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LAW514 Commercial Law Problem Based Question Assignment 2 Answer

LAW514 Commercial Law

Value: 20% or 20 marks

Word Count: 1,500. This includes all footnotes and references. (10% margin under or over)

Assignment 2 - Problem-based question

Johnny’s friend Arnold wishes to purchase a restaurant. One Friday evening he finds an Indian restaurant called Puluub for sale, which is located on Kerouac Avenue around the corner from Johnny’s restaurant The Lame Duck. The restaurant is full of customers. The following Monday Arnold speaks to Johnny about his plans. Arnold explains that he is very keen to buy the business but that he has never owned a restaurant or even worked in the industry before, and he would appreciate Johnny’s advice and guidance. Johnny assures Arnold that Puluub appears to be a very successful restaurant and that he is ‘almost guaranteed’ to make a profit in the first twelve months. Arnold immediately decides to purchase the restaurant with his brother Cameron. One year later they are on the verge of bankruptcy; the restaurant was not as popular or as profitable as they expected, and turnover has declined even further since they took over the business. Has Johnny committed the tort of negligent misstatement? In your answer focus on whether or not Johnny owed a duty of care to (1) Arnold and (2) Cameron.

Important: Your answer must use the IRAC structure and refer to the relevant case law.



Whether or not Johnny owed a duty of care to (1) Arnold and (2) Cameron?


One of the friends of Johnny is Arnold and he shows his interest in buying a restaurant which is near to the restaurant of Johnny and having the good number of customers over there. He told about his planning to Johnny and asked for his guidance to execute the deal. Johnny gave him the assurance that this restaurant would be a profitable deal for him. Arnold with his brother Cameron bought the restaurant, but after one year, the business went into bankruptcy as the restaurant didn’t get the profits from the business. Whether Johnny shall be held liable for committing the breach of duty of care or not.

Section 8 of Law of Negligence and Limitation of Liability Act, 2008 states that the person is not considered as negligent if 

  1. The risk is unforeseeable.
  2. The risk is minor.
  3. The ordinary man would have taken all the precautions to avoid the risk.

The Court can take the following factors while determination the standard duty of care is taken:-

  1. The probability of occurring harm in case of not taking care
  2. Gravity of harm
  3. The burden of proof that the person has taken the necessary precautions.
  4. Social use of the activity that may increase the risk of harm.

Section 10 of Law of Negligence and Limitation of Liability Act, 2008 says that the person who is owing the duty of care also owns the duty of warning for the risk or other information to another person and He need to prove before the court that he has taken all the necessary precaution to prevent the plaintiff from the significant risks .

For determining the breach of duty of care, one has to determine the standard of care. In this case, it is seen that what will be actions of the ordinary man in the said circumstances. A Duty of care obliges one person to take the necessary care and it arise because of nature of relations between the parties. The duty of care arises in the situation when one person control the decisions of the another person, that person should take the necessary precautions to prevent the other person from the risks or similar risks. The standard of care is what actual duties are of the person.

Section 16 of the act provides that the plaintiff has to prove about the unawareness of the risk. The plaintiff may claim that the defendant has not informed about the risk of harm to the plaintiff and the defendant has not given the information to the plaintiff.  But this provision is not applicable on the suit of damages in relation to associated risks. The person who commits the negligence by breaching the duty of care, he shall be liable for damages and can claim the compensation. The harm may be either physical or mental. The burden of proof shall be on plaintiff.

In case of Libra Collaroy Pty Ltd v Bhide [2017] NSWCA 196), the court of appeal held that there was the error in identification of risk of harm and failed to decide whether section 5B of civil liability act includes that the owner and tenant have the knowledge of the risk. This case is relating to contributory negligence and the agents are equally liable for negligence.

Section 32 of the act specifies for the provisions of mental harm. This section says that a person of normal fortitude may suffer the psychiatric illness if no reasonable care is taken. In this situation, the defendant owns the duty of care in respect of plaintiff. 


In this case, Johnny and Arnold are the good friends. Arnold is interested to purchase a restaurant. He has found a restaurant near to the restaurant of Johnny, The Lame Duck.  He reviewed the restaurant and the gatherings in the restaurant. Then, he asked for his advice and guidance as Arnold is new in the industry. Johnny ensure to him about the performance of the restaurant. Arnold purchased the restaurant with his brother Cameron. But after one year, he incurred large losses in the restaurant and turnover of the business was declining very fast. So the business got bankrupt. Johnny has given the advice on his best knowledge. He gave the information relating to the restaurant in the good faith. As Arnold enquired about the restaurant himself and see the crowd in the restaurant. Although Johnny owes the duty of care, he didn’t breach the duty of care. He informed his friend about the true information as he gathered from other sources. Arnold should check the details of accounts of the restaurant. Johnny cannot be said the negligent as he complete acted according to the duty of care. He performed the reasonable care before the purchase deal of restaurant. Arnold and Johnny are in the fiduciary relation in which they have the relations based upon the trust. Arnold asked him for his advice on the purchase of Puluub, an Indian Restaurant. Johnny advised him in the good faith that the restaurant can give him good profits. Arnold is responsible for the working of the restaurant. The Working of restaurant depends upon the management of the restaurant. Johnny cannot be liable for Negligence and Arnold along with Cameron cannot claim damages from Johnny as he has not given any false information or does any misrepresentation. Johnny gave the information with the good intention. Arnold is also under the duty of care against his brother Cameron as he is doing the business with his brother. Arnold checked the facts before the purchase of the Restaurant and started their business. There can be other reasons for failure of business as there is no false information supplied to him. Johnny cannot be said to be negligent under Section 9 of the law of Negligence and Limitation of liability Act, 2008. The risk is unforeseeable and significant. The Ordinary man has taken the necessary precautions to prevent him from the harm.


Hence, Johnny is not liable for doing any negligent act as he did not do any misrepresentation and did not give any incorrect information to give him harm to his friend. Arnold cannot prove that Johnny did the negligence against him and his brother Cameron. Section 9 prescribes about the conditions on which the person can be considered as negligent. Johnny owes the duty of care but he risk is unforeseeable as he didn’t see the accounts of the restaurant so he was not aware about the profits and turnover of the Restaurant. Risk is significant as Arnold and his brother became bankrupt in this business. Johnny has not intended to give any harm to Arnold as he advised to Arnold with bonafide intention. Johnny has performed his duty and reasonable care is taken on the part of Johnny. Arnold is responsible for management and administration of the business. He was already aware about the public gathering on such place. He enquired about the status of the restaurant and then, asked to Johnny. Johnny advised him about the good profits from such business. So Arnold cannot held Johnny liable for negligence as he did not performed any act negligently. Even Cameron cannot held Johnny liable for losses incurred in the business.

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