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.

Misleading and Deceptive Conduct by energy retailers

Misleading and Deceptive Conduct by energy retailers

Commercial Law, Energy Law

There have been a number of cases of energy retailers’ non-compliance with s 18 of Australian Consumer Law. These cases are useful for retailers looking to assess the adequacy of the controls that they have in place to reduce the risk of a contravention of s 18.

Australian Competition and Consumer Commission v EnergyAustralia [2015] FCA 274 is a case that was heard in the Federal Court of Australia with a decision handed down on 27 March 2015. This case concerned conduct by a company called Bright Choice Australia Pty Ltd who were engaged as a tele-sales agent of EnergyAustralia.

From 4 April 2012 until 23 April 2013, EnergyAustralia engaged Bright Choice under a Services Agreement to sell, by way of telemarketing, plans for electricity and gas in defined sales territories. The relevant sales territories included consumer premises located in New South Wales, Queensland, Victoria, South Australia and the ACT. Pursuant to the Services Agreement, EnergyAustralia agreed to pay Bright Choice on each occasion that a consumer contracted to enter into a new plan to purchase electricity or gas from EnergyAustralia as a result of Bright Choice’s marketing. Representatives from Bright Choice where remunerated on the basis of a wage plus commission.

Obligations to comply

Within the Services Agreements were a number of obligations on Bright Choice relating to compliance. These included an obligation to exercise the standard of care, skill and judgement that would be expected of a professional contract experience in the performance of services of a similar nature, to comply with all applicable laws and standards necessary to perform the services, and to ensure that its team members conducted outbound telemarketing calls in accordance with scripting approved by EnergyAustralia. Further, Bright Choice was required to establish, implement and maintain a quality assurance and control program that was subject to EnergyAustralia’s approval.

Bright Choice was required to implement a training program that utilised training materials developed by EnergyAustralia. The relevant training materials developed by EnergyAustralia outlined the requirements for compliance with the applicable laws and standards.

The Services Agreement made reference to the requirements to obtain explicit informed consent. Bright Choice was required to make call recordings of all outbound telemarketing calls and all telephone discussions with customers in which explicit informed consent was obtained and to retain such call recordings for a minimum of two years after the applicable call was made or for a longer period as may be required by any applicable law.

In addition, Bright Choice was required to listen and evaluate a sample of call recordings made for the purposes of recording explicit informed consent with an express obligation to listen to at least 2% of the total number of call recordings that were created every calendar month.

Following the appointment of Bright choice, EnergyAustralia conducted ‘train the trainer’ sessions for Bright Choice senior sales managers in March 2012 and provided training material in March 2012 and updated material in July 2012. The relevant training material covered legal and regulatory compliance topics relating to explicit informed consent and the law of misleading and deceptive conduct. The training material also included instructions in relation to sales techniques to be used, and to be avoided by sales representatives, including ensuring that customers had a full understanding of what they were agreeing to.

EnergyAustralia provided Bright Choice with questionnaires that were designed to test the adequacy of Bright Choice’s training program and which were required to be successfully completed by personnel before they conducted any telemarketing.

The bonus commissions

On 28 March 2013, the Services Agreement was amended whereby EnergyAustralia agreed to pay an additional bonus fee to Bright Choice upon Bright Choice achieving 9,000 new sales per month for five months from 1 April 2013. The base fee for electricity sales, of $120, increased by $35.

Between August 2012 and May 2013, Bright Choice representatives contacted consumers in a number of states and did not obtain the consent of consumers to enter into an EnergyAustralia electricity or gas plan but did submit sale reports to EnergyAustralia for each consumer.

The actual misrepresentation centred on Bright Choice advising consumers that they would be sent an information pack or welcome pack and that they would be able to consider the information to decide whether or not to receive a supply of electricity and/or gas from EnergyAustralia. Consumers were told that if they wanted to accept the offer, they would need to contact EnergyAustralia and unless they did make contact, they would not be treated as having entered into a plan for the supply of electricity and/or gas.

These telephone representations were false, misleading and deceptive because following each telephone conversation, Bright Choice acted and EnergyAustralia dealt with each consumer as if they had agreed to enter into a plan with EnergyAustralia for the supply of electricity and/or gas, when in fact they had not.

Further specific instances of conduct were discussed in the case. For example, on around 18 February 2013, a representative of Bright Choice contacted a certain consumer by telephone and said words to the effect that they were calling because EnergyAustralia had a new offer of a discount of 13% off bills and that this offer was not offered by AGL. The consumer responded that the last time she had been signed up to EnergyAustralia and did not want to be with EnergyAustralia.

The investigation

On 7 December 2012, EnergyAustralia commenced an investigation into Bright Choice’s telemarketing practices. On 28 March 2013, EnergyAustralia received details of concerns with Bright Choice’s telemarketing practices including a failure to obtain explicit informed consent. In April and May 2013, EnergyAustralia identified an increased number of customer complaints and cancellations from telesales made by the Representative. EnergyAustralia commenced an investigation into Bright Choice’s conduct and the investigation included a review of sample call recordings. EnergyAustralia identified that representatives were not obtaining explicit informed consent from customers nor were they following the scripts provided to them.

On 23 September 2013, EnergyAustralia terminated the services agreement with effect from 23 October 2013. EnergyAustralia required that Bright Choice cease all marketing sales calls from 23 September 2013.

In accordance with section 274 of the National Energy Retail Law, EnergyAustralia reported the non-compliance to the Australian Energy Regulator. In or around November 2013, EnergyAustralia voluntarily implemented a consumer remedial program at its own cost of $958,085.00 under which EnergyAustralia sought to contact remaining customers of EnergyAustralia originating from Bright Choice.

EnergyAustralia also implemented a process to safeguard against new customers being transferred without explicit informed consent. This process involved EnergyAustralia sending an SMS or email to every new customer that is entered into a contract with EnergyAustralia following an unsolicited outbound telemarketing sales call. This correspondence included a mobile number or email address to confirm the customer had in fact requested the transfer to, and entered into a market retail contract with, EnergyAustralia.

The court noted that following the termination of the Services Agreement and reporting of the conduct subject to the proceedings, EnergyAustralia made significant improvements to its compliance program to align it with the principles of the Australian standard for compliance programs AS3806.

The improvements made by EnergyAustralia included:

  • undertaking a quarterly certification and risk assessment of explicit informed consent compliance across the business, including by, each quarter, reassessing the effectiveness of business practices and processes against the explicit informed consent obligations.
  • Providing regular, at least annually, practical training for directors, officers, employees, representatives and agents of EnergyAustralia whose duties could result in them being concerned with conduct that may contravene EnergyAustralia’s obligations to obtain explicit informed consent;
  • appointing a compliance officer with responsibility for ensuring compliance and for overseeing its compliance program;
  • establishing a monthly scorecard process to assess the performance of third-party vendors in relation to complaints, cancellations and compliance with EnergyAustralia’s ACL and NERL obligations; and
  • ensuring that all third-party telesales calls are recorded in their entirety with random telesales call recordings provided to EnergyAustralia for quality assurance review.

When considering sections 18 and 29(1) of Australian Consumer Law, his honour noted the well-defined applicable legal principles that conduct is likely to mislead or deceive if there is a real or remote chance that it will do so and that the conduct must be capable of leading a person into error and the error or misconception must result from the conduct.

EnergyAustralia and Bright Choice admitted that the representations that were made were made in trade or commerce and in connection with the supply or possible supply of electricity and/or gas. They further admitted that the conduct was misleading and deceptive or was likely to mislead and deceive in contravention of section 18 and that they were false and misleading representations concerning the existence, exclusion or effect of a condition or right in contravention of section 29(1)(m).

Section 38 of the National Energy Retail Law provides that a retailer must obtain the explicit informed consent of a small customer for certain transactions including the transfer of the customer to the retailer from another retailer and the entry by the customer into a market retail contract with the retailer. Section 39 of the National Energy Retail Law provides that explicit informed consent is given where the retailer, or a person acting on the retailer’s behalf, has clearly, fully and adequately disclosed all matters relevant to the consent of the customer, including the purpose or use of the consent, and the customer gives consent. Consent by the customer must be given in writing signed by the customer, verbally (provided that it is evidenced in such a way that can be verified), or by electronic communication generated by the customer.  

The penalty

In considering the appropriate penalties to be applied, the court considered the case of Ministry for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72. The relevant principles included that it is the responsibility of the court to determine the appropriate penalty to be imposed in respect of a contravention. Determining the quantum of a penalty is not an exact science. Within a permissible range, the courts acknowledge that a particular figure cannot necessarily be said to be more appropriate than another.

After considering all of the applicable principles, the court ordered that EnergyAustralia pay a penalty of $1,000,000.

Where did EnergyAustralia fall short?

In examining where EnergyAustralia fell short, the court accepted the submissions of the Australian Competition and Consumer Commission and the Australian Energy Regulator that the presence of a significant financial incentive at least increased the risk of sales calls to consumers occurring without proper processes being observed.

The court noted that there was a flaw in EnergyAustralia’s internal processes in that even though the Services Agreement provided for an audit mechanism, EnergyAustralia did not, or did not adequately, exercise its audit powers. The court concluded that “given the size of the commissions being paid by EnergyAustralia and the number of telesales made by its agent, Bright Choice, EnergyAustralia’s internal procedures were deficient.”

Case Note: Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor

Case Note: Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor

Commercial Law

Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors v Kenneth Ross Pickard & Anor [2019] SASC 123 concerned a claim for money that was said to be owed under a guarantee. The plaintiffs in this case sought to enforce a guarantee that they said was provided by the directors of a company Kenrop Pty Ltd (the Borrower). Kenrop was in liquidation at the time of the judgement.

Background

The loan amount was $505,250 and the purpose of the loan was for Kenrop to invest in plantation, wine grape, and cattle schemes.  Kenrop made payments in the order of $350,000 until it became apparent that the schemes in which it was investing had failed.

The key issue in the case was whether the directors of Kenrop had signed the loan application documentation in the name of Kenrop or also personally as guarantors. Great Southern Finance Pty Ltd (GSF), purported to execute the personal guarantees under power of attorney.

The plaintiffs claimed that GSF had executed the loan documents for Kenrop and the defendants as guarantors on or about 17 November 2008. The defendants contended that the power of attorney could only be conferred by deed and that the loan application that they executed was not a valid deed. Further, the defendant submitted that the loan deed, which purported to be a deed, was not a valid deed.

The plaintiffs claimed that Kenrop’s failure to make payments under the loan deed resulted in an acceleration event under clause 11. The lender then became entitled to demand immediate repayment of all monies payable including interest under a rate of 13.5%.

The power of attorney

The loan application, in Part 6, contained a power of attorney clause. The signature page was signed by the defendants, and each of their signatures were witnessed. Their signatures appeared below the words signature of ‘applicant/guarantor.’ The loan application referred to the need for independent legal advice to be sought both in the checklist for applicants and the signature clause box.

The power of attorney in Part 6 of the application provided that GSF, its directors and its secretary were appointed jointly and severally as the attorneys for the borrower and the guarantors. It further provided that GSF was authorised to enter into and execute a loan deed in the form attached to the application on behalf the borrower and the guarantors and that it was authorised inter alia to fill in the blank spaces in the schedule to the loan deed consistent with the provisions of the application.

On 17 November 2008 the loan deed was electronically signed by directors of GSF under the power of attorney for Kenrop pursuant to section 127 of the Corporations Act 2001 (Cth). The loan deed attached list of the repayment dates and listed an interest rate of 10.5% per annum. On 22 April 2009, the defendant signed an application for variation to loan deed. That document included a checklist that provided that the declaration at Part 7 of the application must be signed and dated by all applicants and guarantors. This was signed by the defendants.

Was the Loan Application a deed?

The Honourable Justice Stanley examined whether the loan application was a deed. ‘A deed is the most solemn act that a person can perform with respect to a particular property or right. At common law there are three requirements for a deed. First, it has to be written on paper, parchment or vellum. Second, it has to be sealed by the party or parties executing the document. Third, it has to be delivered and is not enforceable until delivery had occurred.’ His Honour considered the intention of the parties which he noted could be discerned from extrinsic evidence concerning the words or acts of the parties, or from an examination of the words contained in the document itself.

Statutory considerations

The Honourable Justice Stanley went on to examine modifications to the common law by the Property Law Act in Queensland and Western Australia.

The Honourable Justice Stanley found that the loan application was to be interpreted according to Queensland law as it was signed by the defendants in Queensland. Section 45 of the Queensland Act sets out the formalities of deeds executed by individuals. The effect of section 45 is to deem a document to be sealed if it is expressed to be a deed.

Section 45(2)(b) is subject to section 47. Section 47(1) provides that the execution of an instrument in the form of a deed shall not of itself import delivery, nor shall delivery be presumed from the facts of execution only, unless it appears that execution of the document was intended to constitute delivery of the document. In the case of Interchase Corporation Ltd (In Liq) v Commissioner of Stamp Duties (Qld) (1993) 27 ATR 154 it was found that section 47(1) displaces a common law presumption that the execution of an instrument in the form of a deed imports delivery but nonetheless the section contemplates that a document may evince an intention that delivery should be inferred from execution.

The Honourable Justice Stanley rejected the defendants’ submission that the loan application was solely intended to be an application for finance rather than a deed and found that it satisfied the requirements of section 44 and section 45 of the Property Law Act in Queensland.

Dual effect signatures

The Honourable Justice Stanley considered whether the application could be signed by the directors both in their capacity as directors of the company and as individuals. He referenced the South Australian Supreme Court case of Burrell & Family Pty Ltd v Harris [2010] SASC 184 where Justice White noted that the court must consider the contract as a whole and not just the manner of execution.

The Honourable Justice White held that it is possible for a person to intend his signature to have a dual effect so as to bind a principal and to accept personal responsibility. In that case the relevant provision provided that the “director of the borrowing entities also acknowledges personal liability for all debt remaining after the loan repayment date inclusive of all interest and recovery costs.”

Was GSF’s actions within the scope of the power of attorney?

The terms of the appointment of a power of attorney will determine the extent and scope of the power. Powers can be conferred by express terms or by necessary implication.

The defendants submitted that the loan application did not specify any interest rate that applies to the loan. In addition, the defendant submitted that they selected to inconsistent options in the loan application and in electing for one of the options, GSF made an election that was beyond the scope of its power. The Honourable Justice Stanley noted that the power of attorney in Part 6 of the loan application permitted GSF to make and initial any necessary alterations to the loan deed provided that such alterations were not prejudicial to the interests of Appointor.

Electronic signature of the loan deed

The defendants submitted that the loan deed was not enforceable against them as a guarantee as the loan deed was signed by GSF as the defendants’ attorney by electronic signature. The defendant submitted that the loan deed, by virtue of being signed electronically, did not meet the common law requirements that a deed be written on paper, parchment, or vellum. The plaintiff submitted that section 127 of the Corporations Act 2001 overrides all other requirements for a deed, including the paper requirement. The plaintiff submitted that section 127(3) expressly gives effect to the document as a deed when it is signed in accordance with section 127(1).

The Honourable Justice Stanley then went on to consider whether the loan deed had been executed in accordance with section 127. His Honour noted that the Corporations Act 2001 excludes the operation of section 10 of the Electronic Transactions Act 1999.

In considering this question, the Honourable Justice Stanley examined the findings of Justice Croft in Bendigo and Adelaide Bank Limited v DY Logistics Pty Ltd [2018] VSC 558. In that case there was no evidence as to the identity of the person who affixed or personally authenticated the affixing of the officer’s facsimile signatures on the relevant loan deed. Justice Croft held that section 127 requires a deed to be physically signed by the relevant company officer or for the person to authenticate the mark appearing on the document as his or her signature. He concluded that the loan deeds in that case had not been validly executed and noted that there was no evidence that either the director or secretary who signatures were purportedly affixed to the deeds authenticated the signatures in any way nor was there evidence in the form of board minutes authorising or authenticating each signature.

The Honourable Justice Stanley noted that GFS’s director did not review the loan deeds to which his electronic signature had been applied and that a standard form signature page was likely used. The plaintiff submitted that this did not mean that the electronic signatures were applied without authorisation. They also submitted that a board resolution existed which had the effect of authorising the relevant act of authentication. Justice Stanley noted that the relevant board resolution was limited to the approval of loans other than bank originated loans, i.e. did not applied to the loan in question.

The Honourable Justice Stanley noted that ‘given section 127 (1) contemplates a document being executed by two officers signing it, there is good reason to consider there must be a single, static document rather than a situation where to electronic signatures are subsequently applied to an electronic document.’

His Honour then went on to find that the plaintiffs cannot rely on provisions of section 127 to prove that the loan was validly executed and therefore the guarantee is contained in the loan deed were invalid. The plaintiffs then sought to rely on the application being a contract. Justice Stanley found that the purported deed would fail as a binding contract for want of consideration.

Ratification

in considering the subsequent ratification of the documents by the defendants, Justice Stanley found that ‘ratification does not transform something that has not been done into something else. The loan document was void at its inception because it was not validly executed by the party against whom it is now sought to be enforced. The doctrine of ratification cannot be applied to this case to validate the ineffective execution of the loan deed.’

Key Lessons

The key lessons from this case are:

a. Power of attorney clauses should be carefully reviewed to ensure that they provide sufficient power to the attorney appointed;

b. To avoid disputes about dual execution clauses, separate execution clauses should be included where directors are signing a document both on behalf of a company and in a personal capacity;

c. Where a company seeks to rely on electronic signatures, it should carefully examine this case and consider whether it needs to amend its processes and authorising board approvals.

Contract Clauses: Rent Review

Contract Clauses: Rent Review

Commercial Law

Mechanisms for rent review are important components of all commercial leases. Typically leases provide for rent review at regular intervals during a lease often in relation to a set percentage or the consumer price index.

CPI increases

It is common to see rent reviewed in line with movements in CPI which is a compilation of indices by the Australian Bureau of Statistics representing the change in cost of living. A CPI increase clause should specify the base date from which the index applies or a range of possible dates i.e. the date of the lease, the date when it was signed, or the date when it was delivered by the lessor to the lessee. Such a clause should consider the possibility that CPI will be discontinued. Where there is uncertainty a court will generally look to interpret such a clause fairly and broadly without being too astute or subtle in finding defects.

Other mechanisms

There are a range of other mechanisms that may be used as a means of varying rent. These include:

Current market rent: In determining current market rent, it would be expected that rents of comparable premises be reviewed.

Rent as a fraction of turnover: The parties will need to consider the process by which turnover is determined and the processes to be followed should there be a dispute.

Retail Leases

When considering rent review clauses, it is important to examine applicable statutory obligations. In New South Wales and South Australia base rent in relation to a retail shop lease is defined as rent or a component of rent that comprises a specific amount of money whether or not that amount is subject to change. In those states a retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must restrict successive changes to that rent in the 12 months after any previous change except where there is a change to the base rent specified by a specific percentage.

In New South Wales, Queensland and South Australia any term of a retail shop lease is void to the extent that it provides for the rent of a shop to change on the basis of whichever results in the highest rent out of two or more methods. In New South Wales, Queensland, South Australia and Victoria, ratchet clauses, which provide that rent review must not result in rent that is less than the amount payable before the review, are void.

When does the Unfair Contract Term law not apply?

When does the Unfair Contract Term law not apply?

Commercial Law, Private Law

In our previous article we examined the situations in which unfair contract term law applies. While unfair contract term laws apply to most standard form contracts and contractual terms, there are a number of excluded contracts and excluded terms. We discussed these below.

Excluded contracts:

  • Contracts entered into a date prior to the commencement of the unfair contract term laws, as applicable between consumer and business contracts, are excluded from the operation of the unfair contract term laws.
  • Contracts which are expressly excluded by section 28 of Australian Consumer Law: including contracts of marine salvage or towage, ship charter contracts, contracts for the carriage of goods by ship, constitutions of a corporation, managed investment scheme or other kind of body.
  • Contracts for financial services. Financial services are excluded from Australian Consumer Law by section 131A of the Competition and Consumer Act. Financial services are regulated separately under the ASIC Act.
  • Insurance contracts that are regulated by the Insurance Contracts Act 1984 (Cth). This act does not apply to private health insurance contracts, state and Commonwealth government insurance contracts, reinsurance contracts, and others.

Excluded terms:

  • a term that defines the main subject matter of the contract;
  • a term that sets the upfront price payable under the contract; and
  • a term required, or expressly permitted, by law of the Commonwealth, a State or a Territory.

Upfront price and subject matter are considered matters which parties exercise choice in deciding to proceed with a contract and are, therefore, excluded. This was explained in the second explanatory memorandum to the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010:

where a party has decided to purchase goods, services, land, financial services or financial products that are the subject of the contract, that party cannot then challenge the fairness of a term relating to the main subject matter of the contract at a later stage, given that the party had a choice of whether or not to make the purchase on the basis of what was offered.

In deciding whether a contract or term type is excluded from the unfair contract terms law, it is important to consider the law as of the date that the contract is entered into as an assumption that the law does not apply may be incorrect with serious consequences.

When do the Unfair Contract Term laws apply?

When do the Unfair Contract Term laws apply?

Commercial Law, Private Law

The unfair contract term law applies to consumer contracts and to small business contracts. The law only applies to contracts that are “standard form contracts.” Standard form is usually understood to mean a document that is routinely used in all transactions without negotiation or amendment. Standard form contracts are commonly described as presented to consumers on a “take it or leave it” basis.

Australian Consumer Law expressly excludes certain categories of contract from unfair contract term law and we will consider these in our next article.

Section 27(2) provides a non-exclusive list of considerations for a court when determining if a contract is a standard form contract including:

  • whether one of the parties has almost the bargaining power in the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect required to accept or reject the terms of the contract in the form in which they were presented; and
  • whether another party was given and an effective opportunity to negotiate the terms of the contract.

Application to consumer contracts

In the case of consumer contracts, courts will consider the purpose of the acquisition and the law will apply where the purpose is wholly or predominantly for personal, domestic or household use or consumption.

Consumer contracts are defined in section 23(3):

A consumer contract is a contract for:

  • a supply of goods or services; or
  • a supply or grant of an interest in land;

to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

The term individual is defined in the Acts Interpretation Act 1901 (Cth) to mean a natural person.

When examining section 23(3) it is necessary to consider the purposes for which goods or services were acquired. Unlike in other provisions of Australian Consumer Law, is not necessary for goods or services to be of a personal, domestic, or household nature rather it is the purpose for which they were acquired that will be relevant at the time that the contract was entered into.

The natural assumption is that businesses will consider the inclusion of business purpose declarations whereby purchases sign a declaration to state that goods or services are being purchased for business purposes. Section 25(1) gives an example of a term that may be unfair, termed that the limits or has the effect of limiting the evidence that one party can adduce in proceedings relating to a contract. Therefore, a business purpose declaration may itself be an unfair contract term.

Application to small businesses

The law was extended to apply to small businesses on 12 November 2015. Businesses were given 12 months to comply with the law and so, it applies to small business standard form contracts that were entered into, renewed, or varied after 12 November 2016. The law applies where a contract that is between businesses:

  • is for the supply of goods or services or the sale or grant of an interest in land;
  • at least one of the parties is a small business employing less than 20 people, including casual employees employed on a regular and systematic basis; and
  • the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

The business may be the purchaser or acquirer under the contract and the business may be conducted by a natural person, a body corporate, a partnership, a trust, or a joint venture.

Contract Interpretation: Context

Contract Interpretation: Context

Commercial Law

The primary duty of a court when interpreting contract clauses is to endeavour to discover the intention of the parties from the words used, considering the document as a whole. The meaning of any one part of a contract may be revealed by other parts. Where possible, the words of every clause should be construed to result in a harmonious document.

This rule was explained in Wilkie V Gordian Runoff Ltd (2005) 221 CLR 522 when considering an exclusion clause:

the intention of an exclusion clause is to be determined by construing the cause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.

This examination of a contract as a whole extends to any contract, document or statutory provision referred to in the text of the contract. Where you are reviewing a contract that cross references another contract, document or statutory provision you must ensure that you read all of the cross-referenced documents and consider the implications of them in terms of interpretation.

There are often words found in contracts that have a special meaning given by the subject matter in relation to which they are used. Rules of interpretation allow courts to correct meaning where ambiguity exists. Courts are permitted to depart from the ordinary meaning of words so far as necessary to avoid inconsistency between that provision and the rest of the document.

It is common to find words that appear to be unnecessary or redundant. Redundancy can be found, for example, where lawyers add clauses to a template document that repeat content already found within the template.  If possible, every word of a contract should be given effect, and no part of it should be treated as creating redundancy or unnecessary language.

Where a word is found more than once in a contract, its meaning will not change throughout the contract. This was described by Lord St Leonards where he said that it was a well-settled rule of construction to never “put a different construction on the same word, where it occurs twice or oftener in the same settlement, unless there appears a clear intention to the contrary.”

As an extension of the rule that contracts are to be construed as a whole, unless a contract provides otherwise, headings and side notes are to be taken into account in the interpretation of meaning.

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.

Key considerations for confidentiality deeds and nondisclosure agreements

Key considerations for confidentiality deeds and nondisclosure agreements

Commercial Law

Confidentiality agreements or NDAs are commonly used where parties are exploring a potential commercial transaction such as a share sale. When completing due diligence, it is standard for a disclosing party, such as a vendor, to require a confidentiality agreement or NDA.

Below we discuss some of the key considerations with confidentiality agreements and NDAs.

Deed vs Agreement:  where there is no consideration passing between the parties in return for the obligations of confidence, a deed should be used as opposed to an agreement. A deed will be enforceable despite the lack of consideration. This is not the case for an agreement. Further, a party seeking to rely on a deed has a longer period of time to do so in that, i.e. in New South Wales, litigation can commence for a breach of the deed within a period of 12 years, whereas litigation for a breach of an agreement must commence within six years.

The definition of confidential information: the parties should carefully consider the scope of confidential information covered by the confidentiality agreement or NDA. For the party disclosing information, a broad definition is favourable as it reduces the risk of information being disclosed that is not subject to the confidentiality agreement or NDA.

Exceptions to the agreement: confidentiality agreements and NDAs typically include exceptions i.e. information that is not confidential as it is public knowledge or actions that do not breach the agreement i.e. forced disclosure to a law enforcement agency. The parties should carefully consider whether proposed exceptions are appropriate.

Term of the agreement: it is common to see an arbitrary term in a confidentiality agreement or NDA i.e. two or three years following commencement. There are benefits in having certainty as to the term of an agreement, but the parties also need to ensure that the term is appropriate having consideration to the nature of confidential information to be disclosed.

Unilateral or mutual: confidentiality agreements and NDAs may either be one way (imposing obligations on one party) or mutual (imposing obligations on all parties). Where the parties are both disclosing confidential information, a mutual document would be preferential.

If you have any questions on the above, please get in touch.

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.