Compliance: Theory and Practice in the Financial Services Industry

6. Competition and Consumer Law

Inhouse Home Compliance Course Visit the Library

IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated.

These slides are made available without the assumption of a duty of care by Inhouse Legal Solutions Pty Limited ("ILS") or the officers, employees or agents of ILS who were involved in their preparation and without any representation or warranty as to accuracy or completeness. Your use of these slides is subject to the terms and conditions set out on our Legal Notices page.

These slides were created with Microsoft FrontPage 2002 and are best viewed with Internet Explorer 6.0+.


Outline

   Basic CCA Concepts
   Anti-competitive Behaviour
   Misleading and Deceptive Conduct
   Unlawful Trading Practices
   Unconscionable Conduct
   Unfair Contracts
   Implied Consumer Warranties
   Compliance Programs

 


Basic CCA Concepts

CCA s6 - Constitutional Reach
•     Corporations = trading or financial corporations formed in Australia, corporations incorporated in a Territory, foreign corporations and their holding companies.
•     Individuals involved in:
  •     trade or commerce between Australia and places outside Australia;
  •     trade or commerce between States;
  •     trade or commerce between a State and Territory, two Territories or within a Territory; or
  •     the supply of goods or services to the Commonwealth or an authority or instrumentality of the Commonwealth.
•     Individuals whose conduct involves the use of the postal, telegraphic or telephonic services or takes place in a radio or television broadcast.
•     Acts done in the course of the promotional activities of a professional person in a Territory.
•     State laws applying the Competition Code and Australian Consumer Law.

Click here for a copy of the Competition and Consumer Act ("CCA"). The Act was previously referred to as the Trade Practices Act 1974 ("TPA").

The CCA primarily relies on the power of the Commonwealth to legislate with respect to corporations under s51(xx) of the Australian Constitution and is generally drafted to impose prohibitions or obligations on corporations. Under CCA s6, references to corporations are read as including references to individuals where the Commonwealth can rely on another head of legislative power, such as the interstate trade and commerce power, the territories power or the postal and telegraph power.

To the extent that this leaves gaps in the constitutional coverage, these are filled by State laws applying the Competition Code (found in schedule 1 to the ACL) and the Australian Consumer Law (found in schedule 2 to the ACL), which apply to all "persons".

CCA s4E - Definition of Market
Market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, those goods or services.

Defining the relevant market is usually the hardest part of any competition issue and is often determinative of the outcome. Markets can be limited by product, geography, function and time. Markets have been held to be as wide as an Australia-wide market for distribution of grocery products (Re Queensland Independent Wholesalers Ltd (1995) ATPR Ά41-438 - although cp QIW Retailers Ltd v Davids Holdings Pty Ltd (1993) 42 FCR 255 where the relevant market was found to be the market for wholesale distribution of groceries in Queensland and northern NSW) and as narrow as the market in which real estate agents compete for advertising services in the eastern suburbs of Sydney (Eastern Express Pty Ltd v General Newspapers Pty Ltd (1993) 106 ALR 297).

Return to Outline


Anti-competitive Behaviour

CCA s44ZZRF and 44ZZRG - Cartel Provisions
A corporation commits an offence if:
•     the corporation makes a contract or arrangement or arrives at an understanding which contains a cartel provision; or
•     a contract, arrangement or understanding contains a cartel provision and the corporation gives effect to it.
See eg ACCC v CC (NSW) Pty Ltd [1999] FCA 954.

There are parallel civil penalty provisions to these criminal offences in ss44ZZRJ and 44ZZRK.

To succeed in a prosecution, the prosecution must prove that the corporation intended to make a contract, arrangement or understanding, and that the corporation knew or believed that the contract, arrangement or understanding contained a cartel provision.

The phrase "cartel provision" is defined in s44ZZRD(1). In order for a provision of a contract, arrangement or understanding to be a cartel provision, it must satisfy: (a) either the 'purpose/effect condition' in s44ZZRD(2), or the 'purpose condition' in s44ZZRD(3), depending on the type of provision in question; and (b) the 'competition condition' in s44ZZRD(4).

The 'purpose/effect condition' in s44ZZRD(2) applies to price fixing. It is satisfied if the provision in question has the purpose, or has or is likely to have the effect, of directly or indirectly fixing, controlling or maintaining, or providing for the fixing, controlling or maintaining of, the price for, or a discount, allowance, rebate or credit in relation to, goods or services supplied or acquired, or likely to be supplied or acquired, by any one of the parties to the contract, arrangement or understanding.

The 'purpose condition' in s44ZZRD(3) applies to output restrictions, market sharing or bid rigging activity. It is satisfied if the provision in question has the proscribed purpose. For output restrictions, that purpose is directly or indirectly preventing, restricting or limiting: (i) the production, or likely production, of goods by any or all of the parties to the contract, arrangement or understanding; (ii) the capacity, or likely capacity, of any or all such parties to supply services; or (iii) the supply, or likely supply, of goods or services to particular persons or classes of persons by any or all such parties (s44ZZRD(3)(a)). For market sharing, that purpose is directly or indirectly allocating between any or all of the parties to the contract, arrangement or understanding: (i) the persons or classes of persons who have acquired, or who are likely to acquire, goods or services from any or all such parties; (ii) the persons or classes of persons who have supplied, or who are likely to supply, goods or services to any or all such parties; or (iii) the geographical areas in which goods or services are or are likely to be acquired or supplied (as the case may be) by any or all such parties (s44ZZRD(3)(b)). For bid rigging, that purpose is directly or indirectly ensuring that in the event of a request for bids in relation to the supply or acquisition of goods or services, either: (i) one or more parties bid to the contract, arrangement or understanding in question bid, but one or more do not; (ii) two or more parties bid, but at least two parties do so on the basis that one of the two bids is more likely to be successful; (iii) two or more parties bid, but not all of the parties proceed the full way through the bidding process; (iv) two or more parties bid, but at least two parties do so on the basis that one of the two bids is more likely to be successful; (v) two or more parties bid, but a material component of at least one of the bids is worked out in accordance with the contract, arrangement or understanding (s44ZZRD(3)(c)).

The 'competition condition' in s44ZZRD(4) effectively restricts the criminal and civil prohibitions to "horizontal" conduct in relation to the production of the relevant goods or the supply or acquisition of the relevant goods or services. It is satisfied if at least two of the parties to the contract, arrangement or understanding are or are likely to be, or but for the collusive conduct, would be or would be likely to be, in competition with each other.

In summary, therefore, a cartel provision essentially is a contract, arrangement or understanding between competitors that fixes prices; restricts outputs in the production or supply chain; allocates customers, suppliers or territories between competitors; or rigs a bidding or tendering process.

Note that these are all "per se" prohibitions - ie they apply regardless of whether the cartel provision has the purpose, or has or is likely to have the effect, of substantially lessening competition in a relevant market.

In ACCC v CC (NSW) Pty Ltd, a secret meeting of representatives of four construction contractors tendering for a project and their association representative took place prior to the submission of a tender on a Commonwealth Government construction project. It was agreed at the meeting that whichever contractor was successful in the tender would pay a fee of $750k to each of the unsuccessful tenderers, plus $1m to the association for brokering the arrangement. This was held to be an unlawful price fixing arrangement in breach of the former TPA s45A – it had the effect of controlling, by way of increasing by $2.25m, the price that would be likely to be charged for the project. Note that with the introduction of the cartel provisions in the CCA, this case would now most likely be prosecuted as a bid rigging case rather than a price fixing case.

CCA ss44ZZRL-44ZZRV contain exceptions to the cartel civil penalty provisions and criminal offences. These include: (a) conduct notified under the collective bargaining regime in s93AB; (b) contracts subject to the grant of an authorisation; (c) contracts, arrangements or understandings between related bodies corporate; (d) joint ventures; (e) dual listed company arrangements; (f) a contract, arrangement or understanding for the acquisition of any shares in the capital of a body corporate or any assets of a person; and (g) provisions in relation to the price for goods or services to be collectively acquired, or for the joint advertising of the price for the re-supply of goods or services collectively acquired.

Contracts, arrangements or understandings involving s45B covenants, exclusive dealing and resale price maintenance are also excluded from the operation of the cartel provisions as they are covered by their own regime (ss45B, 47 and 48 respectively) – see ss44ZZRQ-44ZZRS.

The definition of “joint venture” in s4J and the defences for joint ventures in ss44ZZRO and 44ZZRP are probably wide enough to apply to joint advisory assignments and underwriting and lending syndicates - so that their participants can safely agree pricing arrangements for those sorts of activities – although I am not aware of any Australian case law or other guidance on this point.

CCA s45(2) - Contracts, Arrangements or Understandings Affecting Competition
A corporation shall not make a contract or arrangement or arrive at an understanding if:
(i)   it contains an exclusionary provision; or
(ii)   a provision of it has the purpose, or would have or be likely to have the effect, of substantially lessening competition [in any market in which a corporation that is or is to be a party to it or a related body corporate supplies or acquires goods or services];
nor shall it give effect to such a provision.

When assessing the effect of a contract, arrangement or understanding on competition, you look at the totality of the contracts, arrangements and understanding between the parties and their related bodies corporate (s45(4)).

Contracts, arrangements or understandings involving s45B covenants, exclusive dealing and resale price maintenance are again excluded from the operation of s45 as they are covered by their own regime (ss45B, 47 and 48 respectively) – see ss45(5) and (6).

This section does not apply in relation to dual listed company arrangements (s45(6A)); contracts, arrangements or understandings for the acquisition of any shares in the capital of a body corporate or any assets of a person (s45(7)); or contracts, arrangements or understandings between related bodies corporate (s45(8)).

CCA s4D - Exclusionary provisions
A provision of a contract, arrangement or understanding shall be taken to be an exclusionary provision if:
(a)   it was made or arrived at between persons any 2 or more of whom are in competition with each other in relation to the supply or acquisition of any of the goods/services to which the relevant provision relates; and
(b)   it has the purpose of preventing, restricting or limiting the supply of goods/services to, or the acquisition of goods/services from:
  (i)   particular persons or classes of persons; or
  (ii)   particular persons or classes of persons in particular circumstances or on particular conditions;
  by all or any of the parties to it or by their related bodies corporate.
See ASX Operations Pty Ltd v Pont Data Pty Ltd (1990) 97 ALR 513.

This section basically prohibits collective or group boycotts. This is also a per se prohibition - ie it applies regardless of whether the exclusionary provision has the purpose, or has or is likely to have the effect, of substantially lessening competition in a relevant market.

In the case of a body corporate, the reference to being in competition with it includes competing with a related body corporate (s4D(2)).

There is a defence in s76C for exclusionary provisions made for the purposes of a joint venture which do not have the purpose, and do not have and are not likely to have the effect, of substantially lessening competition.

In ASX Operations Pty Ltd v Pont Data Pty Ltd, Pont was a supplier of financial data to clients in competition with ASXO's subsidiary JECNET. It entered into a licence agreement with ASXO to take a Signal C feed containing information about trading activities on the ASX. The agreement prohibited Pont from selling or supplying the information to its clients unless they had entered into a tri-partite licence agreement with ASXO. Pont objected to this because it effectively meant disclosing information about its customers to a competitor, JECNET. It also objected to the pricing structure under the agreement which it said was being used to subsidise the loss making JECNET and sued alleging a breach of various provisions of the former TPA, including both limbs of s45, s46 abuse of market power and misleading and deceptive conduct. The tri-partite licence requirement was held to be an unlawful exclusionary provision in relation to Signal C information. ASXO's subsidiary JECNET and Pont were in competition with each other in relation to the supply of Signal C information in the downstream information market. The particular persons who were affected by the boycott were those who had not entered into the tri-partite licence.

CCA s47 - Exclusive Dealing
A corporation shall not, in trade or commerce, engage in the practice of exclusive dealing, ie:
•     supplying goods/services on condition that the purchaser:
  •     does not acquire goods/services from a competitor of the supplier (s47(2));
  •     accepts some restriction on the right to resupply goods/services (s47(2));
  •     acquires other goods/services from a third party (s47(6));
•     acquiring goods/services on condition that the supplier accepts some restriction as to the freedom to supply third parties (s47(4));
•     refusing to supply goods/services because the purchaser:
  •     has dealt or refused to cease dealing in a competitor's products (s47(3));
  •     has failed to accept some restriction on the right to re-supply (s47(3));
  •     refuses to acquire other goods/services from a third party (s47(7));
•     refusing to acquire goods/services because the supplier refuses to accept some restriction on the right to supply third parties (s47(5)).
See Re United Permanent Building Society (1976) 26 FLR 129.

This provision has been significantly paraphrased and simplified for the purposes of presentation.

In the case of ss47(2) and (6), the references in the slide to "supplying goods/services" include offering to supply goods/services and supplying them or offering to supply them at a particular price. In the case of s47(4), the reference in the slide to "acquiring goods/services" includes offering to acquire goods/services and acquiring them or offering to acquire them at a particular price. In the case of s47(3) and (7), the reference in the slide to "refusing to supply goods/services" includes refusing to supply them at a particular price. In the case of s47(5), the reference in the slide to "refusing to acquire goods/services" includes refusing to acquire them at a particular price.

In the case of ss47(2) and (6), the references in the slide to "supplying goods/services" also extend to a person giving, allowing or offering to give allow a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods/services to a person. In the case of ss47(3) and (7), the references in the slide to "refusing to supply goods/services" extend to refusing to give or allow a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods/services to a person.

Of these, third line forcing (ss47(6) and (7)) - supplying goods/services on condition that the purchaser acquires other goods/services from a third party or refusing to supply goods/services because a purchaser has not acquired other goods/services from a third party - has been the most troublesome because it is a per se breach of the Act, whereas to breach the other provisions in s47 it is necessary that the exclusive dealing has the purpose, or has or is likely to have the effect, of substantially lessening competition in a relevant market (see s47(10)).

So, in Re United Permanent Building Society, UPBS's requirement that borrowers insure property to be taken as security with an insurance company nominated by UPBS as a condition of getting a loan was held to be illegal third line forcing. A similar decision was reached in relation to a terminating building society in Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 2 ALR 621. In TPC v British Building Society (1988) ATPR 40-880, a lending scheme offered by a building society which required the borrower to take out life insurance with a nominated insurance company was also found to be a breach of s47(6).

CCA s48 - Resale Price Maintenance
A corporation or other person (where it is dealing with a corporation) shall not engage in the practice of resale price maintenance, ie as a supplier of goods/services:
(a)   making it known to a person that the supplier will not supply goods/services unless that person or someone to whom the goods/services are on-sold agrees not to sell them below the supplier's specified price (s96(3)(a), (d) and (e));
(b)   attempting to induce a person not to sell the supplier's goods/services for less than the supplier's specified price (s96(3)(b));
(c)   entering into an agreement for the supply of goods/services containing a provision that the purchaser will not sell them below the supplier's specified price (s96(3)(c)); and
(d)   using in relation to any goods/services supplied a statement of a price that is likely to be understood by the person to whom they are supplied as the price below which the goods are not to be sold (s96(3)(f)).

This provision has also been significantly paraphrased and simplified for the purposes of presentation.

Again, resale price maintenance is a per se offence - ie it applies regardless of whether the conduct in question has the purpose, or has or is likely to have the effect, of substantially lessening competition in a relevant market.

A price does not have to be fixed in dollar terms to fall within this prohibition - it may be specified by reference to a formula (s96(4)(c) and (d)).

A reference to preventing sale of goods/services at less than a specified price includes preventing them being advertised, displayed or offered for sale at such a price (s96(7)). Having "recommended prices" is permissible, however, subject to satisfaction of certain conditions (s97).

While s96 only refers to goods, s96A extends those references to services. However there are no RPM cases that I have been able to find involving services. Possibly this is because services are rarely on-sold. Watch out however for the wide definition of services in CCA s4, which includes "any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce" which are not goods and which specifically includes insurance contracts, contracts between bankers and customers, and loans. It now implicitly captures all financial services, as defined in the Australian Securities and Investments Commission Act, given the carve-outs for financial services in the unconscionable and misleading conduct provisions in the CCA. It may also capture some things that you would think of as financial products rather than financial services. For example, it could technically capture shares, as these are a species of personal property but are not goods.

Consequences of Breach
•     Cartel conduct is a criminal offence punishable by a fine equal to the pecuniary penalties mentioned below (ss 44ZZRF(3) and 44ZZRG(3)). Other anti-competitive conduct is not a criminal offence (s78).
•     Pecuniary penalties for individuals of up to $500k and for bodies corporate an amount which is the greatest of:
  •     $10,000,000;
  •     if the Court can determine the value of the benefit that the body corporate and its related bodies corporate have obtained directly or indirectly and that is reasonably attributable to the breach - 3 times the value of that benefit; and
  •     if the Court can't determine the value of that benefit - 10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the breach occurred (s76).
•     Civil liability for damages to anyone who suffers loss or damage as a result (s82).
•     Injunctions (s80).
•     Non-punitive orders (s86C).
•     Adverse publicity orders (s86D).
•     Orders disqualifying individuals from managing a corporation (s86E).
•     Compensation orders (s87).

Non-punitive orders include a community service order, a probation order, or an order to disclose information or publish an advertisement.

The cartel offence provisions apply not only to those who contravene s44ZZRF or 44ZZRG but also to those who: (a) attempt to contravene; (b) aid, abet, counsel or procure a contravention; (c) induce, or attempt to induce, a person, whether by threats or promises or otherwise, to contravene; (d) in any way, are directly or indirectly, knowingly concerned in, or party to, the contravention; or (e) conspire with others to contravene. The penalty for this, in the case of an individual, is imprisonment for 10 years and/or a fine of 2,000 penalty units and, in the case of a body corporate, is the same as for the main offence (see s 79(1)).

The liability for pecuniary penalties also extends not only to those who contravene but also to those who: (a) attempt to contravene; (b) aid, abet, counsel or procure a contravention; (c) induce, or attempt to induce, a person, whether by threats or promises or otherwise, to contravene; (d) in any way, are directly or indirectly, knowingly concerned in, or party to, the contravention; or (e) conspire with others to contravene (see s 76(1)).

Similarly, the liability for civil damages under section 82 extends not only to those who contravene but also to any person who is "involved in the contravention". This is defined in CCA s75B to mean any person who has: (a) aided, abetted, counselled or procured the contravention; (b) induced, whether by threats or promises or otherwise, the contravention; (c) been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) conspired with others to effect the contravention.

Hence officers of bodies corporate who are involved in a contravention of the CCA by the body corporate potentially face the same types of criminal and civil penalties and damages exposures as the body corporate itself.

Note also s77A, which prohibits a body corporate, or a related body corporate, from indemnifying an officer of the body corporate (whether by agreement or by making a payment and whether directly or through an interposed entity) against any: (a) civil liability; or (b) legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability, incurred their capacity as an officer of the body corporate.

Return to Outline


Misleading and Deceptive Conduct

ACL s18(1) - Misleading or deceptive conduct
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

This provision was formerly s52 of the TPA.

CCA s131A effectively excludes the application of the ACL to the supply, or possible supply, of services that are financial services, or of financial products. These are instead covered by equivalent provisions in the Australian Securities and Investments Commission Act. The effect is to allocate administrative responsibility for regulating financial products and services to ASIC and all other goods and services to ACCC.

CA s1041H(1) - Misleading or Deceptive Conduct
A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

Click here for a copy of the Corporations Act 2001.

Note that CA s1041H(3) excludes from this section conduct that contravenes ss670A (misleading or deceptive takeover document) or 728 (misleading or deceptive fundraising document) or in relation to a disclosure document or statement within the meaning of ss953A or 1022A. It also excludes offences against ss1021NA, 1021NB and 1021NC. These matters have their own liability regime and defences, including due diligence defences, and they are excluded from s1041H to maintain the integrity of that regime.

In ASIC v Narain [2008] FCAFC 120, the managing director of a company that manufactured disinfectants caused the company secretary to publish a statement to the ASX claiming that its products offered a global solution to stop the spread of HIV and would also control and prevent SARS, influenza and the common cold. He was sued for engaging in misleading conduct in relation to shares in breach of section 1014H of the Corporations Act. The court at first instance dismissed the action, holding that the representations weren't published by the managing director and were not made in relation to shares in the company. On appeal, the Full Federal Court reversed the decision on both counts.

In Commonwealth Financial Planning v Couper [2013] NSWCA 444, a Mr Stevens had a life insurance policy with Westpac Life. An authorised representative of Commonwealth Financial  Planning (CFP), a subsidiary of the Commonwealth Bank, persuaded him to take out cover with CommInsure, another subsidiary of the Commonwealth Bank, and cancel his existing policy. Mr Stevens had a history of medical issues arising from a serous drinking problem and his true medical history was not disclosed to CommInsure. When Mr Stevens was diagnosed with pancreatic cancer one year later, CommInsure avoided the policy for non-disclosure pursuant to s29(3) of the Insurance Contracts Act 1984 (Cth), which entitles an insurer to avoid a life insurance policy for non-fraudulent non-disclosure within three years from entry into the contract (that three year period had long since expired in relation to Mr Stevens' Westpac Life policy). The trial judge found CommInsure validly avoided the policy and no appeal was brought from that decision. The trial judge relied on the evidence of Mr Stevens and his daughter to conclude that CFP's authorised representative was negligent and engaged in misleading or deceptive conduct, in that he was too hasty and failed to sufficiently impress upon Mr Stevens the risk he took replacing one policy for another. The Court of Appeal upheld the decision but on different grounds to the trial judge. On a review of the evidence, the Court of Appeal found that the primary judge's findings were incorrectly based on the credibility of Mr Stevens and his daughter and that by themselves these could not sustain the judgment. However, it found that the written advice given by CFP's authorised representative was misleading and deceptive and had caused Mr Stevens to cancel his existing policy. The advice: (a) wrongly supposed a comparison could be made between the CommInsure and Westpac Life policies, because at the time the advice was given, it was not known whether CommInsure would insure Mr Stevens and on what terms (such comparison as there was was also incomplete); (b) did not disclose that the CFP authorised representative was not permitted by his employer to recommend Mr Stevens maintain his Westpac Life policy, and (c) failed to disclose the effect of s29(3) of the Insurance Contracts Act. The Court of Appeal also noted that the advice arguably was not "appropriate" for the purposes of former CA ss945A and 953B of the Corporations Act 2001, although it declined to make a finding on that point because (bizarrely!) that issue had not been developed in argument before the court.

CA s1041H(2) - Matters Included in "Conduct"
•     Dealing in a financial product;
•     Issuing a financial product;
•     Publishing a notice in relation to a financial product;
•     Making, or making an evaluation of, an offer under a takeover bid or a recommendation relating to such an offer;
•     Applying to become or permitting a person to become a standard employer-sponsor of a superannuation entity;
•     A trustee of a superannuation entity dealing with a beneficiary of that entity or an employer-sponsor or associate;
•     An employer applying for an employee to become the holder of an RSA product;
•     An RSA provider dealing with an employer making such an application;
•     Carrying on negotiations, or making arrangements, or doing any other act, preparatory to, or in any way related to, any of the foregoing.

 

Consequences of Breach
•     Not a criminal offence
•     Civil liability for damages to anyone who suffers loss or damage as a result (s1041I)
•     Injunctions (s1324)
•     Order to disclose information or publish advertisement (s1324B)
•     Compensation orders (s1325)
•     If person infringing is a licensed dealer or its representative - cancellation or suspension of licence (ss915C(1)(a) and 912A(1)(c)) or banning order (s920A(1)(e)) for breach of a financial services law.

Again, the liability for civil damages under s1041I extends not only to those who contravene but also to any person who is "involved in the contravention". This is defined in CA s79 to mean any person who has: (a) aided, abetted, counselled or procured the contravention; (b) induced, whether by threats or promises or otherwise, the contravention; (c) been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) conspired with others to effect the contravention (see below). So if a body corporate breaches these rules, any officer knowingly concerned in the breach is potentially liable to damages.

A court may relieve a person from civil liability if it finds they have acted honestly and they ought fairly to be excused. In this regard, CA s1041I(4) provides that s1317S (which allows a court to grant relief to a person from liability for contravention of a civil penalty provision if it appears to the court that the person has acted honestly and, having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention) applies in relation to liability under s1041I(1) as if s1041H were a civil penalty provision and proceedings under s1041I(1) were eligible proceedings.

In ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27, the Federal Court held that the managing director of a company contravened his director's duties under s180(1) of the Corporations Act by authorising and procuring the company to make a statement to the ASX that was misleading and deceptive. A similar finding was made by the NSW Supreme Court against the CEO, CFO, company secretary/general counsel and non-executive directors of James Hardie in ASIC v Macdonald (No 11) [2009] NSWSC 287. The CEO did not appeal the decision at first instance. The decision against the CFO was affirmed on appeal by the NSW Court of Appeal in Morley v ASIC [2010] NSWCA 331. The decision against the non-executive directors and the company secretary/general counsel was affirmed on appeal by the High Court in ASIC v Hellicar [2012] HCA 17 and Shafron v ASIC [2012] HCA 18 respectively.

For an example of the final bullet point, see ASIC Advisory 09-48. There ASIC banned a broker from providing financial services for 18 months for failing to comply with CA s1041H. The broker had composed and sent e-mails to 32 traders at a number of financial institutions in Australia and overseas alleging, falsely, that there had a run on a Macquarie cash management trust that had adversely affected its ability to meet withdrawals and that when news of this became known it could result in a halving of Macquarie's share price overnight.

ASICA s12DA(1) - Misleading or Deceptive Conduct
A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

Click here for a copy of the Australian Securities and Investments Commission Act 2001.

Again, s12DA(1A) provides that this section does not apply to conduct caught by CA ss670A (misleading or deceptive takeover document) or 728 (misleading or deceptive fundraising document) or in relation to a disclosure document or statement within the meaning of CA ss953A or 1022A, leaving these to be covered by relevant CA liability provisions.

Financial product and financial service are defined in terms similar to, but somewhat wider than, chapter 7 of the CA (see ss12BAA and 12BAB, below).

ASICA s12DA potentially covers much the same territory as CA s1041H, dealing with misleading conduct in relation to financial products and financial services. Note there is no equivalent provision in ASICA to CA s1041I(4), allowing a court to relieve a person from liability for misleading and deceptive conduct. This may lead to statute shopping by plaintiffs.

Consequences of Breach
•     Not a criminal offence (see s12GB)
•     Does not attract pecuniary penalties (see s12GBA(1)(a))
•     Civil liability for damages to anyone who suffers loss or damage as a result (s12GF)
•     Injunctions (s12GD)
•     Non-punitive orders (s12GLA), including orders to disclose information or publish advertisements
•     Compensation orders (s12GM)
•    

Orders to redress loss or damage suffered by non-party consumers (s12GNB)

•     If person infringing is a licensed dealer or its representative - cancellation or suspension of licence (CA ss915C(1)(a) and 912A(1)(c)) or banning order (CA s920A(1)(e)) for breach of a financial services law.

Again, the liability for civil damages under s12GF extends not only to those who contravene but also to any person who is "involved in the contravention". The phrase "involved in the contravention" has its CA meaning (ASICA s5(3)). So if a body corporate breaches these rules, any officer knowingly concerned in the breach is potentially liable to damages.

The regulatory action in the US and elsewhere relating to some of the more complex financial products that became fashionable in the lead up to the GFC demonstrates the potential reach of the prohibitions in CA s1041H and ASICA s12DA against misleading conduct.

In July 2010, the SEC announced that Goldman Sachs had agreed to pay a US$550 million penalty - at that point, the largest ever penalty assessed by the SEC against a financial services firm - and to reform its business practices to settle SEC charges that it had misled investors in relation to a synthetic collateralized debt obligation (CDO) involving sub-prime residential mortgage-backed securities. The CDO had been marketed and sold to wholesale investors just as the US housing market was starting to collapse in the lead up to the GFC. The SEC charged that Goldman Sachs had misrepresented in the marketing materials that the underlying investment portfolio had been "selected" by a particular firm when in fact the hedge fund Paulson & Co. Inc. had played a significant role in the portfolio selection process and it was conflicted in doing so because it had taken a short position against the CDO. These latter facts were not disclosed in the marketing materials (see http://www.sec.gov/news/press/2010/2010-123.htm).

In August 2010, the SEC announced that Citigroup had agreed to pay a US$75 million penalty to settle SEC charges that it had misled investors about the company's exposure to sub-prime mortgage-related assets. The SEC charged that Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by sub-prime mortgages between July and mid-October 2007, by representing that its sub-prime exposure was less than $13 billion, when in fact it was more than $50 billion (see http://www.sec.gov/news/press/2010/2010-136.htm).

In October 2015, the SEC announced that UBS AG had agreed to pay US$19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to US investors in structured notes linked to a proprietary foreign exchange trading strategy that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about 5% (see https://www.sec.gov/news/pressrelease/2015-238.html).

In June 2016, the SEC announced that Merrill Lynch had agreed to pay a $10 million penalty to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index. According to the SEC's order instituting a settled administrative proceeding, the offering materials emphasised that the notes were subject to a 2% sales commission and 0.75% annual fee. Due to the impact of these costs over the five-year term of the notes, the volatility index would need to increase by 5.93% from its starting value in order for investors to earn back their original investment on the maturity date. But the offering materials failed to adequately disclose a third cost included in the volatility index known as the "execution factor" that imposed a cost of 1.5% of the index value each quarter (see https://www.sec.gov/news/pressrelease/2016-129.html).

While these type of penalties could not have been imposed in Australia under CA s1041H and ASICA s12DA - a breach of those sections only attracts civil liability for damages - there is little doubt that an Australian investor who had suffered loss or damage because of such misleading conduct would have an actionable claim for damages under these sections. Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028 (involving investments by local councils in synthetic collateralised debt obligations) and Lee v Westpac Banking Corporation [2012] NSWSC 899 (involving a highly geared "capital protected" portfolio loan) amply illustrate the point.

ASICA s12BAB - Meaning of Financial Service
A person provides a financial service if they:
(a)   provide financial product advice (see s12BAB(5));
(b)   deal in a financial product (see s12BAB(7));
(c)   make a market for a financial product (see s12BAB(11));
(d)   operate a registered scheme;
(e)   provide a custodial or depository service (see s12BAB(12));
(f)   operate a financial market (see s12BAB(15)) or clearing and settlement facility (see s12BAB(17));
(g)   provide a service (not being the operation of a derivative trade repository) that is otherwise supplied in relation to a financial product (other than a carbon unit, an Australian carbon credit unit or an eligible international emissions unit); or
(h)   engage in conduct of a kind prescribed in regulations made for these purposes.

Paras (a) - (e) are the same as the CA definition of "financial service" but paras (f) and (g) are additional.

ASICA s12BAA - General Definition of Financial Product
Definition of financial product modelled on the 3 prong definition in CA s761 but:
•     the list of specific inclusions in s12BAA(7) is wider than CA s764A;
•     the list of specific exclusions in s12BAA(8) is narrower than CA s765A; and
•     the definition of non-cash payments (s12BAA(6)) is broader than the equivalent concept in the CA as it does not have the exclusions in CA s763D(2)).

For instance, specifically included in the ASICA definition of "financial product" are contracts to exchange one currency for another that are immediately settled and credit facilities (ASICA ss12BAA(7)(j) and (k)) - these are specifically excluded from the CA definition of "financial product" (ss765A(1)(m) and (h)). This is intended to ensure that ASIC rather than the ACCC has broad responsibility for consumer protection in relation to financial products. It is also intended to ensure that ASIC's consumer protection provisions will apply to financial products that may not be subject to the licensing and disclosure regime in CA Chapter 7.

Engage in Conduct
•     CA: "engage in conduct" means:
  •     do an act; or
  •     omit to perform an act (s9).
•     ASICA: a reference to engaging in conduct is a reference to doing or refusing to do any act, including:
  •     making, or giving effect to a provision of, a contract or arrangement;
  •     arriving at, or giving effect to a provision of, an understanding; or
  •     requiring the giving of, or giving, a covenant (ASICA s12BA(2)(a) and (b)),
  and a reference to refusing to do an act includes a reference to:
  •     refraining (otherwise than inadvertently) from doing that act; or
  •     making it known that that act will not be done (ASICA s12BA(2)(c)).

So not doing anything, including simply remaining silent, can amount to conduct which, if it is misleading or deceptive, will give rise to liability. At least for the purposes of ASICA, however, the failure to act must be deliberate and not inadvertent (see s12BA(2)(c)(i)).

Meaning of Misleading or Deceptive
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191:
•     "Misleading" = leading into error.
•     "Deceptive" is redundant (deceptive conduct will be misleading as well).
•     Conduct is assessed in context.
•     Innocent conduct may still be misleading - intent or fault is not required.

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd is the leading High Court case on former TPA s52. In it a manufacturer of a distinctive style of lounge argued that a competitor had engaged in misleading conduct by making a virtually identical style of lounge under a different name. The High Court held that this did not infringe s52 because the lounges were labelled with the names of the manufacturers and marketed under different names. Per Gibbs CJ (at 197-98):

    

"… section 52 is not confined to conduct intended to mislead or deceive. … There is nothing in the section that would confine it to conduct which is engaged in as a result of a failure to take reasonable care. A corporation which has acted honestly and reasonably may therefore nevertheless be rendered liable to be restrained by injunction, and to pay damages, if its conduct has in fact misled or deceived or is likely to mislead or deceive. The liability imposed by s52 … is quite unrelated to fault …

    

The words of s52 require the Court to consider the nature of the conduct of the corporation against which the proceedings are brought and to decide whether that conduct was, within the meaning of that section, misleading or deceptive. Those words are on any view tautologous. One meaning which the words "mislead" and "deceive" share in common is "to lead into error". If the word "deceptive" in s52 stood alone, it would be a question whether it was used in a bad sense, with a connotation of craft or overreaching, but "misleading" carries no such flavour, and the use of that word appears to render "deceptive" redundant. …

    

The conduct of a defendant must be viewed as a whole. It would be wrong to select some words or act, which, alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading. It is obvious that where the conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave meaning to the particular words. The same is true of acts. In the present case the conduct of the appellant was not simply to manufacture and sell furniture that resembled that of the respondent. The appellant sold only furniture that had been labelled, in the ordinary way, so as to show the name of the manufacturer."

Of course, you look at context the other way too. Words or acts looked in isolation may not seem offensive, but when viewed against the background of a transaction or set of circumstances or course of conduct, they may be misleading.

 

Meaning of "Involved" in Contravention
CA s79 and ASICA s5(3): a person is involved in a contravention if they:
(a)   aid, abet, counsel or procure;
(b)   induce, whether by threats or promises or otherwise;
(c)   are in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to; or
(d)   conspired with others to effect;
the contravention.
Yorke v Lucas (1985) 158 CLR 661: for a person to be liable for being "involved in a contravention", it must be shown that they intentionally aided, abetted, counselled or procured it and that to form the necessary intent, they must have knowledge of the essential matters which make up the contravention, even if they do not know that those matters amount to a contravention.

In Yorke v Lucas, a business broker, through its managing director, innocently passed on misleading turnover figures provided by its client to a prospective buyer of the business. The purchaser sued the vendor and the broker for contravening former TPA s52 and the MD for being knowingly involved in the contravention. The claim against the vendor and broker was upheld but the claim against the MD was dismissed because he was not aware at the time the figures were passed on that they were misleading. The plaintiff appealed that dismissal. The High Court rejected the appeal holding that for a person to be liable for being "involved in a contravention", it must be shown that they intentionally aided, abetted, counselled or procured it and that to form the necessary intent, they must have knowledge of the essential matters which make up the contravention, even if they do not know that those matters amount to a contravention.

Representations as to Future Matters
•     When a person makes a representation with respect to any future matter and the person does not have reasonable grounds for making the representation, the representation is taken to be misleading (ACL s4; CA ss670A(2), 728(2) and 769C; ASICA s12BB).
•     In some cases, the person making the representation is taken not to have had reasonable grounds for making the representation unless they adduce evidence to the contrary (ACL s4; ASICA s12BB).
•     See Sykes v Reserve Bank of Australia (1998) 88 FCR 511.

These provision have particular application to forecasts and projections. It is therefore important that these are based on proper grounds and that any material assumptions and qualifications are objectively reasonable and disclosed.

In Sykes v Reserve Bank of Australia, the plaintiffs had developed machines for handling the new polymer currency about to be introduced to replace paper notes. They made enquires of the RBA about the timetable for the introduction of the notes and were told that the $5 polymer note would be released "sometime after" Easter 1991 and that thereafter $10, $20, $50 and $100 notes would be released at approximately six monthly intervals. The introduction of the notes was delayed significantly due to technical difficulties in production and the $5 note was not released until July 1992 and the other notes released after longer intervals than 6 months. The plaintiffs had spent significant sums developing, planning and promoting their technology and suffered loss and damage because of the delay. They sued the Reserve Bank asserting that representations it had made were representations as to the future which the Bank did not have reasonable grounds for making under former TPA s51A. On appeal, the Full Federal Court upheld that argument. It held that "sometime after" meant within a reasonable period. The Bank had failed to discharge the onus of proving that it had reasonable grounds for making that representation when it did. It was aware of the production difficulties and at the point it made the representation did not really know how long it would take to fix them.

Representations as to Future Matters (cont.)
•     A representation as to future matters which is honestly made and based on reasonable grounds is not misleading just because it does not come to pass.
•     A representation as to future matters may be misleading if:
  •     the person does not believe the representation or is recklessly indifferent to its truth;
  •     there is no objectively reasonable basis for the representation; or
  •     there are important assumptions underlying the representation or qualifications to which it is subject that are not expressed.
•     See James v ANZ Bank (1986) 64 ALR 347.

In James v ANZ Bank, a representation by a mortgage broker that he could obtain long term low interest finance to enable the plaintiffs to purchase a farming property (a statement as to the future) was held to be misleading because there was no evidence that he had the capacity to raise the loan. The broker had declined to testify and what evidence there was available to the court indicated that he did not in fact have the capacity to fulfil that undertaking. However, he was found not liable because the action was brought out of time. Toohey J summarised the applicable principles in this area (at p372):

>   

The mere fact that representations as to future conduct or events do not come to pass does not make them misleading or deceptive …

>   

Nevertheless, a statement relating to the future may contain an implied statement as to present or past fact. It may represent impliedly that the promisor has a present intention to make good the promise and it may represent impliedly that he has the means to do so …

>   

A statement involving the state of mind of the maker of the statement (such as a promise, prediction or opinion) ordinarily conveys the meaning that the maker of the statement had a particular state of mind when the statement was made and that there was basis for that state of mind. If the meaning contained in or conveyed by the statement is false in that or in any other respect, there will have been a contravention of [former TPA] s52.

ASIC v Macdonald (No 11) [2009] NSWSC 287, mentioned above, is another example of a misleading representation as to future matters - in that case a representation by James Hardie that a corporate restructure it was proposing would ring fence its future asbestos liabilities and leave them fully funded. The decision against James Hardie was affirmed on appeal by the NSW Court of Appeal in James Hardie Industries NV v ASIC [2010] NSWCA 332.

See also Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300, where it was held that a representation by the defendant to a prospective lender that a service station company owned by his cousins was a "good business" and would be a reliable borrower was a statement as to a future matter and that, as he did not have reasonable grounds for the representation, was misleading. Accordingly, he was liable to the lender when the borrower eventually went into receivership and could not repay the loan.

 

Outdated Representations About the Past
•     A representation about the past may carry with it implied representations about the present or future eg:
  •     a statement that a person has always paid his debts on time, even though true, could be misleading if that person is now known to be in financial difficulty;
  •     a statement that someone was granted patent rights in relation to an invention, even though true, could be misleading if it is known that the patent has since been revoked; and
  •     the inclusion of impressive past performance figures in a prospectus, even though accurate, could be misleading if there has since been a marked downturn in performance.
•     See Leda Holdings v Oraka Pty Ltd (1998) ATPR Ά41-601.

Leda Holdings v Oraka Pty Ltd involved a shopping centre lease. In the course of negotiations with a prospective tenant, a letting agent predicted that the centre would be almost fully let by the time it opened. This representation was found to be reasonable given the circumstances at the time. The letting program however did not go as well as planned and the centre was far from fully leased at the time an agreement to lease was eventually entered into. The level of letting was considered important by the tenant. As a purveyor of Wendy's ice cream, it was significantly reliant on customer traffic past the shop front. The tenant made a number of enquiries as to the state of leasing during the lead up to it signing an agreement for lease and was always told that "things were going OK". The court at first instance found that had the tenant been told the true position at the time that it was due to sign up the agreement for lease, it would have refused to do so and found the shopping centre owner liable for misleading conduct through the representations of its letting agent. It did so despite a clause in the agreement for lease disclaiming any pre-signing representations. It granted an order reducing the rent payable under the lease to nil for the period the tenant had occupied the premises (the lease had since been assigned to a third party) and setting aside a guarantee of the lease. On appeal in a split decision, the judgment was set aside. The majority decision has some questionable aspects (it seems to suggest, for example, that the owner was not liable for misrepresentations of its letting agent) but, in essence, the majority of the full court were not convinced that the tenant had in fact relied on the statements and should have made a bigger deal about the issue at the time it signed the agreement for lease. The fact that the tenant was an experienced lessee and businessman weighed heavily on the majority.

Literal Truth
•     A statement that is literally true may still be misleading if:
  •    it only tells half the truth;
  •    it conveys a second meaning that is misleading;
  •    it conveys a false impression; or
  •    subsequent events render it false or misleading.
•     See Porter v Audio Visual Promotions Pty Ltd [1985] ATPR Ά40-547; GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761; and Endresz v Whitehouse (1997) 15 ACLC 936.

Porter v Audio Visual Promotions Pty Ltd is an example of literal truth being misleading. Porter was induced to subscribe for shares in a company after having been told that it was a financially sound "million dollar company" with a paid up capital of $750,000. This was literally true. However, in the previous 12 months, the directors had revalued plant and equipment from $24,000 to $274,000 and valued the company's goodwill at $500,000, and then used the asset revaluation reserve thus created to fund a bonus issue. Per Smithers J (at p46,442):

    

"… to say that the company was a million dollar company with a paid up capital of $750,000 was misleading and deceptive. It was said in the context of other statements tending to show that the company had financial strength. In a sense, of course, it was true that the company was a million dollar company with a paid up capital of $750,000 but the question is how, in the circumstances, the statement to that effect would be understood or be likely to be understood by the person to whom it was made. In the circumstances the picture to be conjured up by the description of the company was that it was a large company adequately supported by large cash capital contributed by persons who had bought shares, and it was carrying on a successful business. In the circumstances it was a misleading description of a company the bulk of whose shareholding was made up of bonus shares supported by a write up of plant and equipment and a valuation of goodwill supported only by expectation of future business by the exploitation of the Fairchild agreement, which in April 1981 had not materialised in line with, or anywhere near that expectation. Statements such as those under consideration invite the hearer to have full confidence in what is said, and to hear it without suspicion that there may be a catch therein."

GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd is also an example of something being literally true but misleading nonetheless. GIO had been the subject of a hostile takeover by AMP, with AMP ending up with 57% of GIO's shares. In May 1999, shortly after the takeover, GIO announced that significant losses had been sustained by its reinsurance business and, in August 1999, announced its intention to exit the reinsurance business. In September 1999, GIO and AMP jointly announced a proposed scheme of arrangement under which AMP would take out the minority GIO shareholders for listed debt instruments having a face value equivalent to $3.05 per GIO share and an unlisted contingent debt instrument potentially entitling the holder to two further cash instalments, depending on the results of GIO's reinsurance business.

Following GIO and AMP's announcements on 24 September, a report was prepared by a member of GPG's investment committee recommending that GPG invest in GIO. The recommendation was accepted and between 30 September and 2 November, GPG progressively acquired more than 16 million shares in GIO.

On 2 November, GIO announced that its financial situation had continued to deteriorate, to the extent that the directors believed it was highly unlikely that the first payment would be made under the contingent instrument. Then, on 4 November, GIO announced that AMP was not prepared to implement the scheme proposal on the terms previously announced and put forward a revised proposal under which GIO shareholders would receive debt securities with a face value of $2.75 per GIO share and a reinsurance note potentially entitling the holder to two cash instalments. GIO's share price tanked.

GPG sued GIO for the losses it incurred as a result of the fall in the market value of the GIO shares. GPG alleged that its purchases of GIO shares were induced by the announcements made by GIO and AMP on 24 September 1999 and their failure to make different disclosure until early November. GPG alleged that GIO had engaged in misleading and deceptive conduct and had breached continuous disclosure obligations. GPG made similar claims against AMP and also alleged that AMP had engaged in unconscionable conduct under the unwritten law of the States in contravention of ASICA s12CA (we look at this later).

Gyles J gave judgment against GIO and awarded GPG damages of $8.36 million plus costs. The proceeding against AMP was dismissed with costs. Justice Gyles considered the terms of the announcement, what the market had been told about the state of GIO's reinsurance business and GIO's state of knowledge at the time. A heavily qualified report prepared in September 1999 by GIO's in-house actuaries concerning the reinsurance losses indicated that they were going to be a good deal worse than expected but without putting a firm figure on the likely losses. Gyles J said he thought the information was not certain enough to require a decision to immediately increase the provisions for the reinsurance losses or to warrant disclosure to the market absent any other announcement. However, he stated that once GIO decided to make an announcement about the scheme and the intended offering of a contingent instrument linked to the success of the reinsurance business, it was obliged not to make a misleading announcement and should have disclosed the substance of the report about the reinsurance losses, appropriately qualified to reflect the nature of the information. Justice Gyles found that the absence of such information rendered the September announcement misleading and deceptive. He then went on to note:

    

"I have not overlooked either the fact that premature release of information may cause damage to shareholders or the fact that casting any doubt upon the adequacy of the increased provision so recently announced would be viewed seriously by the market. Having chosen to speak, GIO came under an obligation not to mislead in so doing."

Gyles J found that AMP was not obliged to disclose what it knew about the probability of GIO making further losses. He also dismissed GPG's argument that AMP's announcement was misleading or deceptive. GPG argued that the intentions disclosed by AMP in its announcement were misleading or deceptive because AMP later resiled from the representations it had made as to what it would do in relation to the scheme in the future. Justice Gyles stated that with "some hesitation" he had to accept the minutes of the AMP Board of 23 September 1999 as evidence that AMP's announcement was neither misleading nor deceptive because there was "nothing about the resolution, or in the surrounding circumstances, to lead to the view that the Board or the delegates of the Board did not mean what was said at the time. The mere fact that some weeks later it took a different position does not suggest any more than that AMP changed its position".

Gyles J also concluded that the demand for "a radical change to the escape clause" and the subsequent refusal by AMP to enter into the scheme proposal as announced was unconscionable in the ordinary sense of that word. This was because the announcement AMP made on 24 September 1999 was unqualified as to its commitment to the scheme. However, it was not unconscionable according to the unwritten law of the States.

In Endresz v Whitehouse, E, the chairman of Emu Hill and a director of its major shareholder CTC, instructed a broker to sell 4m of CTC's shares in Emu Hill on market and then instructed a different broker to buy them back on a deferred settlement basis, with the purchase price payable after 3 months. The price for both trades, at 14 cents, was significantly in excess of the prevailing market price of 9 cents. After the transaction in question, the ASX wrote to Emu Hill and queried it about the fluctuations in its share price. E responded on behalf of Emu Hill without referring the matter to his fellow directors. He said that the board of Emu Hill was not aware of any information not known to the market that would explain the movement in its share price. The letter set out various generally known factual matters about the earlier takeover of Emu Hill by CTC and then expressed the opinion that the price movements were the result of the market's reappraisal of the company in light of those developments. The letter also stated that CTC had purchased various shares in the ordinary course of trading on the ASX without disclosing the fixing of the price. E was charged and convicted of breaching the precursor to s1041E, disseminating misleading information to the market. His appeal against the conviction was rejected. Ormiston JA, with whom the rest of the court agreed, said (at p 955):

    

"… what the appellant said in the letter was that CTC had purchased the shares "in the ordinary course of business" on the Stock Exchange 'in accordance with the rules of that stock exchange containing the standard terms and conditions'. … The answer was by no means candid in that he did not say why the price of 14 cents per share had been "fixed" for the sale of the … shares …. The appellant did not disclose that the other 4 million were being sold, nor that he had been required to clear the market for a sale at 14 cents per share. … [T]he appellant purported to give an answer which was only half-true because he knew all the facts but chose to give only some to the Stock Exchange."

For an example of subsequent events rendering a previously true statement misleading, see Leda Holdings v Oraka Pty Ltd, above.

Stephen J in Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) ATPR Ά40-067 proffered as an example of a literally true statement conveying a false impression, an advertisement for an opera highlighting the name of a famous diva as a performer when in fact it is an unknown performer who coincidentally bore the same name.

 

Statements of Opinion
•     A statement of opinion which is honestly held and which is based on reasonable grounds is not misleading just because it turns out to be wrong.
•     An expression of opinion may be misleading if:
  •     it is expressed as a matter of fact rather than opinion;
  •     the person expressing the opinion does not honestly hold that opinion;
  •     there are no reasonable grounds to support the opinion; or
  •     there are important assumptions underlying the opinion or qualifications to which it is subject that are not expressed.
•     If an opinion is expressed by an expert, there will usually be an implicit representation that it was formed with due care and skill after applying the relevant expertise.
•     See National Australia Bank v Nobile [1988] ATPR Ά40-856; Reil Corporation Ltd v Bankers Trust Australia Ltd and Aveling [1988] Unreported FCA No. G1422; and MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313.

In National Australia Bank v Nobile, a bank manager told prospective guarantors of a company's bank overdraft that the company was trading satisfactorily. The company was actually experiencing significant trading difficulties which eventually led to its liquidation. In an action by the guarantors against the bank seeking to avoid liability under the guarantee for misleading and deceptive conduct and unconscionability, the bank sought to argue that the bank manager's statement was simply a statement of opinion that was truthfully held and was therefore not misleading. The court rejected the argument. It held the statement was one of fact rather than an opinion and was misleading.

In Reil Corporation Ltd v Bankers Trust Australia Ltd and Aveling, Reil Corporation was negotiating to acquire a parcel of Wormald shares held by Sunshine (a company formerly owned by Lee Minh Tee but which, as a consequence of a takeover bid by Wormald, had become a Wormald subsidiary). This was shortly before the '87 market crash. The acquisition required the approval of Wormald shareholders and, as part of that process, an expert's report was being prepared by Arthur Young as to whether the acquisition price was fair and reasonable. Reil had offered $4.25 per share. Aveling, a BT director representing the seller, had asked for $5.00 per share and made a representation along the lines that "if you think I am being tough, AY are more like $5.50". Reil increased the price to $5.00 per share, knowing that if they were too far below the expert's opinion on fair value, the directors would have difficulty recommending the transaction to shareholders. Ultimately the AY report valued the shares at much less than $5.00. The market crashed and Reil sued BT and Aveling personally under former TPA s52 arguing that Aveling had made a representation of fact as to the AY valuation and that, as a result of that misrepresentation, they had increased their offer and suffered a loss. BT and Aveling countered that it was only a statement of opinion and that it was honestly and reasonably held. The court found in favour of BT and Aveling on the facts. He had had detailed discussions with AY as to the appropriate method of valuation, had reasonable grounds for thinking the shares were worth $5.50 and for thinking that AY shared that opinion. The case highlights the significance of the difference between a statement of fact and a statement of opinion. If the judge had found it to be a statement of fact, it most likely would have been held to be misleading and BT and Aveling would have lost the case.

In MGICA (1992) Ltd v Kenny & Good Pty Ltd, a property valuation provided by a valuer significantly overstated the value of a property. Based in that valuation, the mortgage insurer provided insurance and suffered loss when the mortgagor defaulted and the property was sold at a loss. Lindgren J said (at pp356-7):

    

"… the supply of [the] valuation reports … conveyed representations, not only that the opinions expressed in them were held, but also (a) that the opinions were based on reasonable grounds; (b) that they were the product of the exercise of due care and skill; and (c) that they were, after making due allowance for their nature as opinions as to the market value of real estate as at a particular time, safe to be relied upon and not outside the range of latitude properly to be allowed to them."

The decision in MGICA was affirmed on appeal by the Full Federal Court (147 ALR 568) and the High Court (163 ALR 611) but the appeals related to the measure of damages rather than the findings of a breach of the former TPA s52.

In ASIC v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586, the Federal Court at first instance dismissed ASIC's claim that a statement released to the market by the defendant to the effect that it had entered into "legally binding" agreements for the construction of a mine, railway and port when the agreements in question were little more than agreements to negotiate, was misleading. The court characterised the statement as one of opinion rather than fact and found that the defendant honestly and reasonably held that opinion, even though others might have held a different opinion, and therefore the statement was not misleading. The decision was reversed on appeal by the Full Federal Court in ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19, with the court unanimously holding the statements in question to be statements of fact rather than statements of opinion. That decision in turn was reversed by the High Court in Forrest v ASIC [2012] HCA 39, with the High Court finding that the statements in question were not misleading.

 

Statements of Intention
•     A statement of intent which is honestly made and which is based on reasonable grounds at the time is not necessarily misleading just because it is not subsequently carried into effect.
•     A statement of intent may be misleading if:
  •     the person in fact does not have that intention;
  •     the person does not have the wherewithal to carry out that intention; or
  •     there are important conditions or qualifications to which it is subject that are not expressed.
•     See Poseidon Ltd v Adelaide Petroleum NL (1992) ATPR Ά41-164 and ASC v Mount Burgess Gold Mining Company NL (1995) 13 ACLC 261.

For an example of changed intentions, see GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd, above (AMP's decision to change the consideration offered under the scheme of arrangement).

In Poseidon Ltd v Adelaide Petroleum NL, Poseidon engaged in contractual negotiations with Adelaide with a view to deflecting it from doing a deal with a third party. It had ensured that there were sufficient "outs" in the contract that it could not be required to perform. It in fact intended to rely on those "outs" unless certain events came to pass and did not disclose that fact to the other party. The court found it guilty of misleading conduct. Per Burchett J (at p40,227):

    

"I do not think it has ever been suggested that [former TPA] s52 strikes at the traditional secretiveness and obliquity of the bargaining process. Traditional bargaining may be hard, without being in the statutory sense misleading or deceptive. No one expects all the cards to be on the table. But the bargaining process is not therefore to be seen as a licence to deceive. If, for example, the bargainer has no intention of contracting on the terms discussed - perhaps because his real aim is to tie up the market, or to achieve some other ulterior purpose - may not (at least, in some circumstances) his conduct in seeming to bargain be accurately stigmatised as misleading?"

A rhetorical question which the court answered in the affirmative.

In ASC v Mount Burgess Gold Mining Company NL, the managing director of company X wrote to Mt Burgess advising it that X intended to make an on-market takeover bid for it "pitched at 40 cents per share". Mt Burgess forwarded the letter to the ASX, which announced it to the market in the usual way. Mt Burgess shares traded upwards dramatically upon the announcement. The managing director of X subsequently called the ASX and told it that the bid was still subject to negotiation. He then wrote again to Mt Burgess claiming that as per previous discussions with the managing director of Mt Burgess, the first letter was supposed to have been kept confidential, was in fact written at the request of the managing director of Mt Burgess to confirm X's good faith interest in pursuing a bid and was intended only to start the ball rolling on negotiations about price. Mt Burgess released that letter to the ASX together with a response denying the allegations in it. ASC applied to the court for an order that the purchases made at the inflated prices were voidable at the option of the purchaser. The order was granted, with an ancillary order that X and its managing director indemnify the vendors for consequential losses suffered by reason of any purchaser exercising the option to avoid the purchases. The Court held that the conduct complained of was a clear breach of s995 of the Corporations Law (the precursor to CA s1041H) and that enlivened the power of the court to grant injunctions where there had been an infringement of the CA.

 

Puffery
•     The use of puffery - superlatives and comparatives that are self-evident exaggerations - does not give rise to liability if it is, or ought to be, apparent that it is just puffery.
•     Statements that can be objectively tested or that are out and out lies will not generally be characterised as puffery.
•     See Pappas v Soulac Pty Ltd (1983) 50 ALR 231, especially at pp234-5; Raestreet Pty Ltd v The Farmers' Shop Pty Ltd [1998] SASC 6753.

Pappas v Soulac Pty Ltd arose out of the sale by Soulac to members of the Pappas family of a shopping centre. It was alleged that Soulac and its selling agent had contravened former TPA s52 by making false representations during negotiations for the purchase that had misled the applicants into paying an excessive price for the centre. The court rejected the claim. Per Fisher J (at 234-5):

    

"It is important to appreciate that many of the statements alleged or admittedly made by [the agent] were wholly or in part statements of opinion, not capable of being objectively proved to be true or false. They were also essentially the type of introductory comments, in the nature of puffery, made at the start of negotiations for the purpose of attracting the interest of a possible purchaser. As such they became irrelevant or of little if any significance when detailed information is subsequently given, a fortiori, to a potential purchaser with commercial experience. To the extent that they are essentially puffery, it is proper to be reluctant to elevate them to the status of potentially misleading conduct."

In other words, conduct is assessed in context. Again the fact that the purchasers were experienced business people who had acquired a number of properties previously was considered significant by the court.

In Raestreet Pty Ltd v The Farmers' Shop Pty Ltd, an agent brought an action against his principal for retainers alleged to be due under the contract of agency. The principal claimed in defence that it was induced to enter into the contract by misrepresentations made by the agent about his experience, integrity and honesty. The agent had in fact lied about his experience and failed to disclose that he had spent time in jail for fraud. It was held that the misrepresentations constituted misleading and deceptive conduct contrary to former TPA s52 and that the principal was entitled to rescind the contract, with no liability to pay the retainers claimed by the agent. An assertion by the agent that the misrepresentations were mere puffs was dismissed out of hand by the court.

 

Passing on Information From Others
•     You don't have to be the author of misleading material to be liable for it. You may mislead a person by supplying them with false or misleading material prepared by someone else.
•     However, a person who passes on misleading material prepared by another will not themselves be guilty of misleading conduct if:
  •     it is clear that they are not the source of the material and are merely passing it on;
  •     they have not done anything, expressly or impliedly, to adopt, endorse or compound it; and
  •     they are not aware that it is, or recklessly indifferent as to whether it is, misleading.
•     See Yorke v Lucas (1985) 158 CLR 661.

In Yorke v Lucas, a business broker, through its managing director, innocently passed on misleading turnover figures provided by its client to a prospective buyer of the business. The purchaser sued the vendor and the broker for contravening former TPA s52 and the MD for being knowingly involved in the contravention. The claim against the vendor and broker was upheld but the claim against the MD was dismissed because he was not aware at the time the figures were passed on that they were misleading. The plaintiff appealed that dismissal. In the course of its decision the High Court cast doubts on whether the broker should have been found in breach of s52 by simply passing on the figures. Per the majority of the High Court (at 666):

    

"It is, of course, established that contravention of [s52] does not require an intent to mislead or deceive and even though a corporation acts honestly and reasonably, it may nonetheless engage in conduct that is misleading or deceptive or is likely to mislead or deceive. … That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said itself to engage in conduct that is misleading or deceptive."

I would not read this passage as saying that if you don't disclaim third party information then you are liable for it. If I innocently take information from, say, a government website and pass it on to someone, identifying its source, I should not be liable if it turns out to be misleading (unless of course I know that it is misleading when I pass it on or I add to or embellish it in a way that is misleading). It is publicly available information that anyone can access. However, while arguably not necessary, including an express disclaimer is obviously good practice.

Where, however, an adviser acting for a client passes on information provided by the client then I think you need to be more careful. The other party may believe that you have helped prepare or have checked the information and so there is a risk that if you don't include an express disclaimer, you may be seen to have impliedly endorsed or adopted it. Even if you include a disclaimer, if you know it is, or are recklessly indifferent about whether it is, false, you run the risk that the disclaimer will be ignored by the court as being itself misleading (see Oraka Pty Ltd v Leda Holdings Ltd, mentioned in the notes to the slide on disclaimers and exclusion clauses below).

 

Silence
•     Silence by itself will not generally be considered misleading.
•     If there is a reasonable expectation in the circumstances that a state of affairs will be disclosed, silence about the matter may be inferred to be a representation that the state of affairs does not exist.
•     Silence combined with other factors may be misleading, eg if it takes the form of:
  •     only telling half the truth;
  •     failing to correct someone known to have misinterpreted a representation;
  •     failing to update a representation that was true when made but which has been rendered false or misleading by subsequent events.
•     See General Newspapers v Telstra Corporation (1993) ATPR Ά41-274 and Metalcorp Recyclers Pty Limited v Metal Manufacturers Limited [2003] NSWCA 213.

In General Newspapers v Telstra Corporation, GN, knowing that the current printing contract was about to expire, made a number of marketing approaches to Telstra to be considered for the job of printing its telephone directories. Telstra advised GN that it had been placed on Telstra's tender list, which it had, but Telstra made no statement about its intention to call for tenders. In fact, it was at the time having confidential discussions with the current printer to renew its printing contract and was not proposing to put the job out to tender. Ultimately that is what occurred. GN then sued Telstra saying that it had been misled into believing that it would be given the opportunity to tender for the contract. The court rejected GN's claim. Davies and Einfeld JJ said (at p41,690):

    

"[Former TPA s52] does not require arm's length negotiations to be completely open or require full disclosure at all times. The particular facts of the case must be considered in the light of the ordinary incidents and character of commercial behaviour. Thus, in the ordinary course of commercial dealings, a certain degree of "puffing" or exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce. So also is a certain degree of "put-off", evasion or obfuscation by commercial people seeking to resist disclosing information which is confidential. Discussions in commerce are so understood."

Then quoting Black CJ in another case (at pp41,690-1):

    

"Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of 'mere silence' or of a duty of disclosure can divert attention from that primary question. Although 'mere silence' is a convenient way of describing some fact situations, there is in truth no such thing as 'mere silence' because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed."

Then later (at p41,691):

    

"In the present case, Telstra desired and was entitled to keep its deliberations and its negotiations confidential to itself and the partners with whom it was negotiating. There was nothing put on behalf of GN in the conversations or letters which indicated a need to inform GN of the true position. It was not said on behalf of GN that it was acquiring equipment with a view to undertaking Telstra's printing or that it was holding a press or presses available for that work or that it had any property or machinery which it wished to dispose of if it could not acquire the contract from Telstra. Any matter of that type, which would have indicated to Telstra that GN was acting in reliance on its being placed on the tender list, may have given rise to the need for a response. But there was no such information. Moreover, GN could not reasonably have expected that Telstra was about to or had decided to call for tenders. The officers of Telstra were always guarded in their responses and the purport of every communication was that Telstra was not then calling tenders and was not then in negotiation with GN about a contract."

A useful case demonstrating both the principles that conduct is assessed in context and about reliance.

In Metalcorp Recyclers Pty Limited v Metal Manufacturers Limited, the appellant sold and delivered 77 tonnes of scrap copper cathode to the respondent. The companies had been doing business with each other for about 10 years. The copper had been stolen from W by persons unknown but the appellant had acquired it in good faith from a third party supplier it had previously dealt with without incident. W informed the respondent about the theft and as a result the respondent suspected that the copper it was buying from the appellant may have been stolen. The respondent inspected the copper after delivery, noticed that less had been delivered than promised, and saw evidence that the copper had been manufactured by W. The respondent passed the relevant information onto W by fax at 8.51 am on 2 February 2001. Under the established course of business between the companies, deliveries of copper by the appellant were quarantined until inspected and accepted and there was a procedure for dealing with quality disputes arising from an inspection. During a telephone conversation between representatives of the appellant and the respondent at about 9 am on 2 February, the respondent said that it had inspected the copper and asked about the short delivery. There was no mention of any difficulties about quality. The appellant told the respondent that it had delivered all the copper that was available. Although the respondent then believed that the copper had probably been stolen, nothing was said about title and the appellant was not told about the theft from W, the evidence found on inspection, or that it had been passed on to W to enable that company to determine whether the copper had been stolen. Later that day W advised the respondent that the copper had indeed been stolen. As a result of the 9 am conversation the appellant understood that the respondent, having only raised the question of the short delivery, had accepted the copper and intended to pay for it in due course.  At about 11.30 am that day it gave a cheque to its supplier for the copper which was specially cleared. The respondent later refused to pay for the copper and the appellant was unable to recover the money it had paid to its supplier. The appellant sued the respondent for damages for misleading and deceptive conduct in contravention of former TPA s52. The District Court Judge dismissed the action. On appeal, it was held that the respondent's conduct during the critical conversation at 9 am was misleading and deceptive. What was said and not said against the background of the established course of business between the companies conveyed a representation to the appellant that the respondent had accepted the delivery and intended to pay for it in due course. This was a misrepresentation which the appellant acted on when it paid its supplier some hours later. The appellant was entitled to recover as damages the price it had paid its supplier.

 

Reliance
•     In order to claim damages for misleading conduct, the plaintiff must show that they relied on the misleading conduct and, as result, suffered loss or damage.
•     Reliance does not have to be reasonable.
•     See Sykes v Reserve Bank of Australia (1998) 88 FCR 511; Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112.

In Sykes v Reserve Bank of Australia, above, per Heerey J (at (1998) 88 FCR 511, p517):

    

"The Act does not … erect any precondition that … reliance is 'reasonable'. Any argument to the contrary would be inconsistent with the well established principle that contributory negligence is not available as a defence to a claim for damages based on a contravention of [former TPA] s52."

In Argy v Blunts and Lane Cove Real Estate Pty Ltd, a solicitor coincidentally specialising in trade practices law had purchased a waterfront reserve property in Longueville with a view to adding a pool and tennis court. He sued an estate agent and firm of solicitors representing the vendor arguing that they had misrepresented the zoning of the land, which would not permit these additions in the area that he wanted to build them. An earlier oral mis-statement by the agent about the development uses to which the land could be put was compounded by the zoning certificate attached to the contract omitting a crucial page. In response to the argument that the solicitor was so negligent in not properly checking the zoning certificate that the true cause of his loss was his own negligence and not the misrepresentation, the court said (at p 137):

    

"The Full Court of this Court in Sutton v. A J Thompson Pty Ltd … in response to a submission that the applicants … had failed to take reasonable care in their own interests by not investigating more closely the affairs of the business which they had purchased described as a "bold submission" the proposition: "You should not have believed me when I misled you"."

Then quoting from that decision (at p137):

    

"… if a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case. But there is nothing in the principles cited, or in any other authority which has been brought to our attention, to suggest that a person who has been misled into entering a contract, by false representations of a type which were likely to produce that result, and in fact did so, can be deprived of his remedy because of his failure to check the accuracy of those representations …"

And then later (at p 138):

     "A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant. However, in my view, the present cannot be said to be that case."

 

Disclaimers and Exclusion Clauses
•     The right to action for misleading conduct, being a statutory cause of action, cannot be excluded by contract.
•     Disclaimers that a person has not relied on any prior representations in entering into a contract are but one factor to consider in the overall context of whether they have been misled.
•     See Oraka Pty Ltd v Leda Holdings Ltd (1997) ATPR Ά41-558 (reversed on appeal but on other grounds).

In Oraka Pty Ltd v Leda Holdings Ltd, Burchett J at first instance said (at p43,717):

    

"Counsel for Leda sought to place reliance on clause 9 of the agreement for lease, and on the corresponding provision in the letter of intent. Clause 9 has been drawn in formidable language, as a representation and warranty by Oraka, reinforced by what is expressed as an indemnity in clause 9.3, that Oraka was not induced by and did not rely on any representations made to it. But there is a difficulty in depending on such a provision according to its literal terms. It cannot be thought that the very agreement that was obtained by a misrepresentation can be made good by incorporating in it a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed. The agreement that so seeks to sustain itself was obtained by a misrepresentation, and no verbal magic of an added clause can change that."

This issue was not addressed by the majority on appeal because they found that the plaintiff had not relied on the alleged misleading representations.

Return to Outline


Unlawful Trading Practices

ASICA s12DB(1) - False or Misleading Representations
A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services, make a false or misleading representation:
(a)   that services are of a particular standard, quality, value or grade;
(b)   that a particular person has agreed to acquire services;
(c)  

that purports to be a testimonial by any person relating to services;

(d)  

concerning a testimonial by any person or a representation that purports to be such a testimonial relating to services;

(e)   that services have sponsorship, approval, performance characteristics, uses or benefits;
(f)  

that the person making the representation has a sponsorship, approval or affiliation;

(g)   with respect to the price of services;
(h)   concerning the need for any services;
(i)   concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy (including an implied warranty under s12ED); or
(j)  

concerning a requirement to pay for a contractual right that: (i) is wholly or partly equivalent to any condition, warranty, guarantee, right or remedy (including an implied warranty under s12ED) and (ii) a person has under a law of the Commonwealth, a State or a Territory (other than an unwritten law).

This section does not apply to conduct caught by CA s670A (misleading or deceptive takeover document) or s728 of the Corporations Act (misleading or deceptive fundraising document) or in relation to a disclosure document or statement within the meaning of CA ss953A or 1022A (s12DB(2)). Again this is there to preserve the separate liability regime for those matters in CA chapters 6D and 7.

In ASIC v GE Capital Finance Australia [2014] FCA 701, GE Money had a $1.5 million penalty imposed for making a false or misleading representations in breach of s12DB(1)(i) that credit card holders could not activate their credit card or obtain an increased credit limit unless they consented to GE Money sending them invitations to increase their credit card limit from time to time. The correct position was that their credit card could be activated and that they could obtain a new credit limit increase whether or not they agreed to receive invitations for credit card limit increases. The representation was intended to circumvent an amendment to the National Consumer Credit Protection Act that prevented a credit provider under a credit card contract from making an invitation to a cardholder to increase his or her credit limit unless the credit provider had previously obtained express consent from the cardholder to the making of the invitation. The amendment also provided that written invitations made to credit cardholders to increase their credit limit were required to seek the consumer's consent only in relation to whether or not to receive such invitations and that such invitations could not be bundled with requests for consent to other services.

ASICA s12DD(1) - Requirement to State Cash Price
A person must not, in trade or commerce, in connection with:
(a)   the supply or possible supply of financial services; or
(b)   the promotion by any means of the supply or use of financial services;
make a representation about an amount that, if paid, would constitute a part of the consideration for the supply of the services unless the person also specifies the cash price for the services.

This section does not apply to dealings in securities (s12DD(2)).

This section mirrors ACL s48 and has particular application to advertising pitches where the price for financial services is expressed to be "from $X" or "$X plus GST". The requirement to specify the cash price for services has been read as requiring the full cash price to be stated: see for example ACCC Media Release 88/03.

ASICA s12DE(1) - Offering Gifts and Prizes
A person contravenes this section if:
(a)   the person offers any rebate, gift, prize or other free item;
(b)   the person offers the rebate, gift, prize or other free item in trade or commerce, in connection with:
  (i)   the supply or possible supply of financial services;
  (ii)  

the promotion by any means of the supply or use of financial services;

  (iii)  

the sale or grant, or the possible sale or grant, of a financial product that consists of, or includes, an interest in land; or

  (iv)  

the promotion by any means of a financial product that consists of, or includes, an interest in land; and

(c)   when the person so offers it, the person intends not to provide it, or not to provide it as offered.

ASICA s12DE(2A) also makes it an offence if a person does the things mentioned in (a) and (b) above and they fail, within the time specified in the offer or (if no such time is specified) within a reasonable time after making the offer, to provide the rebate, gift, prize or other free item in accordance with the offer.

ASICA s12DF(1) - Misleading the Public
A person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services.

Note the potential double coverage between s12DF and s12DA, although s12DF requires the public to be liable to be misled and, unlike s12DA, breaching it is a criminal offence (see s12GB(1)).

For an overseas example of the potential reach of a provision such as s12DF(1), note the US$7 billion global settlement the US Justice Department reached with Citigroup in 2014 for misleading investors about securities containing toxic mortgages. As part of the settlement, Citigroup acknowledged it had made serious misrepresentations to the public about the mortgage loans it securitized in residential mortgage-backed securities. Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects. On a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects. In one instance, a Citigroup trader stated in an internal email that he "went through the Diligence Reports and think[s] [they] should start praying ... [he] would not be surprised if half of these loans went down ... It's amazing that some of these loans were closed at all."  Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars. This conduct, along with similar conduct by other banks that bundled defective and toxic loans into securities and misled investors who purchased those securities, contributed significantly to the global financial crisis.

Of the $7 billion resolution, $4.5 billion was paid to settle federal and state civil claims by various entities related to RMBS ($4 billion as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery and Enforcement Act, $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation, $102.7 million to settle claims by California, $92 million to settle claims by New York, $44 million to settle claims by Illinois, $45.7 million to settle claims by Massachusetts, and $7.35m to settle claims by Delaware.

Citigroup was required to pay out the remaining $2.5 billion in the form of relief to aid consumers harmed by its unlawful conduct. That relief took various forms, including loan modification for underwater homeowners, refinancing for distressed borrowers, down payment and closing cost assistance to homebuyers, donations to organisations assisting communities in redevelopment and affordable rental housing for low-income families in high-cost areas. An independent monitor was appointed to determine whether Citigroup satisfied its obligations by the end of 2018, with an obligation for it to pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organisation and leader in providing affordable housing and facilitating community development.

The settlement did not absolve Citigroup or its employees from facing any possible criminal charges.

ASICA s12DG(1) - Bait Advertising
A person must not, in trade or commerce, advertise financial services for supply at a specified price, if there are reasonable grounds, of which the person is aware or ought reasonably to be aware, for believing that the person will not be able to offer for supply those services at that price:
(a)   for a period that is, and                                                                                
(b)   in quantities that are;
reasonable having regard to the nature of the market in which the person carries on business and the nature of the advertisement.

ASICA s12DG(2) provides that a person who has, in trade or commerce, advertised financial services for supply at a specified price must offer such services for supply at that price for a period that is, and in quantities that are, reasonable having regard to the nature of the market in which the person carries on business and the nature of the advertisement.

For an example of bait advertising, see ASIC Media Release 06-276, announcing an agreed suspension by Aussie Credit Cards of a higher interest rate for cash advances, following concerns raised by ASIC that it may have engaged in bait advertising. The Aussie MasterCard was widely advertised as having a 'low ongoing rate' of 9.99% p.a. Television advertisements for this flat rate aired until early May 2006, and online advertising continued until 20 June 2006. In early June, Aussie introduced a higher rate of 13.99% p.a. on cash advances, to take effect on 10 August 2006. Existing customers received written notification of the impending change in mid to late June. Aussie altered its advertising to reflect this change, limiting references to the 9.99% p.a. rate to purchases and referring to the higher rate applying to cash advances. However, ASIC was concerned this change was not simply a variation to a variable interest rate, but rather a structural change that considerably altered the product being offered to consumers. Consumers responding to advertising as late as mid-June would find themselves with a very different card come 10 August. In ASIC's view, this was well short of the reasonable period required by law that financial services must be available when they are advertised at a specified price.

ASICA s12DH(1) - Referral Selling
A person must not, in trade or commerce, induce a consumer to acquire financial services by representing that the consumer will, after the contract to acquire the services is made, receive a rebate, commission or other benefit in return for:
(a)   giving the person the names of prospective customers; or
(b)   otherwise assisting the person to supply financial services to other consumers;
if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.

Referral selling occurs where a business induces a consumer to buy goods or services with promises that the consumer will receive a rebate or other benefit in return for helping introduce more customers. Typically, the promoter pays commissions or rebates only if a new recruit satisfies some condition after he or she joins the scheme, such as purchasing products or paying a membership fee.

This conduct is made illegal for fear that the consumer will be induced to pay a higher price for a product than they would normally be willing to pay, because of the prospect of receiving a future rebate or commission. However, as this rebate is conditional upon an introduced party satisfying some condition (such as purchasing an item or paying a membership fee), there is often a chance that the consumer will never receive this rebate. In addition, typically the only parties who benefit from such systems are the promoters. When no more consumers can be recruited into the system (and therefore no more rebates are available), the schemes tend to collapse, leaving the majority of consumers out of pocket.

These provisions occasionally arise in the context of financial services. In 2001, the ACCC obtained an injunction to prevent the promotion of a home loan scheme by Guardian Finance and Insurance Consultants Pty Ltd, which it alleged amounted to an illegal pyramid selling scheme or referral selling scheme. The scheme involved a reducible home loan where consumers who took out a loan would receive a 0.1% reduction in their interest rate for each customer they successfully referred to Guardian Finance and Insurance Consultants. See ACCC Media Release 91/01.

ASICA s12DI(1) and (3) - Accepting Payment Without Intending to Supply
If a person, in trade or commerce, accepts payment or other consideration for financial services and:
•     at the time of acceptance, the person intends:
  •     not to supply the financial services; or
  •     to supply financial services materially different from the financial services in respect of which the payment or other consideration is accepted,
  they contravene s12DI(1); or
•     at the time of acceptance, there are reasonable grounds for believing that the person will not be able to supply the financial services within the period specified by the person or, if no period is specified, within a reasonable time, they contravene s12DI(3).

 

ASICA s12DJ(1) - Harassment and Coercion
A person contravenes this section if the person uses physical force or undue harassment or coercion in connection with the supply or possible supply of financial services to a consumer, or the payment for financial services by a consumer.

In ACCC v Davis [2003] FCA 1227, the ACCC instituted proceedings against Esanda Finance Corporation, a tow truck company and six individuals (three debt collectors and three tow truck operators) alleging that their conduct in entering the customer's home and pinning him to the ground while they re-possessed a car amounted to undue harassment and unconscionable conduct in breach of former TPA s60 (the equivalent to ASICA s12DJ) and, in the case of the individuals, the former WA Fair Trading Act. Consent orders were made against Esanda and some of the other defendants, including an order requiring Esanda to pay $20,000 compensation to the customer and his wife. The individual tow truck operators, who were not part of the consent orders, were found to have aided and abetted and to have been knowingly concerned in Esanda's unconscionable conduct by not stopping their attempts to re-possess the car when they had reasonable cause to believe a physical confrontation may occur if they continued. Two of them were also found to have contravened section 23 of the WA Fair Trading Act by physically restraining the customer while the vehicle was being removed.

ASICA s12DK - Pyramid Selling of Financial Products
It is unlawful for a person who is a promoter of or participant in a pyramid selling scheme in relation to financial products to receive payments under the scheme (s12DK(1)), to attempt to induce others to join the scheme or, if they are already members, to make a payment as part of the scheme (s12DK(2)) or otherwise to promote the scheme (s12DK(3)).

Pyramid selling scheme is defined in s12DK(5).

Pyramid selling is closely related to referral selling, with the difference often being quite fine. The defining characteristics of pyramid schemes are: (1) new participants make a payment to an existing member to join the scheme; and (2) the 'joining fee' is paid predominantly on the promise that new participants will be entitled to earn similar payments for introducing more members to the scheme. Pyramid schemes do not necessarily involve the sale of any actual products. Conversely, the existence of a product for resale does not necessarily exclude a scheme from being classified as pyramid selling.

The structure of pyramid schemes makes it near impossible for later recruits to earn money and recoup their investment. The promoters, those at the top of the pyramid, make the most money as they get a share of the fees paid by each new recruit to the scheme. As more and more members join, the market quickly becomes saturated, i.e. no new recruits are available or there is no further interest in the product. Once the market has become completely saturated, it is impossible for those on the lower levels of the scheme to recoup their investment.

ASICA s12DL - Unsolicited Credit and Debit Cards
•     A person must not send another person a credit card or debit card unless they do so in pursuance of a request in writing by a person who will be under a liability to the issuer of the card in respect of its use or in renewal or replacement of, or substitution for, a previous card of the same kind issued to that person (ss12DL(1) and (2)).
•     A person must not take any action that enables another person who has a credit card to use it as a debit card, or who has a debit card to use it as a credit card, except in accordance with a request in writing by the other person (s12DL(4)).

See ASIC Regulatory Guide RG 201 Unsolicited credit cards and debit cards and Westpac Banking Corporation v ASIC [2009] FCA 1506 (holding that a debit card with additional functions provided by a bank to an existing customer in substitution for his or her existing debit card with less functions is still "a card of the same kind").

ASICA s12DM(1) - Asserting a Right to Payment for Unsolicited Services
A person must not, in trade or commerce, assert a right to payment from another person for unsolicited financial services or unsolicited financial products.

The meaning of "asserting a right to payment" is expanded in s12BEA(1). It is a defence if the person has reasonable cause to believe that there is a right to payment (s12DM(1A)).

ASICA s12DMA provides that if a person, in trade or commerce, supplies unsolicited financial services or unsolicited financial products to another person, the other person: (a) is not liable to make any payment for the services or products; and (b) is not liable for loss or damage as a result of the supply of the services or products.

ASICA s12DMB also prohibits asserting a right to payment for unauthorised advertisements.

Consequences of Breach
•     Criminal offence - 2,000 penalty units for an individual and 10,000 penalty units for a body corporate (see s12GB)
•    

Pecuniary penalties of up to 2,000 penalty units for an individual and 10,000 penalty units for a body corporate (s12GBA)

•     Civil liability for damages to anyone who suffers loss or damage as a result (s12GF)
•     Injunctions (s12GD)
•     Punitive orders (s12GLB) to disclose information or publish advertisements
•     Non-punitive orders (s12GLA)
•     Compensation orders (s12GM)
•    

Orders to redress loss or damage suffered by non-party consumers (s12GNB)

•    

In some cases, infringement notices (s12GXA)

•     If person infringing is a licensed dealer or its representative - cancellation or suspension of licence (ss915C(1)(a) and 912A(1)(c)) or banning order (s920A(1)(e)) for breach of a financial services law.

The criminal offence and pecuniary penalties extend to any person who: (a) aids, abets, counsels or procures a person to contravene; (b) induces, or attempts to induce, a person whether by threats or promises or otherwise, to contravene; (c) is in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) conspires with others to contravene (ss12GB(1) and 12GBA(1)). The pecuniary penalties also apply to a person who attempts to contravene (s12GBA(1)(b)). Similarly, the liability to civil damages under s12GF extends to any person "involved in the contravention". So if a body corporate breaches these rules, any officer knowingly concerned in the breach is potentially liable to a criminal and pecuniary penalties and damages.

CA s1041G - Dishonest Conduct
•     A person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service (s1041G(1)).
•     For these purposes, "dishonest" means:
  •     dishonest according to the standards of ordinary people; and
  •     known by the person to be dishonest according to the standards of ordinary people (s1041G(2)).

A possible example of dishonest conduct from the UK - Wonga, a UK payday loans company, sent letters to customers from fake law firms "Chainey, D'Amato & Shannon" and "Barker and Lowe Legal Recoveries" (firms that did not exist) demanding repayments of loans in arrears. The tactic was used to make customers believe their debt had been escalated to legal action, and in some cases fees for sending the letters were added to overdue accounts. The Financial Conduct Authority said that the company had committed serious misconduct by asserting pressure on clients who were already in the difficult position of arrears. Wonga was required by to pay customers a total of £2.6 million in compensation (see http://www.fca.org.uk/news/wonga-redress-unfair-debt-collection-practices).

Consequences of Breach
•     Criminal offence punishable by:
  •     in the case of an individual, 10 years’ jail and/or a fine equal to the greater of: (a) 4,500 penalty units; or (b) if the court can determine the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence, 3 times that total value; and
  •     in the case of a body corporate, a fine equal to the greatest of: (a) 45,000 penalty units; or (b) if the court can determine the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence, 3 times that total value; or (c) if the court cannot determine the total value of those benefits, 10% of the body corporate’s annual turnover during the 12-month period ending at the end of the month in which the body corporate committed, or began committing, the offence (s1311)
•     Civil liability for damages to anyone who suffers loss or damage as a result (s1041I)
•     Injunctions (s1324)
•     Order to disclose information or publish advertisement (s1324B)
•     Compensation orders (s1325)
•     If person infringing is a licensed dealer or its representative - cancellation or suspension of licence (ss915C(1)(a) and 912A(1)(c)) or banning order (s920A(1)(e)) for breach of a financial services law.

Again, the liability for civil damages under s1041I extends not only to those who contravene but also to any person who is "involved in the contravention".

Return to Outline


Unconscionable Conduct

Australian Securities and Investments Commission Act
A person must not in trade or commerce:
•     engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories (s12CA); or
•     in connection with:
  •     the supply or possible supply of financial services to a person (other than a listed public company); or
  •     the acquisition or possible acquisition of financial services from a person (other than a listed public company),
  engage in conduct that is, in all the circumstances, unconscionable (s12CB(1)).
See GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd, above, and ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18.

These sections correspond to the unconscionable conduct provisions in ACL ss20 and 21.

Instituting legal proceedings or referring a matter to arbitration is not per se unconscionable under s12CB(1) (s12CB(2)).

In determining whether something is unconscionable under s12CB(1), a court must not have regard to factors that were not reasonably foreseeable at the time of the alleged contravention (s12CB(3)).

ASICA s12CB(4) provides that it is the intention of the Parliament that s12CB is not limited by the unwritten law of the States and Territories relating to unconscionable conduct and is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour. It also provides that in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of: (i) the terms of the contract; and (ii) the manner in which and the extent to which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract.

In GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd, Giles J held that s12CA was not directed to the broad range of equitable remedies available when a person did something unfair or unconscionable but rather the narrow equitable doctrine of unconscionability dealt with by the High Court in Commonwealth Bank v Amadio ie where a party makes unconscientious use of their superior position or bargaining power to the detriment of another party who suffers from some special disability or is placed in some special situation of disadvantage. Its purpose was to add the remedies available under the ASICA to the limited range of remedies available under the common law for unconscionable conduct (usually no more than an order setting aside the transaction).

In ACCC v CG Berbatis Holdings Pty Ltd, a majority of the High Court found that the lessors of premises in a shopping centre had not breached former TPA s51AA (the equivalent of ASICA s12CA) when they stipulated, as a condition of their consent to a proposed renewal of a lease, a requirement that the lessees abandon certain legal claims against them. The lessees, who were trying to secure an extension of their lease to facilitate a sale of their business on advantageous terms, had no option to renew their lease and were therefore in a difficult bargaining position. However, the fact that the lessors exploited that did not involve them taking advantage of some special disability or disadvantage of the lessees and therefore was not "unconscionable within the meaning of the unwritten law of the States", as referred to in section 51AA.

ASICA s12CC - Relevant Factors to Assessing Unconscionability Under s12CB(1)
(a)   The relative strengths of the bargaining positions of the parties.
(b)   Whether a party was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party.
(c)   Whether a party was able to understand any documents relating to the transaction.
(d)   Whether any undue influence or pressure was exerted on, or any unfair tactics were used against, a party.
(e)   The amount for which, and the circumstances in which, a party could have supplied/acquired equivalent financial services to/from another person.
(f)   The extent to which a party's conduct was consistent with their conduct in similar transactions with other parties.
(g/h)  Whether conduct was consistent with any applicable industry code.
(i)   The extent to which a party unreasonably failed to disclose certain matters to the other party.
(j)   If there is a contract between the parties:
  (i)   the extent to which a party was willing to negotiate the terms and conditions of the contract;
  (ii)   the terms and conditions of the contract;
  (iii)   the conduct of a party in complying with the terms and conditions of the contract; and
  (iv)  

any conduct that a party engaged in, in connection with their commercial relationship, after they entered into the contract.

(k)   Whether a party has a unilateral right to vary the contract between the parties.
(l)   The extent to which the parties acted in good faith.

This is not an exhaustive list - the court can consider other factors in addition to these.

Consequences of Breach
•     Not a criminal offence (see section 12GB)
•    

Pecuniary penalties of up to 2,000 penalty units for an individual and 10,000 penalty units for a body corporate (s12GBA)

•     Civil liability for damages to anyone who suffers loss or damage as a result (s12GF)
•     Injunctions (s12GD)
•     Punitive orders (s12GLB) to disclose information or publish advertisements
•     Non-punitive orders (s12GLA), including orders to disclose information or publish advertisements
•     Compensation orders (s12GM)
•    

Orders to redress loss or damage suffered by non-party consumers (s12GNB)

•    

Infringement notices (s12GXA)

•     If person infringing is a licensed dealer or its representative - cancellation or suspension of licence (ss915C(1)(a) and 912A(1)(c)) or banning order (s920A(1)(e)) for breach of a financial services law.

Again, the pecuniary penalties under s12GBA extend to any person who: (a) attempts to contravene; (b) aids, abets, counsels or procures a person to contravene; (c) induces, or attempts to induce, a person whether by threats or promises or otherwise, to contravene; (d) is in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (e) conspires with others to contravene (s12GBA(1)). Similarly, the liability to civil damages under s12GF extends to any person "involved in the contravention".

CA s991A - Unconscionable Conduct
(1)   A financial services licensee must not, in or in relation to the provision of a financial service, engage in conduct that is, in all the circumstances, unconscionable.
(2)   If a person suffers loss or damage because a financial services licensee contravenes s991A(1), the person may recover the amount of the loss or damage by action against the licensee.
(3)   An action under s991A(2) may be begun at any time within 6 years after the day on which the cause of action arose.
(4)   This section does not affect any liability that a person has under any other law.

Unlike the ASICA provision, there are no guidelines as to what is unconscionable in all the circumstances. It is unclear why it was included in the FSR reforms, given the unconscionable conduct provisions in the ASICA.

Return to Outline


Unfair Contracts

ASICA s12BF(1) - Unfair Terms in Consumer Contracts Void
A term of a consumer contract or small business contract is void if:
(a)   the term is unfair;
(b)   the contract is a standard form contract; and
(c)   the contract is:
  (i)   a financial product; or
  (ii)   a contract for the supply, or possible supply, of services that are financial services.

These provisions were introduced into the ASICA by the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 and came into force on 1 July 2010. They originally applied just to consumer contracts but will be extended on 12 November 2016 to apply to small business contracts as well. They have their counterpart in ACL Part 2-3.

The contract continues to bind the parties if it is capable of operating without the unfair term (s12BF(2)).

A "consumer contract" is a contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption (s12BF(3)).

The phrase "personal, domestic or household use" is not defined, although there is a reasonable amount of case law on its meaning under the former TPA. For example, in Begbie v State Bank of New South Wales, the court held that the provision of a $250,000 overdraft for the purpose of assisting a corporation to buy a business and undertake a commercial property development, as well as to enable a director to pay off his personal indebtedness to another, was not a service acquired for personal, domestic or household use and therefore fell outside the unconscionability provisions in the former TPA s51AB (that section only applied in relation to goods or services supplied or acquired for personal, domestic or household use). A common law unconscionability claim did succeed however (a widow in her mid 40s being duped into giving a mortgage over land to secure an overdraft which was used by her boyfriend director both for legitimate purposes and to fund personal debts).

A "small business contract" is a contract where at least one party to the contract is a business that employs fewer than 20 persons and either: (i) the upfront price payable under the contract does not exceed $300,000; or (ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000 (s12BF(4)). In counting the persons employed by a business for these purposes, a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis (s12BF(5)). Also, in working out the upfront price payable under a contract under which credit is or is to be provided, any interest payable under the contract is disregarded (s12BF(6)).

ASICA s12BF does not apply to a term of a contract to the extent that, but only to the extent that, the term: (a) defines the main subject matter of the contract; (b) sets the upfront price payable under the contract; or (c) is a term required, or expressly permitted, by a law of the Commonwealth or a State or Territory (s12BI(1)). It also does not apply to the constitution of a company, managed investment scheme or other kind of body (s12BL).

If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise (s12BK(1)).

ASICA s12BK(2) provides that in determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account: (a) whether one of the parties has all or most of the bargaining power relating to the transaction; (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in s12BI(1)) in the form in which they were presented; (d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in s12BI(1); (e) whether the terms of the contract (other than the terms referred to in s12BI(1)) take into account the specific characteristics of another party or the particular transaction; and (f) any other matter prescribed by the regulations.

ASICA s12BG(1) – Meaning of Unfair
A term of a contract referred to in s12BF(1) is unfair if:
(a)   it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
(b)   it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c)   it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term of a contract is unfair under s12BG(1), a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent and the contract as a whole (s12BG(2)).

For these purposes, a term is "transparent" if the term is: (a) expressed in reasonably plain language; (b) legible; (c) presented clearly; and (d) readily available to any party affected by the term (s12BG(3)).

A term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise (s12BG(4)).

ASICA s12BH lists examples of contract terms that are potentially unfair. It includes a term that: (a) permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; (b) permits, or has the effect of permitting, one party (but not another party) to terminate the contract; (c) penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; (d) permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; (e) permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; (f) permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; (g) permits, or has the effect of permitting, one party unilaterally to vary financial services to be supplied under the contract; (h) permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning; (i) limits, or has the effect of limiting, one party’s vicarious liability for its agents; (j) permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; (k) limits, or has the effect of limiting, one party’s right to sue another party; (l) limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; (m) imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; (n) is of a kind, or has an effect of a kind, prescribed by the regulations.

Return to Outline


Implied Consumer Warranties

ASICA s12ED(1) - Implied Warranty in Provision of Services
In every contract for the supply of financial services by a person to a consumer in the course of a business, there is an implied warranty that:
(a)   the services will be rendered with due care and skill; and
(b)   any materials supplied in connection with those services will be reasonably fit for the purpose for which they are supplied.

 

ASICA s12ED(2) - Implied Warranty re Fitness for Purpose
If:
(a)   a person supplies financial services to a consumer in the course of a business; and
(b)   the consumer, expressly or by implication, makes known to the person:
  (i)   any particular purpose for which the services are required; or
  (ii)   the result that he or she desires the services to achieve;
there is an implied warranty that:
(c)   the services supplied under the contract for the supply of the services; and
(d)   any materials supplied in connection with those services;
will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the person's skill or judgment.

ASICA s12BC(1) provides that services are acquired by a "consumer" if:

(a) the price of the services did not exceed the prescribed amount (currently $40,000: s12BC(3));

(b) if the price of the services exceeded the prescribed amount - the services were of a kind ordinarily acquired for personal, domestic or household use or consumption; or

(c) if the services were acquired for use or consumption in connection with a small business and the price of the services exceeded the prescribed amount - the services were of a kind ordinarily acquired for business use or consumption.

ASICA s12BC(2) defines a "small business" as a business employing less than 100 people if it is or includes the manufacture of goods and otherwise a business employing less than 20 people.

ASICA s12ED(2) doesn't apply to services that are, or are to be, provided, granted or conferred under a contract of insurance (s12ED(3)).

ASICA s12EA - Conflict of Laws
If:
(a)   the proper law of a contract for the supply by a person of financial services to a consumer would, but for a term that it should be the law of some other country or a term to the like effect, be the law of any part of Australia; or
(b)   a contract for the supply by a person of financial services to a consumer contains a term that purports to substitute, or has the effect of substituting, provisions of the law of some other country, or of a State or Territory, for all or any of ss12EA to 12ED;
ss12EA to 12ED apply to the contract notwithstanding that term.

 

ASICA s 12EB - Application Not to be Excluded or Modified
A term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) is void if it purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying:
(a)   the application of all or any of the provisions in ss12EA to 12ED;
(b)   the exercise of a right conferred by such a provision; or
(c)   any liability of the person for breach of a condition or warranty implied by such a provision.
A term of a contract is not taken to exclude, restrict or modify the application of a provision of ss12EA to 12ED unless the term does so expressly or is inconsistent with that provision.

 

ASICA s12EC - Limitation of Liability
A term of a contract for the supply by a person (the supplier) of financial services other than services of a kind ordinarily acquired for personal, domestic or household use is not void under s12EB merely because the term limits the liability of the supplier for a breach of a condition or warranty to:
(a)   the supplying of the services again; or
(b)   the payment of the cost of having the services supplied again.
This does not apply in relation to a term of a contract if the person to whom the services were supplied establishes that it is not fair or reasonable for the supplier to rely on that term of the contract.

In determining whether or not reliance on a term of a contract is fair or reasonable, s12EC(3) requires a court to have regard to all the circumstances of the case and, in particular, to (a) the strength of the bargaining positions of the supplier and the person to whom the services were supplied (the buyer) relative to each other, taking into account, among other things, the availability of equivalent services and suitable alternative sources of supply; (b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity to acquire the services or equivalent services from any source of supply under a contract that did not include that term; and (c) whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).

Return to Outline


Compliance Programs

ACCC View of Essential Ingredients
The essential ingredients of an effective compliance program are:
1.    Total commitment by senior management to compliance.
2.    A compliance policy, which needs to include a clear statement of the company's commitment to compliance with applicable laws, regulations, codes and organisational standards. This policy needs to be understood and acted on by those who work for the company, whether internally or externally.
3.    An operational system that will address the problems identified through the audit and ensure breaches of the law will be avoided. Typically, the system will consist of, but not be limited to:
  •     compliance management procedures used to support the compliance systems, such as ongoing legal obligation identification, trade practices training programs, breach monitoring and reporting, disciplinary policy/code and complaint handling;
  •     documented due diligence procedures to ensure promotional materials are not misleading or deceptive;
  •     incentive/reward schemes for those employees who are diligent in complying with the law;
  •     in-house vetting committees with trade practices expertise;
  •     checking of contracts by trade practices practitioners; and
  •     product testing.
4.    Maintenance of the compliance program. The compliance program and systems should be monitored, maintained and communicated to staff to ensure that they continue to be both effective and efficient. This should be done, among other things, through:
  •     record keeping;
  •     regular and ongoing in-house compliance auditing to ensure that compliance failures are identified and addressed on a proactive basis;
  •     regular external reviews by someone with independent expertise (e.g. every two years) to ensure that the system is properly maintained and is meeting current regulatory requirements;
  •     ongoing liaison with regulatory authorities. [ACCC, Forward and Introduction, "Best and Fairest" Compliance Manual: a Trade Practices Training Program"]

The "Best and Fairest" Compliance Manual has been rendered redundant by changes to the law and is no longer in production.

Suggestions as to What Should Your Compliance Program Cover
•     A general statement of principle that while competition is expected to be vigorous, it must be fair and comply with applicable laws.
•     You must not denigrate competitors or their goods and services.
•     You must not discuss or collude with competitors about prices charged to customers or paid to suppliers.
•     In auction or tender situations, you must not discuss or collude with competitors beforehand about prices to be bid/tendered.
•     You must not enter into any agreements or arrangements with another competitor or competitors to divide up any market (whether by reference to products/services, customers, territory or revenue).
•     You must not enter into any agreements or arrangements with another competitor or competitors to boycott or impose restrictions on a fellow competitor or a customer or supplier.
•     No condition to be imposed on a customer or supplier that they must acquire goods or services from a third party.
•     No condition to be imposed on a customer or supplier that they must deal exclusively with the house or not deal with a competitor without specific approval from the Legal Department.
•     All joint ventures, joint assignments or joint marketing arrangements with competitors (excluding lending or underwriting syndicates on normal terms) must be approved by the Legal Department.
•     Guidance on unfair trading practices in ASICA part 2 div 2 subdiv D.
•     Guidance on misleading and deceptive conduct and how to avoid it.
•     If you deal with retail customers or small businesses, guidance on unconscionable conduct and how to avoid it.

Return to Outline


Copyright © 2002-2016 Inhouse Legal Solutions Pty Limited ABN 16 003 663 456.