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Alert – Personal Property Securities Reform

Written by: Andrew Cox, Consultant

The Personal Property Securities Act (2009) (‘PPS Act’) was due to come into force in May 2011. At the COAG meeting on Sunday 13 February that date was deferred to October 2011.

The PPS Act will replace 40 existing State and Federal registers for securities other than land, including the existing ASIC register of company charges, with a single Federal register.

The definition of ‘security interest’ in the PPS Act is wider than current registrable interests under the existing regimes and includes the following:

  • Retention of Title clauses in contracts for the supply or manufacture of goods;
  • Conditional sale agreements (known as ‘goods on consignment’);
  • Hire Purchase Agreements;
- Lease Agreements that secure an obligation;
  • Chattel mortgages;
- Factoring.

In many cases the first to register will have priority.
We will circulate a special issue newsletter regarding the Act and the registration scheme shortly, but if your business involves any of the above then you will need to alter your documents and practices to ensure that your security interests do not lose priority.

Director & Executive Remuneration – Proposed reforms

Written by: Michael Bishop, Director

The Federal Government has recently released draft legislation aimed at improving accountability in relation to director and executive remuneration of listed entities.

The proposed reforms will affect a number of different aspects of the Corporations Act and can be summarised as follows:

Strengthening of non binding vote on remuneration report

The Bill introduces what the Government calls a two strikes and re-election process as follows.

As from 1 July 2011 if a listed company has a 25% vote against its remuneration report at its AGM then in its subsequent remuneration report the company must explain whether shareholders’ concerns have been taken into account and either how they have been taken into account or why they have not been taken into account.

If that subsequent remuneration report receives a 25%
vote against it then that same AGM a resolution (‘the spill resolution’) must be put to the meeting concerning whether the Board needs to stand for re-election within 90 days.
If that spill resolution is passed by 50% of the vote then
a further general meeting is required to be held within 90 days at which the entire board (other than the Managing Director) is up for re-election.

Use of remuneration consultants

The reforms will require the company to make detailed disclosures in its remuneration report concerning any remuneration consultant used including:

  • the name of the consultant;
  • the name of each director who executed the contract under which the consultant was engaged;
  • the name of each person to whom the consultant directly gave the advice;
  • a summary of the nature of the advice and the principles on which it was prepared;
  • the amount and nature of consideration provided under the contract for the advice;
  • the nature of any other work the consultant did
for the company during the year and the amount of consideration received by the consultant.

The legislation also stipulates that only non executive directors can execute a contract on behalf of the company to engage a remuneration consultant.

Further, the remuneration consultant may only provide the advice to non executive directors. The only circumstance in which the remuneration consultant can provide the advice to executive directors is if all the directors are executive directors.

Prohibition on key management personnel voting on remuneration resolutions

Key management personnel and their related entities
will be prohibited from voting at general meetings on resolutions concerning remuneration of members of the key management personnel. This will include resolutions such as:

  • the adoption of the company’s remuneration report;
  • whether a spill of the company’s board ought occur, if there has been a 25% vote against two consecutive remuneration reports;
  • fixing of directors remuneration.

Prohibition on hedging by executives of incentive remuneration

Since 2007 the Corporations Act has required companies to disclose what policies (if any) the company has in relation to hedging of incentive remuneration by
their executives.

The proposed reforms will prohibit key management personnel (and their related parties) from hedging remuneration that depends on the satisfaction of a performance condition.

No vacancy rule

Currently some public company constitutions allow a board to declare that it has no vacant positions even though the maximum number of directors allowed by the constitution has not been reached. This means that people are prevented from nominating for election unless an incumbent board member is up for re-election, retires or is removed by shareholders.

The proposed new law will require the board to obtain shareholder approval for a declaration that there are no vacant board positions.

Cherry picking of directed proxies

It is currently the law that if the chairman of a general meeting holds a directed proxy from a shareholder then the chairman has to vote that proxy.

However currently if the person holding the directed proxy is not the chairman of the meeting then they are not obliged by law to vote the proxy. However if they elect to vote it (rather than refrain from voting) then they have to vote it in accordance with the direction.

The draft legislation seeks to require that any person holding a directed proxy is mandated to vote the proxy (in accordance with the direction) and cannot refrain from voting.

Please note that this particular reform will apply to directed proxies dealing with any matters and not merely directed proxies relating to remuneration issues.

Conclusion

We will keep you updated regarding the progress of this draft legislation. If you have any queries regarding it please feel free to contact Michael Bishop.

uniform national competition and consumer regulation: from the trade practices act to Australian Consumer Law

Written by: Michael Bishop – Director

The Government, in the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) and subsequent Trade Practices Amendment (Australian Consumer Law)
Bill (No.2) 2010 (Cth)(ACL), has now completed what the Hon Dr. Craig Emerson MP described as the ‘complete modernisation’ of Australia’s trade practices and consumer protection laws.

Businesses should familiarise themselves with the reforms and review their practises to ensure that they are compliant with the Competition and Consumer Act 2010 (Cth)
(‘the CCA’).

Overview

The CCA replaces the Trade Practices Act 1974 (Cth) and has the effect of replacing State and Territory provisions (including the Fair Trading Act 1999 (Vic) in circumstances where businesses transact with consumers for the sale of goods and services. The CCA was introduced in two phases.

The First Phase

The first phase of reforms came into effect on 15 April 2010 (new civil penalty provisions / strengthening the Australian Competition and Consumer Commission’s (ACCC) investigation and enforcement powers) and 1 July 2010 (unfair contract terms) respectively. The key reforms include:

1. New civil penalty provisions

The ACL has introduced new civil penalty provisions
to replace many existing criminal fines provisions.
This change is significant for the reason that a civil penalty regime has a lower onus of proof (‘balance of probabilities’) than the pre-existing criminal fines regime, which required the prosecution to prove an offence ‘beyond all reasonable doubt.’

The above, coupled with new civil penalties of a maximum of $1.1 million for corporations and $220,000 for individuals for certain contraventions of the ACL, such as unconscionable conduct and false or misleading representations, is likely to lead to a significant increase in enforcement proceedings being brought by the ACCC.

2. Strengthening the ACCC’s investigative and enforcement powers

Further to the civil penalty provisions referred to above, the ACCC and the Australian Securities and Investment Commission (‘ASIC’) now have an increased range
of enforcement options at their disposal in respect of contraventions of the ACL. These include the ability to seek disqualification orders and/or court orders to redress loss or damage, and the ability to issue:

a) ‘substantive notices,’ requiring the recipient to provide information and/or documents in relation to a
specific claim;

b) ‘infringement notices,’ containing a financial penalty for suspected contraventions of certain civil penalty provisions; and

c) ‘public warning notices,’ which inform the public of a particular instance of unfavourable conduct.

3. The voiding of standard form contracts containing ‘unfair’ terms

Regulators have been concerned that businesses are increasingly transferring transactional risk onto consumers. In response, the CCA provides that standard form contracts that contain ‘unfair’ terms will be void. Section 24 provides that a term of a contract will be unfair if:

a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;

b) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The Second Phase

The second phase of reforms came into effect on 1 January 2011. Broadly speaking, the reforms introduced new statutory consumer guarantees to replace implied conditions and warranties, replaced existing product safety provisions with a new standard consumer product safety law, and introduced a raft of further consumer protection provisions. The key reforms include:

1. Consumer guarantees

The consumer guarantees provided for in the CCA, which will apply uniformly across all States and Territories, are substantially the same as those already implied into consumer contracts under pre-existing regulatory regimes. it does however appear that the implied condition that goods be of an ‘acceptable quality’ is broader in its scope and application than the previous ‘merchantable quality’ condition.

Goods are of ‘acceptable quality’ if they are ‘as fit for all the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe and durable’.

The nature and price of the goods as well as any statements made about the goods on any packaging or any other representation made about the goods is to be taken into consideration when determining whether the goods are of ‘acceptable quality’.

There will be a ‘major failure’ to comply with a consumer guarantee where the goods:

a) would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure;

b) depart significantly from a description or sample;

c) are substantially unfit for the purpose for which goods of the same kind are commonly supplied; or

d) are unsafe.

In circumstances where there is a ‘major failure’ to comply with a consumer guarantee, a consumer will in general be entitled to recover damages for any loss in value of the goods, or elect to reject the goods. If a consumer elects to reject the goods, they will be entitled to a refund or a replacement.

If there has been a ‘non major failure’ and the defect can be remedied, then the consumer may require the supplier to remedy the defect in a reasonable time. Failure by the supplier to do so will generally entitle the consumer to elect to reject the goods.

Manufacturers of goods should take note that a supplier of goods is entitled to be indemnified by the manufacturer for any claim made against the supplier for goods which do not comply with the consumer guarantees.

2. Product safety

The CCA has the additional effect of replacing existing national, State and Territory consumer product safety law. Importantly under the CCA, goods can now be recalled
in circumstances in which a foreseeable misuse of the good creates a risk or injury. Previously, the ability to recall a good was limited to circumstances where the primary, normal or intended use of the good created a risk of injury.

Businesses should also be aware that the CCA mandates the reporting of any death, serious injury or illness of a person caused by the use or foreseeable misuse of a consumer product within two (2) days of the business becoming aware of the fact.

What This Means for Clients

Given the changes outlined above, it is imperative that clients:

  • review their current business practises to ensure that they comply with the various reforms, especially considering the strengthening of ASIC’s and the ACCC’s investigative powers and the introduction
of new civil penalties;
  • review their standard form contracts to ensure that they do not contain any ‘unfair’ terms;
  • are aware of consumer guarantees that will be implied into consumer contracts; and
  • are aware of their product safety obligations.

Pointon Partners has experience in advising on trade practices and consumer protection issues and is able to advise on the effect of the introduction of the ACL and associated compliance issues.

If you have any queries about the reforms outlined above, or if you have any other trade practices or consumer protection queries, please feel free to contact our office.

summary judgment under the civil procedure act 2010

Written by: Amelita Hensman, Senior Associate

The new Civil Procedure Act 2010 (Vic) (‘the Act’) came into operation on 1 January 2011 and makes a number of reforms to Victoria’s civil procedure laws.

This article focuses on one of the reforms namely the changes to the test for summary judgment. Summary judgment is the determination of a proceeding in a summary way, that is, without a trial in the ordinary sense. A plaintiff can apply for summary judgment at any time after the defendant has filed a Notice of Appearance.

A defendant may apply for summary judgment on a plaintiff’s claim or a defendant who counterclaims may apply for summary judgment on the counterclaim.

Prior to the changes to the test for summary judgment brought about by the Act summary judgment was difficult to obtain as the test of a Court’s summary powers to terminate proceedings was difficult to satisfy. Chief Justice Barwick in General Steel Industries Inc v Commissioner
for Railways (NSW) (1964) summarised the various formulations of the test as follows:

  • ‘so obviously untenable that it cannot possibly succeed’;
  • ‘manifestly groundless’; ‘so manifestly faulty that it does not admit of argument’;
  • ‘discloses a case which the Court is satisfied cannot succeed’;
  • ‘under no possibility can there be a good cause of action’;
  • ‘be manifest that to allow the pleadings to stand would involve useless expense’.

Under section 61 of the Act however a plaintiff (or plaintiff by counterclaim) may apply for summary judgment on
the ground that a defendant’s defence, or part of that defence, has no real prospect of success. Similarly section 62 of the Act provides that a defendant (or defendant by counterclaim) may apply for summary judgment on the ground that a plaintiff’s claim, or part of that claim, has no real prospect of success.

Section 63 of the Act provides the courts (Supreme, County and Magistrates’) with power to give summary judgment if satisfied that a claim, defence or counterclaim has no real prospect of success. The Court may do so on application or of its own motion.

The current ‘no real prospect of success’ test imposes a different and less stringent test than the ‘no reasonable cause of action test’ espoused in the General Steel Industries case. The no real prospect of success’ test for summary judgment in Victoria will be similar to that used in Queensland and the Federal Court.

In the Federal jurisdiction it has been held in Fortron Automotive Treatments Pty Ltd v Jones (No 2) (2006) that the ‘no real prospect of success’ test may be satisfied where there is a defect in the pleadings which may not
be cured, or where there is evidence which reasonably excludes the possibility that facts essential to the success of the claim or defence will be able to be satisfied.

The Queensland Court of Appeal has also held in Deputy Commissioner of Taxation v Salcedo (2005) that the ‘no reasonable prospects of success’ test requires the court to determine whether there are “real” as distinct from “fanciful” prospects of success.

It has been suggested in the case of Jefferson Ford Pty Ltd v Ford Motor Company of Australia (2008) that that the ‘no real prospect of success’ test has the effect that where the party making the application has established a case that its opponent has no reasonable prospect to a prima facie standard, the opponent must identify specific factual or evidentiary disputes to make a trial necessary; generalised details will not suffice to defeat the motion.

Section 64 of the Act retains the court’s discretion to allow a matter to proceed to trial despite there being no real prospect of success because it is not in the interests of justice to dispose of the matter summarily or the dispute is of such a nature that only a full hearing on the merits is appropriate.

It will be interesting to see how the Victorian Courts apply the new and less rigorous test for summary judgment.
A party involved in litigation should consider whether an application for summary judgment is warranted in their particular circumstances. If you have any queries in relation to this article please contact Andrew Cox or Amelita Hensman of our office.

protecting your
brand against parallel importation

Written by: David Mazzeo – Director

The Australian dollar has proven its weight in gold over the past year, having reached and surpassed parity with the American greenback. While this is great news for the Australian economy, the downside to this strength is the risk of Parallel importation. This article sets out to explain what parallel importing is and what you can do to prevent this from occurring to your brand.

What is parallel importing?

Parallel importation describes a situation whereby goods manufactured by the lawful owner in a foreign market are lawfully permitted to import into Australia without
the permission of the local authorised distributor, user, registered trade mark owner or the owner of copyright.

If a competitor can purchase the same legitimate goods from a source overseas at a cheaper price than what is being charged in Australia by the local distributor, they may decide to import the goods themselves, sell the goods for a cheaper price in Australia and thereby jeopardise the brand and goodwill the authorised distributor has built up. These goods are not counterfeits, they are usually legitimate products produced by the original brand owner.

Changes to the Trade Marks Act 1995 (Cth) (‘the Act’) has meant that it is all the more important that a distributor in Australia secure rights to the trade mark, for example by way of assignment or registration in Australia of the trade mark. This is because the original brand owner in the foreign country will have consented to the use of the trade mark on the goods in question. As outlined below, this consent provides the parallel importer with a defence to claims brought against them.

Consent – A defence to parallel importation and trade mark infringement

Section 123 of the Trade Marks Act 1995(Cth) may provide a defence to trade mark infringement proceedings where parallel importing is permitted on account of the trade mark owner having expressly consented or where consent was implied:

  1. In spite of section 120, a person who uses a registered trade mark in relation to goods that are similar to goods in respect of which the trade mark is registered does not infringe the trade mark if the trade mark has been applied to, or in relation to, the goods by, or with the consent of, the registered owner of the trade mark.
  2. In spite of section 120, a person who uses a
registered trade mark in relation to services that are similar to services in respect of which the trade mark is registered does not infringe the trade mark if the trade mark has been applied in relation to the services by, or with the consent of, the registered owner of the trade mark.

The importance of registering a trade mark
in Australia

Where the Australian distributor is the registered owner of the trade mark in Australia and is an unrelated entity to the original brand owner, they are in a much stronger position than the original brand owner. Whereas the original brand owner would have consented to the use of the trade mark on the goods initially, the Australian trade mark owner could not have provided their consent to use of the mark at that point in time and consequently to the use of the mark in Australia.

Trade mark infringement proceedings may be brought against the parallel importer to enforce trade mark rights. There are also similar rights attached to copyright and owners of copyright can also seek to protect their rights in a similar fashion.

Fender Australia Pty Ltd v Bevk t/as Guitar Crazy (1989) 15IPR 257 is an example of when the Federal Court of Australia has found that an infringement of trade mark has occurred as a result of parallel importation. Fender Australia Pty Ltd was the authorised distributor of Fender guitars in Australia. Fender Australia Pty Ltd had been assigned the right to use the Fender mark in Australia by the US registered proprietor. Bevk purchased new and second-hand Fender guitars from retail stores in the US and attempted to resell them in Australia.

His Honour Burchett J held that:

If, in such a case, a parallel importer purchases the genuine goods sold under the overseas mark, imports them into Australia, and sells them here under the Australian mark, the genuineness of the product and its identity with that sold by the registered proprietor in Australia will not avoid infringement.1

Burchett J held that Bevk had infringed Fender Australia’s trade mark. Fender Australia could not be taken to
have consented to Bevk’s use merely because the US manufacturer had not placed restrictions on the export of its products.

Fender Australia was an independently controlled entity which had developed its own goodwill. Its relationship with the US proprietor was purely contractual and it had assigned the right to use the trade mark.

On the other hand, the case of Revlon Inc v Cripps and Lee Ltd2 is a UK decision which resulted in the Defendant having been found not to have infringed the Plaintiff’s trade mark.

Revlon manufactured toiletries & cosmetics. One of the companies subsidiaries, Revlon Suisse SA was the owner of the ‘Revlon’ and ‘Revlon Flex’ trade marks in the UK. Revlon International & Revlon Inc. marketed shampoos and conditioners in the UK under the ‘Revlon Flex’ trade mark. Revlon Inc. commenced sales of a ‘Revlon Flex’ anti-dandruff shampoo and conditioner in the US but not in the UK. Shortly thereafter, the product was discontinued in the US and surplus stock was sold to wholesalers and also distributed to various charities on the condition that they were not to be re-sold.

Cripps and Lee Ltd imported the US anti-dandruff shampoo and conditioner from the US to the UK and marketed the product under the mark ‘Revlon Flex’.
The Plaintiffs alleged the Defendant was passing off their mark and also infringing their registered trade marks.
The Court found that the ‘Revlon Flex’ mark had been used internationally which indicated that the ‘Revlon Flex’ range originated from the Revlon Group of companies. Revlon Inc maintained overall control of the Revlon Group. The Group of companies had consented to the ‘Revlon Flex’ mark being used as a group mark to disseminate products.

Consent could be implied as Revlon Inc did not impose on its U.S wholesalers any conditions prohibiting the export of goods from the US. Purchasers relied on the international reputation of the Revlon group. So long as the goods bore the legitimate mark of the Revlon Group, the source of the goods was immaterial.

Conclusion

An authorised distributor can also rely upon section 18, Schedule 2 of the Competition and Consumer Act 2010 (Cth) (which, as of 1 January 2011, has replaced section 52 of the Trade Practices Act 1974 (Cth)) for misleading and deceptive conduct and also the tort of passing off.
It could be argued that the parallel importer has made false representations to the general public that they are the authorised distributor of the goods in Australia and that the original brand owner has authorised that sale.

It is important that an authorised distributor consider securing the rights to a trade mark in Australia so that they are in a strong position to enforce and protect their rights.

security of payment: what you need to know about getting paid

Written by: Michael Bishop – Director

Security of payment is a hot issue for the building and construction industry. The prospect of not being paid
in full or on time for work provided or goods supplied is
a harrowing one, especially given the industry’s heavy reliance on cash-flow to sustain business. The risk is heightened by contractual chains that typically develop between principals, agents, contractors, sub-contractors, suppliers and advisors, and their cascading payment obligations. One glitch in the contractual chain, such as a delay in payment or a party becoming insolvent, can have ramifications for all involved.

In light of this, industry participants should be aware that there is a quick and inexpensive way to get paid under the Building and Construction Industry Security of Payment Act 2002 (Vic). Moreover, recent changes to the Act create clearer avenues for dispute resolution that apply

to contracts which have been entered into on or after 30 March 2007.

How does it work?

Payment Claims

A person who has performed work or supplied goods
and services under a construction contract in Victoria can claim progress payments by giving a ‘payment claim’ to the relevant contractor, purchaser or client. These can
be made by contractors, subcontractors, suppliers of materials or building components, architects, engineers and other providers of building advice. Payment claims can be made in any form (e.g. an invoice), but must contain the following elements to be valid:

  • Specification of the work, goods or services provided;
  • Specification of the amount claimed; and
  • Statement that: “This is a payment claim under the Building and Construction Industry Security of Payment Act 2002”

Payment Schedules

Upon receiving a payment claim, the respondent can
either pay in full or, if they dispute the amount due, give the claimant a ‘payment schedule.’ This sets out how much the respondent is willing to pay and why it is different from the amount claimed. Under the Act, respondents who fail to provide a ‘payment schedule’ within 10 business days (or time specified in contract – whichever is earlier) are liable to pay the full amount claimed.

Dispute resolution

If the respondent…

  • Neither provides a payment schedule nor pays the whole of the ‘claimed amount’ (the amount claimed on the payment claim) on time;
  • Provides a payment schedule and the ‘scheduled amount’ (the amount the respondent proposes to pay) is less than the claimed amount; or
  • Provides a payment schedule but does not pay the scheduled amount by the due date 
Then the claimant can apply for adjudication 
- Apply for adjudication or go to court to recover the unpaid amount
  • Exercise a lien over unfixed plant and materials
  • Suspend work or the supply of goods and services
until the amount payable has been paid. The respondent must be given three business days’ written notice of the suspension and the notice must state that it has been made under the Act. A claimant who exercises this right under the Act is not liable for any consequential loss or expense suffered by the respondent.

For advice on exercising rights under the Act, please contact Pointon Partners. Sample forms for payment claims and fact sheets about payment schedules can also be found on www.buildingcommission.com.au.

with big savings come big risks

Written by: Laszlo Konya – Senior Associate

A recent decision of the Administrative Appeals Tribunal in Sinclair v Commissioner of Taxation [2010] AATA 902 highlights the traditional distinction between lawyers and accountants and the importance of obtaining legal advice regarding the tax implications of complex or unusual transactions. 
In this case, Mr Sinclair entered into a contract to purchase a property. The vendor was cash strapped and the vendor’s mortgagee was threatening to foreclose
on the property. The terms of the contract were unusual because Mr Sinclair agreed to pay $99,000 to the vendor’s mortgagee in satisfaction of interest due and payable by the vendor to the mortgagee between the sale date and the settlement date. If the interest due and payable turned out to be less than $99,000, then Mr Sinclair agreed to pay the balance to the vendor. 
Mr Sinclair claimed a deduction of $99,000 in his income tax return for the year in which the amount was paid
to the vendor’s mortgagee as interest on a loan. The Commissioner of Taxation did not accept the deduction and issued a penalty to Mr Sinclair.

Mr Sinclair sought legal advice regarding the contract only. He sought accounting advice as to his claim for a deduction, which the accountant recommended.
Mr Sinclair appealed to the Tribunal, which upheld the Commissioner’s decision on the basis that:

  •  the amount was paid to satisfy the vendor’s obligations under a loan agreement to which Mr Sinclair was not
a party;
  •  the vendor’s mortgagee acknowledged receipt of
the amount on the vendor’s account but there was no evidence of the vendor’s mortgagee accepting the amount as payment of interest; 
- the contract of sale capped Mr Sinclair’s liability for interest due and payable by the vendor at the amount, however if interest accrued in addition to the amount, then the vendor would be liable for it; 
- the amount was clearly part of the purchase price and therefore a capital expenditure;
  • 
the vendor’s mortgagee did not consent to the transfer of the liability to pay interest from the vendor to Mr Sinclair; and 
- notwithstanding the above, Mr Sinclair did not gain assessable income from the property.

The Tribunal also upheld the penalty of 25% issued by the Commissioner to Mr Sinclair on the basis that the claim
for the deduction was false in a material particular. Mr Sinclair was mature in age, he worked as a stockbroker and he had good knowledge of property development.
Mr Sinclair’s attributes did not give him any particular knowledge of tax law, however the Tribunal found that he should have been aware that there may be tax implications in connection with the contract he decided to enter into. The Tribunal found that Mr Sinclair did not seek legal advice in relation to the tax implications of the contract as a reasonable person would have.

This case highlights the importance of seeking appropriate legal advice in relation the tax implications of complex
or unusual transactions. The cost of not obtaining legal advice may result in you paying for it dearly.

asic and james hardie litigation – nsw court of appeal judgement

Written by: Phillip Grundy – Director

Implications for non-executive directors

Former non-executive directors of James Hardie Industries Ltd (‘JHIL’) have successfully appealed against the Supreme Court of New South Wales decision which had ruled they breached their duty of care and diligence by approving an ASX company announcement which was found to be misleading.

Summary

  • The non-executive directors were found not to have approved the draft ASX announcement which was misleading and led to a finding of a breach of duty. However, it was noted that had they approved the draft announcement, then a breach of duty would have been made out.
  •  ASIC were found to have failed to discharge their burden of proof by not calling a key witness (the company’s external lawyer) who could have provided evidence as to whether the non-executive directors approved the draft announcement. In civil penalty proceedings, ASIC has an obligation to call such a key witness in the interests of fairness.

This case serves as a timely reminder that directors must exercise care when making and approving company announcements:

  • Directors should carefully consider the wording used in announcements, and be careful not to use definitive and emphatic language unless certain or justifiable.
  • Prior to voting on board resolutions, directors should review and familiarise themselves with the content of a resolution to ensure that they make fully informed decisions at board level.
  • If they are participating by telephone link, they should ensure that all relevant materials subject of the board meeting have been provided to them for their review and consideration. 
Background 
By way of background, this litigation arose out of a decision of the board of James Hardie Industries Ltd (‘JHIL’) made 15 February 2001 to establish a compensation foundation to payout James Hardie’s asbestos claims liabilities and to research asbestos related diseases. 
An announcement was made to the ASX on 16 February 2001 confirming that the foundation had been established and that it had sufficient funding to meet the liabilities arising from asbestos claims against JHIL subsidiary entities. However, this assertion proved incorrect as the level of funding was insufficient to meet the
asbestos claims.

ASIC brought civil penalty proceedings against the company officers who approved the 16 February 2001 ASX announcement.

At first instance, Gzell J found that the company’s directors had approved the draft ASX announcement, and in doing so, breached their duty to act with care and diligence in the exercise of their powers and discharge of duties.

The non-executive directors, the company’s Chief financial officer and company secretary/general counsel appealed the decision.

Key Findings relating to Non-executive Directors:

  1. ASIC failed to discharge its burden of proof in establishing that the non-executive directors approved
the ASX company announcement at the relevant board meeting. ASIC failed to call the company’s external
lawyer, an important and available witness who could
give evidence regarding whether the non-executive directors had approved the draft announcement. The final announcement incorporated amendments suggested by the company’s external lawyer who was also present at the meeting. ASIC was found to have an obligation to call this witness in the interests of fairness.
  2. As ASIC had not made out that the non-executive directors had approved the draft ASX announcement, the declarations of contravention were set aside.
  3. However, it is important to note that had the non- executive directors been found to have approved the draft announcement, then they would have breached their duty of care and diligence.
  4. Although non-executive directors may not be involved in a company’s day to day operations, they are officers of the company and will be liable for a failure to meet the standard of care and diligence expected of someone in their position.
  5. Non-executive directors may be afforded greater allowance to rely on management than executive directors, however, this may not be the case where the matter is of sufficient significance and seriousness for the company. The circumstances of this case were not such where non- executive directors could simply rely on management.

ASIC seek to appeal to the High Court

On 14 January 2011, ASIC announced that they were seeking special leave to appeal to the High Court.

This update focuses on the issues arising from the proceeding that are relevant to non-executive directors.

If you have any queries regarding these matters then please contact Michael Bishop, Partner or
Phillip Grundy, Lawyer.

behind-the-scenes negotiations held to constitute misleading and deceptive conduct – vendors beware!

Written by: Ted Vlahos, Director

In a recent decision of the Supreme Court of New South Wales, a vendor’s conduct in not disclosing parallel dealings in sale negotiations was found to be misleading and deceptive.

The case, Fabcot Pty Limited v Port Macquarie-Hastings Council [2010] NSWSC 726 (2 July 2010), is a reminder of the need for diligence to be exercised by vendors when negotiating with multiple parties in circumstances where the vendor creates a reasonable expectation that it will negotiate with only one party at a time. The case is relevant to all jurisdictions in Australia.

The facts

Port Macquarie-Hastings Council (Council unsuccessfully ran an “Expression of Interests” (EOI) process in late 2005 to sell a supermarket development site. In late 2007, the Council ran a second EOI process, with both Coles and Woolworths as final bidders. In early 2008, the Council selected Woolworths and approved their proposal subject to certain conditions.

  •   Negotiations between Woolworths and Council came to an impasse in early 2009 over issues regarding contamination indemnities and developer contribution levies.
  •   In April 2009 the Council decided to get in touch with Coles to see if it was still interested in the site. This was the Council’s self-described “back-up plan”. As it turned out, Coles was very interested in the site. The Council originally planned to tell Woolworths that it had restarted communications with Coles. Usually, informing a bidder that there are other interested parties is one of the best ways to reintroduce some competitive tension. However, for reasons unknown, the Council deliberately refrained from telling Woolworths.
  •   As negotiations with Woolworths were coming to a head, the Council was busy behind the scenes finalising its deal with Coles. Coles moved quickly to take up
the opportunity. Whilst Coles’ bid contained provisions regarding site contamination, these were slightly more favourable to the Council than those insisted upon by Woolworths. Contracts with Coles were prepared and then signed on 1 July 2009. In short, Woolworths had been gazumped.
  • When it found out about the sale to Coles, Woolworths sued the Council. It alleged that the Council’s non- disclosure of its behind-the-scenes negotiations with Coles was misleading and deceptive. More specifically, Woolworths alleged that it had a “reasonable expectation” that it would be told if its negotiations with the Council were not, or had ceased to be, exclusive.

Decision

The Court agreed with Woolworths. It thought the following factors were key to giving rise to the “reasonable expectation” in this instance:

  • the EOI process involved the selection of only one bidder for negotiation (although there was actually nothing in the EOI documentation which indicated that the Council would deal with only one party);
  • the Council had approved Woolworths’ bid (although that approval was subject to further negotiation in relation to several matters);
  • after being short-listed, a potential buyer still had to expend considerable time and money to realise the opportunity; and
  • the Council’s starting a new EOI process when the negotiations stalled after the first EOI process indicated that Council would only involve other interested parties if a new EOI process was undertaken.

Although not raised in the case, it is possible that the identity of the vendor was also a factor in recognising a reasonable expectation in this instance.

The Court specifically held that the lack of a contractually binding exclusivity arrangement did not “displace the reasonable expectation that the Council would not clandestinely conduct negotiations outside the framework of the process”. Overall, the Court concluded that 
the Council’s conduct fell “well short of commercial
fair dealing” and “well short of the standards which a commercial party dealing [with the Council] was entitled to expect”.

Unfortunately for Woolworths, the Court held that, even if
it had been told about the Council’s parallel negotiations with Coles, Woolworths still would not have bought the site because the contamination indemnity was a deal-breaker on which neither the Council or Woolworths were prepared to concede. The Court reached this conclusion even though at the trial Woolworths claimed that it would have conceded on the indemnity if it had known that the Council was about to sell to Coles.

Implications

The case generates a clear liability risk if a vendor fails to tell its shortlisted bidder that the vendor is going to restart negotiations with other bidders. The case is particularly significant because it is the first case to recognise a “reasonable expectation” regarding the disclosure of what is essentially the vendor’s strategic planning, rather than the disclosure of information regarding the actual asset proposed to be sold.

Although every case will depend on its own special facts (including the identity of the vendor), vendors should consider some steps to keep their options open and thus minimise exposure to “reasonable expectation” claims of the type made by Woolworths. For instance, a vendor should not act in a way to implicitly suggest exclusivity. Rather, the vendor should reserve its position and keep
its options open. Well-drafted sale process provisions in the sale process documents may also assist, by expressly stating what the expectations of the parties are.

flooding – a force majeure?

Written by: Andrew Cox

The devastating recent flooding in Queensland, Victoria and New South Wales will have many legal consequences, in addition to sociological consequences. For those businesses fortunate enough to have not been affected
by the floods, they were a reminder, amongst other
things, to ensure that in the event of a flood or other like event beyond the party’s control, your business would be adequately protected.

Now is the opportune time to review your contracts to ensure that they contain properly drafted force majeure clauses which will protect your business or the business of your goods or service provider.

A particularly unsavoury eventuality for businesses which fall victim to flood would be for an unforgiving counterparty to seek performance of a contract in circumstances where it is particularly burdensome or worse, impossible to do so, leading inevitably to a claim for breach of contract. A properly drafted force majeure clause will guard against further hardship in the event of a flood or other like unforeseeable events.

“Force Majeure” – what does it mean?

First things first, I’ll spare you the need to consult your French dictionary. “Force majeure” is a concept of French law and so when used in Australian legal documents it has required the Australian courts to give it meaning. In Agricultural and Rural Finance Pty Ltd v Atkinson and Ors. [2006] NSWSC 202, the concept was said to have a relatively definite meaning that is wider than an act of God, but invariably involves a physical or material constraint

imposed by an external actor on the performance of a party’s obligations under a contract.

The concept does not however encompass all events which are beyond the control of the parties. For example, changes in economic conditions do not constitute a
force majeure event (see Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235). In Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd 235 ALR 115, Justice Kiefel noted that Australian courts have characterised force majeure events as events that are:

(a) irresistible;

(b) unforeseeable; and

(c) external to the person claiming discharge; and has

(d) made performance impossible and not merely onerous or difficult.

Critically, Justice Keifel also recognised that “impractability [sic] of performance is not generally recognised as a ground of discharge of a contracting party’s obligations.”

Therefore, the occurrence of the event is not a ‘get out
of jail free’ card; it will not excuse the affected party
from performance where a reasonable alternative for performance exists. Goods and service providers should build the costs of these types of contingencies into their business; if they don’t, their competitors will and will pick up business following a force majeure event. For the counterparty relying on the services of the affected party, because impracticability of performance is not an excuse, a level of protection is provided from opportunistic parties seeking to hide behind the protection of a force majeure clause where performance should not, in all fairness, be excused.

Practical Considerations

Where an event occurs that is specifically covered by the clause, the outcome is determined by reference to the clause.1 If it is not specifically covered by the clause, the court will determine whether the event can be classified as a force majeure event by reference to the criteria cited by Justice Keifel above.

It is thus more protective for the party who may be affected by a force majeure event to broaden the clause, specifying all events which may occur and make performance impossible. That will force the counterparty to argue that the clause has a meaning contrary to that which is clearly expressed; an argument which courts may accept, but generally do so with great reluctance. If the clause does not specify the particular event, the affected party must make the more difficult and uncertain argument that the event fits the abovementioned criteria.

Take note of what the clause permits the parties to do, whether it allows for termination or suspension or whether it mandates an alternative operation of the contract during the force majeure event. If you are the party seeking the safe-harbour of the force majeure clause, it would be prudent to ensure the clause excuses performance and depending upon the value of the contract to your business, either allows for the resumption of the contract after the force majeure event or the termination of the contract altogether. If you are the counter-party, an alternative operation of the contract during the force majeure event, such that the supply of product or service in relation to your business is not disrupted, would probably be preferable.

Further, the clause may be worded to place additional contractual obligations on one or other party to facilitate a quicker resumption of the contract or the implementation of the alternative contractual operation, depending on what is envisaged.

The clause may also involve time limits or notification periods. For the affected party, less stringent and/or onerous notification requirements and lengthier notification periods would be preferable. If the occurrence of the force majeure event is itself going to make compliance with the notification requirements difficult or impossible, the protection the clause may offer will be completely undermined. For the counterparty, the converse will generally be true. In considering these factors, it is worth noting that courts generally require strict compliance with force majeure clauses.

Finally, consider whether it is appropriate to suspend the counterparty’s obligations also. For the affected party, continued payments may prove integral to the long-
term survival of the contractual relationship, if that is envisaged. Conversely, for the non-affected counterparty, the continuation of their liability to pay may not be feasible during an extended force majeure event. In this case, parties should consider placing a time limit on the duration of the force majeure which suits the particular industry and which enables the implementation of other remedial consequences upon its expiration.

For all considerations above, the existing business relationship between the parties may end up playing the greatest role in determining the boundaries of the force majeure clause adopted.

As noted at the beginning of the article, now is an opportune time to consider the operation of force majeure clauses upon your business. Some time spent pro-actively considering these issues now may save considerable time and expense upon the occurrence of a force
majeure event.

If you have any queries concerning force majeure clauses, please feel free to contact our office.

CLIENT CORNER
ENABLING THE BLIND TO SEE

Written by: Melissa Merrett – Whittlesea Leader

We are pleased to include a recent article from “The Whittlesea Leader Newspaper” about the Eyes for Africa Charitable Foundation. Pointon Partners has provided pro bono legal services to the foundation since its’ establishment in 2007. If you would like to find out more about Eyes for Africa, contact Michael Bishop or go to www.eyesforafrica.org

A MERNDA nurse is combining her love of Africa with her passion to restore the eyesight of some of the world’s poorest people.

Julie Tyers, who has worked at Melbourne’s Eye and Ear Hospital as an ophthalmic nurse for more than 30 years, has dedicated her life to helping Victorians improve and restore their eyesight.

But in the past five years she has taken her passion to the remote villages of Africa.

After volunteering with a number of Australian-based aid charities in Tanzania, Ms Tyers said she made the decision to do similar work in rural areas of Ethiopia.

“I founded the charity Eyes for Africa in 2007 because I had seen the need in Ethiopia and I knew I had the skills to help,” she said.

“I have found there is no eye care at all in these rural areas. These people have no money for transport to hospital, let alone an operation.”

She recently returned from her fifth trip, where a team of eight volunteer ophthalmologists and medical staff did 190 cataract surgeries.

With the help of donated surgical equipment and funds, the team’s main focus was to treat blindness among the country’s nomad tribes in the remote southern areas of Buta Jira and Omo Valley.

In 2006, a national survey found that more than one million Ethiopians were blind and three million had low vision, and only 77 ophthalmologists were in the country treating
the problem.

Each operation costs between $40 and $50, depending on donations.

But Ms Tyers said for such a small cost came massive rewards.

“During the last trip I cried when this young boy, aged about six, opened his eyes after surgery and said he could see his mum for the first time,” she said. “It’s very cheap for us to restore the sight for someone. But the people are so amazingly grateful once they can see again.”

Now Ms Tyers and a team of doctors and nurses, including her eldest son Cameron, are planning another visit to Ethiopia in June. Donations can be made to the Eyes for Africa Foundation at eyesforafrica.org

POINTON PARTNERS ACTS FOR

FORTIS MINING LTD ON ITS ASX LISTING IN DECEMBER 2010

Written by: Michael Bishop, Director & Phillip Grundy, Director

Pointon Partners recently advised Fortis Mining Ltd (‘Fortis’) on its initial public offering to list on the Australian Securities Exchange.

Fortis listed on the ASX on 15 December 2010 and since listing, has traded at a significant premium to the IPO offer price of $0.20 per share. The ASX code for Fortis is ‘FMJ’.

Fortis is a gold and base metals exploration company with mining tenement interests that lie within the Norseman – Wiluna belt in Western Australia.
Fortis has also recently announced plans to expand internationally by signing Heads of Agreement to acquire an interest in two significant Potash assets located in Kazakhstan.

Pointon Partners advised Fortis and its directors on a range of issues arising on the IPO, including:

  • Negotiating the acquisition of exploration and prospecting licences over mining tenements from the respective tenement vendors;
  • Preparing the Prospectus for the share offer; and
  • Applying to list on the ASX, ensuring that Fortis satisfied relevant ASX listing conditions.
  • Pointon Partners were able to guide the Fortis IPO with timely and efficient legal advice, ensuring that the ASX listing was successfully achieved within the timeframe sought by Fortis and its directors.
  • If you have any queries regarding listing a public company, or require any advice in relation to these matters generally, then please feel free to contact Michael Bishop or Phillip Grundy of our office.
  • The articles contained in this Update are intended for information purposes only and are not intended to constitute advice. Please contact us to discuss any particular and specific circumstances even where they are similar to circumstances depicted in this Update. For further information
  • or advice please contact us.

POINTON PARTNERS & STREAM TELECOMMUNICATIONS

“Pointon Partners commenced with Stream back
in November 2010, and to date we have saved between 40%-60% on our phone bill. So basically within 3 months, we have almost paid for the “Set-Up” costs, which is brilliant. Pointon Partners recommends this service to any of our clients wishing to save on calls within and out of Australia”.