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What do you need to do?This publication aims to provide you with an overview of recent legal developments that are relevant to your business. Should you wish to discuss any of the information attached please contact the relevant Partner.
Scott Budd
Partner
T +61 7 3244 8054
Matthew Austin
Special Counsel
T +61 7 3244 8108
Brisbane
Aaron Bourke
Nicole Heller
John Humphrey
Justin McDonnell
Risk of inserting ‘Nil’ or ‘N/A’ in Annexure of Australian Standard Contracts
Silent Vector Pty Ltd t/as Sizer Builders v Squarcini [2008] WASC 246
A property developer (the ‘Respondent’) and contractor (the ‘Applicant’) entered into a building contract using the Australian Standard General Conditions of Contract AS2124-1992 (the ‘Contract’) for the construction of a 12 storey apartment building.
Subsequently, numerous disputes arose which were referred to arbitration. One of the Respondent’s claims in the arbitration was for general damages for non-completion by the Date for Practical Completion and the arbitrator ruled in the Respondent’s favour.
The Applicant sought leave to appeal this decision, claiming that on the proper construction of the relevant clause of the Contract, the Respondent was not entitled to such damages for delay.
Clause 35.6 of the Contract stated that if the Applicant failed to reach Practical Completion by the Date for Practical Completion, then the Applicant would be liable to pay the Respondent liquidated damages for each day which exceeded the Date for Practical Completion at the rate set out in the Annexure to the Contract. In respect of clause 35.6 in the Annexure, beside the item entitled ‘Liquidated Damages per day’ was handwritten ‘N/A’, which was initialled by both parties. However, the parties had written ‘NIL’ in respect of one of the other items contained in the Annexure.
Reading the Annexure in light of the entire Contract, the arbitrator adopted a broad interpretation in concluding that the use of the abbreviation ‘N/A’ in the Annexure meant that the parties intended that the entire clause 35.6 was not applicable and not that the rate at which liquidated damages was fixed was nil. In reaching this position the arbitrator concluded that the use of the two different terms in the Annexure (ie ‘N/A’ and ‘NIL’) indicated that the parties intended them to bear different meanings. He also held that a number of clauses in the Contract as well as letters of intent evinced an intention to preserve the common law right to claim damages for delay. He ruled that the parties had failed to use ‘clear and unequivocal words’ in expressing any intention to abandon a remedy in general damages. Thus the arbitrator held that the option to claim general damages was left open to the Respondent and the Applicant was liable to pay damages.
In considering whether to grant leave to appeal, the judge was to determine whether the arbitrator made an error of law in deciding that the Respondent was entitled to claim general damages.
The judge agreed with the arbitrator that a reasonable person would believe that the use of the different terms ‘N/A’ and ‘NIL’ were to bear different meanings. Therefore, he agreed that the inclusion of ‘N/A’ beside clause 35.6 indicated that the entire clause was no longer applicable to the Contract, thereby leaving the Respondent’s option to claim general damages intact. The judge concluded that any alternative construction of the clause and Annexure would result in consequences which were ‘unreasonable, inconvenient or unjust’ to one or other party.
The judge conceded that:
“There is no doubt that there is an issue in the construction industry as to the meaning of amendments or additions to standard form contracts containing liquidated damages clauses which have rates for liquidated damages inserted as ‘NIL’ or ‘N/A’. The constructions of such contracts is not certain given the unlimited ways standard form contracts containing liquidated damages clauses can be altered and completed……However, in my opinion the delivery of another case interpreting such a clause in a particular contract which has been amended in a particular fashion by the parties is unlikely to add to the certainty of commercial law.”
In light of this, the judge confirmed that he saw no need to grant leave in this case and instead advised that parties to such contracts should exercise caution when deleting, amending or adding clauses to contracts and do so in a clear and consistent manner. The uncertainty which exists in this area primarily occurs because parties fail to adhere to this principle.
Exercise caution when deleting, amending or adding clauses to contracts and particularly when considering using the words ‘N/A’ and/or ‘NIL’. |
Author
Scott Budd, Partner
Serving payment claims via facsimile - risk of non-receipt
Zebicon Pty Ltd v Remo Constructions Pty Ltd [2008] NSWSC 1408
A contract between Zebicon and Remo provided a reference date of the 20th of each month, unless the 20th day was not a business day, in which case the reference date would be the next following business day.
Zebicon argued that it had served a payment claim on Remo on the 19th of July 2008 (which was a Saturday) by facsimile. Remo claimed that it did not receive the document as the fax machine was ‘playing up’. A facsimile transmission report produced by Zebicon at the hearing indicated a positive transmission result ‘OK’.
Whilst the Court accepted that the fax machine was indeed malfunctioning, and at that time did not print out faxes that had been received, it was held that the Payment Claim was successfully transmitted and received by Remo on 19th of July 2008.
It did not matter that the document was not brought to the attention by someone at Remo’s office where the facsimile machine was located and that it was not printed out. The Court reasoned that if such factors were relevant, it would essentially mean that a recipient of a facsimile could avoid service by means of facsimile, by simply ensuring that the paper tray in the machine remained empty.
Counsel for Remo further argued that section 31 of the Building and Construction Industry Payments Act 1999 (‘the Act’) required the Payment Claim to be lodged ‘during normal office hours’. Section 31(1) provides:
Any notice…may be served on the person:
- by lodging it during normal office hours at the person’s ordinary place of business, or
- by sending it by post or facsimile addressed to the person’s ordinary place of business.
The Court held that the requirement of ‘normal office hours’ did not apply to documents sent by post or facsimile addressed to the person’s ordinary place of business.
Finally Remo argued that the Payment Claim could only be served on the 21st of July 2008 (pursuant to the reference date under the Contract). The Court suggested that ‘premature service may have afforded a good answer to [the] payment claim’, however as this was not raised in the payment schedule, the Court was not required to make a determination on it.
Documents served by facsimile pursuant to 31(1)(c) of the Act, are not required to be served in ‘normal office hours’ and service can still be effective service even if faxed documents are not printed out by the machine. Even if the machinery is malfunctioning, this will not automatically provide the recipient with a means of relief.
Author
Scott Budd, Partner
Acquisition of Land and Other Legislation Amendment Bill 2008 (Qld)
The Queensland Government recently introduced a number of amendments to the Acquisition of Land Act 1967 and the Land Act 1994 in a bid to clarify the rights of persons affected by compulsory acquisition.
The bill overturns the effect of a recent Court of Appeal decision (Sorrento Medical Service Pty Ltd v Chief Executive, Department of Main Roads) by excluding any person who only has a mere contractual interest (i.e. cleaning or maintenance contract) in the acquisitioned land from claiming compensation. Persons with a contractual right to enter land (such as an easement or car park license) will still have a right to claim compensation.
The Court of Appeal had extended the class of persons who may be entitled to claim compensation to those holding only a personal right in the land but not a proprietary right in the land. Prior to the recent Court of Appeal decision, the Act had been interpreted to mean that a person was only entitled to compensation in respect of resumed land if that person had a freehold or a leasehold estate, or an interest such as an easement.
This bill introduces a separate head of claim for disturbance items to simplify the land acquisition process. Disturbance items are those costs which are the reasonable and probable results of the acquisition and are not reflected in the valuation of the land (i.e. removal costs, reconnections, valuation and legal fees). Several other key amendments were also introduced by the bill:
- clarification that the taking of an easement under the Act does not extinguish any interests over the relevant land
- allowing for a notice of intention to resume to be served on a body corporate rather than each individual owner, and
- allowing claims for the consequential costs of purchasing a replacement investment property.
The bill can be viewed here.
Compensation in respect of resumed land will not be payable to a person with a mere contractual interest in the land. The proposed amendments seek to provide some clarity as to what will constitute ‘disturbance’ costs. |
Authors
Matthew Austin, Special Counsel
Holly Monks
New powers granted to the Coordinator-General under State Development legislation
The Queensland Government has amended the State Development and Public Works Organisation Act (‘SD Act’) following Parliament’s recent passing of the Revenue and Other Legislation Amendment Act (No.2) 2008 (‘Amending Act’).
The SD Act allows the Coordinator-General to declare complex projects of environmental, economic and social significance to be a ‘significant project’ for which an Environmental Impact Statement (EIS) is required. The amendments clarify that a proponent can apply for a significant project declaration or alternatively, the Coordinator-General can declare a project to be a significant project.
State and local governments have traditionally charged assessment fees for development applications. Under the amended SD Act, similar powers have now been granted to the Coordinator-General, allowing for the recovery of the costs of any services the Coordinator-General considers necessary to assist in assessing significant projects. Costs which the Coordinator-General may seek to recover from a proponent include any costs associated with the commissioning of an independent report into the project or the costs of public notification.
These recent amendments also clarify that the Coordinator-General’s decisions relating to significant projects are not subject to the Judicial Review Act 1991. Previously a decision of the Coordinator-General was regarded as being outside the scope of judicial review as there were no final decisions made of an administrative character. The Coordinator-General will however be required to provide reasons to a proponent whose application for a significant project declaration or a change to an existing proposal is rejected.
The Coordinator-General has also been granted increased compliance and enforcement powers. The Coordinator-General will be able to issue enforcement notices to compel compliance with any conditions imposed under the SD Act. The enforcement notices will mirror similar notices that can be issued under the Integrated Planning Act 1997 and Environmental Protection Act 1994. The maximum penalty (for a corporation) for non compliance with an enforcement notice is $832,500.00.
In certain circumstances, the Coordinator-General will be able to seek an enforcement order in the Planning and Environmental Court if there is a past, current or threatened contravention of an enforceable condition. The maximum penalty (for a corporation) for non compliance with an enforcement order is $1,500,000.00 or two years imprisonment.
Proponents of significant projects must take into account potential costs arising from the Coordinator-General’s ability to recover any expenses considered necessary for deciding applications under the Act. Proponents should also carefully scrutinise conditions attaching to Coordinator-General’s evaluation reports as the Act now contains powers for the Coordinator-General to compel compliance. |
Authors
Matthew Austin, Special Counsel
Kelli How
Native title reforms on the agenda in 2009
In late 2008, the Federal Government released two discussion papers with the broad aim of delivering greater intergenerational social and economic wealth for indigenous communities under native title agreement negotiations. The foreshadowed reforms have been instigated as part of the Rudd Government’s overall pledge to ‘close the gap’ between indigenous and non-indigenous Australians.
In the first discussion paper released on 8 December 2008, ‘Optimising benefits from Native Title Agreements’, a number of key reforms are proposed with the aim of delivering meaningful, long term social and economic benefits to indigenous communities. The discussion paper raises a number of issues for comment and possible legislative reform. Key issues raised include:
- agreements - the creation of template Indigenous Land Use Agreements (ILUAs) containing both optional and mandatory clauses imposing minimum statutory benefits, which may assist with dispute resolution
- benefits - encouraging the provision of more effective benefits under ILUAs which allow for sustainable intergenerational socio-economic development including support for employment, leadership and resources to assist with negotiating agreements, and
- taxation - the creation of new trust vehicles, tax incentives and tax exemptions to ensure long term financial benefits to indigenous groups.
If a number of the reforms proposed in the discussion paper are ultimately adopted by the Federal Government, they will need to be taken into account when drafting and negotiating native title agreements. Submissions on the issues raised in the discussion paper can be made by 13 February 2009.
The second discussion paper, entitled ‘Proposed minor native title amendments’, was released on 23 December 2008 and outlines reforms to the rules governing the admissibility of evidence in native title proceedings and the areas covered by Native Title Representation Bodies (NTRBs). The discussion paper proposes that the role of the Federal Court of Australia in managing claims be expanded in a bid to increase the portion of native title claims resolved through negotiation and mediation. This proposal reflects the Federal Government’s concerns that costly litigation serves to reduce the potential benefits accorded to indigenous communities under native title legislation.
Further details will be available once the consultation process is completed and the draft amending legislation released. The Federal Government expects the amendments to come into effect in July 2009. Submissions on the second discussion paper close on 16 February 2009.
The proposed regulatory reforms reflect the Federal Government’s preference that litigation be avoided in settling native title disputes. Amendments to the Native Title Act and related legislation, including taxation laws to optimise benefits delivered to indigenous communities, are likely in 2009. |
Authors
Matthew Austin, Special Counsel
Danny O’Brien
Update on subpoenas used to gain access to confidential documents
AGL Wholesale Gas Ltd & anor v Origin Energy Ltd & ors [2008] QCA 366
In our October 2008 update we covered the recent decision of Justice Dutney in the Queensland Supreme Court regarding applications to set aside subpoenas aimed at third parties’ confidential documents in relation to a gas price arbitration. The documents included board reports and internal management papers.
AGL appealed the decision of Justice Dutney. BG and QGC resisted disclosure of the documents on the basis that the arbitrators’ task was to determine a ‘market price’ for gas; and that price could only be determined by reference to information reasonably available in the market, not confidential information. A number of English authorities were cited in support of this argument. An admitted exception to this proposition was evidence of actual sales of gas in the market place.
The Court of Appeal held the confidential information concerned projects that were at early stages of development. Any assessment by the arbitrators would necessarily involve a substantial degree of speculation about the degree of likelihood of the projects’ proceedings, the likely prices and impacts of the projects. These issues were peripheral. Parties need to focus on the true issues in the litigation and not be diverted by matters of limited probative relevance. The confidential and commercially sensitive nature of the documents were also a factor in the Court’s exercise of its discretion in whether to allow the subpoenas to stand.
The Court of Appeal rejected AGL’s appeal, on the basis that it would be oppressive to require production. The Court took a narrower view of the previously accepted low threshold of “apparent relevance” to issue subpoenas.
Regrettably, the Court chose not to determine the issue of whether confidential information could be considered in a valuation exercise to determine ‘market price’.
If you are issued with a subpoena in an arbitration that covers commercially sensitive material, it may be possible to oppose the subpoena if the relevance of the documents to the true issues is peripheral. Should you wish to serve a subpoena aimed at confidential documents, you should be aware that it may be set aside unless you can demonstrate relevance to the true issues of the matter. |
Author
Justin McDonnell, Partner
Cartel conduct
In December 2008 the Commonwealth Parliament introduced a bill that proposes to change the law on cartel conduct. Cartel conduct can occur where there are understandings or arrangements between companies to fix prices, share markets, control output or rig bids.
The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 proposes to change the law on cartel conduct by establishing criminal penalties and parallel civil penalties for serious cartel conduct.
An exception to the proposed prohibitions is where the cartel conduct is contained in a contract for the purposes of a joint venture and the joint venture is for the production and/or supply of goods or services.
You will need to review your documents, systems and procedures to ensure compliance with the new cartel conduct laws. |
Component pricing
The Trade Practices Amendment (Clarity in Pricing) Bill 2008 has been discussed in previous updates. The Bill became an Act on 25 November 2008 and will come into effect on 25 May 2009.
The Act prohibits component pricing for goods and services unless a single figure price prominently accompanies the component pricing. However the new rules on component pricing will not apply when a corporation is making a representation exclusively to other businesses or governments.
If you have standard consumer contracts which include component pricing, you should revise them to ensure that a single figure price prominently accompanies any component pricing. |
Predatory pricing and unconscionable conduct
The Trade Practices Legislation Amendment Act 2008 was passed in November 2008, resulting in a change in the law on predatory pricing and unconscionable conduct. Predatory pricing occurs when a company charges a very low price for goods and services with the intent of forcing a competitor to withdraw from the market or to prevent entry of competitors into the market.
A company will now contravene predatory pricing laws even if it will not be able to recoup the losses incurred by predatory pricing. Laws on predatory pricing now also apply to corporations with a substantial degree of market power as opposed to a substantial market share.
The Act also changes the law on unconscionable conduct. Previously, companies were not allowed to engage in unconscionable conduct in trade or commerce, but only where the supply or acquisition of goods or services was at a price of $10 million or less. The Act removes the $10 million threshold in these cases.
You will need to review your documents, systems and procedures to ensure compliance with the new predatory pricing and unconscionability laws. |
Contributory infringement of patents by product suppliers
The High Court has recently considered the meaning of ‘supply’ and ‘staple commercial product’ in relation to contributory infringement of patents.
In October 2008 the High Court handed down judgment in the case of Northern Territory v Collins. Collins had a patent for producing oil from the mixture of bark and wood in cypress trees.
The Northern Territory government grew cypress pine on its Howard Springs Plantation and between 1993 and 2001 it granted licenses to Collins and later to Australian Cypress Oil Company (ACOC) to enter its land and harvest the cypress trees. Collins sued the Northern Territory government for contributory infringement of the patent, because it granted ACOC a license to harvest the cypress trees.
The High Court held that the granting of a license to ACOC constituted ‘supply’ of a product. In coming to this decision the High Court focused on the practical effect of the ACOC license rather than the legal nature of the license.
However, Collins was ultimately unsuccessful because the High Court held that the cypress trees were a staple commercial product. Under section 117(2)(b) of the Patents Act a person will infringe a patent if they supply a product to another person, unless the product is a staple commercial product. The High Court held that cypress trees were a staple commercial product because they are supplied for a variety of commercial uses.
If you supply products that have a variety of legitimate commercial uses you are unlikely to infringe a patent, except if you induce infringement by, for example, advertising the product with infringing instructions on how the product can be used. |
Author
Nicole Heller, Partner
Dealing with distressed companies
Entities proposing to enter into material transactions with a contracting company need to be alert to indicia that the directors of the contracting company might be acting in breach of their duties in respect of the transaction. This issue has assumed a new prominence in today’s business environment, following the global financial crisis and its consequences for Australian corporations and financiers.
Entities can be adversely affected when contracting or dealing with distressed companies in circumstances where the entity, whether a financier, asset buyer or contractor, ought to have known or knows of the financial stress the contracting company is under, and therefore that the directors of the contracting company may be breaching their directors’ duties by entering into the transaction. Such a situation can have several consequences for the entity. This was recently highlighted in Owen J’s decision in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No. 9] [2008] WASC 239 (“The Bell Group Case”).
What is a distressed company?
A distressed company is a company which is insolvent, so cannot pay its debts when they fall due, or is solvent but there is a reasonable apprehension that it may be insolvent in the foreseeable future. Companies which are not in a strong financial position and are involved in restructuring, refinancing, going through a work-out, selling assets or raising equity may be a distressed company.
What to do when entering into a transaction with a company which may be distressed
When dealing with a company which may be distressed, the following (non-exhaustive) steps can be taken:
- make enquires that an honest and reasonable person would in a similar position. This means ensuring that the directors are not breaching their directors’ duties, the company is solvent and will remain solvent after the transaction, and obtaining documents such as cash flow statements, management accounts and other relevant financial information
- obtain, as a condition precedent, a solvency certification signed by two of the directors of the company, and
- obtain, as a condition precedent, a certified extract of board minutes which includes a resolution confirming that the directors of the company have resolved that:
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However, The Bell Group Case has demonstrated the importance of a counterparty not relying blindly or passively on solvency certifications and other similar documentation or information given by the distressed company. Despite receipt of such documentation, a counterparty which has knowledge or ought to have known that the distressed company may be facing insolvency or that the directors giving the certificates or extract of board minutes were not acting honestly, should make an independent assessment as to whether it should in fact contract with that company. A counterparty needs to be satisfied that the directors of the company have satisfied themselves as to corporate benefit and solvency, in addition to making its own independent assessment in relation to such matters.
Consequences of failing to make due enquiries
If a counterparty fails to make due enquires or knows that the directors of the company are breaching their fiduciary duties by entering into the transaction, it may face several consequences, including:
- be personally liable as a “person involved” in the contravention of the Corporations Act and face civil penalties
- having the transaction deemed voidable in equity, or
- being held accountable as constructive trustee of money or property received from the distressed company.
Companies proposing to enter into transactions with an entity which may be a distressed entity must take further steps to satisfy themselves as to both corporate benefit and solvency. |
Authors
John Humphrey, Partner
Justin McDonnell, Partner
New Australian short selling regime (as at 21 January 2009)
As anticipated in our September update, the Corporations Amendment (Short Selling) Act 2008 (Short Selling Act) became law on 11 December 2008. The three key measures under that Act include:
- a legislative ban on naked short selling (with limited exceptions - see below)
- a disclosure regime for permitted covered short selling, and
- a clarification and expansion of ASIC’s powers to limit, prohibit or impose additional conditions on short selling transactions.
In other major markets, the UK Financial Services Authority lifted the ban on certain short selling of shares in UK financial companies, effective 16 January 2009. This follows the US Securities and Exchange Commission lifting its short selling ban in October 2008.
You can view a copy of the Act by clicking here and a copy of the Explanatory Memorandum by clicking here.
Ban on naked short selling
Under the Corporations Act, naked short selling is banned (subject to limited exceptions). The Short Selling Act further limited the exceptions to the naked short sale ban, effective 8 January 2008. The current exceptions relate to:
- situations where the seller has already contracted to buy the relevant financial products at the time of the sale, and the purchase is only conditional on payment of consideration or receipt of transfer or title documents
- giving or writing of certain exchange traded call options, and certain sales resulting from the exercise of exchange traded options
- sales where the seller can obtain the sold financial products by exercising exchange traded options, and
- sales of corporate and government bonds where certain conditions are satisfied.
Temporary ban on covered short selling of financial stocks
The ASIC ban on covered short selling of financial stocks (with limited exceptions - see below) has been extended from 27 January 2009 to 6 March 2009. Financial stocks are those comprising the S&P/ASX 200 Financials (including property funds) plus five other APRA regulated businesses. The exemptions to the ban on covered short selling of financial stocks relate to:
- certain hedging by market makers in certain circumstances
- certain arbitrage transactions
- hedging exposures arising from underwriting a dividend/distribution reinvestment plan or security/interest purchase plan
- hedging exposures arising from being issued securities/interests on conversion of a convertible, and
- hedging of pre-22 September 2008 exposures.
Covered short selling of non-financial stocks is permitted subject to the disclosure regime discussed below.
Disclosure of covered short selling
The Short Selling Act provides for a permanent disclosure regime for covered short selling that is expected to be introduced over the next 12 months. Much of the detail of the new disclosure and reporting regime is not known, as it will be contained in regulations which have not yet been released.
The new regime under the Short Selling Act is expected to replace the current disclosure and reporting regime which requires disclosure and reporting of ‘long sales’, ‘short sales’, ‘exempt covered sales’ and ‘naked exchange traded option short sales’.
It is expected the new regime will require that the client advise their executing broker if the sale is a covered short sale. The broker must in turn report details relating to the information disclosed to it, to the relevant market operator (e.g. the ASX). The market operator must then publicly disclose the reported short sale information.
The disclosure requirements will apply to both Australian and overseas sellers. Regulations will set the timing and manner of disclosure. Failure to comply with the disclosure requirements will be an offence.
These recent development may affect your business if it short sells securities, managed investment products and certain other products. Your business should prepare for the disclosure regime to apply to permitted short selling and keep itself informed of further ASIC announcements affecting short selling. |
Author
Aaron Bourke, Partner