influence updates

Time to review your IP arrangements

Posted on by influence legal.

In February this year, the Federal Parliament passed the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (Act), repealing the intellectual property exemptions under section 51(3) of the Competition & Consumer Act 2010 (Cth) (CCA).

The repeal is set to come into effect on 13 September 2019.

What’s section 51(3)?

Section 51(3) covered contractual terms in licences and assignments of patents, designs, copyright and EL rights, and specified agreements in relation to trade marks.

Do your IP contracts need review?

The section provided a limited exemption for IP rightsholders, to allow them to make arrangements that would otherwise be prohibited under the CCA. So, for example, a generally anti-competitive term, or a cartel provision, which met the requirements of section 51(3), would be permitted.

The background of the section was the perceived conflict between the monopoly rights of IP rightsholders, and the competition provisions under the CCA, meaning that IP rights needed this exemption.

What’s the background to the changes?

Section 51(3) has had a life under the microscope, with consistent review and advocation for its repeal for quite some time. It was reviewed in the Hilmer Report, as well as in a number of subsequent competition reviews.

More recently, the Productivity Commission’s Inquiry into Intellectual Property Arrangements, released in late 2016, considered the balance between access to ideas and products, and the encouragement of innovation and investment.

The report recommended the repeal of section 51(3) on the basis that IP rights did not have significant competition implications, and issues only arose where there were few substitutes or where IP rights aggregation could create market power.

The Commission considered that there would be increasing benefits to repeal, especially in the pharmaceutical and communications markets, as the level of licensing and cross-licensing rises in the future.

 Where does this issue arise?

There have been very few cases where section 51(3) has been considered – in fact the ACCC stated in its 2016 submission to the Productivity Commission that it was not aware of any cases where section 51(3) had been used successfully as a defence.

That said, it’s anecdotally clear that IP rightsholders have relied on knowing that section 51(3) was there, in structuring agreements, and there are several situations where regulators and courts have considered a tension between IP rights and competition regulation. These include:

  • Exclusive dealing – such as where rightsholders impose restrictions on distributors about their permitted suppliers or customers. For example, in Transfield v Arlo [(1979) 144 CLR 83 at 108, the Court considered whether Transfield was obliged to sell exclusively promote and sell Arlo’s steel pole. Wilson J was of the view that if a contract clause requiring a licensee to use its ‘best endeavours’ to sell a patented product meant that the licensee could not sell competing products, it would have been protected by section 51(3).
  • Geo-blocking – where rightsholders impose geographical restrictions on the basis of consumer nationality or location. The EU recently regulated geo-blocking with Regulation 2018/302. The European Commission subsequently found that clothing company, Guess, violated the regulation by restricting authorised retailers from selling cross-border to consumers within the EU single Market, allowing them to maintain artificially high retail prices.
  • Assignments-back – In the US, Pilkington Glass was found to have built up a dominant position in the glass manufacturing market by requiring licensees to assign back improvements to Pilkington’s processes. Consequently, the court prohibited Pilkington from imposing territorial and use limitations on their US licensees, allowing them instead to manufacture and sublicence anywhere in the world, free of charge, using the technology in the licences.

What will happen when the repeal comes into effect?

When the repeal takes effect this September it will operate retrospectively, meaning p

We can anticipate that with this change, the ACCC will have an increased focus on IP-heavy arrangements and compliance activities to ensure businesses understand their new obligations under the CCA.

The ACCC has stated that they are in the process of writing guidelines to assist businesses in complying with the repeal, but while we wait for these, we can expect that agreements including the following aspects will be of interest:

  • Exclusive arrangements, territory restrictions, geo-blocking and assignments-back, as mentioned above;
  • Licences that impose quantity restrictions on the licensees, split licensees’ rights by reference to customers, or involve bid-rigging;
  • Bundling and third-line forcing, where the licensee has to accept other products from the licensor or a third party;
  • Patent pooling arrangements – these are agreements where companies with related patents cross-license them to each other and agree on the terms of licence agreements to parties outside the pool; and
  • Clauses that provide for a first mover advantage or “pay for delay”, where one party pays the other to agree not to commercialise a product or move into a market.

Now is the time to review

With the commencement date fast approaching there is still a window of time to ensure that your existing IP arrangements will comply with the repeal.

If you have any concerns or questions about the potential impact of the repeal on your IP licensing, assignment or distribution arrangements, please contact us.

Author: Blake Motbey, Paralegal.

What are you implying?

Posted on by influence legal.

There are several ways for terms be implied into a commercial contract. Terms can be implied:

  • by law – such as the consumer protection provisions of the Australian Consumer Law or the implied duty of good faith; or
  • by fact, where a term is reasonable, equitable, obvious and necessary to give business efficacy to the contract.

The recent case of Rehau v AAP Industries provides a useful reminder that key terms can be implied into a contract, with significant effect.

The facts


Terms that you may not have intended can be implied into your contract

AAP Industries, a manufacturer of plumbing products, and Rehau, a wholesale supplier, were in dispute over a supply agreement dated 1999.

AAP Industries had agreed to supply 9 specified plumbing products to Rehau at a fixed price. The initial term of the agreement was 12 months with automatic renewals.

In 2013, after trying to renegotiate prices, Rehau stopped ordering the products. AAP Industries claimed that this was a breach of the agreement.

AAP Industries argued that although the agreement didn’t state so expressly, it contained an implied exclusivity clause, requiring Rehau to purchase the products only from AAP Industries.

The decision

Both the primary judge and the Court of Appeal agreed with AAP Industries.

The court’s view was that even though there was no exclusivity clause, the agreement, when construed as a whole, required Rehau to purchase the products exclusively from AAP Industries.

The main provisions that were considered included:

  • AAP Industries had to reserve production capacity to meet Rehau’s requirements and to plan raw material to meet Rehau’s deadlines.
  • AAP Industries had to maintain 2 months’ buffer stock free of charge.
  • Any failure by AAP Industries to meet a delivery deadline would constitute default of performance, entitling Rehau to withdraw from the Contract.
  • The agreement renewed automatically unless a party gave 3 months’ notice.

The court said that these terms meant it was equitable and reasonable to find that exclusivity was implied. The court also said that the agreement didn’t make sense without exclusivity as otherwise AAP Industries would have to hold buffer stock and reserve capacity with no corresponding obligation on Rehau to buy.

Sackville AJA noted the case of Colonial Ammunition Co v Reid, which stated that where a written agreement contains express terms relating to a party, the court should only find an implied obligation for the same party in the clearest case. In this case, the court considered that the proper construction of the contract was sufficiently clear to warrant the implication of exclusivity.

“Shall”

This case also highlights the importance of plain language drafting. Issues about interpreting “shall” vs “will” have a lengthy history.

In this case, the provision that stated “Rehau shall purchase the

[plumbing products]

from AAP” was interpreted as an obligation on Rehau to purchase the products at the fixed price. A non-legal reader could easily think this was a statement of intention, not obligation.

This finding was made even though the fixed price was not actually set out in the document.

Takeaways

The key takeaways from this case are:

  • You can exclude implied terms and warranties (to the extent permitted by law) in a general clause, but it works even better to add clear statements on important issues – for example, that the agreement is non-exclusive.
  • If you use plain language drafting, your business is more likely to understand its obligations and be able to head off potential disputes.

If you would like us to review your standard contracts with these takeaways in mind, contact us.

ACCC announces 2019 enforcement priorities

Posted on by influence legal.

Earlier this week, the ACCC announced its enforcement priorities for 2019.

As well as the enduring priorities of:

  • cartel conduct;
  • anti-competitive conduct;
  • product safety;
  • conduct affected vulnerable and disadvantaged consumers; and
  • conduct affecting Indigenous consumers,

this year’s focus areas include:

  • consumer guarantees on high value electrical products and whitegoods;
  • anti-competitive conduct and competition issues in the

financial services sector, including foreign exchange services where fees “seem to remain stubbornly high“;

  • opaque pricing of essential services, including telecoms and energy;
  • protection for small business, including under franchising and unfair contract requirements; and
  • customer loyalty schemes.

A new focus is on emerging issues in advertising and subscriptions on social medial platforms, especially for younger consumers.

In announcing the 2o19 priorities, Chair Rod Sims stated that the ACCC expects 3 significant cartel investigations to be referred to the Commonwealth DPP. The ACCC will also be occupied with the Consumer Data Right, where pilots and generic data sharing are expected to be in place in July, with consumer data to be shared by February next year.

Highlights of 2018 and areas to watch in 2019

Posted on by influence legal.

2018 came and went in a flash. France celebrated glory in the FIFA World Cup in Russia; Banksy sold his ‘Girl With Balloon’ painting for $1.86 million before the artwork shredded itself seconds after the gavel dropped; and the online world was captivated by the World Record Egg. And as we say goodbye to summer and settle into the working year, why not take the chance to reminisce on some of the more important developments of 2018, and look forward to those that 2019 has in store?

Looking back on 2018

  • New obligations were enforced under the European Union General Data Protection Regulation (the GDPR). While the GDPR is an EU regulation, the obligations have a wide reach, applying to all Australian businesses who have an establishment in the EU, offer goods & services to the EU, or monitor the behaviour of individuals in the EU.
  • As part of the government’s safe harbour and insolvency reforms, we saw the introduction of the ipso facto insolvency reforms by way of the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017. The reforms apply to contracts entered into on or after 1 July 2018, affecting the ability of contracting parties to exercise termination, enforcement or other rights that are triggered by a company restructuring or insolvency.
  • The European Parliament voted in favour of introducing the controversial EU Copyright Directive, a legislation designed to better meet the needs of copyright protection in the internet age. The proposed directive caused significant global debate around the detrimental effects of Articles 11 (the Link Tax) and 13 (the Meme Ban), headlined as the ‘death of the Internet’.
  • The ACCC highlighted its hard stance against franchises attempting to contract out of their obligations under the Franchising Code of Conduct and the Competition and Consumer Act. The ACCC’s case against Husqvarna Australia highlighted the importance of all companies that appoint dealers, distributors, licensees or similar, to confirm whether their contracts are in fact franchise agreements.
  • A Victorian Supreme Court cast some doubt over the enforceability of contractual provisions that attempt to limit the period in which parties can claim for misleading or deceptive conduct. This arose in the case of Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd [2018] VSC 246, where the court considered the enforceability of a contractual provision requiring claims (including for misleading or deceptive conduct) to be made within 7 days.Justice Riordan, deciding in contradiction to a number of NSW decisions, ruled in favour of the “no exclusion principle”, stating that allowing the enforceability of such time limitations on claims would be against the public policy underpinning the provisions of the Australian Consumer Law (ACL).

Some areas to watch in 2019

  • Discussions over the EU Copyright Directive continue, with negotiators for the European Parliament aiming to finalise the directive shortly. However, negotiations have broken down, with the three-way discussion between Council, Parliament and member states  derailed over the exact wording over Article 11 and Article 13. Consequently, the “trialogue” discussion that was set to take place on  23 January was cancelled. With upcoming EU elections in May, there likelihood of any closure on this matter in the near future is low, with a final vote likely to take place under the next parliament.
  • The Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018, commonly referred to as the AA Bill, was passed in December of last year. The Bill’s aim is to compel various companies, especially those in communications industries, to assist Australian security and law enforcement agencies by allowing access to encrypted communications they believe may contain plans for illegal or terrorist activity. The implications of the Bill will be an interesting area to watch throughout the year, with a number of people, especially those within the tech and start-up communities expressing their concerns.
  • On 10 December 2018, the ACCC released its Digital Platforms Inquiry Preliminary Report. The ACCC’s report is founded on questioning the role and accountability of the global digital platforms (such as Facebook and Google) in the supply of advertising, news and journalism in Australia. The final report addressing these issues will be due on 3 June of this year.
  • There has been some debate globally and in Australia regarding the “hipster antitrust” laws, questioning the standards of competition law. The current foundation of competition law in Australia is focused on consumer welfare. However, concerns have been raised that this standard is too narrow and does not allow for prosecution of some types of conduct that some commentators believe competition law should cover.While this debate is likely to continue throughout the year, ACCC Chairman Rod Sims has reinforced Australia’s consumer welfare position, expressing their opposition to the introduction of broader interest considerations of public policy into competition law enforcement.

Author: Blake Motbey, Paralegal.

If it quacks like a franchisor …

Posted on by influence legal.

McDonald’s, Subway, KFC – all well-known global giants in both fast-food and franchise systems.

These companies, among many others around the world (not just within the fast food industries), are easily recognisable to us as franchisors.

However, franchise systems come in many shapes and sizes, and there are some franchises that are not quite as well-known and obvious as the ones above. Companies may even try to distance themselves from the F word, and associated franchise regulation, by telling everyone (or at least the parties contracting with them) that they are expressly not franchisors.

This situation can be seen in the recent ACCC action against the Australian subsidiary of Swedish power-tool powerhouse, Husqvarna Australia.

Husqvarna and the ACCC

Earlier this year, the ACCC took action against Husqvarna.

The ACCC was concerned that the company was in breach of the Franchising Code of Conduct (Code) and the Competition and Consumer Act (Act). Husqvarna had told its dealers that their “dealership agreements” were not franchising agreements and, consequently, they were not entitled to protections for franchisees under the Code.

The ACCC also argued that the company was likely to have contravened the Act as a result of making misleading representations and that the dealer agreements contained unfair contract terms.

… and swims like a franchisor …

In the result, Husqvarna admitted that categorising its agreements in the way it had, ‘probably’ did in fact mislead the dealers. To resolve the issue, Husqvarna also agreed to rewrite its agreements to ensure they complied with the Code and the Act. Also, the company agreed to enter an undertaking with the ACCC that it will not enforce any unfair contractual terms in the existing agreements.

Define: “Franchise Agreement”

An agreement will be covered by the Code when:

  1. A party, having substantial control over a business, grants another party the right to carry on that business;
  2. The business is associated with a specific brand name or trade mark; and
  3. The other party is required or agrees to pay for the right to use the brand and operate the business.

If an agreement satisfies all of the above, it will be considered a franchise agreement and will therefore be covered by the Code.

Importantly, a franchisor cannot simply attempt to waive or exclude the mandatory obligation to comply with the Code and the relevant protections for franchisees.

The Husqvarna case provides an important lesson for all companies that appoint dealers, distributors, licensees or similar, highlighting the importance of carefully assessing your agreements to ensure whether they may be considered a franchise agreement.

As Mick Keogh, the ACCC Deputy Chair, put it: “if it looks and smells and appears to be a franchise agreement, it’s considered to be one, irrespective of what the franchisor says.”

Are you a franchisor or franchisee?

If you are a business concerned that your agreements may be considered a franchise agreement, or if you are considering becoming a franchisee and would like to know your protections under the Code, please contact us.

Author: Blake Motbey, Paralegal

EU Copyright Directive – what’s all the fuss about?

Posted on by influence legal.

Earlier last month the European Parliament voted in favour of the EU Copyright Directive (known more formally as ‘Directive on Copyright in the Digital Single Market’), proposed legislation designed to better meet the needs of copyright protection in the Internet age.

The directive is an attempt at amending the imbalances between the large digital corporations and the content creators who use these platforms to share their work. The aim is to implement a more rigorous process for protecting works against copyright infringement, while also providing a more efficient way to distribute earnings to rightsholders and reduce the ‘value gap’ between creatives and the big players in the tech world.

With piracy and the misuse of copyright being one of the ubiquitous consequences of the digital era, updating copyright protection laws would be something to get behind and celebrate, right?

Well…

While those in the creative industries, such as publishers, music labels, and individual creatives have thrown their support behind the Directive, many others, especially those in Silicon Valley, are rallying in strong opposition of the proposed laws; extreme opposers even heralding the “death of the Internet” as we know it.

Two specific articles of the directive find themselves at the heart of the polarising debate, namely, Articles 11 and 13.

Article 11

Article 11, aptly nicknamed ‘the Link Tax’, is designed to allow publishers of news content to request online platforms and news aggregators to obtain licences before they are able to share any of their publications. The obvious players finding themselves in the cross-hairs of this article are the larger platforms such as Google and Facebook. However, while individual and non-commercial use has been exempted from the law, there is concern the article will have broader implications, especially on smaller websites who wish to publish snippets and links to articles and who may be unable to afford the required fees.


Will this be the end of the Internet as we know it?

Article 13

Article 13, dubbed the “upload filter”, is the more controversial of the two.

The article is aimed at holding platforms that host user-generated content (such as YouTube) liable for any misuse of copyright that may result from any material uploaded by their users. Essentially, it means these platforms can be sued directly by rightsholders for infringement.

While the current method of policing the misuse of copyright is by responding to complaints by rightsholders, and removing any infringing content accordingly, the directive will require these platforms to take “effective and proportionate” measures to prevent unauthorised works from being uploaded.

“But YouTube has over 300 hours’ worth of video content uploaded every hour. How could they possibly find and stop all the infringing content from being uploaded?” you ask. It is exactly this practicality of complying with Article 13 that has proved one of the more contentious points of the debate.

It is argued that the only possible way to implement this process of prevention is by using automatic filtering technology capable of scanning through every single piece of content and stopping any content it recognises as copyrighted material in its tracks. Easy enough, right?

While it might not be a significant burden for the giants of the tech world, like Google, YouTube, and Facebook, who have the finances to develop and implement such technologies, its effect on smaller platforms appears to be more problematic; with some contending it will hinder the growth of digital platforms in the EU which will be unable to cope with the article’s requirements.

Just as concerning is just how efficient such filtering technology can be. It has been queried how the technology will be able to recognise and distinguish copyright infringement from other authorised or legal uses of copyright, such as parody or satire. This worry has given the article another common nickname: the “Meme Ban.”

For those not familiar, memes are often created by using still images (commonly taken from copyrighted works such as photographs, films, or television shows) and layering text over the top for comedic effect or expression of an idea. While they are most often created without the author’s consent for use of an image, they are still currently considered legal under EU law. Accordingly, there are serious concerns that if the filtering technology required by Article 13 is unable to distinguish legal use from infringement, content such as memes will mistakenly be flagged as infringement.

So, while memes may not be technically banned as the nickname suggests, they may likely still be flagged and killed off amongst the other infringing uploaded content.

What happens next?

The proposed legislation still faces one more round of voting in January 2019 before it will receive final approval. Many believe that, after the successful vote last month, it is very unlikely the legislation will be defeated in the new year.

What remains to be seen is in fact, however, is just much of a disruptive impact the directive will have on the Internet both in the EU and around the world.

Author: Blake Motbey, Paralegal.

Can I protect my business when an employee leaves?

Posted on by influence legal.

When running a business, you will inherently find yourself in competition with other businesses and companies in your industry or market area.

However, it is not uncommon to find your best employee has decided to move on to work for a competitor; nor is it rare for an employee to resign with ambitions to start their own business in direct competition to you.

So, what can you do when a valuable employee suddenly becomes the competition?

Restraint of trade clauses

To protect themselves in the event of an employee’s exit, many Australian businesses regularly include restraint of trade clauses in their employment agreements.

Employers may use these clauses to try to prevent former employees, as well as contractors or suppliers, from:

  • Competing against the former employer;
  • Soliciting clients; or
  • Poaching other employees.

Restraints are often also used to protect the employer’s or customer’s confidential information, in conjunction with standalone confidentiality clauses.

A reasonable restraint of trade clause can help protect your business

Validity of restraint clauses

Restraint clauses are legally presumed to be void, as it is considered contrary to public policy to unreasonably prevent a person from lawfully obtaining gainful employment.

However, there are some circumstances in which the court may override this presumption and find a restraint clause to be valid and enforceable. The key principle is reasonableness.

Reasonableness

A restraint clause will be considered ‘reasonable’ when it restricts no more than is reasonably necessary to protect the employer’s legitimate commercial interests.

An employer does not have a legitimate interest in merely protecting themselves against competition as such. Instead, the employer must demonstrate special circumstances that justify the need for the restraint.

These circumstances may include:

  • The scope of the employment;
  • The nature of the employer’s business;
  • An employee’s connection to clients;
  • Access to confidential informational or trade secrets; and
  • Whether the employee received any compensation or remuneration for the restraint.

Employers will also often specify both a restraint period and a geographical area for which the clause applies. However, the court will consider whether the duration and reach of the restraint goes beyond what is adequate in protecting the employer’s interest.

In Pearson v HRX Holdings, the Federal Court found that a lengthy restraint against HRX co-founder, Mr Pearson, was reasonable.

HRX, an HR company, sought to enforce a restraint on Mr Pearson preventing him from working within the HR industry for 2 years.

The court held the restraint was reasonable because:

  • Pearson was vital in building and retaining the company’s client base, and was considered the ‘human face’ of the company;
  • He had access to all the company’s confidential information;
  • The two-year period reflected the average client contract length and gave the company reasonable opportunity to renew these without competition from Mr. Pearson; and
  • The clause was negotiated and specifically tailored to Mr. Pearson, and in exchange for the restraint, Mr. Pearson would receive his salary for the restraint period as well as an 8% shareholding.

By comparison, in Just Group v Peck, the restraint clause was determined to be unreasonable.

Just Group attempted to enforce a restraint preventing Ms Peck, former CFO, from working with their competitor, Cotton On.

The clause attempted to restrain Ms Peck for 2 years from carrying on “any activity, the same or similar to” her role with Just Group in Australia and New Zealand. The clause also referred to a list of 50 brands Ms Peck would be prevented from working with.

The court determined that this restrained went beyond what was required to protect Just Group’s legitimate business interests, considering that:

  • “Any activity” undertaken by Ms Peck as CFO was likely to be similar in any CFO role or similar position;
  • The clause was too broad and prevented Ms Peck from working with any other fashion brand or retailer, including non-competitors; and
  • The list of 50 brands included a majority that were not in competition with Just Group.

Just Group had given enough evidence proving Cotton On was a competitor, and if the clause had been more specific towards the brand, the restraint may have been enforceable. However, the court held the annexure was to be read as a whole and could not be re-written later in attempt to restrain Ms Peck from working with a specific competitor.

These cases highlight the importance of restraint clauses being drafted to be specific to an organisation’s precise business interests.

Summary

If you are an employer or customer wanting to include restraint of trade clauses in your agreements, it is important to remember that the reasonableness of a restraint of trade clause is determined by the specific nature and circumstances of your business and the individual employee or contractor.

If you would like more information on restraint of trade and confidentiality clauses to protect your business, contact us.

Author: Blake Motbey, Paralegal.

My business idea is being copied – what can I do?

Posted on by influence legal.

You’ve put time and thought into a great idea, invested in R&D, brought your idea to market – and now you find a competitor marketing the same idea.  What can you do?


How can you protect your idea?

The different aspects of intellectual property can help to an extent, but the issue of copying a concept can become complex.

Copyright protects the original material expression of an idea, rather than the idea itself. Unless your competitor copied your original artwork, wording or code, copyright won’t assist – for example, if you have had an idea for a scheduling program, and a competitor saw your idea and released a scheduling program which doesn’t use any of the original coding or graphical elements of your program, you won’t be able to make a copyright claim.

What about trade marks? Have you applied for trade mark protection of your product’s distinctive name? If the competitor used your name or a substantially similar name to promote similar products, you can make a claim based on your registered trade mark.

Patents protect inventions. They must be new to the market. If you think that your idea may be patentable, consult a patent attorney – but you must keep your idea confidential until the patent application is filed. If you have publicised it yourself, it may no longer be patentable. You can use confidentiality agreements where you need third parties to develop your invention. Also, take practical steps to protect confidentiality – limit distribution and keep information in secure files.

The law of passing off and consumer protection law can help where the competitor is making their offering look like it is, or is associated with, yours. For example, your competitor might be marketing compatible goods which have the look and feel of your brand, or suggesting that they are your authorised distributor or licensee.

If none of these will help in your specific situation, there are still practical steps you can take:

– make sure that you have all the relevant variations of your domain name so that there is no chance that an unscrupulous competitor can pick up similar names to direct traffic to their own website;

– make sure you have your domains set to auto-renew, or diarise renewal dates, so that you don’t accidentally drop your domain and have it picked up by your competitor;

– ensure that your website security is strong so that you reduce the risk of losing customers if your website is offline;

– make sure you are actively marketing on all relevant social media channels;

– if you are using a name or logo that is distinctive, apply for a trade mark, including in relevant overseas markets you plan to expand to;

– once you have your trade mark, ensure you diarise renewal dates;

– keep a record of your marketing activities, including promotions, press releases and media coverage, in case you need to demonstrate your reputation in the market in future years; and

– ensure that your concepts are kept confidential, including using effective confidentiality agreements, until they are ready for release.

If you have any questions about how to protect your ideas, contact us.

What’s this ipso facto whatsit?

Posted on by influence legal.

Like us, you may at first have read straight past the headlines of recent articles about the “ipso facto” changes in the context of the safe harbour reforms. However, on further exploration it’s clear that it will be important for businesses and their commercial advisers to be aware of this upcoming legislative change.

The ipso facto changes and safe harbour changes, both relating to insolvency, are both included in the recent package of enterprise incentive reforms as part of the National Innovation and Science Agenda.

Safe harbour

Directors have long been subject to strict requirements preventing them from allowing a company to trade when insolvent, meaning that companies in financial distress had to promptly appoint an administrator or liquidator.

The safe harbour reforms under the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 will protect directors from personal liability, but allow the company to continue to trade and incur debts, where the directors start developing a course or courses of action that are reasonably likely to lead to a better outcome for the company than immediate administration or liquidation. The company will need to meet employee entitlement, tax and other statutory requirements.

The goal of these reforms is, in part, to attract investment, and experienced directors, to new businesses in the start-up economy, and to allow businesses to trade out of early difficulties.

Rights triggered by insolvency (“ipso facto” rights)

As part of the package of enterprise incentive reforms, the new “ipso facto” regime will commence on 1 July 2018.

Ipso facto rights are rights under a contract that allow Party A to take action on the occurrence of a specified event; they can be distinguished from rights that arise on Party B’s breach.

In this context, we are talking about Party A’s rights to take action when Party B becomes insolvent. Common rights include:

  • terminating;
  • suspending or stepping in;
  • calling on a bank guarantee or other security;
  • setting-off; or
  • cancelling or changing credit terms.

In the past these have been seen as sensible rights for Party A to have in case of Party B’s insolvency. For customers, they allow an orderly transition to a new supplier before the supplier stops performing altogether. On the other side, they allow suppliers to minimise their losses when a customer looks likely to collapse owing funds.

Under the enterprise incentive reforms, as Party A you will not be able to exercise ipso facto rights arising from your Party B’s:

  • voluntary administration;
  • receivership;
  • a scheme of arrangement; or
  • financial position, where it is subject to one of the reasons above.

The legislation includes anti-avoidance provisions which cover reasons that, in substance, are contrary to the new rules. Likely areas to be caught here are a breach of financial covenants, like debt to equity ratios or net tangible assets. In some circumstances Party B may be able to prevent you from exercising other rights, such as a termination for convenience right, that you have chosen to exercise solely because of Party B’s financial position.

You will still be able to exercise rights for an actual payment default or breach of obligations to perform.

Your rights are stayed during the period of the insolvency process, but cannot be reactivated in respect of the original issue once the stay period is over.

There are exceptions where your Party B is a foreign entity which becomes insolvent, or your contract is governed by overseas law. Some additional exceptions will also be prescribed by regulation – these are likely to be banking and financial markets contracts.

What should you do?

The reforms are not retrospective. If your contract is in place before 1 July 2018 and continues to run into the future, your contract will be grandfathered and you will still be entitled to exercise rights triggered by insolvency.

For contracts which are made after 1 July – including contracts which expire and are then renegotiated after 1 July – you will need to review your processes in 2 key areas:

  • avoid the risk of accidentally exercising these rights, if they have been included in the contract, without your Party B’s agreement. Although there are no legislative penalties, you will run the risk of breaching the contract yourself (potentially a repudiation entitling your Party B to make a claim against you) if you try to terminate for insolvency when you are not entitled to do so.
  • review your credit terms and how you will react to early warning signs of insolvency in the future. It may be too late to wait to act until there has been an actual contract breach, so suppliers may react to these changes by allowing shorter credit terms overall, and customers may need to place more focus on developing back up options for when a supplier collapses.

If termination and step-in rights for insolvency are important to your business, you should also consider:

  • taking steps to keep current contracts on foot, rather than allowing them to expire and then renegotiating, and
  • whether, under your contract, each new order is treated as a separate contract or as part of the original, grandfathered contract.

Thanks to Scott Mannix at Maddocks for an excellent recent presentation on this important issue.

Anti-bribery and corruption requirements for Australian businesses

Posted on by influence legal.

Many Australian businesses who deal with customers based in the US and UK will be faced with contract clauses requiring compliance with the US Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act.

There is a lot of doubt and disagreement about the way that these laws apply to conduct outside the home jurisdiction and whether Australian businesses should accept these contract clauses.

Here are some key points to know if you are confronted with a clause like this.

Coverage

Anti-bribery and corruption (ABAC) laws focus on 2 key areas:

  • corruption of public officials; and
  • bribery in the private sector.

Australia

Australia has its own anti-bribery and corruption (ABAC) requirements.  Specific requirements include:

  • State and Territory legislation applying to bribery of public officials and private individuals;
  • Criminal Code (Commonwealth) offences for bribery of Commonwealth officials;
  • Criminal Code offences for bribery of foreign officials (with some application to overseas conduct); and
  • false accounting offences where a business falsely records bribes as legitimate expenses.

Australian laws also catch “grease” payments, also known as facilitation payments.  These are payments to public officials to speed up or smooth out an approval which would have happened anyway, and are distinguished from payments to change an outcome. Grease payments are only permitted if they meet certain criteria, including prompt, accurate records.

We are expecting further tightening of Australian ABAC requirements when the Crimes Legislation Amendment (Combatting Corporate Crime) Bill is implemented, most likely later this year.

US

The FCPA catches all US entities including their overseas subsidiaries; US subsidiaries of overseas entities; overseas entities which issue securities in the US; and overseas entities which take steps towards the corrupt conduct in the US.

It covers corrupt gifts and payments to foreign public officials – defined very broadly – for the purpose of obtaining or retaining business.

Foreign public officials would include, for example, a doctor in a state hospital, or a government official who also acts in a private capacity where the corrupt conduct occurs.

There is no materiality threshold so small gifts are caught – the test is the purpose of the payment or gift.

Controversially, the FCPA does not apply to grease payments, on the basis that they do not change the outcome. These may still be prohibited under the local laws where the conduct takes place.

UK

The Bribery Act covers the bribery of any person to obtain or retain business or a business advantage. Unlike the FCPA it applies to private sector as well as public sector conduct.

The Bribery Act covers both making and taking bribes, and a foreign public official is defined more narrowly than in the FCPA.

It applies to overseas conduct of UK firms and their subsidaries and emphasises a compliance culture with strict liability corporate offences (that is, there is no requirement to prove the company meant to commit the offence).

There is no exception for grease payments, but the Ministry of Justice has released guidance suggesting that prosecutors will exercise discretion where the company:

  • has a clear policy;
  • has issued guidance to staff;
  • is monitoring compliance;
  • is recording gifts;
  • is taking proper action to inform local governments; and
  • is taking practical steps to curtail grease payments.

Where does this leave Australian suppliers?

Both US and UK companies (and their Australian subsidiaries) are obliged to do supplier due diligence to avoid liability for ABAC issues. For the FCPA, for example, this is understood to include doing business with reputable third parties who are acting in compliance with the FCPA, and this leads to contractual requirements for compliance in Australian supply contracts.

Many Australian companies are naturally reluctant to agree, in a contract, to be caught by overseas legislation that would not otherwise apply to them. It is important to recognise, though, that the customer may have very limited discretion on these issues, meaning that these clauses can be a negotiation roadblock.

Possible compromises to offer include:

  • compliance with your own ABAC policies;
  • compliance with the Criminal Code and applicable State and Territory legislation;
  • compliance with detailed obligations stated in the contract which equate to, but don’t refer to, the overseas legislation; or
  • an obligation to assist the customer with its own compliance.

If, as will often be the case, the customer insists on an express reference to the overseas legislation, then you’ll need to review the detail against your existing legal obligations and your own ethics policies.

If you would like advice on a specific ABAC clause, contact us.