Legal Insight Issue 2

Contents:

"Unfair" Contracts Amendments to Trade Practices Act

Update on Alternative Dispute Resolution and Civil Litigation

Appointment of Voluntary Administrator Amounts to a "Change in Ultimate Control"

"Unfair" Contracts Amendments to Trade Practices Act

Amendments to the Trade Practices Act have been proposed by the Trade Practices Amendment (Australian Consumer Law) Bill, 2009. These provisions, if enacted, will prescribe as void any term in a "standard form contract" which is "unfair". Such contracts are likely to include contracts issued by banks, credit card providers, mobile phone providers, internet providers, airlines, public transport, some franchisors and equipment lessors.

The main intention of the provisions is to provide consumers who have little or no bargaining power (i.e. consumers contracting with big business) with a legislative "stick". An "unfair" term of a "standard form" contract is a term which:

causes significant imbalance to a party's rights and obligations; and
is not reasonably necessary to protect the legitimate interests of the party in whose favour it operates.

The proposed wording has the effect that "unfair" provisions of such standard form contracts will not be read down (as they may be under the current law) but rather struck out of the contract completely. The onus of proof in respect of these claims, unsurprisingly, will be on the party seeking to enforce the contract (i.e. a reverse onus). That party must show either:

the contract is not a standard form contract; or
the term in question is fair.

The Bill was introduced into Parliament in June 2009. The Government has intimated that it is likely to come into effect on 1 January 2010. It is proposed that mirror legislation will be enacted in fair trading legislation in each State and Territory.

Update on Alternative Dispute Resolution and Civil Litigation

In mid 2009, the Commonwealth Attorney General requested the National Alternative Dispute Resolution Advisory Council ("NADRAC") to enquire into and recommend ways to remove barriers and provide incentives for greater use of alternative dispute resolution, either as an alternative to civil court proceedings, or for use during Court or Tribunal processes.

The closing date for submissions was 30 September 2009. We consider that the recommendations to be put forward by NADRAC will be very interesting and may well have a significant bearing on issues such as whether, for example, mediation ought to be a mandatory step in civil disputes before a party is permitted to access the Civil (Federal or State) Courts to litigate a dispute.

Our John Vohralik is an accredited mediator with LEADR (Association of Dispute Resolvers). LEADR submitted a response to NADRAC earlier this year. LEADR's submission is that most civil matters are appropriate for mandatory assessment for alternative dispute resolution, and suggested that compulsory forms of alternative dispute resolution may be appropriate for civil litigation. Alternative dispute resolution options may have more to offer parties before they actually commence civil litigation, as parties are likely to still have genuine desires to resolve their problems at that time.

As a result of these submissions, it may well be that before making use of Civil Courts, prospective litigants will be required to certify that they have considered engaging in some form of alternative dispute resolution (e.g. mediation) before filing civil proceedings. Further, it remains to be seen whether the Federal Attorney General will make recommendations to enshrine in legislation a mandatory requirement to participate in an alternative dispute resolution session as a pre-requisite to filing civil court proceedings.

If positive recommendations are made by the Attorney General, we foresee wholesale changes being implemented in the not too distant future in connection with the way civil litigation operates in both Commonwealth and State jurisdictions.

Appointment of Voluntary Administrator Amounts to a "Change in Ultimate Control"

The Victorian Court of Appeal decision in Burbank Trading Pty Ltd v Allmere Pty Ltd highlights the importance of carefully drafting Shareholders' Agreements, particularly when dealing with the triggers which enliven pre-emptive rights to transfer shares.

Facts

Burbank and Allmere were the only two shareholders in a carpet retail joint venture. Burbank and Allmere operated Carpet Call pursuant to a written Shareholders Agreement. The Shareholders Agreement had a (standard) pre-emptive share purchase clause which was triggered, for relevant purposes, if a shareholder wished to sell its shares or underwent "a change in ultimate control". In either event, the other shareholder(s) then obtained a preference option to purchase the shares before they could be offered to a third party.

Allmere appointed a Voluntary Administrator ("VA") in September 2006 and in October 2006 sent an offer to sell its shares to Burbank. Allmere contended that as Burbank did not accept the offer it lost its pre-emptive rights, therefore entitling Allmere to transfer its shares to a third party. Burbank contended that the offer was invalid as, inter alia, the appointment of a VA in September 2006 constituted a "change in ultimate control" and enlivened the pre-emptive rights as at that time, which were undetermined as at the time the "offer" expired and the purported transfer to the third party was made.

Decision

The Appeal Court held that the use of the word "ultimate" was referable to the control, rather than the change in it - i.e. it was a change in ultimate control, not an ultimate change in control. The Appeal Court found that the expression meant: "[a change in] the supreme or authoritative decision making power, rather than a long term or final change" and it "… does not matter that it may be temporary…". The Appeal Court also held that:

"[it is a] radical change of status which mandates the transfer of all corporate control and decision-making power to the administrators";
"[A 1995 survey found that] over 80 percent of companies using voluntary administration were subjected to winding up"; and
"[it is] necessary to consider the general nature of the voluntary administration procedure and its probable consequences as a whole when determining whether it constitutes a change in ultimate control",

which can readily be distinguished from a "temporary….incapacity [of a controller] which is a de-facto incapacity" and not a "de jure change in the identity of…" the controller(s).

The Appeal Court therefore found that the pre-emptive rights were triggered on appointment of the VA. As the price pursuant to the relevant provisions of the Shareholders' Agreement had not yet been determined, those rights were not lost by Burbank. The decision highlights the importance of careful consideration and consideration of pre-emptive rights provisions in Shareholders' Agreements.

Personal Property Securities Law

The Personal Properties Securities Bill (2009) to reform personal property securities in Australia was approved through the Senate last week. It deals with all personal property except for land, fixtures and water rights. Personal property will include goods, contractual rights and intellectual property. The legislation is expected to be enacted in mid 2010 (however to only apply on and from May 2011), with a Personal Property Securities Register System to be adopted soon after. That Register is expected to operate in a different way to the NSW Land Titles register.

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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