Australian Commercial Law: Rule of Recognition and Remedies for Breach of Contract

This article discusses the Rule of Recognition in Australian Commercial Law and compares it to the legal system in the United Kingdom. It also explores the remedies available for breach of contract under common law principles and the Sale of Goods Act, 1954.

Running head: AUSTRALIAN COMMERCIAL LAW
AUSTRALIAN COMMERCIAL LAW
Name of the Student
Name of the Universities
Author Note

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Part A
Question 1 (b)
H.L.A Hart in his book the concept of law laid down what is known as the “Rule of
Recognition”. This rule states three requisites which need to be made for a rule to become a law.
These are1:
 To establish a test for a valid legal provision in the legal system.
 Confer validity to everything else that exists within the applicable legal system.
 To unify all laws prevailing within the applicable legal system.
This basically meant the use of a three tier system which identifies what constitutes law
in such a system. This would usually use a descending order structure that flows from Statutes to
Judicial precedents (common law) to customs.
The legal system in the United Kingdom closely follows the demarcations made in the
Rule of Recognition. This means the legal system embodies the three tier system. The United
Kingdom does not have a codified constitution. The British Constitution is a sum of legislations
that have been enacted over the years. These legislations define the relationship between
individuals and the state and the functioning of/the interaction between the executive, legislature
and judiciary2. This firstly lays down what would be a valid law in the legal system following the
various legislations thus the first criteria is met. The constitutional legislations provide for the
division of powers of the various wings and the subjects that maybe legislated on thereby
conferring validity on all laws that exist within the system. The constitution acts as a basis for the
1 Loughlin, Martin, and Samuel Tschorne. Public law. Routledge, 2016.
2 Wilson, Steve, et al. English Legal System. Oxford University Press, 2014.

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existence of all other laws within the system and thus unifies all laws prevailing within the
system. The sources of the constitution are statutory law, common law and customary law. Thus
the system embodies Hart’s three tier legal system entirely. Thus the Rule of Recognition in the
United Kingdom flows from statutory laws to judicial precedents (that interpret common law
principles) and customary law3.
In Australian the legal system follows a similar approach. Australia follows a federal
system of government which means a two-tier structure of governance. The two tiers are divided
as a federal government (Commonwealth Parliament) and various state governments. Australia
has a codified constitution which is the Commonwealth of Australia Constitution Act. This is a
codified text and defines the interaction between individuals and state and the various wings of
the state4. Australia also incorporates common law principles into their legal system and thus
judicial precedents interpreting the common law principles also have a binding effect. Australia
also incorporates various customs as these customs are a part of common law principles that
prevail within the Australian legal system. Thus, it can be inferred that Australia follows the
Rule of Recognition as laid down by Hart. This becomes evident from the fact that it has a
constitution which defines what would be considered law in the Australian legal system (thus
laying down the test for what would be valid law), it defines the interaction between individuals
and the state and interaction between the states wings (thus conferring validity of all other
aspects existing within the legal system) and it defines legislative powers through which
statutory law is developed (thus unifying all laws existing within the legal system)5. Thus the
three tier system defined by Hart is embodied in Australia by recognizing laws through a
3 Cownie, Fiona, Anthony Bradney, and Mandy Burton. English Legal System in Context 6e. Oxford University
Press, 2013.
4 Rembar, Charles. The law of the land: The evolution of our legal system. Open Road Media, 2015.
5 Greene, Edith, and Kirk Heilbrun. Wrightsman's psychology and the legal system. Cengage Learning, 2013.

3AUSTRALIAN COMMERCIAL LAW
constitution (which forms the basis for statutory law), incorporating common law principles
through judicial decisions and incorporating customary law. Thus the legal system in Australia
can be compared to the system in the United Kingdom both of which embody Hart’s three-tier
legal system. The conspicuous difference in both these systems is that the United Kingdom
employs an unwritten constitution which is a bundle of legislations that define and regulate
constitutional provisions, this leaves more room for common law interpretation of circumstances
and a wider scope of recognition of laws. Australia has a codified constitution and thus has well
developed definitions of what may be recognized as law6. This means that common law
principles have a much narrower scope of incorporation as judicial decisions would not have as
much of a binding effect as compared to codified constitutional provisions. Thus it would also
follow that laws have a narrower scope of recognition too as a codified constitution would have
more defined tests for what is law and less room for subjective interpretation.
Part B
Question 2
Issue
Barry and Angelo entered into a contract for the purchase of a fruit and vegetable store.
The offer made by the shop owner stated that the shop was a highly profitable venture that had a
turnover of $20,000 per month and that there were no competitors. Angelo also stated that the
expenses for the shop amount to $8000 per month. Barry made an offer for the store to the tune
of $200,000. The contract stated that the sale included a delivery van and a loader. Barry
6 Saunders, Cheryl, and Michelle Foster. "The Australian Federation: A story of the centralization of
power." Federalism and legal unification. Springer, Dordrecht, 2014. 87-102.

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subsequently faced problems as the revenue was far lower than promised, there was competition,
the delivery van was leased and thus was repossessed and the loader needed to be replaced. The
issue here is to determine if there was a valid contract.
Rule
Australia incorporates common law principles in its legal system like the United
Kingdom. As per common law a contract is valid if the following essentials can be inferred from
it7:
 Agreement.
 Intention to form legally binding relationships.
 Consideration.
Agreement here refers to the existence of offer and acceptance. The acceptance in
question however, which forms the basis of the contract of sale, must not be tainted. This means
that the consent obtained (which is the acceptance of the offer) must be true consent. True
consent is consent that is obtained devoid of any form of fraud, misrepresentation, coercion or
undue influence. If any of these elements, namely, fraud, misrepresentation, coercion or undue
influence can be proved then the contract would be void and the parties would not be bound by
terms of the contract. The court may even order specific performance in some cases8.
Carlill v Carbolic Smoke Ball Company9 laid down that an offer made to the public may
be accepted by any one. However, it was held in Hyde v Wrench10 that a counter-offer would
7 Hudson, John. The formation of English common law: law and society in England from the Norman Conquest to
Magna Carta. Routledge, 2014.
8 McKendrick, Ewan. Contract law: text, cases, and materials. Oxford University Press (UK), 2014.
9 [1892] EWCA Civ 1
10 [1840] 49 ER 132

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lead to rejection of the offer and a variation of the terms of the original offer. The offer would
have to then be accepted by the person who made the original offer.
Misrepresentation is a false representation of facts presented to a party to a contract. To
amount to a void contract the misrepresentation would have to have the following elements:
 A false statement of represented facts.
 Such statement obtained consent for the contract.
In the presence of these elements misrepresentation would be established and thus the
contract would be void. Misrepresentation maybe of various types namely, fraudulent, negligent
or a mistake. Fraudulent misrepresentation is when the person making the statement is aware that
the statement is false and yet endorses it to be true. This representation leads to the acceptance of
the offer or amounts to the other person making an offer. In the case of Edgington v
Fitzmaurice11 the directors of a company (defendant) made a fraudulent misrepresentation and as
a result the plaintiff wanted to rescind the contract. The court held that the company had made a
fraudulent misrepresentation and thus the plaintiff has the right to rescind the contract. This was
also reiterated in Car & Universal Finance v Caldwell12.
There are various remedies in case of a contract where acceptance has been obtained
through fraudulent misrepresentation. These are:
 Rescission of Contract as laid down by Long v Lloyd13.
 Indemnity as laid down by Whittington v Seale-Hayne14.
11 [1885] 29 Ch D 459
12 [1965] 1 QB 525
13 [1958] 1 WLR 753.
14 [1900] 82 LT 49.

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 Damages as laid down by Doyle v Olby (Ironmongers) Ltd15.
Application
In the given set of circumstances Angelo had put on a public offer and it could be
accepted by anyone following the judgment in Carlill v Carbolic Smoke Ball Company. Barry
however made a counter-offer for the shop and thus the original offer stood canceled due to the
same as laid down by Hyde v Wrench. The only term that was varied however was the sale price
thus when Angelo accepted the offer the original terms set by him were still in force barring the
price.
Thus the terms stated by Angelo still formed a part of the contract. This meant that the
statement that there were no competitors and the statement regarding the revenue of the shop
would still be a part of the contract. Barry found out that the monthly revenue of the store was
significantly lower than the one stated in the initial offer and that there was a grocery shop
nearby that sold similar products. Being engaged in the business of sale of fruits and vegetables
in the area it may be inferred that Angelo was aware of the revenue statistics and the fact that
there was direct competition nearby. These representations were what convinced Barry to make
the counter-offer and thus in such a case his agreement was obtained through misrepresentation.
Following the judgment in Edgington v Fitzmaurice it becomes evident that the contract
would be liable to be rescinded. The statements about the van and the loader were also fraudulent
misrepresentations (to the extent that Angelo had no right to sell the van and the loader was
damaged to a point that it would have to be replaced) and would also amount to the contract
being void.
15 [1969] 2 QB 158.

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Conclusion
Thus, Barry could challenge the validity of the contract of sale by virtue of the promises
made by Angelo. The fraudulent misrepresentations made by Angelo would in effect make the
contract void. In conclusion the contract would be rescinded following the common law judicial
pronouncements. Barry can further opt for various other remedies available to him such as
indemnity and/or damages. Thus Angelo is in breach of his duties under common law as a seller.
Question 3
Issue
Barry and Angelo have entered into a contract which had given rise to various disputes.
The contract has been accepted as a valid contract and thus for any action in respect of these the
plaintiff (Barry in the present scenario) would have to establish breach of contract. The issue
here is to determine the remedies available to him in case of such a breach of contract.
Rule
Car & Universal Finance v Caldwell16 laid down that if the title of a car has not been
transferred then a sale that transfers physical possession of such a car would not amount to a sale.
This means that even if the possession of a property has been transferred to another individual,
unless the person making the transfer had ownership rights over the property (title) it would not
be deemed a proper sale and hence would have no effect.
16 [1965] 1 QB 525.

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Fraudulent misrepresentation does not necessarily have to lead to the rescission of the
contact. Thus in cases the court may award damages for fraudulent misrepresentation as laid
down by East v Maurer17.
Section 19 of the Sale of Goods Act, 1954 lays down an implied condition on the seller
with reference to the quality or fitness of the goods in question18. An implied condition is one
which is not made explicitly in the contract but forms part of the contract by virtue of statutory
provisions. Section 19 (1) of the act states that in a situation where the buyer makes the purpose
for such a purchase clear to the seller and from such an implication it is clear that the buyer is
relying on the seller judgment as far as the quality and fitness of the goods are concerned then
the seller has an obligation to ensure that the goods received are of such quality and fitness that
they fit the purpose.
In cases where there has been a breach of contract there are various options available to
the buyer these are defined under Part 6 of the act which deals with actions for breach of
contract19. Section 54 of the act defines remedies for non-delivery and provides for damages in
such a case. Section 55 defines specific performance and mandates that in case of breach of
contract the plaintiff may apply to the Court to make an order in terms of specific performance.
Section 56 deals with the breach of a warranty and also provides for damages for the same.
Section 57 deals with interests and special damages and provides for recovery of any amount
paid if the consideration has not been delivered20.
17 [1991] 2 All ER 733.
18 Sale of Goods Act, 1954.
19 Sale of Goods Act, 1954.
20 Sale of Goods Act, 1954.

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Application
Angelo was aware that the van was on lease and he did not have the right to sell it. An
explicit term was included in the contract with respect to the van and the loader. It is obvious that
the van would be purchased for the use in the business and thus it may be inferred that Barry
relied on Angelo’s judgment with regard to the quality of the truck and the loader.
Following the judgment in Car & Universal Finance v Caldwell it may be inferred that
since Angelo did not have ownership of the car mere delivery of possession would not amount to
delivery of the goods agreed upon. Thus no delivery was made with respect to the van. In this
scenario following the provisions of section 54 Barry would be able to claim damages for non
delivery of the van agreed upon in the contract.
The loader is used for loading goods on to the van and thus when the loader is damaged
to such an extent that it needs to be repaired it would amount to a breach of warranty under
section 19 (1) of the act. This is because the purpose of the loader was clear when the contract
was made and thus it can be inferred that Barry relied on Angelo’s judgment as far as the quality
and fitness of the good was concerned.
Such a breach of warranty would attract the provisions of section 56 of the act and he
would be liable to claim damages. This also means that Barry would be able to recover the
money paid to him as per the provisions of section 57 of the act since the money was paid but the
consideration was not received. In light of this he would also be able to recover interest on the
same.

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Conclusion
Barry would thus have remedies available to him as per the provisions of Part 6 of the
act. With respect to the delivery of the van he can pursue Angelo legally for non-delivery under
section 54. With respect to the breach of guarantee he would be able to recover damages as per
the provisions of section 56 of the act. He would also be able to recover the money paid to him
as the conditions laid down by 57 mandates the receipt of consideration.
Part C
Video transcript:
0:00- 1:10- Our client Barry has entered into a sale contract with Angelo who is the previous
owner of the fruit and vegetable shop that is bought by Barry. Angelo had made an
advertisement which was available to the public and had represented that the shop is in a
profitable location and provides revenues of approximately $20,000 per month. It was also stated
that the expenses for the shop are $8,000 per month and that there was no possibility of any form
of competition. Our client offered $200,000 believing the representations made by Angelo.
1:10-2:00- Thus a contract of sale was executed between these two parties. The contract of sale
also provided that this sale included a van for delivery and a loader of the same purpose. After
the purchase with the passage of time our client came to the realization that the revenue figures
from the store did not exceed $13,000 per month. There was a nearby stall that sold fruits and
vegetables and were thus a direct competition.
2:00-3:20-The van which was delivered in the contract was repossessed by its true owners as it
was a leasehold property and did not belong to Angelo. The loader that was provided by Angelo

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was damaged and the repairs would amount to the cost of a new loader. The total expenses for
the shop including the rent for the van would amount to $8,500 per month.
3:20-3:50 -Thus Angelo’s representations regarding the shop were wholly false and it was
evident that he was aware that these representations were fabricated (as he was the previous
owner of the shop). This in legal terms would be construed as fraudulent misrepresentation.
3:50-4:10 - Angelo had thus acted fraudulently when he was representing the shop for sale to our
client. This would thus mean that our client’s consent was taken by means of fraudulent
activities. This means that the acceptance given by our client with respect to the terms and
conditions of this contract was tainted. This would be reasonably construed by the court as
misrepresentation and thus it would invalidate the implications and obligations under the contract
completely. The party to the contract who was a victim of such fraudulent misrepresentation
would have the right to rescind the contract and claim for monetary compensation for the same in
the form of damages. There are judicial precedents that support this claim as discussed above.
4:10-4:50 - However, if such a contract would be deemed enforceable depends on the
interpretation of the facts by the court. Thus, if the court determines that the contract was valid
and that the parties are bound by such obligations the responsibility of the best remedy available
to our client is to establish breach of contract.
4:50-5:00 - Under the circumstances faced our client would be able to claim for breach of
contract on the grounds of non-delivery of the contracted goods (van). This is because the person
selling a good must be the true of the same. If this does not happen the sale is ineffective.
Additionally the condition of the loader would not constitute a valid sale as it was not fit for the

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purpose specified by our client. Thus our client can claim for damages, specific performance of
contractual duties and interest and special damages due to the breaches committed by Angelo.
5:00-5:30-Thus Angelo would be liable to compensate our client for breach of contract in case it
is considered a valid contract or compensate our client for fraudulent misrepresentation. This is
how the court would ideally decide this dispute and depending on the determination of the court
5:30-6:00-Angelo would have to compensate our client for the misrepresentation which obtained
our client’s consent in a mala fide manner or pay damages to our client for the breach of
contractual duties under common law and statutory law relating to sale of goods.

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Bibliography
Statues
Sale of Goods Act, 1954.
Commonwealth of Australia Constitution Act.
Case law
Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1.
Hyde v Wrench [1840] 49 ER 132.
Edgington v Fitzmaurice [1885] 29 Ch D 459.
Car & Universal Finance v Caldwell [1965] 1 QB 525.
Long v Lloyd [1958] 1 WLR 753.
Whittington v Seale-Hayne [1900] 82 LT 49.
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158.
East v Maurer [1991] 2 All ER 733.
Articles
Cownie, Fiona, Anthony Bradney, and Mandy Burton. English Legal System in Context 6e.
Oxford University Press, 2013.
Greene, Edith, and Kirk Heilbrun. Wrightsman's psychology and the legal system. Cengage
Learning, 2013.

14AUSTRALIAN COMMERCIAL LAW
Hudson, John. The formation of English common law: law and society in England from the
Norman Conquest to Magna Carta. Routledge, 2014.
Loughlin, Martin, and Samuel Tschorne. Public law. Routledge, 2016
McKendrick, Ewan. Contract law: text, cases, and materials. Oxford University Press (UK),
2014.
Rembar, Charles. The law of the land: The evolution of our legal system. Open Road Media,
2015.
Saunders, Cheryl, and Michelle Foster. "The Australian Federation: A story of the centralization
of power." Federalism and legal unification. Springer, Dordrecht, 2014. 87-102.
Wilson, Steve, et al. English Legal System. Oxford University Press, 2014.