Legal Insight Issue 6

Contents:

Liquidator to Pay Costs on an Indemnity Basis Personally

Misleading and Deceptive Conduct – "Reasonable Consumer" Test Confirmed

Amendments to the Building and Construction Industry Security of Payment Act ("ACT")

Steps you Must Take Before Commencing Proceedings - It's Now Law

Australian Consumer Law - ACCC Substantiation Notices

Trademark/Domain Name Disputes

Liquidator to Pay Costs on an Indemnity Basis Personally

The Supreme Court of NSW held in late 2010 (in Arena Management Pty Ltd (Administrator Appointed) (Receivers and Managers Appointed) –v- Campbell Street Theatre Pty Ltd) that a Liquidator who failed in proceedings must pay the other party's costs on an indemnity basis without any recourse to the assets of the company.

Facts

Campbell Street Theatre (Defendant) appointed receivers and managers to Arena (First Plaintiff) pursuant to a Charge. Mr Joubert (Second Plaintiff) was appointed Liquidator of Arena. The Liquidator brought proceedings against Campbell Street Theatre seeking declarations and consequential relief that, inter alia:

no money was owed by Arena to Campbell Street Theatre;
the Charge was unenforceable or voidable as an unfair preference, uncommercial transaction, related entity transaction or unreasonable director-related transaction; or
if the Charge was enforceable, the maximum amount payable was $500,000 as that was the total amount stamp duty had been paid on.

Law

The trial Judge held that the Liquidator failed to prove that execution of the charge was an "insolvent transaction" and therefore failed in all claims based on 2 above. Further, the Court held that the Charge was enforceable and dismissed the claim based on 3 above as no evidence was lead on this issue and it was first raised in closing submissions.

After dismissing the application and hearing the parties as to costs the Judge held:

The Liquidator failed on both of his substantive claims so there was no basis for an order that each party pay their own costs.
The Liquidator's counsel by cross-examining in a way to advance a positive case of fraud (which was not pleaded and particularised) constituted impermissible conduct, an abuse of privilege and was perhaps in breach of the Bar Rules.
The tone and language of the Liquidator's counsel's submissions "… is to be deplored".
The Liquidator relied solely on Arena's general ledger to deny any loans being made to Campbell Street Theatre while other evidence clearly supported the fact there were loans made and the Liquidator "was unreasonable… to have blinkered himself…" in this way.
The Liquidator's claim was bound to fail if he could not prove insolvency and all evidence on this point was "piecemeal and fragmentary" and some evidence was irrelevant. In light of the evidence relied upon by the Liquidator to apparently support insolvency being "so weak" it was held that the Liquidator "…was not acting responsibly and prudently as liquidator in allowing the case to go forward to trial" and if comprehensive evidence was available "he was not acting reasonably and prudently as liquidator in failing to prepare that evidence before the trial."
The proceedings did not have "a sufficient prospect of success", which is a higher threshold than "a fairly arguable" case (which is the test to resist an application for summary dismissal) and "…a liquidator, like a trustee, is dealing with other people's money and he or she must look at the ultimate result of the proceedings, not merely whether it will survive an application for summary dismissal".

Comment

The Judge was rather scathing of the liquidator and his legal representatives in the general handling and preparation of the case. Although the circumstances of this case are unusual, it is a timely reminder that insolvency practitioners expecting to be indemnified from the assets of an insolvent company (e.g. liquidators, receivers and administrators) risk being exposed as the liquidator was in this case if cases are not prepared and presented with great care. These reminders are for all parties, but particularly those litigating with "other people's money"!

Misleading and Deceptive Conduct – "Reasonable Consumer" Test Confirmed

The Federal Court recently dismissed an application by Optus to restrain Vodafone from broadcasting two mobile telephone advertisements on the basis that a "reasonable consumer" would not interpret the advertisements the way that Optus contended.

Facts

Vodafone launched a campaign for its new "Infinite" mobile phone packages, including by broadcasting two commercials stating that on these new plans consumers would have "infinite calls" and "infinite social networking" when in fact the plans were limited, only to standard landline and mobile telephone calls within Australia and excluded, amongst other things, premium telephone calls, 1800 calls, 1300 calls and when calling on international roaming. Each advertisement included very small text with words such as "to any standard number in Australia" and "to any personal mobile phone".

Law

The Judge confirmed that the appropriate test for whether an interlocutory injunction should be granted is that the Plaintiff must make out a "prima facie case" (i.e. prove that it is probable that the Plaintiff would succeed at a final hearing) and that the balance of convenience favours it being granted (i.e. weighing up the possible injury caused to the Defendant if the injunction was granted versus the possible damage caused to the Plaintiff if it was refused).

When considering whether Optus had made out a prima facie case, the Judge affirmed that for the purposes of section 52 of the Trade Practices Act (as it was then known – see now section 18 of the Australian Consumer Law), the Court considers how a "reasonable" or "ordinary" consumer would understand each of the advertisements. The Judge agreed with Vodafone's submissions to the effect that an ordinary and reasonable consumer would understand that the use of "infinite" in the contexts of the advertisements would be understood as referring to the number of standard calls that may be made as distinct from the types of calls and that there was very little evidence regarding the number of Australians who use, inter alia, satellite phones, 1800 numbers, 1300 numbers, directory assistance and whether they would consider them to be included in such a plan. Further, the Judge held that most consumers in this day and age would not simply rely on these advertisements and would know that such plans ordinarily involve contractual commitments of a year or more and are subject to detailed terms and conditions. Vodafone also offered an undertaking to issue a bulletin to all its stores and dealers to draw customers' attention to the relevant fine print (i.e. the infinite plan only includes calls within Australia, standard texts within Australia and to overseas and access within Australia to the listed social networking sites).

Comment

This case again confirms the "reasonable and ordinary consumer" test for whether conduct is misleading or deceptive. Although the application was interlocutory only (and therefore Optus may ultimately succeed in obtaining an injunction, assuming it continues to pursue the matter) the level of intelligence and scepticism which the judge imputed to the ordinary consumer is perhaps indicative of the age in which we live.

Amendments to the Building and Construction Industry Security of Payment Act ("ACT")

From 1 March 2011 amendments to the Act came into operation. These are intended to provide further comfort for sub-contractors.

The amendments provide that the principal contactor ("head contractor") must retain sufficient money owed to any contractor ("middle man") to meet a claim made against the middle man by a sub-contractor. The sub-contractor triggers the benefits of the Act by serving on the head contractor a prescribed form of notice, along with a statutory declaration declaring that the sub-contractor genuinely believes the money claimed is owed by the middle man ("Notice"). The head contractor must retain sufficient monies to meet the claim, until the first of the following:

the adjudication application (lodged by the sub-contractor against the middle man) is withdrawn;
the middle man pays the sub-contractor the claimed amount;
the sub-contractor serves a claim on the head contractor under the Contractors Debts Act, 1997; or
20 business days elapse after an adjudicator's determination (of the sub-contractor's claim against the middle man) is served on the head contractor.

If a head contractor does not retain sufficient money to meet the sub-contractor's claim after being served with the Notice it becomes jointly and severally liable with the middle man in respect of the debt owed to the sub-contractor. Interestingly, the amendments are to operate retrospectively, including to adjudication applications made before, but pending, as at commencement.

As with all claims made under the Act, there are strict time limits to enable sub-contractors to obtain the above "security" against a head contractor.

The amendments are similar to the procedure under the Contractors Debts Act, 1997. However, unlike the Contractors Debts Act, the procedure has been streamlined and does not require the sub-contractor to first obtain a judgment against the middle-man.

Steps you Must Take Before Commencing Proceedings - It's Now Law

As foreshadowed in the previous edition of Legal Insight, the Civil Procedure Act 2005 was amended to require parties to attempt settlements before commencing legal proceedings. These changes came into effect for all NSW State Courts, except the Supreme Court, effective on 1 April 2011. These changes are proposed to commence in the NSW Supreme Court at the same time as the equivalent Federal Court provisions (which still await proclamation).

We summarise the new provisions below:

Most civil proceedings (some proceedings are exempt) require the proposed plaintiff, before commencing proceedings, to take "reasonable steps", having regard to the nature of the dispute, value of the claim and the party's situation, to resolve the dispute by agreement or to clarify/narrow the issues in dispute.
"Reasonable steps" is not defined, however certain indicia are listed, including:
1. notifying the other party of the issues and offering to discuss them and responding appropriately to such notice;
2. exchanging appropriate correspondence, information and documents critical to a resolution;
3. considering and, where appropriate, proposing alternative options for resolution (e.g. genuine and reasonable negotiations and alternative dispute resolution processes, including perhaps mediation and neutral evaluation); and
4. taking part in an alternative dispute resolution process.
Parties must not "unreasonably refuse" to participate in genuine and reasonable negotiations or ADR processes.
Any correspondence, information or documents provided in accordance with the requirements cannot be used for a purpose other than the resolution of the dispute between the parties or in subsequent civil proceedings arising out of the dispute (unless by agreement or with the Court's permission). A breach of this requirement may be a contempt of Court.
When proceedings are commenced, the plaintiff must file with their originating process a "dispute resolution statement" specifying the steps taken to resolve/narrow the issues or why no steps were taken (if they were not). A defendant when filing a defence must also file a "dispute resolution statement" which states whether the defendant agrees with the plaintiff's statement or specifying a part (or all) of the plaintiff's statement which they do not agree with, together with the reasons why and specifying other "reasonable steps" that the defendant believes could be taken to resolve the dispute and/or narrow the issues.
Solicitors instructed to act in proceedings which are covered by these new rules (i.e. most proceedings) must inform a party of the above requirements and advise them of the alternatives to commencing proceedings that are "reasonably available" to resolve/narrow the issues in dispute. There may be costs consequences for solicitors personally if they fail to comply with the new rules.
A failure to comply with the new rules does not invalidate the proceedings or prevent the commencement of proceedings. However, it may have costs consequences (irrespective of the ultimate outcome of the proceedings).
Generally the parties are to bear their own costs of compliance with the new rules. However, a Court may make orders in respect of the costs of compliance "if satisfied that it is reasonable to do so, having regard to the overriding purpose [to facilitate the just, quick and cheap resolution of the real matters in the proceedings]".
Consistent with the general law and rules in respect of mediation, statements made at a mediation conducted for the purposes of compliance with the above rules are not admissible in any subsequent proceedings. Similarly, any document prepared for the purpose of, or in the course of, or as a result of, any such mediation is not admissible in any subsequent proceedings.

The above rules are now in force in respect of the majority of proposed Local Court and District Court proceedings. This is yet another example of the State and Federal Governments' push to seek to reduce the number of court proceedings. It will be interesting to see the results/statistics of these new provisions over the coming years.

Australian Consumer Law - ACCC Substantiation Notices

Impact on Suppliers/Retailers of Goods and Services

Introduction

The power given to the ACCC to serve substantiation notices as provided for in the new Australian Consumer Law (being Schedule 2 of the Competition and Consumer Act 2010 (Cth)) is part of the relatively new armoury available to the ACCC to obtain information or documents to support claims or representations made by persons who supply goods or services.

What is a Substantiation Notice

A substantiation notice is a notice issued by the ACCC to a person who makes a representation or claim in respect of the promotion of the supply of goods or services (including interests in land or offers of employment) to require the person served with such notice to provide information or documents to the ACCC, within 21 days from service of the notice, to substantiate or support the claim or representation made.

Formal Requirements

A substantiation notice:

must be addressed to the person who has made the claim or representation;
must be in writing;
must require the person to do one or more of the following things:
1. provide information and/or produce documents to the ACCC that could be capable of substantiating or supporting the claim or representation;
2. if the claim or representation relates to a supply or possible supply, of goods or services by the person to another person- give information and/or produce documents to the ACCC that could be capable of substantiating the quantities in which and the period for which the person or other person is or will be able to make such a supply; and
3. give information and produce documents to the ACCC that are of a kind specified in the notice;
must provide 21 days after the notice is served to provide the information requested;
must specify the claim or representation to which it relates; and
must explain the effect of sections 220, 221 and 222 (see below).

Extensions of Time

The recipient of the Notice may apply in writing within the 21 days to extend the compliance time. The ACCC has the discretion to extend the time.

Compliance

Failure to comply with a Notice is a breach of the Act and the recipient may be liable to a pecuniary penalty (s.221). An individual may refuse to comply with a Notice if the information or document to be produced might tend to incriminate the individual or expose them to a penalty (s.221).

If a person gives false or misleading information or documents containing false or misleading information, they will be in breach of Section 222 of the Act and liable to a pecuniary penalty. Limited exceptions apply.

What do you do if you are served with a Notice?

Seek legal advice.
Compile relevant information and documents immediately.
Notify the compliance officer/in house lawyer/Board.
Consider all your options. These will in all probability involve:
1. non compliance on a valid basis – that could be a technical matter or if production is likely to incriminate;
2. comply and produce information and documents - you have a discretion as to what information or documents to provide – carefully decide what information and documents to produce. The ACCC may then take further action or decide not to follow up with further action.
Act quickly and within 21 days.

Other important issues

Generally, all organisations should collect and retain in an easily accessible form documents and information to substantiate claims they make about their goods and services. Marketing or advertising personnel should adopt compliance practices to make certain that product or services representations can be supported properly by records or available information.

ACCC may follow up a Substantiation Notice with a formal investigation. It has other wide powers and tools available to it to investigate and/or prosecute.

Trademark/Domain Name Disputes

M. Corentin Benoit Thiercelin v Cyberdeal, Inc. Case No. D2010-0941

The Complainant, the owner of a French company named VIRTUALEXPO, was also the registered owner of the Trademark "VIRTUALEXPO" ("Trademark").

The Respondent, an American corporation named CyberDeal, Inc owned the domain name, ("Domain Name").

On 9 2010, the Complainant filed a complaint with the World Intellectual Property Organisation Administration and Mediation Center ("Center") asserting that the Domain Name was identical to the Trademark, that the Respondent had no rights or legitimate interests in respect of the Domain Name and that the Domain Name was registered in bad faith.

The Complainant made the following claims:

that he ran a company named "VIRTUALEXPO" registered on 2 August 2000 (although there was no evidence in support of this claim, the Center's Administrative Panel ("Panel") accepted it as fact);
that he was the owner of domain names and registered 17 December 2003; and
that he was the owner of three trade marks covering the mark "VIRTUALEXPO" with the first registered on 14 December 2005.

In order to succeed in his complaint under the Uniform Domain Name Dispute Resolution Policy (UDPR), the Complainant had to prove each of the following:

the Domain Name was identical or confusingly similar to the Trademark;
the Respondent had no rights or legitimate interests in respect of the Domain Name; and
the Domain Name had been registered and was being used in bad faith.

The Panel found that the Domain Name was identical to the Trademark. Despite this, the Panel found against the Complainant for the reason that the Complainant could not establish bad faith. It was therefore unnecessary to decide the issue of the Respondent's rights or legitimate interests in the domain name.

In this case, the Domain Name was registered almost 10 years before the Complainant had registered the Trademarks and four years after the Complaint's company was registered. The Panel found that the Respondent could not have contemplated the Complainant's Trademark rights, such rights not yet having come into existence. Consequently, the Panel found that there was nothing to support the Complaint's claim that the Domain Name was registered in bad faith. To add insult to injury, the Panel determined that the complaint was brought in bad faith and constituted an abuse of the administrative proceeding.

The lesson from this decision is that a Trademark owner does not automatically have the right to the corresponding domain name.

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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