Legal Insight Issue 10

Contents:

Former Employee Ordered to Pay Damages to Former Employer for Poaching Clients

ACCC 2012 Objectives and Updated Compliance and Enforcement Policy

ACCC's action regarding "unfair terms" in contracts

Amendments to the Home Building Act

Proposed Changes to Supreme Court of NSW Equity Division Case Management

Proposed Changes to Tax Law – Extended Potential Personal Liability For Directors of Companies

In Commercial & Accounting Services (Camden) Pty Limited –v- Cummins [2011] NSWSC 843, Gzell J (of the Supreme Court of NSW) held that Mr Cummins (a former employee of Commercial & Accounting Services (Camden) Pty Limited ("Company")) breached his duties to the Company by poaching its clients after his employment ended.

Mr Cummins (a chartered accountant) sold his practice to the Company, on terms that he would continue to work as an employee and not compete for a period of 3 years within a radius of 10 kilometres. 

Thereafter, Mr Cummins agreed with the Company to a consensual termination of his employment and advised it that he would establish his own accounting practice.  Mr Cummins and the Company agreed that some "clingy clients and family" were likely to transfer their business to Mr Cummins' new practice.  Mr Cummins' and the employer's evidence of the agreement as to which clients were allowed to be poached was inconsistent.  The Court preferred the Company's evidence on these matters and held that Mr Cummins had obtained contact details of clients, which he subsequently poached, from the Company's client lists (which were confidential).

Mr Cummins proceeded to send a letter ("Poaching Letter") to various clients of the Company advising them he had established his own new business, gave them details of same and enclosed a template letter for them to sign and return to him to enable transfer of their files from the Company to him.

The Court held that Mr Cummins had breached his duties as an employee by intentionally using knowledge and confidential information of the employer after his employment ended.  The Court also held that Mr Cummins' failure to produce a list of the persons to whom he sent the Poaching Letter made it very difficult to assess damages.  On this basis, the Court decided that damages/compensation should be assessed in a "robust manner" and against Mr Cummins.  At the time Mr Cummins sold his business, it had approximately 2,000 clients.  After Mr Mr Cummins' employment ended it lost approximately half of them, 75% of which were attributed to Mr Cummins' poaching. 

The Court decided that the goodwill of the business which Mr Cummins had sold had reduced by approximately $160,000.00 and decided that 75% of this reduction was due to his poaching (adopting the "robust manner").  The Court ordered Mr Cummins to pay the Company approximately $120,000.00.

This case ultimately turned on the acceptance of evidence as the law in this area is clear… confidential information obtained by an employee during employment cannot be intentionally memorised or copied during employment for use after the employment relationship comes to an end.

The Chairman of the ACCC, Rod Sims, in a speech delivered on 20 February 2012 in Melbourne, indicated that the ACCC has a number of "high level" objectives in 2012.  The following is a summary of those outlined objectives:

1. Make use of the increased powers available to the ACCC under the Australian Consumer Law (for example, seeking civil pecuniary penalties for breaches of consumer laws, issuing infringement notices in less serious matters, testing the unfair contracts terms provisions and enforcing statutory consumer guarantees).  The ACCC will work closely with State and Territory fair trading departments.  A particular emphasis will be placed on misleading and deceptive conduct, for example, making misleading representations regarding carbon pricing.  Industry sectors that may be carefully monitored include telecommunications and energy;
2. Focus will be placed on protecting vulnerable consumers, particularly the elderly and indigenous consumers;
3. Enhancing and maintaining competitive business in concentrated markets (examples being the fuel and supermarket industries).  Further effort by the ACCC will be taken to prevent unconscionable conduct between businesses, particularly in connection with small business;
4. Examining monopolies (e.g. the operation of the NBN and the electricity industry); and
5. Engaging with its counterparts internationally, particularly in developing countries nearby Australia.

At the same time as he delivered his speech, Mr Sims confirmed that the ACCC had issued an updated Compliance and Enforcement Policy. 

It will be interesting to monitor the ACCC's stance and in relation to ensuring compliance with consumer laws.  Should you require any assistance in your or your clients' dealings with the ACCC (e.g. complaints, notices, infringements or other action), please do not hesitate to contact us.

Federal Court proceedings have been commenced by the ACCC in the Federal Court in Melbourne against Advanced Medical Institute, which sold its business to two NRM companies (which were joined to the proceedings).  The ACCC is seeking orders in respect of alleged "unfair terms".  The case involves, inter alia, allegations by the ACCC to the effect that a contractual term is "unfair" where it seeks to impose fees including a 15% fee (based on the contract price) in the event the customer wishes to terminate a consumer contract by giving 30 days notice. 

Readers may recall that part of the Australian Consumer Law (which is a Schedule to the Competition and Consumer Act, 2010 (Cth), previously Trade Practices Act, 1974 (Cth)) came into force in July 2010.  That law makes "unfair terms" in standard consumer contracts void.  Matters relevant for the Court to consider include the imbalance (if any) between the respective rights and obligations of each party, whether the relevant term is reasonably necessary to protect a legitimate interest of a party and whether it may cause detriment to the other party if it were relied upon.

It will be interesting to see how the Court interprets and applies the new provisions.

Interestingly, insurance contracts have been excluded from the operation of the new "unfair terms" law.  This seems to have been on the basis that insurance contracts are governed by unique legislation (Insurance Contracts Act, 1984 (Cth)).  Following public outcry in late 2011 as a result of insurers denying indemnity in respect of claims resulting from the devastating floods in Queensland, the House of Representatives Standing Committee tabled a document which includes a recommendation that the "unfair terms" law be amended to remove the exemption for insurers.

Amendments have been made to the Home Building Act.  The main amendments are:

1. A contract must be in writing for residential building works only if the work is valued at over $5,000.  Residential building work between $1,001 - $5,000 requires a written quote.  Work below $1,001 does not require any writing.
2. The monetary threshold for mandatory Home Warranty Insurance has increased from $12,000 to $20,000.
3. The limitation periods for breach of the statutory warranties and the home warranty insurance scheme will be aligned; both will be 6 years.  Readers should note that the warranty in respect of "non-structural defects" (generally more cosmetic or minor defects which do not prevent the premises from being used for living) is only 2 years.  This change will apply to new contracts entered into after 1 February 2012.
4. A new definition of "completion" has been inserted. This is the date from which statutory warranty and home warranty insurance time periods begin to run. 
5. Amendments to the Home Warranty Insurance provisions, which require (subject to limited exceptions) a claim to be notified and made within the period of insurance.
6. Strengthening the consumer protection objectives of the Act by clarifying that proportionate liability provisions of the Civil Liability Act do not apply to claims arising from a breach of the statutory warranties.  This means a party who is only partly liable for the loss (by reason of sub-contracting part of the work to others) cannot limit their liability.  E.g. one of many wrongdoers (perhaps the only wrongdoer who has the means to pay damages) cannot limit the damages otherwise payable by saying "but I sub-contracted that part of the work to ABC Pty Limited… I shouldn't have to pay for that", therefore ensuring that the homeowner is not left short by choosing not to, or not being able to, pursue ABC Pty Limited. 
7. The minimum amount of cover for home warranty insurance policies will increase from $300,000 to $340,000 and the maximum excess on a claim will be reduced from $500 to $250.

Changes are proposed to the standard Supreme Court of NSW Equity Division case management procedures.  The proposed changes are to vary the "standard steps" in preparing a matter for a final hearing and, if implemented, will require evidence to be settled and served prior to any orders for discovery (if discovery orders are made at all). 

We understand that a Practice Note is under consideration and may be issued shortly dealing with the proposed change. 

The practical effect of this change is that parties will need to serve their lay evidence without reviewing or having access to the other side's documents. 

This is another example of the Courts discouraging orders for discovery.  If such orders are to be made, it is likely that they will be limited to specific categories of documents.  It is no doubt contended that if discovery is considered (and ordered) after the service of evidence, discovery will be more limited as the issues in dispute are likely to be narrowed. 

One potential problem with this change is that parties may seek orders to permit them to serve further Affidavits after the discovery process is complete, in circumstances where further evidence is uncovered.  The consequences may be added delays in settling further evidence and additional costs. 

Clearly, however, if the time consuming and costly process of discovery is minimised, this should reduce the costs of litigation and result in matters progressing to a final hearing more quickly.

Proposed amendments to taxation laws (see Tax Laws Amendment (2011 Measures No. 8) Bill 2011) which may, amongst other things, extend the personal liability of directors for company taxes have been raised again, following its abandonment in late 2011. 

The proposed reforms could mean:

1. director liability if a company has not paid an applicable tax within 3 months of its due date;
2. an extension of the personal liability of directors, to also include a company's failure to pay the superannuation guarantee charge; and
3. (in some instances) affecting the ability of directors and their associates (for example, family members) to claim PAYG tax credits if a company fails to pay certain taxes. 

Although the proposed reforms were abandoned in late 2011 (due to public criticism), the Government has indicated it proposes to re-introduce them into Parliament soon.

Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.

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