Legal Insight Issue 18

Contents:

Misleading Conduct in Advertising

Product Safety Guide for Online Businesses

Proposed Changes to Franchising in Australia

The Importance of Registering on the PPSR

Failure to register security interests has drastic effects!

The Australian Competition and Consumer Commission ("ACCC") has been focusing on misleading or deceptive advertising.  In the case of Australian Competition and Consumer Commission –v- TPG Internet Pty Limited (2013) HCA 54 the High Court allowed an appeal by the ACCC from a prior decision of the Full Court of the Federal Court of Australia and reinstated findings that TPG's advertisements which prominently displayed an offer to supply broadband internet ADSL 2+ services for $29.99 per month ware misleading or deceptive due to the disparity between that price and a qualification in the advertisement, which was less prominently displayed - bundling with a landline service for a further cost of $30.00 per month and a minimum contract period of 6 months.  Additional charges were also payable as set up fees and a deposit.

Having allowed the appeal, the High Court reinstated the primary Judge's contravention findings and restored his order that TPG pay a pecuniary penalty of $2 million.

Whilst the case was brought under the old provisions of the Trade Practices Act, similar provisions are currently found in the Australian Consumer Law ("ACL"), being Schedule 2 of the Competition and Consumer Act, 2010 (Cth).

The High Court accepted the finding by the primary judge that the "dominant message" of the advertisements were crucial.  Further, the tendency of the subject advertisements to mislead was not neutralised by attributing knowledge to members of the target audience (first time users of such services) that the particular services may be offered by way of a "bundle".  The Court was of the view that the tendency of the advertisements to mislead should be determined by asking if the advertisements would cause consumers to negotiate with TPG instead of one of its competitors due to an erroneous understanding gained from the advertisement.

The High Court's views regarding the impact of the message contained in the advertisements are conveniently set out in paragraph 57 of the judgment in the following terms:

"It cannot be denied that the terms of the message and the manner in which it was conveyed were such that the impression TPG intended to create was distinctly not that which would have been produced by an advertisement which gave equal prominence to all the elements of the package it was offering to the public"(noting, of course, that proving the advertiser's intention is not necessary to establish misleading or deceptive conduct).

As to the penalty, the High Court considered that it was important to appreciate that TPG had previously given an enforceable undertaking to the ACCC by which TPG undertook not to engage in misleading and deceptive conduct.  The fact that such an undertaking had previously been given by TPG was sufficient for the Court to find that a severe penalty was appropriate.

Factors that were also considered important in determining the penalty were:

1. TPG spent approximately $8.9 million on the advertising campaign;
2. TPG earned revenue of $59 million with estimate profits at $8 million; and
3. Its customer base grew during the 13 month period of advertising.

The amount of the penalty should not be considered as "an acceptable cost of doing business".

TPG was also ordered to pay the ACCC's costs of the various appeals, which would have been substantial.

The case is a timely reminder that the ACCC will prosecute businesses for misleading or deceptive conduct, particularly where a wide body of the target audience is likely to be misled.  Prominent representations may not be negated by small print terms and conditions which seek to qualify the impact of the main advertising message.

The ACCC recently released a Report which provides guidance for businesses and "best practice tips" for businesses selling products over the internet to Australian consumers.  The Report is called the "Consumer Product Safety Online" and may be downloaded for free from the Product Safety Australia website at www.productsafety.gov.au/consumersonline. 

In releasing the Report, the ACCC noted that the online environment creates unique product safety challenges for businesses.  The Report is a useful and easy-to-read document which provides simple guidance on responsibility, compliance tips and practical examples.

The Minister for Small Business has recently released a statement outlining the Federal Government's proposed franchising reforms, including draft amendments to the Competition and Consumer Act, 2010 (Cth) (previously the Trade Practices Act). 

This follows the review conducted in 2013 by Mr Alan Wein which made 18 recommendations.

The proposed amendments fall broadly into the following categories:

1. franchisors and franchisees are to act in good faith in their arrangements with each other;
2. new penalties and powers in regard to certain breaches of the Code will be introduced;
3. improvement to the transparency of marketing funds; and
4. easier to understand, simpler and shorter disclosure requirements. 

Various processes of consultation and review have occurred since Mr Wein's review, including seeking input from various stakeholders.  The Government has indicated it is fundamentally seeking to reduce unnecessary compliance burdens. 

In more detail, the changes include:

1. removing the obligation of "double disclosure" currently imposed in multi-tiered franchises and which summarise provisions of the franchise agreement;
2. addressing various ambiguous clauses in the Code;
3. ensuring franchisors remind franchisees that they are entitled to current disclosure and other general short form information sheets when they intend to renew a franchise agreement;
4. requiring franchisors to disclose proposed significant capital expenditure;
5. preventing parties to a franchise agreement from attributing their costs in dispute resolution to the other party and ensuring franchisors cannot force franchisees to conduct dispute resolution outside the state where the franchisee's business is located;
6. preventing franchisors from unreasonably imposing restraints of trade on former franchisees;
7. introducing the obligation to act in good faith into the Code; and
8. improving compliance and enforcement outcomes by giving the ACCC flexible tools, including the introduction of penalties of up to $51,000.00, the power to issue infringement notices for breaches of the Code and allowing the ACCC to use audit powers to obtain documents from a franchisor.

Do you have adequate security for goods supplied on credit terms?  The recent decision of Ferguson J in Central Cleaning Supplies (Aust) Pty Limited v Elkerton [2014] VSC 61 highlights the importance for suppliers to have adequate terms of trade in their credit applications and to register their security interests on the Personal Property Securities Register ("PPSR"). 

Background

In September 2009, Swan Services Pty Ltd ("Swan") signed a credit application ("Credit Application") with Central Cleaning Suppliers (Aust) Pty Ltd ("Central"). 

Central subsequently supplied goods to Swan over a period of time.  On each occasion after the provision of goods to Swan, Central issued an invoice, which included a retention of title clause ("ROT Clause").

Central did not register its interest in the goods on the PPSR before Swan went into administration and liquidation in May and June 2013, respectively. 

Central claimed that goods supplied after 30 January 2012 had not been paid for and sought their return from the liquidators on the basis that it had a transitional security interest which was temporarily perfected under the Personal Property Securities Act, 2009 ("PPSA").  The liquidators rejected Central's retention of title claim and argued that Central's interest vested in the administrators. 

Issue

The key issue in this case was whether Central's security interest was founded in the Credit Application, giving it a transitional security interest, or in each invoice.  If Central's security interest was in each invoice (each being a security agreement), it would not have had a transitional security interest in the goods because the transitional provisions in the PPSA only apply to security agreements that were immediately in force before 30 January 2012 and continued to be in force after that date. 

Decision

The Court held in favour of the liquidators, finding that the security interest over the goods was created by the ROT Clause in each invoice, which was not incorporated as a term of the Credit Application. 

The words "goods the subject of this sale" (emphasis added) in each invoice inferred that the parties intended each invoice to create a separate contract of sale (and therefore a separate security agreement) for the goods supplied under that invoice.

The result was that the security interests which Central did have arose under the ROT Clause in each of the invoices issued after 30 January 2012.  However, those interests were not the subject of the transitional provisions in the PPSA and had not been perfected by registration on the PPSR.  Therefore, Central's interests vested in Swan when it went into administration.

Conclusion

This case highlights the care which must be taken when drafting credit applications and the importance of registering on the PPSR in order to protect the interests of the secured creditor.

On 16 April 2014, the Supreme Court of Western Australia held that the owner of certain motor vehicles, trailers and plant ("Plant") worth approximately $1.4 million was trumped in a priority dispute with National Australia Bank Limited ("NAB").  The decision is cited as White v Spiers Earthworks Pty Ltd [2014] WASC 139. 

The facts and outcome in this case were similar to the decision of the Supreme Court of NSW in the Maiden Civil Case (see our prior edition).  The pertinent facts and findings were:

1. Various parties ("Vendor") sold their earthmoving business to a company ("Purchaser").  The arrangements for the sale were documented in two agreements, one of which was a hire-purchase agreement in respect of the Plant.  The Judgment suggests the Plant was valued at approximately $1.4 million. 
2. Before the PPSA commenced (ie pre 30 January 2012):
   1. the sale of business agreements were entered into;
   2. the Purchaser granted a fixed and floating charge to NAB. 
3. NAB's charge (in PPSA language "general security agreement") was migrated to (automatically registered on) the PPSR. 
4. In July 2013, the Purchaser appointed voluntary administrators.  Shortly thereafter, NAB appointed receivers and managers ("Receivers") to the Purchaser. 
5. After the appointments, the Vendors gave notice to the Purchaser and the Receivers, relying on various clauses of the hire-purchase agreement, asserting their ownership of the Plant and terminating the Purchaser's right to possession. 
6. The Receivers commenced proceedings seeking a declaration that the Plant vested in the Purchaser immediately before appointment of the voluntary administrator, the Purchaser holds the Plant subject to NAB's charge and orders for delivery up of the Plant. 
7. The Court found that the real issue was a priority dispute between the Vendors and NAB and the vesting (or not) of security interests and, for this purpose, the Vendors' ownership was irrelevant.
8. The Court's reasoning was:
   1. the sale of business agreements were "transitional security agreements" and the Vendors' interest under the hire-purchase agreement was a "transitional security interest";
   2. a "transitional security interest" ordinarily obtains "deemed perfection" (deemed registration on the PPSR) until, in most cases, 31 January 2014;
   3. there are certain exceptions to "deemed perfection" and, for relevant purposes, an interest in personal property which was registrable on a "transitional register" (in this case, the Western Australia REVS Register) but was not registered before commencement of the PPSA;
   4. as the security interest was not registered on the REVS Register, it did not have the benefit of "deemed perfection"; and
   5. as an unperfected security interest, the Vendors' interest vested in the grantor (Purchaser) immediately before the appointment of administrators.
9. The Vendors raised two substantive arguments in an effort to defeat NAB:
   1. Firstly, it claimed that the PPSA and the Australian Constitution prevented a finding that their interest vested in the Purchaser as this would be an acquisition of property on other than "just terms" (remember that old chestnut from The Castle?).  The Court rejected this argument in finding that there was no "acquisition of property" as that phrase is understood in the Constitution; and
   2. Secondly, the Vendors relied on Section 261 of the PPSA which deals with the interaction of the PPSA and, inter alia, State law.  It is beyond the scope of this article to explain Section 261 and its operation, suffice to say that the Court found that it did not operate in the circumstances to avoid vesting of the Vendors' interest in the Purchaser. 

The practical effect of the decision is that the owners of the Plant will be ordered to deliver them up to the Receivers who will quite likely use or sell them to pay NAB.

Our readers should be under no misapprehension as to the potentially catastrophic effects of not taking and properly protecting security under the PPSA. 

When it comes to the insolvency of an individual or company, unless you have taken appropriate steps you may find yourself watching your goods being sold by your customer (or its external administrator) or another creditor who also takes the proceeds of the sale!