pty Ltd is forced to close its factory. Normal losses amount to $1,000 a day, and the factory usually operates seven days a week. Alpha Pty Ltd has also lost a lucrative government contract worth a further $50,000.

What damages can Alpha Pty Ltd claim?

16. Cate decides it is time for a make-over. She makes an appointment with one of the 'in' hairdressers in town. While they are discussing her new hairstyle, Cate tells the hairdresser that she has a very sensitive scalp. After her new style, the hairdresser advises Cate that she should buy his new hair shampoo 'Lasting Hair Colour' in order to ensure that her highlights do not fade too fast. After using the product for a few days, Cate develops a nasty skin rash. She goes back to the hairdresser in order to return the shampoo and get a refund. The hairdresser shows her a big sign over the cash register saying: 'No refund for opened products'.

Advise Cate under the ACL consumer guarantees.

17. Fred and Bert run a gift store called "The Entourage". They sell trendy accessories. Tom has helped with the business by lending Fred and Bert $50,000. In return he agreed to receive one-quarter of the profits at the end of the financial year but he also assists with the management of "The Entourage". Will has also lent money to the business but he has agreed to receive just a percentage of the profits in return. Although there is no formal agreement in place, Fred purchases the store stock, whilst Bert looks after the accounts. Tom helps out when Fred and Bert require his assistance. The business is being sued over an unpaid loan.  

Advise Will and Tom about their liability for the unpaid loan.

18. Nick went to buy a pet bird from a shop called The Birdcage. He told the shop that he wanted to buy a bird that was allergy free. The shop staff told him, the sulpur crested cockatoo would be ideal and sold him a grey and crimson bird. When he arrived home, Nick's wife began sneezing and developed a skin rash. Nick then researched sulpur crested cockatoos and discovered they are a white bird with a yellow crest and realizes his bird is not a sulpur crested cockatoo. Nick was furious.

The next day he went back to the store for a refund. The shop staff responded by pointing to a big sign on the wall behind him which said that "The Birdcage does not allow exchanges or returns or refunds EVER". Nick remembers seeing it when he bought the bird.

Advise Nick whether he can sue under the ACL statutory guarantees and is the exclusion clause effective?

19. Holdfast Pty Ltd operates several retail stores selling industrial clothing wear. It has the following three directors on its board: Dave who is the managing director; Jane who is the company secretary and a director; and Mary who is a director.

In May, Mary proposed that Holdfast Pty Ltd should buy a laundry business owned by BS Pty Ltd for $2 million. This item was placed on the agenda of the June directors' meeting. Prior to the meeting Jane was asked to prepare a business plan for the new acquisition and Dave was asked to prepare a financial report outlining the impact of the acquisition. The June directors' meeting went overtime and Jane had only a couple of minutes to explain the business plan. Dave tabled his financial report but there was no time to discuss it. After a very quick discussion which was mainly about the Melbourne Cup horse race, the directors voted to approve the acquisition. After the purchase was finalised it was discovered that Dave's financial report had many mistakes and did not give a true picture of Holdfast's poor financial position, and Dave's family company owned 80% of the shares in BS Pty Ltd. The purchase of the business plunged Holdfast quickly into insolvency.

Advise the directors of actions they may face.

20. Holdfast Pty Ltd has contract to clean Dave's factory each week by Barn every Monday. Holdfast are aware that his cleaning is required for the factory to operate safely. Holdfast fail to clean the shop one week, and Dave has to hire another cleaner that week, which costs $1000 more than the Holdfast fee and can only be done at 10.30 am on Monday, requiring the factory to be shut down.

Because the factory is closed for this cleaning, Dave loses $12,000 profit from regular production during this period and also loses a profitable, unexpected government contract that they could not fulfill due to the closure.

a) Advise Holdfast of their liability to Dave under implied terms of contract and the ACL statutory guarantees.

b) Assuming Dave can successfully sue for breach; what damages can he claim?

21. Elvira has just opened up a new accountancy office. She visits Fred’s Furniture Retail Store Pty Ltd and buys a new desk for $2,000. Elvira then hires ABC Transport Co Pty Ltd to take the desk to her office. The written contract between Elvira and ABC Transport Co is very brief and only includes details of the goods to be carried and the destination as well the parties’ names and the price.

The contract also includes an exclusion clause on the back which ‘exempts ABC from liability for all losses or damage to the goods occurring during transit’.

The furniture is damaged owing to the carelessness of ABC Transport Co.

a) What rights does Elvira have under common law implied terms?

b) Is the exclusion clause effective?

22. Joyce recently purchased a house, on a large block of land, in inner Melbourne from Star Properties Ltd. Her dealings were with Phillip, the sales manager of Star Properties Ltd. Her plan was to demolish the house and to build four small townhouses on the land; one to live in, one for her sister to live in, and two for sale.

Joyce has little experience at property development, and prior to purchasing the land she explained her plans to Phillip. She asked Phillip whether she would have any problems gaining a permit to build the four townhouses. Phillip told her “You won’t have any problems”. Joyce again stated her needs in relation to the land, and suggested that perhaps she should discuss her plans with her architect before proceeding with the purchase. Phillip reassured her that everything would be fine. He told her that he was a property agent, had bought and sold land in the area for many years, and that he was very well informed about building laws and council regulations.

Satisfied by this, Joyce signed a contract of sale to buy the house for $500,000. No mention of her requirement of a permit to build four townhouses was made in the written contract. After discussions with the local council, she has now learned that the council will only grant Joyce a permit to build two townhouses.

Joyce approaches you for your advice in relation to the above matter. She has had the house valued and discovered it is now estimated to be worth only $450,000. She has also discovered that finding land in the area that meets council requirements for four townhouses is difficult to obtain. If she can find such land, the likely cost would be $750,000.

a) Advise Joyce of her common law contractual rights against Star Properties Ltd in relation to the purchase of the house.

b) What would your answer be if Phillip had been instructed by his manger NOT to discuss or answer any questions relating to planning permits, and instead to forward such queries to his immediate manager to handle?

23. SMK Bakery Pty Ltd is a successful Franchise business established by John Cindric. The franchise costs in excess of $500,000 to buy into. The franchisor provides all training, signage and marketing for franchisees. It is a condition of the franchise that all ingredients used in the baking of breads and cakes must be purchased from the franchisor on a monthly basis. As is usual with such agreements the franchisor retains complete control of all business decision making. The franchisor has the right to terminate any franchisee who does not comply with all directions of the franchisor. All franchisees must agree to this condition before being approved by the franchisor.

The franchise agreement permits franchisees to purchase half quantities of ingredients. Further, franchisees may use their discretion to limit the range of breads and cakes available for sale to only popular items in any particular month depending on sales.  SMK Clayton is run by Tina Truong. It has been operating for 12 months. Sales have been slower than expected due to the existence of a popular local bakery. For this reason SMK Clayton has always purchased half quantities of ingredients and provided only a limited range of SMK products.

Tina is contacted by the John and is told that a new marketing initiative is to be implemented Australia wide to boost sales. This initiative requires offering the full range of SMK products for sale in all franchise outlets. It also requires Tina to give out marketing literature giving the locations of all SMK bakeries within a 10 km radius.

Tina tells John that this will not only require them to purchase full quantities of ingredients and put on another baker but might also result in losing customers to other SMK bakeries. Tina also tells John that the current turnover does not warrant the additional expenditure and that there is no reason to believe that turnover at SMK Clayton will improve.

John firmly reminds Tina of her obligations under the franchise agreement. He tells her that non compliance with his instructions will result in immediate termination of her franchise.

Advise Tina of any action she may take under the ACL and or Common Law for Unconscionable Conduct.