An introduction to section 18 of Australian Consumer Law

An introduction to section 18 of Australian Consumer Law

Business Sale, Commercial Law

Section 18 of Australian Consumer Law provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The objective of section 18 is to act as a catchall provision that can apply to objectionable conduct. The provision has been interpreted widely in a large number of cases involving different factual circumstances.

Section 18 prohibits misleading or deceptive conduct but does not, by itself, create a cause of action. The remedy provisions are found in other provisions of the Competition and Consumer Act 2010. This was described by Justice Fox in the decision of Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at paragraph 348 as follows the section “does not purport to create liability at all; rather [it creates] a norm of conduct, failure to observe which has consequences provided for elsewhere in the same statute, or under the general law.”

While there has been significant caselaw on the interpretation of the misleading and deceptive provisions of Australian Consumer Law it is important to note that it is a statutory text and the factual circumstances of each individual case that is of paramount importance. This was described by Justice Hayne in the case of Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435 as follows “when considering what was said in the reasons for decision in a s 52 case, the description of the relevant conduct is as important as are the facts and circumstances identified as bearing upon whether that conduct was misleading or deceptive.”

For a court to find a breach of section 18 of the ACL, it is not necessary that there has been any loss or damage. However, as the court noted in the case of Astrazeneca Pty Ltd v GlaxoSmithKline Australia Pty Ltd (2006) ATPR 42-106 “evidence of actual misleading or deceptive and steps taken in consequence thereof is… both relevant and important on the question of whether the relevant conduct is” misleading or deceptive.

What is misleading or deceptive conduct

There is no definition of the term misleading or deceptive conduct in Australian Consumer Law. The term has been interpreted by the courts to mean conduct that leads, or is likely to lead, a person or persons into error. Consequently, it is necessary to consider the target audience to whom the representation was directed. There are exceptions, but the general rule is that a party who engages in misleading or deceptive conduct will fall foul of a section 18 regardless of whether or not they intended to deceive and even where they have acted reasonably and honestly.

Section 18 prohibits conduct that not only actually misleads or deceives but conduct that is likely to mislead or deceive. Examples provided by the Australian Competition and Consumer Commission of claims that may mislead or deceive include claims relating to:

  • the quality, style, model or history of a product or service
  • whether goods that are on sale are new
  • the sponsorship, performance characteristics, accessories, benefits or use of products and services
  • the need for the goods or services
  • any exclusions on the goods or services.

Examples of misleading or deceptive conduct provided by the ACCC include:

  • a mobile phone provider signing a consumer up to a contract without telling them that there is no coverage in their region; and
  • a company misrepresenting the profits of a work at home scheme or other business opportunity.

It is very common to see ‘fine print’ i.e. terms and conditions usually in small print at the end of an advertising page or bottom of a TV commercial. When considering whether conduct is misleading or deceptive, the overall impression of the representational advertise meant will be considered and as such where that overall impression is misleading, ‘fine print’ will not save conduct from falling foul of section 18.

Heads of Agreement: When are they used and are they binding?

Heads of Agreement: When are they used and are they binding?

Business Sale, Commercial Law

Heads of agreement are also commonly referred to as letters of intent, term sheets, memorandum of understanding, memorandum of intent, or commitment letters.

Why are they used?

Generally, these documents set out the intention of the parties with respect to formal agreements that will be entered into at a later date. Heads of agreement typically set out the terms that have been agreed and the parameters that will govern future negotiations between the parties.

There are a number of benefits to using heads of agreement including that they:

  • can record the terms that have been agreed to date;
  • provide a structure for final documentation;
  • assist in the drafting of final documentation; and
  • allow the parties to continue negotiations in good faith.

Heads of agreement will typically include a statement on the purpose of the document, an overview of the proposed transaction, clauses on confidentiality and publicity, clauses on exclusivity, a clause about the enforceability of the document, a timeline, and any other terms that have been agreed at that stage.

Are heads of agreement enforceable?

Heads of agreement will be legally enforceable if the terms are sufficiently clear and certain and it is the intention of the parties, as evident from the document, to be legally bound. There are four recognised categories of heads of agreement and these are:

  • where the parties have reached agreement on the terms of a contract and agreed to be immediately bound but wish to restate those terms in final transactional documents;
  • where the parties have reached agreement on all of the terms of the transaction and intend to be bound by them but have made performance conditional upon execution of final transactional documents;
  • where the parties agree to be immediately bound but expect to make a final transactional contract that will substitute the heads of agreement and add additional terms; and
  • where the parties do not intend to be bound by the heads of agreement.

It is common to find the words ‘subject to contract’ or ‘subject to the finalisation of a formal contract’ in heads of agreement. This is prima facie evidence that it is the intention of the parties that the heads of agreement are non-binding.

To avoid disputes about the nature of heads of agreement it is preferable for the parties to clearly specify whether or not they intend to be legally bound by its terms, and where they do wish to be legally bound to ensure that its terms are sufficiently clear and certain.

A quick comparison of share vs asset sales

A quick comparison of share vs asset sales

Business Sale, Commercial Law

When looking to either sell or purchase a business, one of the first questions to consider is whether the transfer should be of the assets of the business or shares of the company that operates the business.

There are commercial, legal, and taxation concerns in structuring an asset or share sale. Both the purchaser and vendor should always seek legal, taxation, and financial advice.

Where the vendor wishes to sell all of the assets and transfer all of the liabilities of their business, the vendor is likely to want to sell the shares of its company. The sale of shares results in a transfer of liabilities both known and unknown to the purchaser. Conversely, where the vendor wishes to retain part of its business, or the purchaser is concerned about the acquisition of liabilities, and asset sale may be appropriate.

By an asset sale, the purchaser acquires only those assets that are specified in the sale document and, unless otherwise agreed, all of the liabilities of the business that were incurred up to the point of transfer remain with the vendor. In an asset sale, if a purchaser wishes to have the benefit of existing contracts (i.e. supply agreements, customer agreements, and leases), those contracts will need to be novated. Novation typically requires the consent or agreement of all parties to a contract. Similarly, any licences that are required to operate the business must be transferred to the purchaser.

By a share sale the purchaser acquires all of the assets of the business and all of the liabilities of the company remain with the company. There is no need to novate existing contracts, however contracts may require certain steps to be taken if there is a change of control of one of the parties or may allow for termination on the basis of a share transfer. It is therefore important that all contracts be examined in detail as part of the due diligence phase. The vendor in a share sale should carefully consider any existing shareholders agreement in terms of restrictions and in how each shareholder is to participate in the sale.

From the purchaser’s perspective, there are also a number of benefits to a share acquisition as opposed to the purchase of assets. These may include the ability to take advantage of tax losses that can be carried forward and set off against future profits. Further, a share purchase is typically quicker.

Contract Clauses: Governing Law

Contract Clauses: Governing Law

Business Sale, Commercial Law

A governing law clause may include a:

1. choice of law clause, setting out the legal rules to govern the contract; and

2. choice of forum clause, setting out the judicial system with exclusive or non-exclusive jurisdiction to hear disputes.

The purpose of a choice of law clause is to avoid a dispute about the appropriate law to be applied. In most cases, in Australian courts, a choice of law clause will be upheld.

The purpose of a choice of forum clause is to minimise later disagreement about the place in which disputes arising under the contract should be litigated. Typically a choice of forum is made on the basis of the reliability and probity of the legal system chosen, the parties understanding of the rules of the court, and convenience.

Where a governing law clause is missing

Where a contract does not include a choice of laws clause, the principles of conflict of laws will apply. This can lead to unnecessary complexity and additional costs.

Drafting considerations

The parties should consider the consequences of a governing law clause. They are often included as ‘boilerplate clauses’ without proper consideration of their effect.

As noted above, relevant considerations include convenience, the extent of the party’s knowledge of the operation of the chosen laws, and the extent to which the chosen laws will modify the rights and obligations of the parties.

Contract Clauses: Confidentiality

Contract Clauses: Confidentiality

Business Sale

Confidentiality clauses aim to restrain the disclosure of confidential information that is considered to be valuable by one or more of the parties to an agreement.

Confidentiality clauses are often found in employment agreements, transactional documents, and as a separate agreement such as a confidentiality or nondisclosure agreement.

Information that is protected by a confidentiality clause should not already be in the public domain. Confidential information is often provided or disclosed during the negotiation of a transaction, and as such, it is common for parties to execute a confidentiality or nondisclosure agreement before beginning negotiations.

What if a confidentiality clause is missing?

A duty of confidence may be implied in certain circumstances. At common law, a court will imply a contractual obligation of confidence where the implication is necessary to give business efficacy to the contract and it reflects the intentions of the parties.

An obligation of confidence may also be imposed in equity. However, where there is any doubt about the application of equity, the parties should include an express contractual obligation of confidence. A fiduciary duty is not necessary to support a contractual obligation of confidence.

Drafting considerations

Parties to a contract should carefully consider the scope of information caught by the definition of confidential information. It should be noted that equity may impose a wider definition than is provided within a contract. The parties should also consider the duration of the obligation of confidence. A confidentiality clause may include both positive and negative definitions i.e. set out information which is and is not confidential. The parties should consider whether they wish to exclude fiduciary obligations. Finally, as noted above, the intended operation of a confidentiality clause may be different from its actual operation if a court imposes additional restrictions or reduces the scope of the confidentiality clause.

 

 

Contract Clauses: Warranties

Contract Clauses: Warranties

Business Sale

A warranty in a commercial contract may be a term or a statement of affairs or statement of a required level of performance. Where a warranty, that this is a statement of affairs and not a fundamental term, is breached, the innocent party may seek damages but not the termination of the contract.

The word ‘warranties’ is often used to describe terms of a contract but are strictly speaking distinct from the terms of a contract. In the remainder of this article, we consider warranties as representations or statements of fact. You can often identify warranties relating to representations by words such as ‘Party A warrants that…’

Where a warranty is a representation, it is a statement or acknowledgement by a party of certain facts. For example, the seller of a commercial property may provide a warranty that it is the absolute and beneficial owner of the property.

Where warranties are missing

Warranties are important as they provide a contractual statement of certain matters that are fundamental to the deal between the parties.

A number of warranties are customary for example when it comes to ensuring that the parties have the required authority to enter into an agreement. Warranties may also be included relating to consents or approvals required to give effect to an agreement. It is important that parties to a commercial transaction consider the inclusion of appropriate warranties.

Drafting considerations

It is important that warranties are clearly defined and that the parties have certainty as to their meaning and effect. The consequences of a breach of a warranty should be clearly set out.

Warranties can be limited to ‘actual knowledge of the parties’ and also limited to a specific time i.e. as of the execution of an agreement. Parties should consider the appropriate limits to place on warranties when finalising an agreement.

Contract clauses: Nomination

Contract clauses: Nomination

Business Sale, Commercial Law, Energy Law

A benefit under a contract may be nominated to a third-party nominee under a nomination clause. Here we look at nomination clauses in contracts relating to the sale of property. Commonly you may see a contract providing for property to be transferred to the buyer or their nominee.”

Á contract of sale may provide for a buyer and allow the buyer to nominate the property to an unnamed third party. A nomination clause is to be distinguished from a novation of the agreement as it is restricted in being a right for the benefiting party to direct a transfer to the nominee.

A nomination clause does not result in the nominee becoming a party to the contract. Consequently, the nominee can reject the nomination. The courts have held that such a clause will only be effective if it’s language and intention are clear and compelling.

Interaction with privity of contract legislation

Legislation exists in Queensland, the Northern Territory, and Western Australia which operates to allow a third party, who is not a party to a contract, to enforce a contract made for their benefit. The question then arises whether such a third party can sue to seek to enforce a nomination clause. In general terms, the third party must be identifiable under a contract to be able to seek to rely on those legislative provisions. This is obviously a complex area of law and legal advice should be obtained to understand its operation.

The lack of a nomination clause

The absence of a nomination cause will not necessarily preclude a buyer from directing a seller to sign a transfer in favour of a third party. However, a nomination clause is preferable as it can deal with the process to be followed and the costs incurred.

Drafting considerations

The first concern is to ensure that the parties intend on a nomination as opposed to a novation or assignment.

As noted above, a nomination clause must be clear and compelling. Words such as substitution can indicate a novation rather than nomination, and so should be avoided. The nomination clause should specify the process to be followed to give effect to the nomination; including timelines, notice requirements, and responsibility for costs.

Contract Clauses: Force majeure

Contract Clauses: Force majeure

Business Sale, Commercial Law

Force majeure is an expression derived from French law. Generally, depending upon the drafting, it will operate to limit the obligations of the parties while they are prevented from performance by a factor that is beyond their control.

The operation of force majeure can be distinguished from frustration in that force majeure is a contractual construct and typically operates to suspend performance, whereas frustration operates where the performance of the contract is impossible or radically different and termination results.

The inclusion of a force majeure clause is standard practice in particular contract types. There is a significant body of case law on the operational force majeure clauses, indicating that force majeure clauses are often characterised by poor drafting.

A risk allocation mechanism

A force majeure clause is a risk allocation mechanism used to limit the liability of a party for events which delay, restrict, or hinder the performance of the contract – where such events are beyond the control of the parties. The triggers of a force majeure event often include acts of God such as fire, storms, earthquakes, and floods, as well as civil unrest, strikes, riots, and acts of war or terrorism.

Where a force majeure clause is missing

Where a contract does not include a force majeure clause, a party prevented from performance would be required to rely on the application of the doctrine of frustration. The doctrine of frustration is limited to events beyond the control of either party and does not apply to all situations or where performance is merely more onerous but is still possible.

Drafting considerations

A force majeure clause may operate to displace rights that would otherwise be available to parties under the doctrine of frustration. This is because the ways in which risk are to be allocated have been agreed by the parties in the formation of the contract, and the courts will give effect to the parties’ wishes as expressed.

Consequently, it is important that force majeure clauses are carefully drafted to reflect the intentions of the parties. Oftentimes, force majeure clauses are included as boilerplate clauses leading to subsequent issues where risks materialise.

One of the key components of a force majeure clause is the triggers i.e. the events that give rise to the operation of the clause. Where the list of triggers or factors giving rise to the operation of the clause is too specific, it may be difficult for the parties to rely on the operation of the clause for an event which is related but not specified within the clause.

Thinking of Selling Your Business?

Thinking of Selling Your Business?

Business Sale

So you are thinking of selling your business? Below, we share some important considerations from the legal side.

The information that follows is general in nature and does not replace individual advice. Individual advice will properly consider the application of the areas (i.e. tax considerations and legal risks) discussed below and identify other areas that you will need to consider.

PRE-CONTRACTUAL RISK

Your first legal challenge in the sale of the business is to work out how and what information to disclose.

There are both statutory and common law obligations that apply in relation to how you approach disclosure. Your solicitor will be able to advise you on your disclosure obligations.

In some States, you are required to provide particular information in a set form. Generally, the information you do disclose needs to be accurate.

Prospective purchasers are going to want to understand the profitability of your business. Overstating the profitability of a business is a clear risk in terms of breaching obligations with respect to misrepresentation. Australian Consumer Law contains prohibitions against misleading statements, including statements as to future circumstances.

The statutory prohibition on misleading conduct is found in section 18  of the Australian Consumer Law (contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth)):

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

There are additional sections of Australian Consumer Law that relate to statements about future matters. Remedies under Australian Consumer Law may include:

a. Section 236: Damages;

b. Section 232: Injunction;

c. Section 237: Compensation; and

d. Section 224: Pecuniary penalties.

There are three common law categories of misrepresentation:

a. Innocent misrepresentation:  misrepresentation that is not fraudulent;

b. Fraudulent misrepresentation: where there is:

  • Actual dishonesty;
  • An absence of belief in the truth of the representation; and
  • Reckless indifference as to whether the representation was true or not.

c. Negligent misrepresentation: where there is a duty of care to ensure that information provided was true and reliable.

The remedies available to a purchaser at common law dependent on the type of misrepresentation and may include rescission or damages.

SALE OF SHARES VS ASSETS

One of the first decisions you will need to make is whether to sell the assets or the shares of your business. This decision will be guided by your commercial objectives and the nature of your business.

The sale of 100 percent of the shares in your company will result in a transfer of control of all of the assets and liabilities. From the perspective of the buyer, the purchase of shares comes with additional risks in that all existing liabilities, both known and unknown, will be assumed.

The sale of assets allows for the selection of specific assets and reduces the risk of unintended assumption of liability from the perspective of the buyer.

If you propose to sell the assets of your business, the proper identification, valuation, and transfer of assets will be paramount. The buyer will want to ensure that they are acquiring all of the components that make up the business.

 

This is part one of a three part series on ‘Selling Your Business.’ If you have any questions on the above, please email us at info@lawquarter.com.au.