(eBook PDF) Business & Company Law

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JAME S | CHAPPLE | WONG | BAUMFIELD | COPP | CUNNINGHAM | HARPUR

BUSINESS AND
COMPANY LAW 1 S T E DI T ION
 13.3 Dividends 447 Company secretary 478
Entitlement to dividends 447 Senior managers 479
Payment of dividends 448 15.3 Roles and powers of directors and
Consequence of improper dividend payment 448 members 480
Taxation of dividends 449 Directors 481
Summary 449 Members’ powers over directors 486
Key terms 450 15.4 Appointment, remuneration, resignation,
Acknowledgements 451 removal 487
Appointment of a director 487
CHAPTER 14 Directors’ remuneration 489
Members’ remedies 452 Resignation and vacation of office 491
Removal of directors 491
Introduction 454
Summary 492
14.1 Members’ rights and remedies 454 Key terms 493
Statutory and contractual rights 454 Acknowledgements 494
The balance of majority and minority members’
rights 455 CHAPTER 16
Remedies 455
14.2 The oppression remedy — s 232 457
Directors’ and officers’
Applicants for oppression remedy 458 duties A 495
Circumstances for oppression remedy 458 Introduction 497
Tests for oppression 458 16.1 Officers’ duties 497
Orders available as a result of oppression 461 Duties under common law and equity 499
14.3 The winding up remedy — s 461 462 Duties under the Corporations Act 500
14.4 The statutory injunction — s 1324 464 The interaction of general law and statutory
14.5 The statutory derivative action — Part duties 500
2F.1A 465 Penalties and remedies 501
Parties that can seek to bring a statutory 16.2 The duty of care and diligence 502
derivative action 466 Who owes the duty of care and diligence? 502
Proceedings will be on behalf of the To whom is the duty of care and diligence
company 467 owed? 503
When the court will grant leave 467 Determining whether a director has breached
14.6 Common law remedies for breach of their duty of care 503
personal membership rights 468 The consequences of breaching the duty 504
A member’s personal rights 468 16.3 The standard of care 504
General law remedies 468 The minimum standards of care 504
Summary 469 The standards of care by types of officers 506
Key terms 470 16.4 Diligence 508
Acknowledgements 470 Attending board meetings 508
Delegation 508
CHAPTER 15 16.5 Defences against a breach of duty of
Corporate governance and care and diligence 510
The business judgement rule in statute 511
company management 471 16.6 The duty to prevent insolvent trading 513
Introduction 472 The duty to prevent insolvent trading under s 588G
15.1 Corporate governance 473 of the Corporations Act 513
Corporate governance and company When is a debt incurred? 514
management 474 Other requirements as to incurring debts 516
Agency theory 475 The time at which a company becomes
15.2 Officers 476 insolvent 516
Directors 477 Reasonable grounds for suspecting insolvency 517

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FMPrelims vii 31 August 2016 1:21 PM

 Defences to a breach of s 588G 517 Impact of appointment 548
Penalties and remedies 518 Powers of the receiver 548
Summary 518 Duties of the receiver 549
Key terms 519 Liabilities of the receiver 550
Acknowledgements 519 Unsecured creditors 550
Termination of receivership 550
CHAPTER 17
18.2 Voluntary administration 550
Directors’ and officers’ duties Aims of voluntary administration 551
Options for a company in administration 551
B 520 Appointment of an administrator 552
Introduction 521 Role of the administrator 553
17.1 Good faith 521 Process of voluntary administration 553
17.2 Best interests of the company 523 Effects of administration 554
Members’ interests — individuals, classes and Liability of a voluntary administrator 554
as a whole 524
The creditors’ decision 554
Creditors’ interests 525
Deed of company arrangement 555
Employees’ interests 525
Summary 556
Corporate groups’ and nominee officers’ Key terms 556
interests 526 Acknowledgements 557
17.3 Proper purpose 527
Determining a breach of the duty of proper
purpose 528 CHAPTER 19
Defences for breach of proper purpose 529 Insolvency 558
17.4 Conflict of interest under general law 529
Introduction 559
When a conflict may arise 530
19.1 Liquidation or winding up 560
Defences 534
Voluntary winding up 560
17.5 Statutory provisions relating to conflict
Compulsory winding up 562
of interest 535
19.2 Insolvency 563
Related party transactions 536
The test for insolvency 563
Defences 537
19.3 The liquidator 565
17.6 Remedies and penalties for breach of
duty 539 Duties and functions of a liquidator 566
Summary of consequences for breaches of 19.4 The assets and compensation a liquidator
directors’ duties 540 can recover 567
Summary 541 Voidable antecedent transactions 567
Key terms 541 Types of antecedent voidable transactions 568
Acknowledgements 542 Defences for creditors 572
Orders in relation to voidable transactions 572
CHAPTER 18 19.5 Final distributions and deregistration 573
Distribution to creditors 573
Receivership and Deregistration of company 574
administration 543 Summary 574
Introduction 544 Key terms 574
18.1 Receivership 545 Acknowledgements 575
The receiver 547
Appointment of the receiver 547 Appendix 576

viii contents

FMPrelims viii 31 August 2016 1:21 PM

Preface
As we publish this title, teaching and learning is going through a period of unprecedented change. Emer-
gent digital and educational technologies have made it possible to develop interactive resources and
employ flexible online delivery methods that simply weren’t possible ten years ago.
Wiley’s new Business and Company Law resource is a landmark departure from the traditional print
text model. Designed and delivered as an e-text, students using Business and Company Law will benefit
from the superior educational design, multimodal presentation of materials and interactive functionality
that the digital format offers.
In this context, the Business and Company Law e-text integrates the following media and interactive
elements into the narrative content of each chapter.
•• Author introduction videos open each chapter on business law to familiarise and engage students with
the topic at hand.
•• Animated interactive cases (based on a fictitious company, Racing Parts) in the company law chapters
allow students to apply the principles explained in the narrative to a range of scenarios.
•• Video interviews with legal practitioners provide insights into real world cases, legal processes and
contemporary issues.
•• Video interviews with leading company law academics explain in-depth of some of the more ‘technical’
points of company law, in particular as it relates to business.
•• News media of topical company law stories illustrates applications of corporate law in the contemporary
business environment.
•• Narrated animations step through the more complex legal concepts and processes.
•• Interactive revision sets, at the end of each section, help students to understand their strengths and
weaknesses and provide remediation to correct areas of misunderstanding.
Business and Company Law takes students on an interactive and engaging journey through the key
topics in the typical one-semester Business/Company Law course.

Preface ix
about the authors
Nickolas James
Professor Nick James is the Executive Dean of the Faculty of Law at Bond University. He is a former
commercial lawyer, and has been practising as an academic since 1996. His areas of teaching expertise
include business and commercial law, ‘law in society’ and legal theory, company law, the law of suc-
cession and property law. He has won numerous awards for his teaching including a National Citation
for Outstanding Contribution to Student Learning, and he is the author of three texts: Business Law,
Critical Legal Thinking and The New Lawyer (with Rachael Field). He has written numerous journal
articles, book chapters and conference papers in the areas of legal education, critical thinking and critical
legal theory. Professor James is the Director of the Centre for Professional Legal Education, Editor-in-
Chief of the Legal Education Review and a member of the Executive Committee of the Australasian Law
Teachers Association (ALTA).
Ellie Chapple
Professor Ellie Chapple, LLB, LLM, SJD, is a Professor in the QUT Business School at the ­Queensland
University of Technology, where she is research leader in the area of forensic accounting. During her
academic career at several Australian universities, she has consistently taught corporations law, and
related areas such as corporate governance and securities law, to undergraduate and postgraduate law
and business students. Ellie’s research interests relate to the regulation and compliance of corporate
reporting and disclosure.
Alex Wong
Alex Wong, BCom, LLB, MTax, CA and CFP Registered Tax Agent, Registered SMSF auditor, is a Ses-
sional Lecturer in tax law and company law at RMIT, where he has acted as the course coordinator for
company law. In addition, Alex teaches tax law and company law at the postgraduate and undergraduate
level at other universities. Alex also runs a tax, strategic and financial services practice in Melbourne. He
has over 30 years’ professional work experience and 20 years’ experience teaching at universities. Alex
is strongly interested in bridging the theoretical world of corporate and tax law to the practical appli-
cations of those principles, and ensuring that business students understand how to apply these principles
in the real world as accountants and business advisers.
Richard Baumfield
Richard Baumfield, BBus, LLB, LLM, is an Adjunct Assistant Professor at Bond University. He teaches
primarily in the area of corporate law, teaching to both law students and commerce students. Richard
was previously a partner with the New York law firm of Andrews Kurth where he specialised in cor-
porate restructuring. In addition to his work at Bond University, Richard sits on a number of company
boards including the board of Intrepid Mines Ltd — an ASX listed mining company.
Richard Copp
Richard Copp practised as a barrister for 15 years before joining Griffith Business School to spend more
time with his family and ‘give something back’ to students. In practice, Richard specialised in com-
mercial law; corporate insolvency (including company liquidations, voluntary administrations, receiver-
ships and schemes of arrangement); trade practices and competition law; and income tax (including tax
planning for the GST). His other legal interests include trusts, banking/finance and superannuation law,
administrative- and government-related law, and mediation/arbitration. Richard was admitted to practise
as a barrister after a career in commercial practice, mainly as a consultant economist, corporate adviser
and banker. In those roles, he had extensive experience as an expert witness in court proceedings. Richard
has advised and acted for a wide range of companies, including some of Australia’s largest publicly

x about the authors

listed corporations, federal and state government agencies, banks, merchant banks, and accounting firms.
Richard has also lectured part-time in finance, banking, economics and law for a number of years at
various Australian universities. He has degrees in Economics and Commerce (with Honours), a Masters
degree in Law, and a PhD in restrictive trade practices. Richard is admitted to practise in the Supreme
Court, Federal Court and High Court. He frequently lectures at university and professional seminars.
Robert Cunningham
Robert Cunningham, BBus, LLB (Hons), LLM (Hons), GradCertLP, PhD (ANU), is an Associate Pro-
fessor based at Curtin Law School in Perth where he teaches corporate governance, corporations law and
professional responsibility. His research efforts concentrate on international trade law, intellectual property
rights and corporate accountability. Robert is particularly interested in the regulation of information. Beyond
academia, he is also a Barrister-at-Law specialising in Federal Court matters and public interest advocacy.
Paul Harpur
Paul Harpur is a Senior Lecturer at the TC Beirne School of Law at the University of Queensland. He
has taught corporate law to students from the school of law and the school of accounting for an extended
period of time. His PhD concerned corporate social responsibility, and since then Paul has had a research
focus on how laws can regulate corporate conduct, primarily in relation to labour rights and human
rights.

about the authors xi

 Part 1
Business law
1 Business and the law 2

2 The Australian legal system 32

3 Deliberately causing harm 77

4 Carelessly causing harm 116

5 Contract law: formation of the contract 154

6 Contract law: terms of the contract 191

7 Contract law: enforcement of the contract 224

8 Contract law: working with agents 256

9 Dealing with consumers 285

c01BusinessAndTheLaw 1 26 August 2016 2:51 PM

 chapter 1

Business and the law

L E ARN IN G OBJE CTIVE S

After studying this chapter, you will be able to:

1.1 explain the ways in which the law relates to business
1.2 define the word ‘law’, explain its purposes and understand why it keeps changing
1.3 understand the connection the law has to justice, ethics and politics.

c01BusinessAndTheLaw 2 26 August 2016 2:51 PM

 johnny and ash

[Johnny Bristol, 25 years old, scruffy and morose, sits by himself in a nearly empty bar nursing a beer.
He looks up when a young woman calls his name as she approaches from the other side of the bar:
Ashwina Redcliffe, smartly dressed and immaculately groomed.]
Ash — Johnny! Hey, Johnny!
Johnny — Hey, Ash.
Ash — [She sits down at the table, carefully placing her glass of white wine on a coaster, and looks at
Johnny.] Johnny Bristol, well, well, well. I haven’t seen you since high school. It’s been, what, seven
years? I heard you moved to New Zealand.
Johnny — I did. I’m back. I heard you went to law school.
Ash — I did. And now I’m a lawyer. Working for Gibson & Gaiman in the city. Loving it. And doing
quite well for myself, thanks. So what brings you back to town?
Johnny — Well, my dad got sick last year, and so I came back to help mum look after him and to set
up a business back here. You know The Lame Duck restaurant? Vegan restaurant over on Kerouac
Avenue? I own the place now.
Ash — Oh, I’m so sorry to hear about your dad. He’s a nice man. A friend of mine ate at The Lame
Duck just last week. She had the tofu burger I think.
Johnny — Yeah? What did she say about it?
Ash — She said it was awful, actually. Sorry! [They both laugh.] Apparently the organic cola was
wonderful though.
Johnny — That’s a relief. [He pauses.] Things really aren’t going that well. I’m having heaps of
problems just keeping the place running. I’m a good cook — well, I thought I was — but I’ve never
run a business before. I’ve got suppliers who don’t do what they say they are going to do, employees
who show up late if they show up at all, and a competitor who keeps stealing my recipes. My landlord
wants to sell the building, and I don’t have enough savings to move to another location.
Ash — Sounds like you need a friend to talk to. And a lawyer.
Johnny — Thanks. I definitely need a friend. A lawyer, I’m not so sure. What do my problems have to
do with the law?
Ash — Are you kidding? It’s all about the law! How can you possibly run a business without being
aware of the law? How can you play a game without knowing the rules? Here, let me get you another
beer, and I’ll tell you a thing or two about the law.
Johnny — Thanks, Ash, I guess you are right. I have always been more concerned with doing what
is ‘right’ than with doing what is ‘legal’. I don’t know much about the law at all. Maybe that’s the
problem. And the tofu burger, of course.
Ash — Of course! Actually, you might be surprised how much you already know about the law  .  .  .

Chapter Problem

As a business owner, Johnny is confronted by a number of challenges. As you make your way through
this chapter, consider the reasons why a better understanding of business law might be helpful for
Johnny. With which specific areas of the law should Johnny become more familiar? Is Johnny correct in
thinking that questions about ‘what is right’ and questions about ‘what is legal’ are unrelated?

Introduction
Ash is right. You can’t play a game without knowing and understanding the rules, and you can’t par-
ticipate in business — whether as a business owner, manager, professional adviser or employee —
without knowing and understanding the law. In this chapter we consider the law in a very general sense.

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 We explain the relevance of the law to business, what makes the law different from other types of rules
and regulation, why it is important that the law keeps changing, and what the law has to do with ethics,
justice and politics.
After working through this chapter you will better appreciate the importance of the law and of being
aware of your legal environment.

1.1 Law and the business person

learning objective 1.1 Explain the ways in which the law relates to business.
Johnny may never have studied law or read a legal textbook, but there is little doubt that he already
knows something about the law. He has encountered the law many times: in his personal life, in his busi-
ness activities, in the media and in popular culture.

Law and personal life

There are very few aspects of Johnny’s personal life that are not regulated by law, either directly
or indirectly. His house was purchased in compliance with property laws and built in compliance
with building laws. When he makes a cup of coffee for his breakfast, he has the coffee in his cup-
board because he has entered into a contract for the sale of goods with his local supermarket, and
he is able to access the electricity that powers the kettle because he has an ongoing contract with the
power company. Driving to work in his car — the loan for which is regulated by consumer credit
law — he is subject not only to statutory traffic laws but also the general duty to take care imposed
by tort law. The music that he listens to on his smartphone is protected from unauthorised copying
by intellectual property law, and consumer protection law regulates the advertisements he sees on
television in the evening.
Johnny already knows that different laws impact different aspects of his life in different ways. Some
laws give him rights that he can enforce against others, and some laws impose obligations upon him to
do or refrain from doing certain things. When some laws are broken (e.g. when a contract is breached)
the person harmed may have the right to commence litigation against (or ‘sue’) the person who caused
the harm for compensation. There are other laws (e.g. traffic laws) that, if broken, will lead to the police
or some other government authority prosecuting the law breaker with a view to punishing them in some
way.

ACTIVITY — Reflect

List five ways that the law has impacted on your own life in the past 24 hours.

Law and business

As a business owner, Johnny knows that he must pay income tax on his business earnings to the Federal
government. He knows that as an employer he must pay payroll tax to the State government. He knows
that as an owner of land he must pay rates to the local authority. Johnny is also aware of the many
other Federal, State and local government laws he must comply with as a business owner: laws about
licensing, advertising, industrial relations, workplace health and safety, and so on. He therefore knows
that there are three levels of government in Australia:
•• a Federal government that regulates national matters,
•• State and Territory governments that regulate State and Territory matters, and
•• local governments that regulate local matters.
He knows that each government makes its own laws and has its own requirements.

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 Legal regulation sometimes seems to be more of a hindrance than a help to people engaging in busi-
ness activities, but the law serves a very important purpose. Business would not be possible without a
system of legal regulation. It is the law that ensures that promises are kept and agreements are enforce-
able. It is the law that tells business people what they can and cannot do in marketing and delivering
their goods and services. And it is the law that enables business people to resolve disputes with cus-
tomers, suppliers and competitors.

ACTIVITY — Reflect

List three reasons why an understanding of the law is essential for the successful business person.

Law in the media

Johnny hears something new about the law every day. Many of the news stories Johnny sees on the
television and reads about in the newspaper and online are about the law or at least related to law.
The government’s latest industrial relations reforms, the jailing of a prominent politician, and the
investigation of an assault outside a nightclub all involve the legal system in some way. Johnny has
seen many examples of politicians talking about new legislation either positively (if the politicians
are members of the government) or negatively (if they are members of the opposition), lawyers and
parties to litigation talking about controversial case law, police talking about criminal prosecutions,
and a variety of bureaucrats and other people talking about legal problems, legal rules, legal investi-
gations and legal solutions.
After watching the news and current affairs programs Johnny knows that many people and organ-
isations form a legal system: politicians, judges, lawyers, police, bureaucrats and citizens; and parlia-
ments, courts, the police force, government departments and corporations.

ACTIVITY — Research

Go to a news website such as www.news.com.au or www.afr.com.au and make a list of today’s

law-related items.

Law in popular culture

It seems to Johnny that any night of the week he can switch on the television and watch stories about
lawyers, law firms, prosecutors and police investigators, and the dramas associated with the practice of
law and with police investigation: Suits, The Good Wife, Law & Order, Rake. And an enormous number
of popular movies feature a lawyer as the principal character, or a trial as the central dramatic device,
including Australian films such as The Castle, US films such as The Lincoln Lawyer, Erin Brockovich
and The Firm, and Chinese films such as Lawyer, Lawyer.
After seeing the law portrayed in films and on television, Johnny knows that the law is much more
than a system of abstract rules and principles. It is something that manifests in and shapes the lives of
real people.

Activit y — Research and reflect

Watch an episode of a television program that is related to the law in some way. In what ways are the
law, the legal system or lawyers referred to, either directly or indirectly? Do you think the way the law is
portrayed is realistic?

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 Revision questions
Before proceeding, ensure that you can answer the following questions.
1.1 In what ways does the law impact upon your personal life?
1.2 In what ways does the law impact upon business activities?
1.3 What can the news and other media stories tell you about the law?
1.4 What can popular culture tell you about the law?

1.2 The nature of law

learning objective 1.2 Define the word ‘law’, explain its purposes and understand why it keeps
changing.
Johnny already knows something about the law. But he is still not sure he understands the difference
between law and other kinds of rules, why knowing about the law is so important, or why the law, appar-
ently, keeps needing to be changed.

Defining law
The question ‘What is the law?’ is much harder to answer than one might think. It is a question that
legal theorists and philosophers have been debating for hundreds of years, and there is relatively little
consensus.
Here are just a few of the many possible definitions and descriptions of law.
•• Law is a system of enforceable rules governing social relations and legislated by a political system.
(Stanford Encyclopaedia of Philosophy)
•• Law is the essential foundation of stability and order both within societies and in international
relations. (J William Fullbright)
•• Law: an ordinance of reason for the common good, made by him who has care of the community.
(Saint Thomas Aquinas)
•• The law is but words and paper without the hands and swords of men. (James Harrington)
•• Law and order exist for the purpose of establishing justice, and   .  
.  
.  
when they fail to do this
purpose they become dangerously structured dams that block the flow of social progress. (Martin
Luther King, Jr)
•• In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets
and steal loaves of bread. (Anatole France)
•• The law is an ass, an idiot  .  .  .  (Charles Dickens)
•• I am the law! (Judge Dredd)
There is a distinction between ‘a law’ and ‘the law’: you would use the term ‘a law’ to
refer to a particular legal rule, and you would use the term ‘the law’ to refer to the legal system
generally.
A simple and practical definition of the law is as follows: the law is a system of rules made by the
state and enforceable by prosecution or litigation. The corresponding definition of business law is a
system of rules regulating businesses and business activities made by the state and enforceable by pros-
ecution or litigation.
These definitions disregard questions of justice, ethics and politics, and focus upon what
law is, without considering whether it is fair or right and without considering the pol-
itical origins and implications of law. We consider the relationship between law, justice,
ethics and politics in detail below. For now, we examine each of the elements of our simple definition
in turn.

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 A system of rules
Most people who attempt to define law will use the word ‘rule’ somewhere in their definition. A law is a
type of rule. A rule is a statement of behavioural expectation; it tells people how they should or should not
behave. There may or may not be negative consequences that flow from failing to comply with the rule.
There are of course many different types of rule, including:
•• the rules of a game, e.g. the rules of poker or cricket,
•• the rules of an organisation, e.g. the membership rules of a football association or the internal gover-
nance rules of a corporation,
•• moral rules, e.g. the rule that you should not tell lies,
•• social rules, e.g. the rule that you should say ‘please’ when asking for something,
•• mathematical rules, e.g. the rules regulating multiplication and division, and
•• traffic rules, e.g. the rule that you should drive on the left-hand side of the road.
Not all of these rules are laws. Traffic rules can be categorised as laws, but the rules of cricket cannot.
The difference between legal rules (i.e. laws) and non-legal rules is not that only legal rules incur pen-
alties; there are penalties incurred if you breach the rules of a game or of an organisation, and even the
disapproval that follows from a breach of a social or moral rule can be seen as a type of penalty. The
most appropriate way to distinguish between a legal rule and a non-legal rule is to consider the source
of the rule.

Made by the state

Legal rules are made by the state. Rules made by persons or organisations other than the state cannot be
said to be laws.
The term ‘state’ is used throughout this text, and is a very common legal term. In lower case, the term
‘state’ refers to the government generally. If it starts with a capital letter, the term refers to a State within
a federation, e.g. New South Wales. In the context of our simple definition of law, the term has the
former meaning: a law is a rule made by the government. In the context of the Australian legal system, a
law is a rule made by either the legislature (the parliament) or the judiciary (the court system).
The words ‘state’ and ‘government’ are often used interchangeably, although they do not mean pre-
cisely the same thing. The word ‘government’ refers to the group of individuals and institutions charged
with constitutional authority to make, administer and interpret the law. The word ‘state’ can refer to
either the government or to the governed territory (e.g. the State or the nation) as an organised political
community.
Another term used in similar contexts is ‘sovereign’. A sovereign is a supreme ruler of a state. In a
traditional monarchy, the king or queen (or ‘monarch’) is the sovereign. In modern liberal democracies,
including constitutional monarchies such as Australia, it is the parliament that is seen as sovereign —
hence the term ‘parliamentary sovereignty’.

Enforceable by prosecution or litigation

Legal rules are backed by the threat of punishment or coercion: if a person does not obey a legal rule,
there will be consequences.
If the legal rule is a rule of criminal law, a person who contravenes the rule may be formally accused
by the state of having committed a criminal offence, a process known as prosecution. For example, if a
person contravenes the criminal law prohibiting assault by punching a stranger in the nose, they may be
charged and prosecuted, and if they are found guilty they will be subjected to a penalty such as a fine or
imprisonment.
If the legal rule is a rule of civil law, a person who contravenes the rule may be sued by the person
they have harmed, a process known as litigation. For example, if a person contravenes the law of con-
tract by failing to pay for a car that they have signed a contract to purchase, they may be sued by the
seller; if the seller ‘wins’ the trial, the person may be obliged to provide a remedy to the seller such as
the payment of monetary compensation.

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 LAW IN CONTEXT: Law and philosophy

Natural law versus legal positivism

Our definition of law as the set of rules made by the state and enforceable by prosecution or liti-
gation disregards what law ought to be and focuses upon what law is. As such it is a ‘positivist’
definition of law, and can be contrasted with the sorts of definitions offered by natural law theory.
Natural law theory and legal positivism are two of the major branches of the philosophy of law, or
jurisprudence.

Natural law theory

In seeking to describe the nature of law, some legal philosophers insist that there is an intimate and
necessary relationship between the law and a set of higher values. These higher values may be the
‘laws of God’, or they may be universal principles of morality and justice. This approach to defining law
is often referred to as natural law theory.
Advocates of a natural law approach insist that some things are objectively right or fair, that some
things are objectively wrong or unfair, and that the law should be made, administered and interpreted in
such a way that it corresponds with these objective standards. Some even go so far as to insist that if a
law made by government (positive law) is inconsistent with these objective standards (natural law), the
positive law does not have to be obeyed.
The concept of natural law was very important in the development of the English common law. In the
struggles between the parliament and the monarch, parliament often referred to the ‘fundamental laws
of England’ that were said to embody natural law principles since time immemorial and to set limits on
the power of the monarchy.
Today natural law theory is relied upon by those seeking to establish a system of universal moral
values according to which technically ‘legal’ wartime atrocities and other abuses of human rights can be
objectively criticised and condemned.

Legal positivism
Legal positivists insist that one should focus not upon what the law ought to be, but upon what the
law is. Consistency with universal standards of morality and justice — which may or may not exist
— is not necessary. The only question one needs to ask about the law is whether or not it is a legit-
imate law; that is, whether it has been made properly and in accordance with requirements of the
relevant constitution.
The practical difference between a natural law approach and a positivist approach can be illus-
trated using a simple example. Imagine that you are driving a car along a motorway at a speed of
120 kilometres per hour, which is 20 kilometres per hour in excess of the 100 kilometres per hour
speed limit. There are three cars in front of you driving in the same direction and at the same speed.
All four cars drive past a police officer operating a hand-held speed camera. The police officer ignores
the first three cars but pulls you over. When the police officer gives you a speeding ticket, you point
out the injustice of the situation. You argue that although it is true that you were speeding, it is not fair
that the other motorists will get away with something for which you are being punished. You argue
that therefore you should not be given a speeding ticket. You are taking a natural law position; you
are arguing that the law must be made and applied in accordance with universal principles of justice,
including the principle that the law should be applied equally to all. The police officer, however, will be
more likely to take a positivist approach and insist that since you have broken the law that limits the
speed at which you are permitted to drive to 100 kilometres an hour, you should be punished, and uni-
versal principles of justice have nothing to do with it.

ACTIVITY — Reflect

Search the internet for a picture of a statue of lady justice, an important symbol of law and the legal
system. What do you think is symbolised or represented by (a) the blindfold, (b) the scales, and
(c) the sword?

8 part 1 Business law

c01BusinessAndTheLaw 8 26 August 2016 2:51 PM

 The purpose of law
We have considered the definition of law. We now consider the purpose of law: What does law seek to
do? By understanding the wide range of possible uses to which laws are put, you will better appreciate
the importance of law.
In this section we explain six purposes of law (see figure 1.1).

Resolving disputes
Business lives and personal lives are frequently characterised by conflict and by differences of opinion.
A homeowner may not agree with their neighbour about the location of the boundary between their
properties. A businessperson may not agree with one of their business competitors about whether or not
it is appropriate for their advertising to refer to the competitor by name. Two motorists may disagree
about who is responsible for a motor vehicle accident.
The law provides a way for these disputes to be resolved. The parties to the dispute can refer to
the relevant legal rules directly and, if the rules are clear enough, resolve the dispute themselves. If
the application of the relevant rules to the dispute is not clear, the parties can seek legal advice. And
if the legal advisers cannot resolve the dispute, the parties can take the dispute to court and resolve
it by litigation.

... resolves
disputes

... prevents
... maintains
the misuse
social order
of power

Law

... stabilises ... reinforces

the community
economy values

... helps the

disadvantaged

figure 1.1 The purposes of law

Chapter 1 Business and the law 9

c01BusinessAndTheLaw 9 26 August 2016 2:51 PM

 Maintaining social order
Many people insist that laws are necessary to keep the peace and to prevent chaos and anarchy. They
insist that laws maintain social order, because without law, everybody could be in perpetual conflict with
each other. The philosopher Thomas Hobbes, for example, famously claimed that in the absence of law,
existence would be a ‘war of all against all’. The strong would oppress the weak, and the able would
oppress the less-abled. By establishing a clear set of standards with which everyone must comply, the
law ensures that order is maintained.
Reinforcing community values
The law is seen as necessary to preserve and enforce the community’s values. The members of any
given community generally believe certain things to be right and other things to be wrong, and certain
behaviours to be acceptable and other behaviours to be unacceptable. The purpose of law is to ensure
that those community values are applied equitably and respected by all members of the community. For
example, it is generally believed that businesses should behave honestly when dealing with consumers
and that they should not take advantage of their superior bargaining position to deprive consumers of
their rightful entitlements; therefore there are laws that oblige businesses to behave fairly and to refrain
from certain kinds of conduct, including behaving in a manner that is misleading or deceptive.
The nature of the relationship between law, values and ethics is considered in more detail below.
Helping the disadvantaged
The law can be seen as a mechanism for ensuring that resources and opportunities are distributed fairly within
a community. There are many within the community who for a variety of reasons — physical disability, intel-
lectual disability, poverty, age, youth, illiteracy — are unable to fend for themselves as well as others, and
the law is supposed to ensure that they are not disadvantaged. Tax laws, for example, seek to ensure that the
wealthier members of the community pay more tax than the less-wealthy. Welfare laws seek to ensure that the
disadvantaged are entitled to appropriate assistance. Anti-discrimination laws seek to prevent conduct that
unfairly disadvantages those who are ‘different’. Without such laws, the strong would take advantage of the
weak and the rich would take advantage of the poor, and the law therefore exists to ensure justice for all.
The nature of the relationship between law and justice is considered in more detail later in the chapter.
Stabilising the economy
Law plays an important role in maintaining the stability and growth of the economy. Changes to the law
almost always have economic consequences. An obvious example is tax law: an increase in the rate of
personal income tax will result in members of the community having less spending money, which will
have an impact on prices, inflation and interest rates. A less obvious example is a change in the laws
relating to civil liability: if the law makes it more difficult for victims to sue for compensation for per-
sonal injury, fewer compensation payouts will be awarded by the courts, which means that insurance
companies will be required to pay fewer claims, which means that insurance premiums will be lower,
which means that members of the community will have more spending money, and so on. The law is
frequently used by governments to ensure that the economy is functioning efficiently, and if there is a
problem with the economy the law is changed to address the problem. The economic impact of a law is
often one of the primary considerations in deciding whether or not it should be enacted.
The problem with such economic approaches to the law is that economic criteria — wealth maximis­
ation, cost reduction, market freedom and the like — are not the only criteria by which legal outcomes
can be judged. An undue emphasis upon economic considerations may not ensure that the legal system
benefits all members of the community appropriately or fairly.
The relationship between law and politics is considered in more detail later in this chapter.
Preventing the misuse of power
A consistent and transparent system of law ensures that the government cannot oppress members of the
community.

10 part 1 Business law

c01BusinessAndTheLaw 10 26 August 2016 2:51 PM

 Many countries, including Australia and other countries that identify as liberal democracies, seek to
comply with the rule of law. This is the principle that governmental authority must be exercised only in
accordance with written, publicly disclosed laws that have been adopted and are enforced in accordance
with established procedure. As Aristotle put it, ‘it is more proper that law should govern than any one
of its citizens’. A legal system that complies with the rule of law can be contrasted with a system where
power is exercised arbitrarily, for example, in authoritarian, totalitarian or anarchic states.
In a state that aspires to the rule of law, the government should not be able to exercise state power
arbitrarily. For example, the police should be able to detain someone only if they are explicitly author-
ised to do so by law; they should not be able to detain a person simply because someone in a position of
authority wants them detained.
According to one legal theorist,1 a legal system that complies with the rule of law will have at least
three important characteristics
1. The law will be applied equally to everyone, regardless of his or her social status, culture, religion or
political beliefs.
2. The courts will uphold the legal rights of the citizens, including the right to personal freedom.
3. No person will be punished other than for conduct that is expressly made illegal.
The rule of law is usually associated with a number of other important principles:
•• The doctrine of separation of powers, according to which there must be a clear separation between
those who make the law (the legislature), those who administer the law (the executive) and those who
interpret the law (the judiciary). This is described in more detail later in the chapter.
•• The principle that a person should not be tried more than once for a given crime (known as double
jeopardy).
•• The principle that a person who has been arrested must be told what crime they have been accused of,
and be given a fair trial.

LAW IN CONTEXT: Law in the media

Magna Carta at 800: we are still enjoying the freedoms won

Around 20 miles from central London, where modern-day government and democracy shape the lives of
citizens throughout the United Kingdom, the Thames meanders peacefully through nondescript English
countryside. This is just another part of the green and pleasant land that has come to define much of
these shores.
Except that there’s something rather different about this rural corner of England. These riverside fields
at Runnymede are reputed to be the setting for one of the most significant moments in UK democratic
and constitutional history. The National Trust labels it ‘the birthplace of modern democracy’, while an
impressive monument commemorates a ‘symbol of freedom under law’. It was here, of course, that the
Magna Carta is said to have been sealed on June 15  1215 under the title of the ‘Great Charter’.
Bad King John
The catalyst for Magna Carta was the tyrannical rule of King John and, in particular, his imposition of
arbitrary taxes upon the barons. The sealing of Magna Carta marked the first time that the notion that
an unelected sovereign should be restrained under law was officially recognised. From then on, the idea
that citizens should not be subjected to the arbitrary rule of a tyrannical monarch but instead be ruled
and governed upon foundations of accepted legal process and law had a legal foundation.
This was, in essence, an evolution of the Aristotelian idea of the supremacy of law in preference to the
supremacy of man. Such a concept is today known as the rule of law and Magna Carta is widely
accepted as being the birth of such rule in the UK constitution. So, a big moment.
Of course, understandings of the rule of law have altered and developed from that determined by
King John’s subjection. Theorists and academics have, over the centuries, debated and set out con-
trasting views as to what Magna Carta means in practice.

1 A V Dicey, Introduction to the Study of the Law of the Constitution (10th ed., Macmillan, 1959).

Chapter 1 Business and the law 11

c01BusinessAndTheLaw 11 26 August 2016 2:51 PM

 Adherence to the rule of law is now believed to demand more than due legal process in preference to
arbitrary rule. It now (for example) demands the equal subjection of all people — whatever their rank or
position — to the ordinary law of the land; the appreciation and protection of individual rights and lib-
erties and the ultimate ability of all citizens to be able to conduct themselves freely in a system guided
by law and legal principle.
Modern Magna Carta
To say that the modern UK constitution is one that adheres to the basic principles of the rule of law is
to state the obvious.
That said, the UK constitutional system is markedly different from that which prevailed in the early
13th century. Monarchical legal power is virtually, if not completely, non-existent. Legislative and exec-
utive functions are in a sense fused through an institution built upon democracy and universal adult suf-
frage. The needs of citizens are fundamentally more diverse and complex than they were 800 years ago.
Consequently, the system involves a great deal more discretionary authority than traditional rule of
law theorists might find acceptable. As well as this, competing interests and concerns of the state often
demand difficult balances and compromises to be struck between pressing political matters and con-
cerns on the one hand, and individual liberties and core values of due process on the other. Even these
occurrences are carefully regulated and debated as part of a constitutional system that, while highly
peculiar, is adaptable and flexible to the constantly shifting needs and concerns of society.
The core values set out by the Magna Carta, therefore — due legal process over arbitrary power and
the freedom to act within a system guided by legal principle — are still very much at the heart of our
constitution, even if that system has evolved and changed beyond all recognition.
Over the centuries most of the Great Charter’s clauses have been repealed. Only three of the original
63 clauses remain in force: those providing for the freedom of the Church of England; the protection of
the liberties and free customs of the City of London; and the protection of individuals from imprisonment
or punishment without due process.
But the legacy of Magna Carta runs much deeper. The establishment of the rule of law at Runnymede
800 years ago went on to inspire and shape the development of the UK constitution and, indeed, the
constitutions of democratic systems the world over.
Source: John Stanton, 15 June 2015, http://theconversation.com/magna-carta-at-800-we-are-still-
enjoying-the-freedoms-won-41928.

12 part 1 Business law

c01BusinessAndTheLaw 12 26 August 2016 2:51 PM

Another random document with
no related content on Scribd:
 Ten minutes later the anchor was weighed, and they were
steaming out towards the breakwater and the open sea.
Meanwhile Ella and Clarence had engaged a small, swift boat to
row them across to the foot of Mount Edgecumbe Park; and climbing
at a great pace up the steep road that skirts the walls, they got into
the field below Maker Church to get a last glimpse of the yacht. They
were in time to see clearly against the blue of sea and sky the bright-
hued pavilion with its curtains thrown back, and a group of scarcely
distinguishable figures underneath.
“Yes—yes, I can see them—I can see them, George and Nouna
and Sundran, too!” said Clarence excitedly.
Ella was shorter-sighted, stamped her foot with impatience
because she could not make them out, and was fain to be content
with watching the yacht until it was a mere speck. At last she could
scarcely see it, for her eyes grew dim with rising tears. Clarence had
now time to feel angrily jealous of her interest in the vessel.
“Poor little girl! Poor little Nouna!” she said at last. “How white and
worn she looks still, so different from the brilliant little creature who
came to us at Maple Lodge!”
“Perhaps she will die and leave him free,” said Clarence rather
bitterly.
But Ella’s expression changed to one of sincerest anxiety.
“Oh, no, indeed I hope she won’t! It would break his heart!” she
said.
“I thought you considered her such an inappropriate wife for him?”
Ella reddened. She had thought so once, and she thought so no
longer; but when and how her thoughts and feelings on the subject
had changed, she hardly knew.
“It is very difficult to judge accurately in such matters. You see it’s
impossible to deny that they’re passionately fond of each other, and
you mustn’t judge of the chances of a marriage by the way it came
about, you know.”
“No,” said Clarence, interested, “marriage is an odd thing.”
“Well,” said Ella brusquely, “we must be getting back now.”
“Won’t you wait till the yacht’s out of sight?”
Ella stopped and looked out to sea again, but she dug the end of
her sunshade into the ground with nervous impatience.
 “I’m so sorry it’s all over; we’ve had such a jolly time getting it all
ready, haven’t we?” said he sentimentally.
“Oh, yes, well enough,” she answered rather crossly, feeling
herself an unpleasant void at the heart which she feared might lead
to some foolish exhibition of weakness.
“It was an interest in life, wasn’t it?”
“Oh, yes, but there are plenty more left.”
“For you, yes, because you’re so good.”
“Nonsense, I’m no better than you might be if you liked. It was
your money that did most of it, remember. I assure you I don’t forget
the obligation.”
“Now, Ella, don’t be ridiculous. What do I care about the miserable
money?”
“You’d care a great deal, if you were wise. A rich man who makes
himself comparatively poor by the good things he does with his
money is a fine fellow.”
Clarence cleared his throat two or three times, and began to shake
violently.
“Do you—do you think, Ella,” he began at last huskily, “that you’d
ever—care to—care to—make a fine fellow—of me?”
Ella turned sharply about and faced him.
“Can’t you do it for yourself?” she asked loftily.
Clarence shook his head.
“Now you know I can’t,” he pleaded gently. Then, as she made no
answer, he looked out to sea again, and saw that the Scheherazade
was dwindling to a little grey point on the horizon. “Now I’ll give you
till the yacht is out of sight to make up your mind,” said he.
Then they both looked at the vanishing speck. The moments
passed, and neither spoke, though they could hear and almost feel
the beating of each other’s heart, and though each felt the silence to
be desperately disconcerting.
“It’s gone!” said he.
“No, it isn’t!” cried she.
Both were growing intensely excited. Ella opened her eyes wider
and wider, and strained them to the utmost. Clarence tried to speak,
but she stopped him by thrusting out her hand right in front of him,
holding her breath. He looked down at it for a couple of seconds, and
then ventured to take it very gently in his right hand, and to put his
left on her shoulder. When he had remained in this position for a few
moments, she drew a long breath, and blinked her eyes violently.
“Don’t cry,” said Clarence soothingly, and he stooped and kissed
her.
“I haven’t answered you,” she objected, raising her shoulder
pettishly.
“Never mind that now. Let me comfort you, and you shall answer
me by and by.”
But Ella still looked persistently out to sea.
“The yacht’s quite gone now,” she said in a disconsolate voice,
“and with it your twenty thousand pounds. I suppose, from a strictly
business point of view, I owe you some compensation.”
“Well, twenty thou is twenty thou,” said Clarence, whose spirits
were rising.
Ella raised her hand to her chin reflectively, a little beam of
mischief coming into her eyes.
“On the whole,” she said at last musingly, making no further
objection to the encroachments of her companion’s arm,
“considering that I’m the ugly duckling of the family, perhaps I might
have made a worse bargain! And to tell you the truth, Clarence,” she
added presently in a gentler voice, with a touch of shyness, when he
had made her seal the contract with a kiss for each thousand, “if you
had gone your way and I had gone mine after the way you behaved
over that yacht, I—I should have missed you awfully!”
The sun was growing hot over the land and over the sea, and a
dim white haze seemed to soften the line between blue sky and blue
ocean, as they stood still side by side under the tower of old Maker
Church, savouring of the strange sweetness of having crowned an
old romance and laid the foundation of a new one with the fitting up
of the yacht Scheherazade.

Away over the quiet sea the little yacht steamed, the red-gold
evening sunlight bathing her decks and cresting with jewels each tiny
wave in her track. Under the silken canopy of the little pavilion
George was still sitting, with Nouna curled up asleep by his side;
while the freshening breeze, which rustled in the heavily fringed
curtains, blew straight in his face, bringing health and hope with its
eager kiss, and sweeping away like noxious vapours the dark
memories of the bygone winter. Ambition was stirring again within
him, and a craving for hard work, that his faults and follies in the past
might be atoned for by worthy achievement in the future. Lost in
thought, he had for a moment forgotten the present, when a slight
movement of her right arm, which lay across his own, brought his
sleeping wife again to his recollection. Bending down with a softened
expression in his eyes, he looked long at the tiny face, the sweeping
black eye-lashes, and the full red lips, the mutinous curves of which
gave him a warning he scarcely needed that, when once the
depression of weak health was past, it might still need all his love for
her and all her love for him to keep the little wilful creature within the
due bounds of dignified matronhood. The “semblance of a soul,” as
Rahas called it, had indeed peeped forth in her, and George
Lauriston’s belief that “the influence of an honest man’s love was
stronger than that of any mesmerist who ever hid pins,” had been
amply justified; but Nouna was not, and never would be, the
harmless domestic creature, absorbed in household duties, whom a
husband can neglect or ignore with impunity. Such as she was,
however, George was more than content that she should be, and the
wavering young heart which had turned to him in the dark days he
was determined by every loving and wise means to keep true to him
in the brighter time.
And so, with good promise of a fair future, the sun went down in a
golden haze on the calm sea, as the yacht still sped on for the warm
lands of orange and palm.

THE END.
 TRANSCRIBER’S NOTES
Florence Warden was the pseudonym of Florence Alice (Price)
James.
The Ward & Downey edition (3 vol., London, 1887) was referenced
for most of the changes listed below.
Minor spelling inconsistencies (e.g. armchair/arm-chair, lattice-
work/lattice work, etc.) have been preserved.

Alterations to the text:

Punctuation: missing periods, quotation mark pairings/nestings,
etc.
Italicize two incidents of “fiacre” to maintain consistency.
[Chapter VI]
Change “At last a board creeked in the hall outside” to creaked.
[Chapter VII]
“of which her vegetabe nature… began to describle to her visitor”
to vegetable and describe, respectively.
[Chapter X]
“Miss Nouna Weston to our office a quickly as possible on receipt”
to as.
[Chapter XI]
“and was familar with every phase of fast life” to familiar.
[Chapter XII]
“pang of yearning towards the sincere and oteadfast old friend” to
steadfast.
[Chapter XIV]
“at last she scarcely gave more, …, then an occasional nod” to
than.
(“You came here this morniug to see your husband drill?”) to
morning.
[Chapter XV]
 “little tyrant that ever capitivated a man’s senses and wormed”
captivated.
[Chapter XVI]
“and certainly done his utmost to persuade him to aecept it” to
accept.
[Chapter XVII]
“and the swarthy white robed Sundran, walking with noiseless” to
white-robed.
[Chapter XXI]
“first direction and then set about carrving out the second” to
carrying.
[Chapter XXII]
“rattled on Dicky, encourged by George’s lenity” to encouraged.
[Chapter XXIII]
“Even the highflown speech was like Nouna in her serious” to
high-flown.
“keep her from having her life ruined by any man’s pig
headedness” to pig-headedness.
[Chapter XXVI]
(“That if I would call in—some dy—bay myself—he would show) to
day—by.
“one of the widows was burst open with a crash” to windows.
[Chapter XXVII]
“quick turn of every head to the left, and and hoarse cry” delete
one and.
“by the time he got inside the gate way of the house” to gate-way.
[Chapter XXVIII]
“Chloris shrugged his shoulders, but she was impressed” to her.
[Chapter XXX]
“To his surprise, the Oriental seem quite relieved to find that” to
seemed.

[End of text]
 *** END OF THE PROJECT GUTENBERG EBOOK
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