Australia Business Law

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nIntroduction

nA great commerce can diminish rapidly if it doesn’t pay appropriate consideration to the rules and guidelines governing its management, as regulations governing customer and servant safety, merchandise release and even business reporting and compliance can be enormous and frequently greatly complex (Brunt, 2003, p.23). The government of Australia, state, and region administration regulation is present to safeguard customers, the surroundings and the community (Brunt, 2003, p.26). It also functions to encourage nondiscriminatory transaction and competition.

nThe regulations manage the way businesses interrelate with their merchants, consumers as well as other businesses. They also outline the civil liberties of businesses and corporate proprietors when conflicts arise (Brunt, 2003, p.37). Australia has a countrywide legislative framework to make sure that exchange is fair for businesses and consumers. The framework is administered and implemented by the Australian Competition and Consumer Commission (ACCC) (Brunt, 2003, p.43).

nIn addition to the regulation of the Australian government, state and territory regulations administrate customer security. An unbiased transaction workplace in each state or territory offers guidance on commerce constitutional rights and requirements (Clark, 2010, p.23). Auditors and financial advisors, in their line of profession are involved in provision of profession advice, which in certain cases may result in economic loss or any other type of loss to these clients or to third party organizations that depend on the services of auditors clients (Clark, 2010, p.31).

nFurthermore, auditing firms activities and reports as contracted by their clients is usually of benefit to the company as well as the public and other organizations that may have interest in the auditors clients (Clark, 2010, p.44). In certain cases, auditors may be taken to task with their activities especially where negligence or malpractice is involved resulting in several liability claims as will be identified in this article. The potential liability risks that auditors face as advisers to their client and to third parties as well as legal claims that may be brought against them by these parties will be identified (Gillies, 2004, p.5). The report will outline the consequences that may accrue auditing firms for breach Australian Business Laws as it relates to offering advisory services to its clients and attempt to establish recommended actions that may benefit auditing firms to minimize liability claims brought against them (Gillies, 2004, p.9).

nCommon Law Liability Risks to Auditors

nAuditors face the same liability risks that professional advisers are exposed to in their line of duty. Part of this risk is concerned with the services they offer to direct clients or from third party (Gillies, 2004, p.15). The Australian Business laws provide for liability clauses that professional advisers, auditing firms included, are likely to be exposed to. One of the common liability risks is the negligent misstatement (Gillies, 2004, p.19). Under this liability risk, the Australia Business Law stipulates that professional advisers are answerable to negligent words coming from them and as such, they should avoid careless statements and ensure accuracy in the advice they extend to their clients whether written or spoken (Gillies, 2004, p.25).

nIn certain instances, there exist exclusion clauses for negligence misstatements that would make it easier for advisers to evade this liability. A case in point of the liability of negligence misstatement is the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (Latimer, 2009, p.31). In this case, her client, Easipower for advertising services, contracted Hedley Byrne, an advertising firm. Hedley Byrne in an effort to determine the creditworthiness of Easipower in order to extend credit to its client sought the professional advice of Easipower ban, who gave positive reviews of her clients financial services. Hedley then proceeded to extend credit to Easipower (Latimer, 2009, p.34).

nEasipower, however, went into liquidation resulting in substantial economic loss to Hedley Byrne & Co Ltd who took legal action against Heller & Partners Ltd for negligence misstatement (Latimer, 2009, p.42). The court judgment however dismissed the case on grounds that duty of care did not arise as the bank had only responded to the inquiry on the basis that their reply was without responsibility (Latimer, 2009, p.48). There are certain elements that would be beneficial to auditing firm and professional advisers in regards to liability they may face due to negligence (Latimer, 2009, p.61). These may include a duty of care not being owed to the plaintiff by the defendant and a reasonably foreseeable risk for which care must be taken to ensure that no omissions or defendants action are taken into claim by the plaintiff that for a duty of care to be awarded (Latimer, 2009, p.65).

nThe above scenario presents a specific case of negligent misstatement whereby the defendant gave the advice without the actual knowledge of whether the advice was true or not (Lipton, Herzberg & Welsh, 2010, p.76). In other cases, where fraud is said to have occurred in which case the liability risk to be encountered will be fraudulent misrepresentation. In the event of a liability risk of fraudulent misrepresentation, the plaintiff must demonstrate evidence that the defendant offered advice considered untrue or had the intention to act so (Lipton, Herzberg & Welsh, 2010, p.81). In both cases however, negligence is said to have occurred and the plaintiff can sue the defendant should he or she show that the advice resulted in economic loss as in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd case of 1964 (Lipton, Herzberg & Welsh, 2010, p.86).

nSituations that would guarantee that a duty of care exists to warrant liability of negligent misstatement to the defendant should indicate that the defendant had prior knowledge that the plaintiff seeking the information sought to use that information and in the event that loss occurs because the information was untrue then the defendant would be answerable (Turner & Trone, 2013, p.45). The Shaddock & Associates Pty Ltd vs. Parramatta City Council (1981) 150 CLR 225 case is a specific example of liability arising from negligent misstatement (Turner & Trone, 2013, p.48). In that case the plaintiff, Shaddock & Associates Pty Ltd sought the advice of the city council both by word of mouth as well as written document regarding a piece of land that they wished to purchase.

nThe intention was to determine if any road widening plans of which the city council advised the plaintiff that no such plans were in existence (Turner & Trone, 2013, p.52) would affect the piece of land. It was however determined that such plans existed at the time and since the plaintiff relied upon the advice of the defendant and purchased the land which was later on subjected to road widening plans, the plaintiff sought for legal justice on grounds of negligent misstatement (Turner & Trone, 2013, p.57).

nThe Supreme court of New South Wales held that no duty of care was in existence to warrant liability of misstatement but the High court ruled otherwise in favor of the plaintiff by awarding the plaintiff damages of $ 170,000. The fee was awarded on grounds that reasonable care ought to be considered by advisers when presenting information that he or she knows the other party intends to use that information (Turner & Trone, 2013, p.60). It was established that liability existed since a duty of care existed in the “context of application of a zoning certificate” despite no such existence could be traced and relied upon the advice given by word of mouth to the plaintiff (Turner & Trone, 2013, p.63).

nFor a plaintiff to claim that they have incurred losses based on the advice given to them by the defendant, he or she must prove that exist a distinct relationship that is a relationship of proximity between the defendant and plaintiff (Turner, Gamble, French & Muurlink, 2012, p.26). The special relationship also known as relationship of proximity should be shown to be in existence alongside foreseeability of loss or damage incurred by the plaintiff on the basis of advice sought from the defendant (Turner, Gamble, French & Muurlink, 2012, p.29).

nThe MLC assurance v Evatt (1968) HCA 74 laid the ground for the concept of special correlation where the Barwick CJ established that the existence of a special relationship occurs whenever an individual gives information or advice to another upon a serious matter. Additionally, it occurs in circumstances where the speaker realizes or ought to realize that he/she is being trusted to give the best information or advice as a basis for action. However, on the part of the other party and it is reasonable in the circumstances for the other party to act on the information or advice (Turner, Gamble, French & Muurlink, 2012, p.333). From this case, it was established that for a relationship to exist so that duty of care could be warranted and established if there was any breach, the adviser must inform the client knowingly and willingly.

nFurthermore, the adviser should realize that the recipient of the information on the advice given trusts him. This in effect is assumption of responsibility and is one of the four steps of establishing whether the adviser is liable to negligent misstatement (Turner, Gamble, French & Muurlink, 2012, p.39). The other steps include provision of evidence that the subject matter is of a serious nature and that the recipient intends to act on the advice given unless of course it is one given at social gathering with no much thought on its legal implications (Vickery & Flood, 2012, p.5). In the case of MLC assurance v Evatt (1968) HCA 74, the plaintiff, a policy holder with MLC Assurance sought the advice of the company on whether it would be viable to invest further in HG Palmer of which he was advised to invest in HG Palmer which later on went into liquidation (Vickery & Flood, 2012, p.11).

nThe plaintiff lost his case against the two companies on grounds that the business scope of MLC assurance did not include hiving advice on investments and that there was no claim from the assurance company that indicate that the adviser possessed the necessary skills and competence to give the plaintiff investment advice that could relied upon (Vickery & Flood, 2012, p.17). Liability could not then be imposed on the assurance company on the basis that an honest answer emanating from the assurance company was given on an issue that clearly lies outside its sphere of operations (Vickery & Flood, 2012, p.25).

nFrom the discussion above it is apparent that advisers, of whom auditors are a part of are liable to negligent misstatement and misrepresentation based on the advice they offer to their clients as long as the necessary elements that warrant breach of a duty of care is proven beyond doubt (Vickery & Flood, 2012, p.29). In addition, the other requirements for such a liability to be extended to the advisers rely solely on loss suffered by the plaintiff and proof that a “special relationship” as stated in the Australian Business law exists between the two parties.

nAuditors and Third Parties

nThere are provisions in the Australian contract law that provide for privacy of contracts between two organizations that may protect these organizations from legal claims brought forward by third parties (Harris, Hargovan & Adams, 2009, p.45). Auditors, for instance are at a much higher risk of being sued by third parties since the audit report is a public document that may be relied upon by the public who may include investors, bankers, shareholders among others (Harris, Hargovan & Adams, 2009, p.47). In most cases, a contract between auditors and the client company does not impose obligations to third party who may use the auditing firms report for their own use.

nThe reason is simply because the contract established is between the auditor and the company and thus the auditor does not owe the third party a duty of care (Harris, Hargovan & Adams, 2009, p.57). The Esanda Corporation Ltd v Peat Marwick Hangerfolds (1997) 23 ACSR 71 provided guidelines that have been adopted by the Australian legal system in relation to duty of care owed to third parties by auditors. In this case, a legal claim brought against auditing company Peat Marwick Hangerfolds by Esanda Finance Corporation on the basis that the plaintiff relied upon auditing records of the defendant in awarding financial loans to companies associated with a major company identified as Excel (Harris, Hargovan & Adams, 2009, p.62).

nThe auditing firm had been conducted by Excel to offer auditing services and the report did not represent the true financial status of Excel, which later on went into liquidation causing Esanda Finance Corporation financial loss (Gamble, Du Plessis & Neal, 2008, p.23). On delivering judgment, the high court established that mere foreseeability of harm occurring to the plaintiff alone could not be relied upon to impose a liability to the auditing firm. As such, the auditing firm did not owe a duty of care to the plaintiff (Gamble, Du Plessis & Neal, 2008, p.26). It is from this case that several policy-based claims were identified in favor of auditors not owing a duty of care to third parties. Such as an increase in the cost of auditing services and the role of the auditor in causing loss is secondary to that of the company to which it had extended its auditing services (Gamble, Du Plessis & Neal, 2008, p.43).

nChallenges arise when trying to establish whether the auditor owes the third party a duty of care and in most cases determining this has proven to be elusive (Davenport & Parker, 2011, p.57). For example, the R Lowe Lippmann Fidgor and Frank v AGC (Advances) Ltd (1992) VR 671, AGC advanced credit to a company basing on the report of its auditing firm who had presented false statement in order to induce the credit lender to advance credit to the company in question (Davenport & Parker, 2011, p.67). AGC sued against the auditing firm but judgment was delivered in favor of the defendant in that the plaintiff (AGC) could not prove that the auditing firms intention was to induce the plaintiff to act based on the auditing reports that were developed by the defendant (Davenport & Parker, 2011, p.83).

nSection 18 of the ACL describes about the dishonest behavior in business where an individual is not supposed to mislead in the act of conducting business (Davenport & Parker, 2011, p.97). The probable consequences of the firm if found liable for breaching of ACL and disregard includes restrictions, indemnities and compensatory commands. Other prohibitions against particular types of dishonest or distorted conduct may also apply to circumstances of misleading conduct and have specific penalties and criminal sanctions (Davenport & Parker, 2011, p.99).

nConclusion

nVirtuous transactions practices result to the contentment of consumers and a more prosperous business. The civil liberties and requirements set out in the ACL are intended to make sure trade activities operates on an equal playing field when marketing products and services to customers (Burnett, Bath & Burnett, 2009, p.12). Every commerce has an accountability to respect a consumers privileges and to honor its lawful requirements. Nearly all business complies with the regulation, but all trades should remember that they are needed to meet universal values of commercial conduct, as well as conform with particular safeties for customers against prejudiced business practices (Burnett, Bath & Burnett, 2009, p.17). Some of the recommended actions include making use of ordinary form contracts that do not possess partial terms, making sure of the security of goods and services as well as abiding by the customer assurances (Burnett, Bath & Burnett, 2009, p.32).

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nReferences

nBrunt, M. (2003). Economic essays on Australian and New Zealand competition law. The Hague: Kluwer Law International.

nBurnett, R., Bath, V., & Burnett, R. (2009). Law of international business in Australasia. Annandale, N.S.W.: Federation Press.

nClark, E. (2010). Cyber law in Australia. Alphen aan den Rijn, The Netherlands: Kluwer Law International.

nDavenport, S., & Parker, D. (2011). Business and law in Australia. Pyrmont, N.S.W.: Thomson Reuters (Professional) Australia.

nGamble, R., Du Plessis, J., & Neal, L. (2008). Principles of business law. Pyrmont, N.S.W.: Lawbook Co.

nGillies, P. (2004). Business law. Sydney: Federation Press.

nHarris, J., Hargovan, A., & Adams, M. (2009). Australian corporate law. Chatswood, N.S.W.: LexisNexis Butterworths.

nLatimer, P. (2009). Australian business law 2010. North Ryde, N.S.W.: CCH Australia.

nLipton, P., Herzberg, A., & Welsh, M. (2010). Understanding company law. Pyrmont, N.S.W.: Thomson Reuters (Professional) Australia Limited.

nTurner, C., & Trone, J. (2013). Australian commercial law. Sydney: Lawbook Co.

nTurner, C., Gamble, R., French, B., & Muurlink, O. (2012). Business law for managers. Pyrmont, N.S.W.: Thomson Reuters (Professional).

nVickery, R., & Flood, M. (2012). Australian business law. Frenchs Forest, N.S.W.: Pearson Australia.