Cigarette packaging up in smoke
Proposed legislation that would only allow the sale of cigarettes in plain packaging has raised the ire of tobacco companies. The issue received further prominence during the Federal election campaign when an alliance, in part funded by tobacco interests, publicly campaigned against the changes.
The government's proposal, which is due to come into effect by 2012, requires cigarettes be sold in plain brown packaging, uniform in colour, shape and material.
The removal of logos and other design elements means that brands will only be differentiated by their brand name, printed in a small standard font.
Health warnings and graphic images of smoking-related diseases will remain.
Although the legislation aims to reduce smoking-related illnesses and deaths, some tobacco companies are threatening to sue over the new laws, which they claim are unconstitutional.
Under the Australian Constitution, a person whose property is acquired by the government is entitled to compensation on “just terms”. Property rights attach to intellectual property such as trademarks and patents.
Tobacco companies argue that the government’s legislation will erode and devalue their cigarette packaging trademarks, and therefore they ought to be “justly compensated” for their losses.
Tobacco companies also argue that the proposed new laws infringe the Trade-Related Aspects of Intellectual Property Rights Agreement 1994 (TRIPS), to which Australia is a party.
Article 20 of TRIPS provides that the use of a trademark is not to be unjustifiably encumbered in a manner detrimental to its capability to distinguish goods or services from each other.
Experts argue that TRIPS and the international trade agreements do not offer the protection claimed by the tobacco companies and that, since the government will not actually obtain any advantage or benefit – constituting an “acquisition” for the purposes of the Constitution – the government will not be liable to pay compensation.
The introduction of plain cigarette packaging by governments is not new. Neither is its opposition by tobacco companies.
The first intellectual property rights challenge against a state was brought in 1994 when two United States tobacco companies threatened to lodge an investor-state complaint against Canada, pursuant to the North American Free Trade Agreement (NAFTA), after the Canadian government attempted to introduce a requirement that cigarettes be sold in generic plain packaging.
The proposed legislation was highly controversial and, according to tobacco companies, tantamount to “a compensable expropriation” of their trademark rights.
The legislation was eventually struck down by the Canadian Supreme Court, not on the basis that it was a violation of the tobacco companies’ intellectual property rights, but on the basis that it was in violation of constitutional freedom of expression under the Canadian Charter of Rights and Freedoms. Australia does not have an equivalent Charter or Bill of Rights.
Trademark law is aimed at protecting broader public purposes and does not grant absolute property rights. Australian National University intellectual property law expert Dr Matthew Rimmer argues that, for this reason, governments have discretion to entirely take away trademark protection in certain circumstances.
A trademark will not be granted, for example, for something that is contrary to law, or in relation to subject matter that is scandalous.
So, while the proposed laws need to ensure existing rights, such as the freedom of the use of physical and intellectual property, are protected, the government retains the overarching power to make laws that aim to achieve social and public interest benefits, such as the benefits to health experts contend will follow the introduction of plain cigarette packaging.
National consumer laws herald new frontier for business and consumers
Reforms to consumer protection laws are set to alter Australia’s retail landscape and change the way SMEs do business.
A package of reforms known as the Australian Consumer Law (ACL), will come into effect over the next 6 months.
These reforms follows a new national unfair contract terms regime that came into force at Commonwealth level, and in NSW and Victoria, on 1 July 2010. SMEs that are regulated by Commonwealth legislation also face new enforcement and remedy provisions.
The ACL replaces consumer protection law that has until now been contained in the Trade Practices Act 1974 (TPA), the Australian Securities & Investments Commission Act 2001 (ASIC Act), and 16 separate State and Territory Acts.
It is the first time that unfair contract terms in standard form consumer contracts will be nationally regulated, ensuring consistency throughout the country.
The national regulations place significant power in the hands of the Courts as the sole authority, that can declare whether a term in a standard form consumer contract is ‘unfair’.
Relying on a term in a consumer contract a Court has declared unfair will contravene the ACL and risk injunctions, damages or compensatory orders and redress for non-parties.
Slater & Gordon’s General Manager Business & Private Client Services Rod Cunich said it was imperative that SMEs seek legal advice “sooner rather than later” as they consider the implications of the ACL.
“It is important that small and medium enterprises ensure that their business practices, including their standard form consumer contracts, are compliant with the legislation,’’ said Mr Cunich.
The first phase of the ACL which began in July, introduced new enforcement powers and remedies into the TPA, including civil penalties, disqualification orders, substantiation notices and infringement notices.
SMEs that receive a substantiation or infringement notice from ASIC or the Australian Competition & Consumer Commission (ACCC) will need to formulate a “prompt and considered response”, said Mr Cunich.
If the response is not appropriate and compliant with the legislation, then further action may be taken, including enforcement through the Courts.
Mr Cunich said SMEs should seek prompt legal advice if they find themselves on the end of a potential disqualification order or substantiation or infringement notice.
“Failure to provide a response that complies with the legislation or fails to satisfy the relevant enforcement agencies may result in the matter being escalated,” he said.
Although the unfair contract term regime applied to consumer-to-business transactions, it did not extend to include business-to-business transactions, said Mr Cunich.
“This means, for example, that a small business caught by an unfair term in a supply contract with a larger business is not protected by the unfair terms regime,” he said.
“It may be prudent for SMEs to seek legal advice for business-to-business transactions because SMEs will have no protection from unfair terms under the ACL.”
The new national regulation of unfair contracts provides that a term in a standard form consumer contract is ‘unfair’ if it:
- would cause a significant imbalance in the parties’ rights and obligations
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it, and,
- would cause detriment to a party if it were relied on.
The legislation requires Courts to take into account the contract as a whole, and the extent to which the term in question is transparent, in determining whether a contract term is unfair.
This sweeping round of reforms is considered the most extensive change to consumer protection laws in Australia since the introduction of the Trade Practices Act 1974 (Cth) (TPA). The TPA will be renamed the Competition and Consumer Act 2010 from 1 January 2011.
The next phase of ACL reforms will be contained in the Trade Practices Amendment (Australian Consumer Law) Bill (No. 2) 2010 (Cth) and will introduce a new national product safety system, a national consumer guarantee regime (replacing existing laws on conditions and warranties), and expanded protection against unconscionable conduct contained in the TPA and the ASIC Acts.
The Federal and State Governments have committed to implementing the complete round of changes by 1 January, 2011.
Spotlight on Leonie's Travel v Qantas Airways Ltd
Multi-million dollar win for travel agents
Leonie’s Travel Pty Ltd v QANTAS Airways Ltd [2010] FCA FC 37 *
International airline Qantas stands liable for a multi-million dollar payout to travel agents after failing to pay them commission for collecting a fuel surcharge on sales of international airline tickets.
The landmark decision by the Full Court of the Federal Court of Australia paves the way for further payouts to Australian travel agents by the world’s major airlines, and confirms that international commercial contracts should be interpreted uniformly wherever possible.
Background
In May 2004, because of the escalating cost of fuel, Qantas and other airlines introduced a fuel surcharge for both international and domestic itineraries.
At the time, Qantas informed travel agents that although it would pay a commission in exchange for collecting the fuel surcharge, the commission would only apply to the sale of domestic, but not international, airline tickets.
The proceedings
In 2006, Leonie’s Travel began a class action against Qantas and five major airlines alleging that Qantas had breached the International Air Transport Association (IATA) Passenger Sales Agency Agreement. The agreement governs the financial relationship between airlines and the travel agents who sell tickets on their behalf.
The issue before the Court was whether Qantas was entitled to unilaterally determine that no commission was payable to agents in exchange for collecting the fuel surcharge component of an international ticket.
In his March 2009 judgment, the Trial judge, Justice Moore, found that Qantas was not required to pay commission to travel agents on the fuel surcharge component of international airline tickets, even if the fuel surcharge was within the terms of the IATA Passenger Sales Agency Agreement, and even if that would ordinarily require a commission to be paid. Instead, Justice Moore found Qantas was entitled to determine that it would pay commission only on domestic airline tickets.
In arriving at his decision, Justice Moore found that an earlier decision of the English Court of Appeal (Association of British Travel Agents Ltd v British Airways Plc [2000] 2 All ER (Comm) 204) ought not to be followed in this case, even though the Court in that decision had found the relevant clause of the Agency Agreement did not confer on airlines the power to unilaterally change the rights and obligations of the parties in the Sale Agency Rules.
The Appeal
Justice Moore’s decision was appealed to the Full Court of the Federal Court. In its judgment in May 2010, the Full Court disagreed with the trial judge’s decision and ordered that commission was in fact payable to travel agents on the fuel surcharge component of international tickets. The Court found that the English Court of Appeal’s decision was right and ought to have been followed by the trial judge.
Their Honours commented that “…there is an obvious commercial imperative for the courts of other nations to follow the decision of a court of the standing of the Court of Appeal in proceedings such as these… An invidious commercial result would come about if other courts ignored such a decision, and construed these documents differently.”
Qantas has applied for special leave to appeal to the High Court of Australia.
* Slater & Gordon are the solicitors for Leonie’s Travel Pty Ltd. For further information please contact Steven Lewis, Practice Group Leader on (02) 8267 0632.
Case Notes
Case 1: CPR Property Pty Ltd & Anor v New South Wales Land & Housing Corporation & the State of New South Wales [2010] FCA FC 32 *
Case 2: Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152
Case 3: Mcgrath and Anor Re HIH Insurance Ltd and Ors [2010] NSWSC 404
Contracts with Government carry same commercial risk as any other
[2010] FCA FC 32 *
Government departments are no different to private entities when it comes to their entitlement to make decisions that meet their commercial interests and obligations of care, Even if those decisions have an adverse effect on a contractor according to a recent Federal Court decision.
Background
In 2002, Mr Robert Hine successfully tendered and was sub-contracted to carry out maintenance work on Western Sydney properties owned by the NSW Land & Housing Corporation (“the Corporation”).
Some years later, the Corporation restructured its maintenance services, entering into head contracts with Transfield Services Australia Pty Ltd and Willowdene Constructions Pty Ltd. At the same time, the Corporation directed Mr Hine set up a company - CPR Property Pty Ltd - to provide maintenance services under sub-contracts with Transfield and Willowdene.
By 2004, CPR had a turnover of more than $1 million and employed in excess of 20 workers.
That all changed on 24 March 2004, when the Corporation issued a Clause 16 Notice to Transfield and Willowdene directing them to stop using Mr Hine and CPR because the Corporation regarded them as 'unsuitable'.
Clause 16 of the head contract with Transfield and Willowdene empowered the Corporation to prohibit both companies from using sub-contractors that the Corporation reasonably regarded as being ‘incompetent, negligent or otherwise unsuitable’.
At the time the Clause 16 notice was issued, the Corporation was investigating one of its employees for misconduct, including inappropriate contact between the employee and Mr Hine. Mr Hine was given no opportunity to participate in the investigation, nor given reasons for his prohibition from working for the Corporation. The CPR business collapsed overnight.
The proceedings
Mr Hine and CPR commenced proceedings in the Federal Court in 2007 claiming, amongst other things, that the Clause 16 Notice amounted to a misrepresentation because it conveyed a permanent prohibition on him and CPR, whereas the state of mind of the Corporation’s decision makers was that the prohibition was temporary, pending the outcome of the Corporation’s investigation.
Mr Hine and CPR also alleged that by failing to take reasonable care in issuing the Clause 16 Notice, the Corporation had breached its duty of care.
The findings
The trial judge, Justice Jagot, rejected Mr Hine’s claim of misrepresentation and the contention that any distinction existed between a permanent and temporary prohibition.
Her Honour concluded that the Corporation’s opinion had been reached by a rational process - namely the Corporation’s investigation - and that their findings had warranted issuing the Clause 16 Notice.
Her Honour also rejected the argument that the Corporation owed Mr Hine and CPR a duty to take reasonable care issuing the notice. Her Honour found that not only did the case not fall into any established category of liability that imposed negligence, but that the relationship between the parties “cannot be affected by any generalised notion that government agencies should somehow be better or fairer than private entities in their commercial dealings”.
Although Justice Jagot accepted that issuing the Notice “involved a reasonably foreseeable risk of harm” to Mr Hine and CPR, Her Honour found that Mr Hine could have taken steps to protect his business from the consequences of the Corporation’s want of care.
Her Honour concluded that to find a duty of care would “impose an unreasonable burden on the autonomy” of the Corporation.
The Appeal
Justices Emmett, Stone and Flick of the Full Court of the Federal Court dismissed the appeal, rejecting that the Clause 16 Notice amounted to a misrepresentation.
* Slater & Gordon acted as the solicitors for Mr Hine and CPR Property Pty Ltd. For any further information, please contact Vicky Antzoulatos, Senior Associate, Commercial & Project Litigation, 02 8267 0619.
Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic
[2010] NSWSC 152
Irreparable breakdown of a business relationship is not enough to order the winding up of a company unless a significant impact on business operations can be demonstrated, a recent Supreme Court of New South Wales ruling has confirmed.
The ruling means, amongst other things, that acrimony between business partners is subject to objective assessment “in the eyes of a commercial bystander”.
The decision also has implications for shareholders seeking a winding up order from the Supreme Court claiming “oppression” in the way a company is operated and managed.
Background
Mr Tomanovic and Mr Sayer were in a successful business relationship from about 1999 to December 2004. From late 2004, they made a general agreement, but on friendly terms, to go their separate ways.
The relationship rapidly soured, however, when differences about the separation arrangements emerged, compounded by mounting frustration as attempts to finalise a concrete separation agreement failed.
The proceedings
Mr Tomanovic commenced proceedings in the NSW Supreme Court alleging oppression and seeking winding-up orders under the Corporations Act or, alternatively, on just and equitable grounds.
Mr Tomanovic’s oppression claims fell into four categories:
- The failure of Mr Sayer to complete the separation arrangements as outlined by the heads of agreement;
- The diversion of money and assets of GMEC (a related company) for the benefit Mr Sayer;
- The reduction in equity in Argyle HQ’s (a related company) assets for the benefit of Mr Sayer, without Mr Tomanovic’s consent; and
- The oppressive conduct generally (including failure to make books and records available, failure to convene annual general meetings, failure to pay dividends), leading to a complete breakdown in the relationship between Mr Sayer and Mr Tomanovic.
The findings
In March 2010, Justice Austin dismissed Mr Tomanovic’s claim on two main grounds. Firstly, the heads of agreement created by Mr Tomanovic and Mr Sayer relating to the separation arrangements between them were not legally binding.
Secondly, the failure of Mr Sayer to comply with the terms of the arrangements could not be sufficiently regarded as oppressive conduct, despite the finding that some of the conduct involved “an absence of compliance with proper procedures”.
The oppression remedy
Justice Austin provided the following useful overview on the Court’s approach to the oppression remedy generally:
- winding up will generally be inappropriate if there is no continuing oppression;
- unfairness is assessed objectively in the eyes of a commercial bystander;
- the non-fulfilment of expectations will not establish oppression if there has been some good reason for the extinguishment of the expectation;
- the extent to which the minority shareholder has ‘baited’ the majority shareholder to act in an oppressive manner is relevant; and
- there is no basis for an oppression claim where the party claiming oppression has acquiesced or consents to the conduct.
His Honour made it clear that winding up should only be regarded as a remedy of last resort.
Just and equitable grounds for winding up
Justice Austin also declined to grant winding-up orders on just and equitable grounds.
His Honour concluded that to justify an order to wind up a company, the breakdown must be of a nature and degree that materially frustrates the commercial viability and sensible operations of the company in accordance with expectations.
Angela Wong, graduate lawyer, Slater & Gordon Lawyers.
Mcgrath and Anor Re HIH Insurance Ltd and Ors
[2010] NSWSC 404
The release of a previously confidential NSW Supreme Court decision may provide insolvent companies with an alternative to commercial litigation funding in future.
The decision, made public in May 2010, approved a loan from one company in liquidation to fund litigation for another in the same corporate group.
Background
The companies were among several of HIH Insurance Group’s 41 companies, all managed by the same liquidator, who found themselves with the potential - but not the financial resources - to pursue legal claims that promised substantial damages awards if successful.
Other companies in the group, despite also being in liquidation, still held substantial cash reserves.
The liquidator’s solution was to propose an arrangement where the group’s other companies would provide funding for the claimant companies’ litigation. If the claimant companies succeeded in recovering damages, the loan would then be repaid with interest and half the proceeds from the litigation. Significantly, the lending companies were already owed money by the companies with potential legal claims.
Because liquidators don’t typically have the power to lend funds from insolvent companies or to enter them into contracts that will last more than three months, Court approval was necessary. That approval required evidence that the transaction was ‘necessary for’ (in the sense of ‘expedient’ or ‘conducive to’) the winding up process and that it was in the best interests of all participating companies.
The decision
Expert evidence was presented suggesting that the claims were very likely to be successful and would very likely allow the lending companies to not only recover all the litigation funds, but also give the claimant companies the resources to repay other debts to the lending companies.
The Court recognized the advantage to the insolvent corporate group and its creditors of retaining the profits of litigation funding and the proposed agreement was therefore approved.