Legal Insight Issue 14

Contents:

Enforceability of Contractual Dispute Resolution Provisions

ACCC Takes Action Alleging "Unfair Terms"

Negotiated Penalty Arrangements with ASIC/ACCC for Civil Penalty Infringements of Corporations Act, 2001/Competition and Consumer Act, 2010

Update on Franchising Code Review

Proposed "Unfair Terms" Amendments to Insurance Contracts Act

Franchising Industry – Franchising Code of Conduct Review

"Clayton's Redundancy" – The Redundancy you're having when you’re not having a Redundancy

Downer Mining Pty Limited –v- Wambo Coal Pty Limited [2012] QSC 290.

In a recent decision of Martin J in the Supreme Court of Queensland the Court ordered that a claim under a maintenance service contract sought to be brought in the Supreme Court be stayed as the agreed dispute resolution procedure had not been complied with prior to commencement of the legal proceedings. 

Wambo succeeded in persuading the Court that Downer EDI had not satisfied the contractual terms of the agreement requiring compliance with the dispute resolution provisions as a condition precedent to commencing Court proceedings. 

Downer EDI opposed the application and argued that the contractual provisions were vague, uncertain and therefore unenforceable; alternatively, that it would be otiose to stay the proceedings (even if the dispute resolution clause was enforceable) as Wambo had been "intransigent and unmoveable" in pre-litigation communications.

The contractual dispute resolution provision was a fairly standard type of provision providing that a party may not commence Court proceedings concerning a dispute unless the clause had been complied with, or if urgent interlocutory relief was sought, or the other party had first commenced proceedings (other than pursuant to the clause) or the dispute had been referred to an expert and either the expert had not made a decision within the 20 business day period specified or the expert's decision was tainted by manifest error.

The provision required:

1. A dispute notice to be given;
2. Within 5 business days after the dispute notice (or such longer period agreed by the parties in writing) each party was to prepare and exchange a brief statement setting out its position and reasons and give to the other party any information they may reasonably require to consider the issues;
3. Within another 5 business days, the parties were to hold a meeting to attempt to resolve the dispute and if 5 days after the meeting it was not resolved, certain senior executives were to meet and use their best endeavours to resolve the dispute.  If not then resolved in 10 business days, chief executive officers were to meet in another 10 business days and use their best endeavours to resolve the dispute, each with full authority to do so; and
4. If then not resolved, subject to certain matters, an expert determination notice was to be given referring the dispute to expert determination for decision within 20 business days.

Justice Martin confirmed the ongoing commercial tendency of the Courts to enforce valid dispute resolution clauses between parties to contracts.  He relied on prior precedent to the effect that Courts should give appropriate weight to dispute resolution provisions, noting that it is desirable that parties who make such bargains should be kept to them.  He also relied on the judgment of Chesterman J (as he then was) in Zeki Services Pty Limited –v- The Traffic Technologies Pty Limited (2005) QSC 35 to the effect that a party opposing a stay must persuade the Court that there are good grounds to exercise the discretion to allow the action to proceed and therefore prevent the agreed contractual dispute resolution procedure from being undertaken.  Chesterman J described that onus as a heavy one.

His Honour did not accept Downer EDI's arguments regarding uncertainty and found that the procedures were sufficiently clear to be enforceable and that provisions were included to allow extensions of time in the event that the limited time frames available for meetings and the like could not be adhered to.

The claim was therefore stayed until the parties had complied with the dispute resolution provisions set out in the agreement.

This judgment confirms that the Courts strive to hold parties to their commercial bargains in relation to dispute resolution/expert determination/arbitration/mediation clauses.  Consideration should be given to incorporating such provisions into commercial contracts and, when disputes arise, checking whether such provisions are included and adhered to prior to litigation being commenced.

The ACCC has commenced proceedings in the Federal Court of Australia in its first case relying on the "unfair contract terms" provisions of the Competition and Consumer Act, 2010 (Cth).

The proceedings have been commenced against ByteCard Pty Limited alleging a number of clauses in its standard form consumer contracts are unfair and should be declared void.  ByteCard is better known as Netspeed Internet Communications and is an Internet Service Provider which provides internet connectivity, domain registration, hosting and web design services.

The alleged unfair contract terms:

1. Allow ByteCard to vary prices unilaterally without providing the customer a right to terminate;
2. Provide an indemnity by the consumer in favour of ByteCard in all circumstances, even where there has been no breach and the loss/damage could have been caused by ByteCard's breach; and
3. Give ByteCard a unilateral right to terminate at any time without cause or reason.

The proceedings have been filed in the Federal Court's Fast Track List.

It will be interesting to see the outcome of this case in due course.  These proceedings follow an industry wide review of contract terms by the ACCC.

For some years a practice has developed, whereby parties on the receiving end of civil actions brought by the ASIC or the ACCC for civil penalty infringements have negotiated with those Authorities an agreed penalty and accompanying statement of facts, with a view to requesting the Court to impose that "agreed" penalty.  This process has recently been put into question by a recent Victorian Supreme Court of Appeal decision in ASIC v Ingleby (2013) VSCA 49, delivered on 19 March 2013 ("Ingleby's Case").

The Court considered the background of the pecuniary penalty regimes that have been in operation for some time under various statutory provisions for contravention of civil penalty provisions.  Generally, such penalties are imposed for the public policy purpose of preventing or punishing a public harm.  The Court observed that such negotiated penalty settlements have a number of advantages, including saving Court time and costs and uncertainties in contested litigation.  On the other hand, the Court observed that from time to time, the accuracy and sufficiency of agreed statements of facts presented to the Court have been wanting.

A further problem with such "agreed penalties" is that there is seen to be a danger that the Courts may just "rubber stamp" such agreements between Authorities and parties, rather than exercise a judicial power based on a proper exercise of discretion.  Weinberg JA was of the view that a judge should regard an agreed position regarding the appropriate pecuniary penalty to be nothing more than a submission by the parties, having no "binding force of any kind".

The Court found that the agreed facts presented to the Court below represented a "watered-down" version of the true level of culpability of Mr Ingleby in connection with the affairs of the AWB.

In the end, the Court allowed the ASIC's appeal from the decision of the Court below (which imposed a lesser penalty on Mr Ingleby than had been presented to the Court as the "agreed penalty" of $10,000), and imposed a pecuniary penalty on Mr Ingleby of $40,000, together with an increased period of disqualification to 15 months.  The Court considered that Mr Ingleby had committed a most serious breach of his obligations under section 180 of the Corporations Act.

Harper JA stated that the Court is placed in a "very difficult position" and that it has the responsibility to decide "the penalty which justice demands be paid by a contravener".  Whilst encouraging parties to reach agreements, His Honour stated that the Court "must not simply allow the parties to determine that penalty for themselves".

We note that Mr Ingleby, the Respondent to ASIC's appeal, was not represented at the Appeal Hearing.  If he had been represented, we question whether the Court of Appeal may have considered imposing an even higher penalty on him for the serious conduct he had engaged in.

The case highlights the importance of seeking to negotiate and draft specific and detailed statements of agreed facts to support the appropriate penalty the parties wish to submit to the Court is appropriate for the contravention(s) in issue.  This decision involved an ASIC action brought in a State Court.  It will be interesting to see whether the decision will be applied to negotiated pecuniary penalty settlements with the ACCC, as most ACCC proceedings are litigated in the Federal Court.  A decision by the High Court in an appropriate matter will certainly clarify the position.

We have previously informed readers that the Franchising Code of Conduct ("Code") is being reviewed.

Recently, the ACCC made submissions in relation to this review.  The ACCC recommended a number of interesting changes to the Code and/or practices relevant to the Code, including:

1. Providing for civil pecuniary penalties and infringement notices for breaches of the Code (for example, where a franchisor fails to provide a disclosure document to a prospective franchisee or for unlawful termination of a franchise agreement);
2. Widening the audit powers of the ACCC to allow it to more accurately assess the level of compliance by a Franchisor with the Code;
3. Short summary documents should be provided by a franchisor to a prospective franchisee dealing with the main risk elements franchisees face (for example, what happens on termination at the end of the franchise agreement term, or what happens when the agreement is breached and the franchisee does not remedy the breach within a reasonable period of time);
4. The disclosure obligations be amended to require franchisors to disclose their ability to operate in competition with a franchisee in an online marketplace; and
5. Franchisors should be required to disclose to prospective franchisees any paid ACCC infringement notices.

We will keep an eye out to see whether these recommendations are accepted and what amendments will be made to the Code in due course (see further article below – the Code review Report has now been issued).

The Federal Government has now released an Exposure Draft Bill ("Bill") proposing amendments to the Insurance Contracts Act to incorporate "unfair terms" provisions akin to the "unfair terms" provisions in the Australian Consumer Law ("ACL") and Australian Securities and Investments Commission Act ("ASIC Act").

Our readers may recall that the ACL (and the ASIC Act) include provisions that "unfair terms" in "standard form contracts" are void.  The proposed amendments (if passed) will have far reaching repercussions and (in its current form) will apply to almost all general insurance contracts.  However, the proposed provisions will only operate if:

1. the insured is an individual and the policy is acquired wholly or predominantly for personal, domestic or household use ("Personal Use").  This looks to the intended use rather than the type of policy and therefore may capture standard commercial/business policies if acquired for Personal Use and, conversely, may not capture standard personal type policies if acquired for business purposes;
2. the contract is a "standard form consumer contract of general insurance" and the relevant term is "unfair".  There are a number of considerations applied in determining these questions; and
3. the relevant term is not a term which is within an excluded class of terms.  For example, terms which define the "main subject-matter" of the contract or stipulate the price would be excluded.

There has been considerable debate in respect of the above proposed amendments and it is likely further industry resistance will be received by the Government.  The Bill is open for public comment until 31 May 2013.

On 30 April 2013, Mr Alan Wein issued his report to the Minister and Parliamentary Secretary for Small Business.  The report is a very substantial document and provides a good deal of background information regarding the Code, issues relating to franchisor disclosure, franchisor failure, payments required by franchisors from franchisees, good faith, transfers, renewals and end of franchise term arrangements, dispute resolution and enforcement, amongst other things.  Issues pertaining to franchisees in the motor vehicle industry are also separately addressed.

The Report makes a number of recommendations, some of which are summarised below:

1. the Code be amended to provide that a franchisor should issue a fresh disclosure document to a franchisee when issuing the franchisee with a Notice of Intention to renew a Franchise Agreement six months prior to the end of the franchise term;
2. the Code be amended to provide for short form disclosure between a master franchisor and a master franchisee, with recommendations as to what such disclosure document should incorporate in terms of disclosure details;
3. the Code be amended to require a franchisor to specifically disclose to a franchisee the parties' respective rights regarding conducting online sales and benefits arising from such sales;
4. the Code be amended to remove short form disclosure documents for franchisees or prospective franchisees (i.e. full disclosure is required to be given to them);
5. the Code be amended to force franchisors to address key risks and other matters a franchisee or prospective franchisee should be aware of, and that a generic type summary should be provided separately from the Franchisor Disclosure documents at the time of first contact with the franchisor;
6. rights to terminate should be available to both franchisees and franchisors within a reasonable period of time after appointment of an Administrator and to allow a franchisee to recover as an unsecured creditor of the franchisor (if it fails) a refund of the franchise fee paid as if that fee had been apportioned for the term of the Franchise Agreement;
7. the Code be amended to disallow franchisors from forcing unreasonable significant capital expenditure on a franchisee, without a valid business case;
8. the Code be amended in relation to marketing funds and their administration, requiring such funds to be held on trust for all franchisees, with franchisor owned businesses required to make equivalent contributions to marketing funds, and limits on the use of monies held in such funds, with independent audits of such funds provided to franchisees;
9. amendment of the Code to provide for an obligation to act in good faith in all aspects of the franchisor/franchisee relationship, with any provision in a franchise agreement seeking to avoid such duty being declared void.  The recommendation provides that a franchisee should not be able to argue a franchisor has not acted in good faith because a Franchise Agreement does not incorporate a right of renewal to the franchisee;
10. amendments relating to notices of consent to the transfer of a franchisee's business, and to provide that restraints of trade clauses on termination of a Franchise Agreement which prevent a franchisee from competing are not enforceable against the franchisee in circumstances where the franchisee was prepared to renew the Franchise Agreement, was not in breach of the agreement, had no entitlement to compensation on non-renewal and where a franchisor refuses to renew with the franchisee;
11. amendments to the dispute resolution provisions of the Code to allow for other dispute resolution processes and to provide that a franchisor cannot pass on dispute resolution legal costs to a franchisee unless a Court orders.  A further recommendation has been made to prevent a franchisor from requiring a franchisee to litigate in a different jurisdiction to that in which it conducts  its franchise business; and
12. the Competition and Consumer Act, 2010 be amended to provide for:
    1. civil pecuniary penalties for breaches of the Code and allow infringement notices to be issued by the ACCC;
    2. an order disqualifying a person from managing a corporation to be made by a Court for a breach of the Code;
    3. an expansion of the powers available to a Court to make orders for royalty free periods to franchisees who have been subjected to Code breaches by a franchisor; and
    4. and for a franchisor to pay monies into a marketing fund.

It will be interesting to see whether these recommendations are implemented in due course.  We expect that a number of these recommendations are likely to be implemented.

Redundancy is a familiar part of the industrial relations landscape, and typically occurs because of an employer's operational circumstances such as market changes, workforce restructure or the need for a reduction in operating costs.

But what if an employer dresses up a termination to look like a redundancy so as to rid itself of an employee who has made a complaint? Could the employee legally challenge what he or she suspects is a 'Clayton's redundancy'?

In the recent case of National Tertiary Education Union v Royal Melbourne Institute of Technology, the Federal Court of Australia was not persuaded by RMIT that its stated reasons for making an employee's position redundant were strictly financial, resulting in an order for reinstatement of the employee and the imposition of a pecuniary penalty.

The applicable law

An employer may be found to contravene section 340 of the Fair Work Act 2009 if it takes "adverse action" against an employee for a reason that includes the employee's "workplace rights". Adverse action is defined quite broadly and can include the act of dismissing an employee. Workplace rights are also defined broadly and will include an employee's right to make a complaint or enquiry in relation to their employment.

An employee (or an industrial organisation on their behalf) may legally challenge a dismissal and allege that the reasons for the dismissal included the employee's workplace rights. Once the employee has identified to the Court what the workplace rights are, it falls to the employer to persuade the Court that it did not dismiss the employee because of the employee's workplace rights.

The facts

Professor Judith Bessant was employed by RMIT as a Professor within the School of Global Studies, Social Science and Planning ("School").  Professor Bessant occupied the position of discipline head in the Youth Work discipline. 

In August 2009, Professor Hayward was appointed head of the School.  Following Professor Hayward's appointment he sought to reorganise the structure of the School.  The restructure of the School led to conflict between Professor Bessant and Professor Hayward not least of all because Professor Bessant lost her place on the School executive, was removed from her position as discipline head and a substantial project she had been working on over the preceding two years which was subject to a recommendation by Professor Hayward not to proceed.  Professor Hayward's decisions in regards to the restructure of the discipline and the School were designed to quite clearly target Professor Bessant's position for redundancy.

Professor Bessant made a series of complaints concerning Professor Hayward's management practices, including about workplace bullying.  Whilst there was obvious conflict between Professor Bessant and Professor Hayward, there were also quite legitimate concerns regarding the financial viability of the Youth Work discipline due to falling student numbers, high costs and an overall loss to the School of around $300,000 per annum.  There was clearly a financial imperative on Professor Hayward to restructure and to seek to reduce the costs of the School and the Youth Work discipline.

The outcome

Despite the legitimate concerns regarding the financial viability of the Youth Work discipline, the decision to make Professor Bessant's position redundant was found to constitute adverse action.  In the Court's view there was no doubt that Professor Hayward harboured animosity towards Professor Bessant and was keen to have Professor Bessant removed from the School for reasons entirely unconnected with the financial difficulties faced by the Youth Work discipline (including the reason that Professor Bessant had made complaints about Professor Hayward). 

Lending weight to the Court's finding that the redundancy was not bona fide was RMIT's failure to adduce evidence of any clear reasoning that linked the financial deficit in the Youth Work discipline with the selection of Professor Bessant's position for redundancy.  There was also an absence of any clear expression, or application, of any selection criteria by reference to the decision to make Professor Bessant's position redundant.  The Court held that the lack of a clear and cogent process of reasoning was a major factor in concluding that there may have been reasons other than purely financial reasons for the decision to make her position redundant. 

Professor Bessant's redundancy was unlawful because the real reasons for the decision and subsequent dismissal included the fact that Professor Bessant had workplace rights, had exercised workplace rights, and proposed to exercise her workplace rights.  The dismissal was therefore found to be a contravention of the General Protections provisions of the Fair Work Act 2009 resulting in Professor Bessant being reinstated to her position and the imposition of pecuniary penalties against RMIT totalling $37,000.

In the Court's opinion, the decision to make Professor Bessant's position redundant constituted a "very serious" contravention of the Fair Work Act.  "In effect, RMIT made use of its redundancy process to rid itself of an employee, who was considered to be troublesome, at least partly because she was prepared to exercise her workplace rights by making complaints about the behaviour or her immediate supervisor."

The case will assist employees who have grounds for suspecting that their redundancy is a sham.

For employers, the lesson to take away is to ensure that a decision to select an employee for redundancy is not infected with an unlawful reason that includes an employee's workplace rights. This might require the appointment of a decision maker who is free of considerations of personal bias. As the employer bears the onus of satisfying the Court as to its motives, the decision making process should be supported by contemporaneous records.

John Vohralik (our Consultant Director) is a mediator on the Panel of Mediators of the Office of the Franchising Mediation Adviser and is a Nationally Accredited Mediator and has expertise in consumer law and franchising disputes.