Topic 3

Summary Cases

The HIH Crisis

HIH Insurance Ltd was Australia’s second largest insurance company until it collapsed in 2001
due to several factors, including unrealistically low premiums, bad management and poor
investment returns. Thousands of individuals and businesses were unable to claim. Premiums
soared and many ‘high risk’ clients, such as builders, public functions and groups, could not gain
cover. The mood of panic was heightened by media stories on multi-million dollar payouts to
apparently careless and undeserving plaintiffs.

The Snail in the Bottle Case [1932]

You must take reasonable care to avoid acts or omissions that you can reasonably foresee
would be likely to injure your neighbor.

Ms Donoghue drank ginger beer from a brown opaque bottle that a friend had purchased for
her in a café. When the rest of the bottle was poured over a plate of ice cream, a dead snail
floated out. Donoghue later suffered gastroenteritis and shock. She could not sue the café
owner for breach of contract because she had not bought the drink. In a radical move,
Donoghue sued Stevenson, the soft drink, manufacturer, for negligently breaching his duty to
take reasonable care to protect the final user of his product.

A majority of the House of Lords held: The defendant was liable. The court laid down a specific
and a general ratio decidendi (reasons for the decision).

Specific ratio: where a product cannot be inspected prior to use, the manufacturer has a duty
to take reasonable care to ensure it does not contain any harmful defect.

General ratio: the rule that you are to love your neighbor becomes in law, you must not injure
your neighbor. (Lord Atkin). In effect, the general rule is:

- You must take reasonable care to avoid acts or omissions which you can reasonably
foresee would be likely to injure your neighbor; and
- Your neighbor is a person who is clearly and directly affected by what you do, or fail to
do. Donoghue V Stevenson [1932] AC 562

Comment: Ms Donoghue’s action only reached the House of Lords because a Scottish law firm
took her on as their annual ‘pro bono’ (free) client.

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 The ‘Doctor’s Underwear’ Case [1932]

Australian manufacturers were liable for defects that cannot reasonably be discovered.

Grant, a doctor aged 38, contracted life-threatening dermatitis that kept him in bed for over
four months when he reacted to a thin coating of sulphide left in two brand new sets of woolen
underwear.

The Privy Council held: manufacturers have a duty of care to any user if the defect was hidden
or could not be discovered through reasonable inspection. Plaintiffs may sue for negligence as
well as breach of contract. Grant v Australian Knitting Mills [1933] AC 35.

Comment: Grant succeeded although the manufacturer had sold nearly five million garments
manufactured in a similar way without any complaints in the previous six years. The court did
not appear concerned that he had worn each set of underwear for one week before changing
it.

Jaensch V Coffey (1984) 155 CLR 549

Refer to the following link for the full case:

https://jade.io/article/67134

Haley v London Electricity Board [1965] AC 778

A blind man was injured because an open trench was not adequately blocked off. The House of
Lords held that the Electricity Board was liable because it was reasonably foreseeable that
passers – by could include blind people.

Fallas V Mourlas: The Drunken Kangaroo Shooters Case [2006]

A defendant is not protected by s 5L unless a recreational activity involves a significant risk

and the plaintiff reasonably knew about the specific risk involved.

Fallas, Mourlas and two other men were driving around at night shooting at kangaroos. None of
them were experienced hunters and they were drinking alcohol.

Mourlas, nervous about Fallas’s automatic handgun, asked him several times not to bring it into
the vehicle. Fallas insisted the gun was empty and perfectly safe. Soon afterwards, while Fallas
was trying to clear a jammed bullet he shot Mourlas in the leg.

Mourlas sued Fallas who argued that:

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 - He was immune under s 5L of the NSW Civil Liability Act 2002 because kangaroo
shooting was a dangerous recreational activity and there was an obvious risk of being
shot while participating in it; and
- If he was liable, Mourlas, conduct amounted to contributory negligence.

The court rejected both arguments and ordered Fallas to pay damages of $98,467. The NSW
Court of Appeal (2-1) dismissed the appeal. Justice Basten found that Fallas had not proved
kangaroo shooting was a ‘dangerous recreational activity’. Justices lpp and Tobias agreed
that: ‘spotlighting’ for kangaroos by inexperienced men who were handling firearms under
the influence of alcohol created a significant risk and was therefore a ‘dangerous
recreational activity’. However, Justice lpp found that a reasonable person in Mourlas’s
position could not have anticipated Fallas’s grossly negligent conduct. Therefore, the risk
was ‘not obvious’. Fallas V Mourlas [2006] NSWCA 32.

Comment: Justices lpp and Tobias agreed there was no specific test for deciding a
‘significant risk’. Judges have to base that determination on the specific facts of the case
before them.

Cook v Cook (1986) 162 CLR 376 - 04-11-2019 by casesummaries - Law Case Summaries -
https://lawcasesummaries.com Cook v Cook (1986) 162 CLR 376
https://lawcasesummaries.com/knowledge-base/cook-v-cook-1986-162-clr-376/ Facts The
Defendant, Margaret, was an inexperienced driver without even a learner’s permit when her
family member, Irene, (the Plaintiff) told her to drive her car. They began to drive together,
however the Defendant thought she was going to hit a parked car. She therefore sped up and
crashed into a stobie (telephone) pole. The Plaintiff sued. The Defendant argued her conduct
should only be measured against that of an experienced driver (rather than an average driver)
because the Plaintiff knew about her inexperience.

Issues What was the standard of care that the Defendant’s behaviour should be compared to?
Held The Court held that there is a “special class” of circumstances where the general
proposition of the ‘ordinary person’ is altered. This occurs where “special and extraordinary
facts transform the relationship between passenger and driver” - for example where a learner
driver is under instruction. In each case, it will be for the person asserting the existence of this
“special class” to prove it exists In this case, the Plaintiff knew the Defendant was inexperienced
and unlicensed, and encouraged her to drive anyway. This was one of those special classes.
Nonetheless, the Plaintiff’s decision to speed up when she saw the parked car was a breach of
the duty of care even for an inexperienced driver. They awarded damages to the Plaintiff but
reduced them by 70% for her contributory negligence.

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 Quotes The most that can be said is that the circumstances must be special and exceptional in
the sense that they so alter the ordinary relationship of driver and passenger that it would be
plainly unreasonable for the standard of the duty of care owed by the driver to the passenger
to be what could reasonably be expected of an experienced, skilled and careful driver. In these
circumstances, the appellant's known incompetence and inexperience as a driver was a
controlling element of the relationship of proximity between the parties. That special element
of the relationship took it out of the ordinary relationship between a driver and passenger into
a special category 1 / 2 Cook v Cook (1986) 162 CLR 376 - 04-11-2019 by casesummaries - Law
Case Summaries - https://lawcasesummaries.com of relationship between a driver who is
known to be quite unskilled and inexperienced and a passenger who has voluntarily undertaken
to supervise his or her driving efforts. The standard of the duty of care which arose from that
distinct relationship of proximity was that which could reasonably be expected of an
unqualified and inexperienced driver. _______________________________________________
Law case summary from www.lawcasesummaries.com

Jaensch v Coffey [1984] HCA 52 http://lawcasesummaries.com/knowledge-base/jaensch-v-

coffey-1984-hca-52/

Facts Coffey’s husband was seriously injured by the negligent driving of Jaensch After seeing
her husband in hospital and being told he probably wouldn’t make it, Coffey suffered a nervous
shock Issue Could she recover? Held It was more than reasonable foreseeability, proximity was
also relevant. Coffey satisfied this test The doctrine was extended beyond those who actually
see the event, to those who perceive its direct aftermath It is necessary to actually perceive the
aftermath, not just learn about it (to avoid a ‘shoot the messenger’ scenario)

Flying Fox Case

The case involved action to stop the killing of thousands of Spectacled Flying Foxes (Pteropus
conspicillatus) on a lychee farm in North Queensland using a large electric grid. It was brought
by a conservationist, Dr Carol Booth, after she visited the farm in late 2000 and found extensive
evidence of the killing.

Full case: http://envlaw.com.au/flying-fox-case/

Agar v Hyde [2003, Australia]

Facts-A rugby player attained a broken neck while playing rugby

Issue-Could the board of control owe a duty to protect the players of the game.

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Reasoning-No controlling relationship, and liability would interfere with autonomy of game

Decision-No liability

NO LIABILITY FOR MATERIALISATION OF INHERENT RISK*

Legal Directions

February 28, 2014

The New South Wales Court of Appeal has dismissed the appeal of a stroke victim who sought to claim
damages from a radiologist for failing to diagnose an aneurysm three years before she underwent an
operation which caused its rupture. Unanimously, the Court held that this rupture was the
materialisation of an ‘inherent risk’ that could not be avoided by the exercise of ‘reasonable care and
skill’, and accordingly there could be no liability attributed to the radiologist pursuant to s5I of the Civil
Liability Act 2002 (NSW).

Background
Christine Paul, the plaintiff, was diagnosed with a brain aneurysm in 2006. She subsequently decided to
undergo an operation to remove it with a view to avoiding the risk of a spontaneous rupture. During the
operation, however, this very risk materialised (without any failure to warn, or lack of care or skill on the
part of the operating surgeons) and Ms Paul suffered a stroke. She brought proceedings in the Supreme
Court of New South Wales against Dr Cook, a radiologist who had failed to diagnose the aneurysm three
years earlier following an angiogram (at which time it was the same size and shape as it was in 2006).
The doctor admitted he breached his duty of care to Ms Paul and damages of $1 million were agreed
between the parties. However, causation was in issue.

At first instance
It was argued on behalf of Ms Paul that, if the doctor had properly identified the aneurysm in 2003, she
would have undergone an operation to remove it earlier and, statistically, she would not have suffered
the rupture (as the likelihood of the risk materialising during the procedure was in the range of 1-2%).
Drawing upon s5I of the CLA, the doctor argued he could not be liable in negligence for the
materialisation of an inherent risk which could not be avoided by the exercise of reasonable care and
skill.

Justice Brereton rejected the interpretation of s5I advanced on behalf of the doctor and held that the
phrase ‘reasonable care and skill’ referred to that of the doctor, not ‘some subsequent intervenor’.
However, his Honour went on to dismiss Ms Paul’s claim on the basis that it was not appropriate for the
doctor’s liability to extend to her injuries, pursuant to s5D(1)(b) of the Civil Liability Act (CLA) (that is, the
‘scope of liability’ element of causation).

On appeal
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Ms Paul appealed Justice Brereton’s decision. The Court of Appeal comprising Justices Basten, Leeming
and Ward, unanimously dismissed the appeal, holding that causation had not been established. Their
Honours also found that, in the circumstances of this case, Justice Brereton’s construction of s5I was too
restricted. Indeed, their Honours considered that s5I was the preferable basis upon which to conclude
that the doctor could not be liable for Ms Paul’s harm.

Justices Basten and Ward agreed with Justice Leeming’s reasons in relation to the correct interpretation
and application of s5I in the circumstances. As a preliminary point the Court noted that the effect of
sections like s5I is to provide a complete answer to any claim for damages (whether it be in tort,
contract, or otherwise) arising out of a failure to exercise reasonable care and skill. The presence of the
phrase ‘as a result of’ in s5I(1), as distinct from ‘caused by’ or ‘arising from’ (which is seen elsewhere in
Part 1A), reveals that s5I deals with the broader, legal concept of liability and its connection with a
defendant’s conduct (rather than the causal connection between that conduct and a plaintiff’s harm).
That is, once it is established that the particular harm suffered by a plaintiff has arisen as a result of the
materialisation of an inherent risk (a risk that could not be avoided by the exercise of reasonable care
and skill), then there is no liability for that harm.

His Honour went on to address Justice Brereton’s restricted interpretation of ‘inherent risk’ to mean
something that could not have been avoided by Dr Cook’s reasonable care and skill. This was potentially
correct where there was a relationship between the act of negligence and the exposure to the inherent
risk, such as when a patient is harmed by the materialisation of an unavoidable risk from treatment
which the patient only underwent by reason of a negligent diagnosis. However, there was no such
relationship in this case. The risk that materialised in Ms Paul’s case could not have been avoided by
reasonable care on the part of the doctor – if Ms Paul chose to undergo surgery the risk that the
aneurysm would rupture was always present. Whether she chose to have the operation in 2003 or in
2006 (as was the case), the risk could not be avoided by reasonable care and skill. Accordingly, there was
no causal link between the doctor’s negligence and Ms Paul’s harm. The doctor could not be held liable.

Conclusion
While Justices Basten and Leeming confirmed that s5I would have no application where negligence
causes exposure to an inherent risk (in keeping with the common law, as exemplified by the decision of
the High Court of Australia in Mahony v Kruschich (Demolitions) Pty Ltd), their Honours declined to
consider how s5I would operate where negligence increases an inherent risk. It appears as though the
primary consideration will be both the existence, and proximity, of a relationship between the failure to
exercise reasonable care and skill and the exposure to an inherent risk.

This decision clarifies that, when looking to apply s5I in a causation argument, it is not necessary to
establish that the materialisation of an inherent risk could not have been avoided by reasonable care
and skill on the part of the defendant. To use the words of Justice Brereton, the relevant care and skill
may be that of a ‘subsequent intervenor’. As a result, s5I has the potential to be applied quite broadly.

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*Paul v Cooke [2013] NSWCA 311

Salomon’s Case [1897]

Moral: A company is separate from the person who controls it.

Aaron Salomon sold his sold-trader boot-making business to Salomon and Co. Ltd; a limited
company is which he was the major shareholder. Members of his family owned the remaining
shares. As part of the purchase price, Salomon received a debenture which made him a secured
creditor to his own company. Salomon continued to run the business. When the company went
into liquidation during the depression of the 1890s, the liquidator argued that Salomon’s
debenture should not be paid out before the unsecured creditors. Since Salomon controlled the
company, the company should be treated as his agent, and its debts were effectively Salomon’s
personal debts.

The House of Lords held: Salomon and the company were separate legal persons according to
the law. Even though Salomon controlled the company, the company was not his agent. The
company operated the business in its own right, and consequently, Salomon was not personally
liable for the company’s debts. He had the right to be paid ahead of the unsecured creditors.

Lee V Lee’s Air Farming Ltd [1961]

Moral: A company can employ its main shareholder and director.

Mr. Lee was employed to fly crop-duster planes in New Zealand by a company in which he was
a director and the controlling shareholder. When he was killed in a plane crash, the Worker’s
Compensation Board claimed that Lee has effectively been self-employed and refused to pay
compensation to his wife, Catherine.

The Privy Council held: Since Lee and the company were separate legal persons; he could have
a dual role as a director and an employee of his company. Therefore, his wife was entitled to
compensation. Lee V Lee’ Air Farming Ltd [1961] AC 12

Gilford Motor Co V Horne [1933]

Horne’s employment contract with Gilford Motor Co provided that he would not solicit (do
business) with any of their customers if he left their employment. Horne resigned and began
working for a rival company run by his wife. The court looked behind the veil and found that
Horne was its true controller. It granted an injunction to restrain Horne as the company was
competing with Gilford Motors.

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 Statewide Tobacco Services Ltd V Morley [1990] 8 ACLC 827

Mrs. Morley was the director of a family company run by her son. She took no part in the
management apart from signing the annual returns. When the company became insolvent, she
was made liable for its debts as she had indirectly approved the insolvent trading.

DFC of T Vs Clark [2003] 21 ACLC 1063

In 2003, the New South Wales Court of Appeal confirmed that a director, such as the wife of the
managing director of a family company, could not escape liability for insolvent trading although
she took no part in company affairs and relied on advice from her husband who was the active
director.

ASIC V. Plymin & Ord [2003] 21 ACLC 700

John Elliot, a former non-executive director of Water Wheels Pty Ltd, was liable for the
company’s insolvent trading. Elliott unsuccessfully argued he had relied on information
supplied to him by the managing director. Given his extensive experience as a director and
business person, it was not reasonable that he had relied on the skill and expertise of the
officers who ran the company. Elliot was disqualified from managing corporations for four
years, fined $15 000 and ordered to pay $1.43 million compensation.

ASIC V Rich (2003)

Civil proceedings were brought against the executive directors of One. Tel (Jodee Rich, Brad
Keeling and Mark Silbermann) for breach of the statutory duty of care and diligence under s 180
(1) of the Act. Proceedings were also bought against the non-executive chairman, John Greaves,
with ASIC arguing that Greave’s duties were greater than those of the other non-executive
directors.

In September 2004 ASIC reached an agreement with Greaves, and the court ordered that
Greaves be prohibited from managing a company for four years, pay compensation of $20
million to One. Tel and pay ASIC costs of $350 000. As part of the agreement, Greaves admitted
he failed to ensure that he and the board of One. Tel properly monitored management and
were aware of the true financial position of the company.

R V Williams [2005] NSWSC 315

One of the charges that resulted in a jail sentence for Ray Williams former head of HIH
Insurance Ltd, was that he had authorized the issue of a prospectus that contained a material
omission.

Rivkin’s Case (2004)

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Mr. Rivkin was found guilty of insider trading in relation to the purchase of 50 000 Qantas
shares by his company, Rivkin Investments. The jury found that Mr. Rivkin bought the shares
being told by Mr. McGowan (the CEO of Impulse) of a proposed merger between Impulse and
Qantas. McGowan warned Rivkin that he should not trade in Qantas shares as the information
was not available to the market, it was confidential. Rivkin was fined $30 000 and sentenced to
nine months’ periodic detention. He was also banned from managing companies for five years,
except with the permission of the court. Rivkin’s conviction and the sentence were both upheld
by the NSW Court of Criminal Appeal. R v Rivkin (2004) NSWSC 447

ASIC v Vizard [2005]

In 2000, when he was a director of Telstra, Steve Vizard used confidential information to buy
shares in three dot.com companies, in an attempt to gain an advantage for himself. ASIC
brought civil proceedings against him under s 183 (1). Vizard admitted his guilt and was
disqualified from managing companies for ten years, and ordered to pay pecuniary penalties of
$390 000. At that time, ASIC was criticized for its ‘soft’ treatment of Vizard and its decision not
to bring criminal proceedings under s 184 and/ or the insider trading prohibitions in the Act.
ASIC v Vizard [2005] FVA 1037

ASC v Fairline (1993)

The managing director was successfully prosecuted for failing to take reasonable steps to
ensure the company kept proper accounting records. The company was having problems in
changing from manual to computerized accounting system and a number of senior staff left the
accounts department. The director employed new accounting staff and outside consultants to
assist them put the accounts department in order. The Supreme Court of Tasmania held that
this action was not sufficient, and that the director should have taken more interest and further
action to resolve the accounting problems.

Budget Rent a Car Case (1977)

A business operator could not use the same name as a well- known car Rental Company even
though he had registered it as a business name.

In 1969 BM Auto Sales Pty Ltd (BM) registered the business name of Budget Rent A Car under
the Business Names Ordinance 1963 (NT) and began a car hire business in Darwin. BM had no
connection with the high –profile national car rental company (the Budget company) of the
same name. In fact, the Budget Company’s name and number had been listed in the Darwin
telephone directory before BM registered its business name. In 1971 the Budget Company
began operating in Darwn. In 1973 it sued BM for the tort of passing off.

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The High Court held that BM’s registered business name did not give it the right to pass itself
off as being associated with the well – known Budget Company. It was significant that the
Budget Company was well established and listed in the Darwin telephone directory before the
registration occurred. BM was prohibited by injunction from trading under the Budget name.
BM Auto Sales Pty Ltd v Budget Rent a Car System Ltd (1977) 51 ALJR 254

Additional Notes:

 A director will be liable if he or she fails to prevent the company incurring a debt when
there were reasonable grounds for suspecting the company is insolvent.
 Directors have a defence if they can prove they:
(i) Reasonably believed the company was solvent, or
(ii) Expected on the basis of information provided by a competent and reliable
person that the company was solvent,
(iii) Did not take part in management because of illness or some other good reason,
or
(iv) They took reasonable steps to prevent the company incurring the debt.

Differences amongst Small and Large Proprietary Companies

A company is a small proprietary company and has reduced reporting requirements, if it

satisfies at least two of the following at the end of its financial year:

 Gross operating revenue is less than $25 million;

 Consolidated gross assets are less than $12.5 million; and
 Group employees total less than 50 full time equivalent employees.

A public company:

 Need not have a share capital, so it may be a company limited by guarantee;

 Must have at least one member (with no upper limit) and at least three directors;
 Can raise funds from the public (subject to the disclosure provisions in the Act);
 May be listed on the stock exchange (not all public companies choose to be listed).

Duties of directors

Directors and other senior executives are in a fiduciary relationship with the company. This
means they are expected to act in the best interests of the company and owe a common law
duty of loyalty and good faith. This can be divided into four specific duties:

 The duty to act in the good faith (honesty) in the interests of the company;
 The duty to act for a proper purpose;

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  The duty to retain discretions;
 The duty to avoid conflict of interests;

Under the common law, directors also owe:

 The duty to care, skill and diligence.

The Corporations Act also imposes duties on directors and other officers, including the
company secretary and senior executives. To some extent, these duties overlap with the
common law duties.

Civil Penalty Orders

 Disqualification from management of companies, civil penalties up to $200,000 or

compensation to the company. The standard proof in a civil penalty action is ‘the
balance of probabilities’.
 Criminal Penalties
 If dishonesty is found to be a factor in an officer’s breach of any of the duties to act in
good faith, for a purpose and to misuse the officer’s position or information, then the
officer has committed an offence.

Rights of Preference Shareholders

 Right to a fixed dividend (dividend at a fixed percentage of the issue price of the shares);
 to be repaid their capital ahead of the ordinary shareholders on a winding up;
 only limited voting rights

However, there is no right to share in any surplus on a winding up.

Rights of Ordinary Shareholders

 right to vote at general meetings;

 receive a dividend after preference shareholders; and
 Repaid their capital on a winding up (after all other claimants have been paid).

Example of a Floating Charge

Racing motors Pty Ltd (RM) borrows $100 000 from Eversure Finance Ltd (EF) and the loan is
secured by a floating charge over the cars owned from time to time by RM. If RM defaults on
the interest payments or allows the total value of the stock to fall below a minimum value of
$150 000, the charge will ‘crystallise’ and ‘attach’ to all RM’s cars. EF runs the risk that the
combined value of the vehicles at the time of the crystallization may be worth far less than
$100 000.

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 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

Contract Law – Australia – Common Mistake – Performance – Mistake – Subject Matter –

Damages

Facts-The complainant, McRae, won a tender from the defendants, Commonwealth Disposals
Commission, to retrieve an oil tanker that was on Jourmaund Reef near Samarai. However,
when the complainant went to the location, after laying out significant expenses for the
salvage, they discovered that in fact there was no oil tanker. The Commonwealth Disposals
Commission had only heard that there was an oil tanker there from gossip. They later learned
that it was not.

Issues-At first instance, it was held that there was no contract between the complainant and
the defendant. However, this decision was appealed by McRae. The complainant sought
damages from the defendant for breach of contract, fraudulent misrepresentation of the oil
tanker and for damages since they did not disclose the information about the oil tanker when it
came to their knowledge that it did not exist. The defendants argued that they had no liability
to pay damages for breach of contract, as it was void by common mistake that the oil tanker did
not exist. The issue in this case was whether the complainant could recover damages and if the
contract could be void by a common mistake.

Held-It was held that the complainant was entitled for damages from the defendant. The
contract was not null and void because of a common mistake. A contract did exist between the
complainant and the defendant and since this oil tanker did not exist, this was a breach of
contract. Thus, the complainant was entitled to damages for breach of contract and for the
purchase price amount of the oil tanker, as well as the expenses paid out for the salvage
operation.

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