What are the limits of free speech and the right to publish personal political views and opinions about your employer as an employee?
Is there an unrestricted right to freedom of speech and expression of political views?
In Comcare v Banerji, (2019) HCA 7 August 2019, the High Court ruled that a dismissal of a public servant who used a Twitter account to post some 9000 tweets, many of which were variously critical of the Department, other employees of the Department, departmental policies and administration, Government and Opposition immigration policies, and Government and Opposition members of Parliament, was justified.
The decision has been widely criticised in some circles as contrary to and an erosion of a right of freedom of speech and political opinion.
Facts: Social Media and Freedom of Speech Case Study
The employee who was employed by the Department of Immigration and Citizenship began broadcasting tweets under the name, “Lalegale”.
A complaint was received that the employee was inappropriately using social media in contravention of the APS Code of Conduct.
The departmental guidelines explained that “[p]ublic comment, in its broadest sense, includes comment made on political or social issues at public speaking engagements, during radio or television interviews, [and] on the internet”, and cautioned that it was not appropriate for a Department employee to make unofficial public comment that is, or is perceived as, compromising the employee’s ability to fulfil his or her duties professionally in an unbiased manner (particularly where comment is made about Department policy and programmes); so harsh or extreme in its criticism of the Government, a member of Parliament or other political party and their respective policies that it calls into question the employee’s ability to work professionally, efficiently or impartially; so strongly critical of departmental administration that it could disrupt the workplace; or unreasonably or harshly critical of departmental stakeholders, their clients or staff. Similar, more extensive guidance was provided in Australian Public Service Commission Circular 2012/1 (“the APS Guidelines”), which recorded that, “[a]s a rule of thumb, irrespective of the forum, anyone who posts material online should make an assumption that at some point their identity and the nature of their employment will be revealed”.
In turn, the tenor of the APS Guidelines was further reiterated for employees of the Department in a document entitled “’What is Public Comment?’ Workplace Relations and Conduct Section Fact Sheet”.
Following an investigation, which found the account, “LaLegale” to be that of the employee, the employee was terminated for breaching the Australian Public Service (APS) Code of Conduct.
The employee challenged her termination including on grounds of an implied freedom of political communication guaranteed in the Constitution.
The Public Service as an Employer
Much of the Court’s judgement revolved around the specific provisions of the Public Service Act, and the essential elements for the functioning of the APS. The majority commented:
“Regardless of the political complexion of the government of the day, or its policies, it is highly desirable if not essential to the proper functioning of the system of representative and responsible government that the government have confidence in the ability of the APS to provide high quality, impartial, professional advice, and that the APS will faithfully and professionally implement accepted government policy, irrespective of APS employees’ individual personal political beliefs and predilections. To the same end, it is most desirable if not essential that management and staffing decisions within the APS be capable of being made on a basis that is independent of the party-political system, free from political bias, and uninfluenced by individual employees’ political beliefs. The requirement imposed on employees of the APS by ss 10(1) and 13(11) of the Public Service Act at all times to behave in a way that upholds the APS Values and the integrity and good reputation of the APS represents a rational means of realising those objectives and thus of maintaining and protecting an apolitical and professional public service. The impugned provisions are suitable in the necessary sense.”
The final comments before upholding the appeal were that:
“The respondent must be taken to have accepted that her conduct in broadcasting the “anonymous” tweets was conduct which failed to uphold the APS Values and the integrity and good reputation of the APS within the meaning of s 13(11), and that, but for the implied freedom, the sanction of dismissal was warranted.”
Comment on Social Media and Freedom of Speech
It should be noted that this was not a case based upon the Fair Work Act provisions.
While this decision was based upon the particular environment of the public service in which the employee worked, and the specific regulatory framework around that environment, there are clear messages for employees in the private sector, that tweets or similar social media activity, even if anonymous, which are critical of the employer may lead to a lawful dismissal, particularly where there are clear policies prohibiting such conduct.
The publication of individual political views, and beliefs which offend the express policies of the employer, and the basic principles of the duties of fidelity owed to the employer, and go so far as to be critical of the activities of the employer and its business activities may well result in a lawful dismissal.
Social Media Policy- Message for Employers
The message for employers from this decision is to ensure that there are robust, but clear, fair and reasonable workplace policies in place, that employees are aware of and acknowledge the existence of them, and that any investigation into a breach of such policies which may result in a termination of employment is conducted with due regard to procedural fairness.
Frequently, an employee or prospective employee will want to take legal advice about the terms of an employment contract before signing. The termination of an offer of employment, or of employment itself as a result of an employee wishing to take such legal advice, has been found to constitute adverse action.
Employment Contract Case Study
In Tran v Kodari Securities Pty Ltd (29 FCA 968), Mr Tran’s employment was terminated when he wished to obtain legal advice in respect of a new employment contract that his employer wished him to execute.
Dismissal from employment-adverse action
The Court found that the dismissal amounted to adverse action by Kodari Securities Pty Ltd via the actions of a director Mr Kodari. It found that the dismissal took place because Mr Tran had earlier on the evening on which his employment was terminated, proposed to exercise a workplace right to seek legal advice, and thereby constituted adverse action and thereby contravention of section 340(1)(a)(iii) of the Fair Work Act. That contravention was by the employer, Kodari Securities, and by its director, Mr Kodari by reason of his conduct giving rise simultaneously to the conduct by the company and the necessary involvement by him.
It was notable in this case that the parties had in fact had a long history together, and that the particular employment contract to be signed contained a provision actually stating that the employee had already received independent legal advice about the terms and effect of the Contract.
This meant that if the Contract had been signed without having had the benefit of independent legal advice about its terms and effect, the employee would have executed the Contract containing a material falsehood.
Threats and coercion
It was further found that the threat by the company director, Mr Kodari to terminate his employment if he did not sign the new Contract was made with the intent to coerce Mr Tran in the sense of intending to negate his choice to exercise that workplace right, and to instead sign a new Contract.
Company failed to discharge the onus
The bare denial in the affidavits of the company directors did not suffice to rebut the presumption in section 361. Their bare denial was found to be unconvincing and ultimately, was rejected by the Court. In effect, they failed to discharge the onus upon them by failing to produce any evidence of the nature or quality adverted to by the High Court in Board of Bendigo Regional Institute of Technical and Further Education v Barclay 2012 HCA 32.
Adverse Action -Civil Penalties
The measure of the civil penalty to be applied required a consideration of the factors relating to the objective seriousness of the contravention and included: the extent to which the contravention was the result of deliberate, covert or reckless conduct, as opposed to negligence or carelessness; whether the contravention comprised isolated conduct, or was systematic or occurred over a period of time; if the defendant is a corporation, the seniority of the officers responsible for the contravention; the existence, within the corporation, of compliance systems and whether there was a culture of compliance at the corporation; the impact or consequences of the contravention on the market or innocent third parties; and the extent of any profit or benefit derived as a result of the contravention.
The civil penalties imposed were:
1. In relation to the adverse action claim against the Company and ultimately the director only:
(a) a penalty of $35,000 payable by the Company;
(b) a penalty of $7,000 payable by the director;
(c) compensation payable by the Company and the director, upon a joint and several basis, for economic loss of $75,000; and
(d) compensation payable by the Company and the director , upon a joint and several basis, for hurt, distress and humiliation, which would have been present to some limited degree, of $10,000.
2. In relation to the coercion action claim against the Company and ultimately, the director only:
(a) a penalty of $20,000 payable by the Company;
(b) a penalty of $4,000 against the director.
In addition, the Court ordered payment of contract compensation of six months salary.
In awarding 6 months, the court considered Mr Tran’s indefinite employment, the highly trusted role he had occupied and the apparently still highly trusted role that he had been earmarked to fill, his age and the time that it should have taken him to find alternative equivalent employment.
Warning to Employers about employment contracts
The decision serves as a warning to employers that failing to afford prospective employees the right to obtain legal advice in respect of employment contracts is a denial of a workplace right that may give rise to significant and costly liability for penalties and compensation for adverse action against both the company as well as directors who are “involved “under the Fair Work Act.
This is especially so where the contracts contain provisions of acknowledgement that the employee has received independent advice prior to signing, and where there is express or implied coercion used to try to have the employee sign with a companying threats that an offer of employment will be withdrawn or, existing employment terminated if the new agreements are not signed.
Michael Sing | Partner
Telephone 3009 8472
Bullying in the workplace is verbal, physical, social or psychological abuse (usually) by an employer (or manager), another person or group of people (other employees) at work. It can often be associated with a general toxic work culture. Often it is a symptom of poor, unethical or negligent leadership. It poses a significant, but avoidable risk. (more…)
Wills and Estates: An annuity may not be adequate provision for proper maintenance and advancement for a widow
What does it take to make adequate provision for proper maintenance and advancement in a will?
Is it a matter of moral duty or community standards?
The answer to those questions depend upon a range of factors.
In Steinmetz v Shannon  NSWCA 114, the appellant was the second wife of the deceased, who left an estate of approximately $6.8 million. The estate consisted of real estate, a superannuation policy, a real estate business and a liquor outlet business.
By his will, the deceased left the appellant an indexed annuity of $52,000 for the remainder of her lifetime. The remainder of the estate was left to the respondents, who were the independent adult children of the deceased’s first marriage.
The will contained the following provision:
“IT IS MY EXPRESS WISH that my Estate remains a whole for my children and grandchildren. I have drafted my Last Will and Testament in the above manner as I believe that it enables my wife to live comfortably for the rest of her life without having to dispose of the assets that I have worked my whole life for.”
The will was made hurriedly in circumstances where the deceased was about to undergo surgery which he feared he might not survive. Instructions were in fact given to the deceased son in law who was a solicitor.
The trial judge dismissed the appellant’s family provision claim. The widow appealed.
The principal issue on appeal was whether the annuity was adequate provision for the appellant’s proper maintenance and advancement in life.
The members of the Court of Appeal all approached the issues slightly differently, but unanimously held, allowing the appeal:
Adequate provision for a proper annuity is not limited to the provision of financial necessities.
Section 59 of the Succession Act (NSW) is to be applied according to its terms, and not confined by notions of reluctance to interfere with freedom of testation.
Insofar as it is necessary to resort to concepts of “moral duty” or “community standards” as a measure of proper provision, the former is preferable.
To leave a 65 year old widow, who is well capable of managing her own affairs, reliant for the rest of her life on quarterly payments by the children of her deceased husband’s first marriage, with one of whom there have been historical tensions, rather than placing her in control of her own resources, is not an appropriate form of provision.
The appellant widow was awarded an amount of $1.75M in lieu of the annuity provided under the will.
In the context of the relationship and marriage, taking into account the sustained and substantial contributions the appellant had made to the welfare of the deceased; the size of the estate; that there was no-one else responsible for the maintenance of the appellant; the appellant’s reasonable wish to relocate; and the absence of competing claims; the annuity provided to the widow under the will was not adequate provision for the proper maintenance and advancement of the appellant.
In relation to the express provision in the terms of the will, Brereton JA said,
“A wish to preserve “the assets that I have worked my whole life for” for the benefit of his children and grandchildren does not reflect a careful balancing of competing claims. The testator allowed this wish to preserve his estate intact to so dominate his decision-making as to fail to have sufficient regard to his obligations to his dutiful wife of 28 years.”
In finding the annuity inadequate, Brereton JA said,
“to leave a 65 year old widow reliant for the rest of her life on quarterly payments by the children of her deceased husband’s first marriage, rather than placing her in control of her own resources, is in this day and age not an appropriate form of provision for a widow who is well and truly capable of managing her own affairs and when there have historically been tensions between her and at least the first respondent. However reliable the respondents might be, this form of provision effectively obliges her to have an ongoing relationship with them, and to trust them to perform the obligation, and does not afford her the independence and self-reliance which, according to today’s community standards, a widow should have. It is not only rigid and paternalistic, but demeaning and controlling.”
The decision highlights the broad approach a court will take in such matters. What may at first glance be adequate and proper provision, may on careful analysis of all of the facts, be quite inadequate and altered.
In ideal circumstances, wills should be made after careful consideration of all of the relevant facts, with sound advice and guidance.
Key Things To Know About Business Sales Contracts and Sellers Warranties
Business sales contracts usually contain warranties by a Seller on a wide range of matters concerning the business sold, including as clear title to all of the assets sold and to the truth and accuracy of financial records. It is frequently the case that buyers and sellers will negotiate on the terms of such warranties. A buyer will want all encompassing broad warranties, while a seller will want to confine and narrow the warranty terms to matters that they absolutely know to be true and correct.
Careful drafting of business sales contracts reduces risk
Careful consideration must be given to the drafting of a sale of business agreement. For vendors in particular, there are a number of contractual terms and conditions by which potential liability can be reduced, (but not fully eliminated) including:
• Avoiding representations about the future performance of the business;
• Limiting warranties to matters that the vendor knows to be true and correct and can control;
• Capping any amount that can be claimed as damages;
• Providing a minimum threshold of damages before a warranty claim can proceed;
• Impose responsibility on the buyer to do their own feasibility on future performance;
• If there is a due diligence period, the buyer should confirm full satisfaction with their enquiries on giving notice to proceed.
For a buyer, any clauses which try to restrict or reduce the Seller’s liability are undesirable. Care should be taken to ensure that there will be appropriate recourse against the vendor for undisclosed issues arising post-completion.
A buyer has a number of remedies available to them if they subsequently find that the warranties are breached, including an action for breach of warranty and action under the Australian Consumer Law (ACL).
Usually, an action for damages will rely on both causes of action, and the making of misleading and deceptive representations which is prohibited by s18 of the Australian Consumer Law (ACL), cannot be excluded by contract. Vendors should be aware that s4(2) of the ACL deems a representation about any future matter to be misleading, where there were no reasonable grounds for making the representation.
Sellers should also be aware that failing to disclose any significant facts or information may well be in itself misleading and deceptive conduct, even in a due diligence process where the buyer will conduct its own investigations. Silence on any material issue can give rise to a liability in damages, or allow a rescission of the contract.
A recent example of these issues was in the decision of Evolution Traffic Control v Skerratt
 NSWSC 49 (ETC).
The key facts of that case were:
• The buyer entered into a share purchase agreement for business for $10 million.
• The price was based on a multiple of 5 times the EBIT of the business.
• The seller provided future financial forecasts upon which the buyer relied in
determining the price paid.
• In calculating the EBIT, reliance was placed by the purchaser on financial forecasts
provided by the vendors.
• The financial forecasts relied upon a specific government funding program, which was
provided based upon the achievement of conditions which were in fact, unachievable
in the future.
• The sellers did not disclose that specific condition during negotiations.
On discovery of the conditions of funding, after completion, the purchaser issued proceedings
to recover the difference between the purchase price and the actual value of the business at
the time of the sale, and pleaded a case based on:
1. misleading and deceptive conduct under the ACL, and
2. for breach of the warranties.
The share purchase agreement contained two specific broad warranties:
(i) the accuracy and completeness of all information disclosed in due diligence
materials during the course of negotiations leading up to the sale; and
(ii) that all information that would be material for disclosure to a prudent purchaser had
The vendors failed to show that they had a reasonable basis for making representations about the business’ future financial performance. The Court ordered damages of around $4 million representing the loss suffered on a re-sale of the business for $6 million.
The key facts of the ETC case are not unusual in the sale and purchase of businesses, and illustrates the risk of a seller making representations about the business sold based on inaccurate and incomplete information.
Selling a business can be a rewarding and profitable experience, and the reward for many years of hard work, capital and effort. Don’t risk losing that with a poorly drafted or inappropriate contract.
Consult an experienced and knowledgeable lawyer on the terms and conditions of a contract before signing. It can make a huge difference to the outcome.
For further information and assistance on any matters relating to the sale and purchase of a business, call us. Our knowledge and experience will help you make good decisions.
Selling a business can be a complex, exhausting and difficult process. Preparation for a sale can minimise if not avoid many of those frustrations.
Getting your records in Order
Any serious buyer will want to conduct a due diligence of the business and see:
- Full financial records and trading history over say 3-5 years;
- any necessary documents such as leases, employment contracts, supplier agreements, sales contracts, contractor agreements;
- any relevant and necessary government consents and approval required;
- intellectual property records such as patents, trademarks, registered designs.
Any shortcomings in being able to provide these will lead to suspicion and price discounting or rejection of the transaction.
Take the time to consult with your accountant and lawyer to get these in order so that a complete and accurate set of records can be disclosed at the right time. Gaps or omissions and inaccuracies can at best result in delays or a lost sale, and at worst, an action for damages if the sale proceeds, and the buyer is not happy.
Of course, some of these records should only be disclosed in detail upon a confidential basis once a contract is signed. Information which is commercially valuable must be protected by a confidentiality and non-disclosure agreement which also requires the return of all copies if the sale does not proceed.
Formalising key arrangements
Some key agreements and contracts which should be reviewed to determine currency include property leases, contractor agreements and supplier agreements. If these have expired or are close to an expiration date, these should be re-negotiated or renewed. Selling a business in leased premises where the lease has expired or is close to expiry will only diminish the value of the business. Similarly, if there are key staff or contractors on agreements which have expired or are due to expire, these should be identified, and renewed. Loss of a key member of staff can also have a detrimental effect on value of a business. Consider the need to have robust post-employment restraints in any key staff contracts to protect the buyer’s goodwill value, and your purchase price.
Identify the actual assets being sold
A sale contract must identify with detail exactly what is being sold. Take the time to identify those assets which are owned and can be sold. Separate out those which are not owned and cannot be sold, but which may be assigned/transferred with third party consent. Ensure that you know and can comply with such consents. For example, leased premises or leased plant and equipment cannot be sold, and will require landlord or financier consent, on specific terms and conditions. Knowing what those conditions and terms are in advance can save time and money.
The nature of what is included in a sale is very important. It must be documented precisely and exactly. The usual items and assets sold in a business sale will expressly include the following:
- plant and equipment;
- key contracts;
- intellectual property;
- communication services/rights (for example, telephone numbers and email addresses);
- property leases and equipment leases; and
- customer deposits and work in progress.
Post- Sale elements
Consideration needs to be given to important post-sale issues. Some of these will include:
- Restraint of trade: reasonableness;
- Debtors-collection and benefit;
- Release of any securities over any of the assets sold,
- employee entitlements-should be calculated and adjusted on settlement; and
- any credit guarantees to be revoked-to avoid unforeseen liability.
Obviously, you need some idea of price range. Most businesses sell on a multiple of net earnings. The multiple applied will depend upon many factors. Addressing some of those factors before the sale, identifying and eliminating the negative ones, can result in a higher multiplier and so a better price. For example, renewing a lease or locking in key employees to robust employment contracts, can be 2 simple steps to take to add value to a business. Similarly, locking or renewing any sales contracts, especially with terms covering future supply and pricing of goods or services can have a strong and positive effect upon the price paid.
A seller should also understand the way that the sale price will be dealt with from a tax perspective. This can determine the timing of the sale, what the sale price of the business and individual components or assets should be, and the impact any resultant tax will have on estate and retirement planning. These factors can significantly effect and determine how to structure the transaction.
The impact of:
2. CGT – applies to assets such as goodwill and intellectual property and special concessions and rule may apply;
3. income tax – payable in respect of the sale of trading stock and plant and equipment;
can all be critical in setting the price of the business. Here, advice should be sought from a good tax accountant preferably one familiar with the business history, and also one able to advise on future estate planning if a retirement is to follow the sale.
Stamp duty is usually, by express contractual terms, generally an issue for the buyer. Any avoidance of these obligations may however, become a seller’s liability.
Getting a contract prepared.
Consulting with your lawyer to discuss the sale and the terms of the contract at an early stage can result in a more streamlined sale process and afford you the best protection. Reviewing all aspects of a sale before actually going to contract can help minimise or eliminate any likely obstacles or impediments to a sale. A pre-sale audit of legal issues including some of the key documents for instance will identify areas of concern for a buyer, give you time to rectify and correct those issues and may end up saving you a lot of money in the long run.
We are experienced and expert in business sales and acquisitions. Contact us if you want any help or assistance.
Signed an option to buy a property? Make sure you exercise it on time and in the correct manner or risk losing it!
It is commonplace for a property purchase to be commenced with an option to purchase the land for various reasons, such as to allow time for a due diligence, to secure finance or a joint venture partner.
An option is usually formally exercised in accordance with its terms by the grantee giving a formal notice and the parties executing a formal document and signing a formal contract to purchase. In many instances, the terms of the option permit the assignment or novation of the right to exercise the option to a third party. For such a novation of the option to be valid, the option needs to be properly exercised.
In Kai Ling (Australia) Pty Ltd v Rosengreen  NSWCA 3, the court examined the requirements for effective novation of contract by the substitution of party, and whether on the facts of that matter, an option to purchase land was properly novated in favour of the substituted grantee.
On 30 April 2015, Mr Rosengreen granted to Saadie Group Pty Ltd (“Saadie Group”), by deed, an option to purchase certain land.
On 3 May 2015, Mr Michael Saadie presented to Mr Rosengreen a single sheet of paper in the same form as the execution page of the deed of option, save that the grantee was named as Kai Ling (Australia) Pty Ltd (“Kai Ling”) instead of Saadie Group. The sheet already bore the signatures of two persons on behalf of Kai Ling. Mr Michael Saadie (who was the father of the sole director of Saadie Group and was not an officer of Kai Ling) asked Mr Rosengreen to sign the sheet, saying that “we may need to change the name of the grantee but it does not change anything”. Mr Rosengreen signed as requested and gave the sheet back to Mr Michael Saadie. Kai Ling contended that the events of 3 May 2015 had brought about a novation of the option contract so that Kai Ling was the holder of the option in the place of Saadie Group. The primary judge dismissed the proceedings. Kai Ling appealed.
The Court held, dismissing the appeal with costs that:
(1) The evidence did not establish that Mr Michael Saadie acted with the authority of Kai Ling in dealing with Mr Rosengreen on 3 May 2015.
(2) There was no basis for a finding that there had been created among Mr Rosengreen, Saadie Group and Kai Ling the tripartite agreement necessary to effect novation.
(3) Mr Rosengreen and Saadie Group had, in any event, conducted themselves subsequently on the basis that they remained the parties to the option contract.
The Court approved the description of the nature of novation and of the elements that constitute it as found in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338;  HCA 6:
“A novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. It is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract. Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation. The effect of a novation is upon the obligations of both parties to the original, executory, contract. The enquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.”
Further, the element of intention was important: In Vickery v Woods (1952) 85 CLR 336;  HCA 7, Dixon J said that “the crux of novation is intention” in the form of consent by way of tripartite agreement; and that the intention may be express or, importantly for a case such as the present, may be implied from conduct and circumstances.
Kai Ling’s case was that the events of 3 May 2015 gave rise to a tripartite agreement among Mr Rosengreen, Saadie Group and Kai Ling by which Mr Rosengreen accepted undertakings from Kai Ling in place of those originally given to him by Saadie Group and released Saadie Group; Kai Ling gave those undertakings to Mr Rosengreen who in turn renewed in favour of Kai Ling the undertakings he had originally given to Saadie Group; and Saadie Group consented to its release by Mr Rosengreen and in turn released him from the original contract. Kai Ling maintained that all those elements, in immediately operative contractual form, can and should be found to have resulted from the events of 3 May 2015.
The appeal was dismissed as the Court agreed with the primary judge who held that Kai Ling had not established that, on 3 May 2015, all of Mr Rosengreen, Saadie Group and Kai Ling agreed that a new contract between Mr Rosengreen and Kai Ling was substituted for the old contract between Mr Rosengreen and Saadie Group and that the obligations of Mr Rosengreen and Saadie Group created on 30 April 2015 were discharged. His Honour’s’ conclusion was correct for three basic reasons:
1. In the absence of proof that Mr Michael Saadie had acted on 3 May 2015 with the authority of Kai Ling, it was not shown that Mr Rosengreen and Kai Ling had engaged in any conduct of a contractual kind towards one another on that day.
2. Even if there had been contractual conduct as between Mr Rosengreen and Kai Ling on 3 May 2015, the purpose of the contractual conduct was to deal with an apparently foreseen possible future need to “change the name” of the grantee of the option, as distinct from immediately substituting a new grantee.
3. As at 27 November 2015, two of the three relevant parties (Mr Rosengreen and Saadie Group) acted on a clear footing that they alone remained the parties to the option agreement made between them on 30 April 2015.
The case illustrates that the exercise of options where an interest is to be novated is a technical and a formal process that should be treated with care to ensure it is effective to novate the rights granted.
Getting this process and documentation wrong can be costly.
We are experts in property transactions. If you wish to discuss or seek advice on any aspects of options to buy property, or matters arising from this article, please contact us.
We were recently successful for a client in a fierce contest in the Supreme Court in enforcing a 12 month restraint on a shareholder working for a direct competitor contrary to the provisions in a shareholders agreement (LCR Group v Bell (2016) QSC 130).
It is commonly the case that shareholders in a company enter into written agreements which set out their rights and obligations. Shareholders agreements of this nature are designed to achieve a harmonious and profitable business operational environment with cooperation between the shareholders.
A well drafted shareholders agreement should, particularly where the shareholders are of a management or executive level contain restraints of trade, drafted to strike a balance between achieving a harmonious and profitable business operational environment with cooperation between the shareholders, protection of the company interests, and protection of individual rights.
Recent decisions on the enforcement of restraints of trade in shareholders agreements point to a more commercial and contractual approach rather than the approach generally accepted by the courts when considering restraint of trade in an employment contract.
Restraints of trade in employment contracts are said to be void being contrary to public policy.
A well drafted restraint clause in an employment agreement will typically contain non-competition provisions, geographical and temporal restrictions.
The starting point as observed by McMurdo J in AGA Assistance Australia Pty Ltd v Tokody  QSC 176 at 25 is that:
“A restraint of trade is void as contrary to public policy unless it is reasonable in the interests of the parties and by reference to the interest of the public: see Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd, Amaco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd. As to the interests of the public, the onus is on the party which is subject to the restraint to establish that the restraint is harmful to the public: Herbert Morris Ltd v Saxelby.”
Restraints on post-employment activity contained in shareholders agreements indicate a different approach. Issues such as mutuality of obligations, legitimate business interests of the company, acknowledgements of independent legal and accounting advice, the risk of loss of client and customer connections and relationship, confidential information and reasonableness of the restraints are all relevant considerations.
In BDO Group Holdings (Qld) Limited & Anor v Sully  QSC 166, Flanagan J considered and enforced a restraint imposed upon an accountant who became a party to a shareholders agreement and a party to an employment agreement when he sold his business into the applicants.
The restraint of trade in the shareholders agreement provided a non-competition restraint of trade which purported to restrain the respondent from engaging in any activity during the restraint period and within the restraint area which essentially competed with the business activity of the company, provision of similar services, inducing, soliciting staff or clients.
In dealing with the shareholders agreement, and Flanagan J observed that the respondent agreed to:-
- Diligently and faithfully devote…attention to the business
- To cooperate and use…best endeavours to ensure that the group successfully conducted the business
- To give approval to make decisions that were required of it in good faith and in the best interests of the group and the conduct of the business as a commercial venture
Relevantly, the shareholders agreement contained an acknowledgment that the terms of the restraint were reasonable considering the interests of each party and went no further than was reasonably necessary to protect the interests of the other shareholders, the group and the business.
In the decision of Seven Network (Operations) Limited & Ors v Warburton (No 2)  NSWSC 386, Pembroke J dealt with a restraint of trade involving a senior executive of the Seven Network in the context of restraints imposed under an employment contract and a management equity participation deed.
In a decision notable for its clarity and analysis of both factual and legal issues, Pembroke J found that the restraints imposed in the management equity participation deed should be enforced. In analysing the circumstances relating to entry into the management equity participation deed, the commercial background and experience was detailed exhaustively. In that case Mr Warburton was a person of considerable commercial experience, knowledge and acumen. His Honour also considered that the entry into the management equity participation deed by senior executives such as the respondent was an important factor in the venture capital company’s decision to invest in the company (an investment of approximately $690 million for a 50% economic interest). The transaction involved, through an equity participation plan, senior management being given a financial incentive to strive to maximise the value of the business. By this means, the interest of the investors and senior management were aligned. In an effective practical sense, they became “owners of the enterprise”.
The commercial rationale for the deed was also analysed and His Honour commented:
“It resulted in the participating executives becoming the holders of shares and options in SMG. By this means, they acquired a shared financial interest in the enterprise with KKR and Seven Network Limited. The MEP Deed was designed, amongst other things, to enhance the prospect of senior management staying together as a team. It provided each of them with an opportunity to achieve a generous return on investment that was disproportionate to the risk being undertaken. From the perspective of KKR and Seven Network Limited, the restraints on competition served to protect their investment. But they also served to ensure that the investment of each of the senior management participants was not undermined or devalued. The object of the restraints on competition was to reduce the risk of devaluation of the business by the departure of any executives to work for competitors: to reduce the risk of the misuse of confidential information by its provision to competitors: and to reduce the risk of dissipation or reduction in the customer connection of the business”.
His Honour found that on the facts of the case, there was no logical reason for denying the existence of a legitimate financial interest to support the restraints imposed.
His Honour also dealt with the provisions in the MEP Deed which contained an acknowledgement of reasonableness of the restraints imposed. His Honour said “this is possibly the most important single factor in determining whether the restraint period was reasonable at the time it was entered into. It does not of course absolve the court from reaching its own conclusion, but as Emmett J observed in Synavant Australia Pty Ltd v Harris (2001) FCA 1517 at 85:
“The matter involves the exercise of business judgment. For that reason, considerable weight should be attached to the period the parties themselves have selected.”
His Honour further pointed to the fact that in this case, Mr Warburton had obtained legal and taxation advice at the time of entry into the deed, had been to a presentation at which attention was drawn to it and the commercial rationale and purpose behind the restraint was explained to him and he obtained written legal advice which specifically addressed the clause. Those factors reinforced the appropriateness of placing weight on his agreement as to the reasonableness of the restraint.
In LCR Group v Bell (2016) QSC 130, Byrne J enforced a 12 months restraint on a manager and shareholder, after analysing the scope of duties of the shareholder and the business interests of the company, finding that the restraint was reasonable and valid where the company and the prospective employer were direct competitors, and “there was a significant risk of appreciable detriment to LCR’s commercial interests through misuse of LCR’s confidential information.”
Enforcing restraints of trade, whether in employment contracts, business sale agreements or Shareholders Agreements is never simple and usually involves complex and contested, factual and legal issues. Where there are significant risks of serious loss and damage occurring if the restraints are not enforced ,protective and urgent injunctions are well warranted.
If you have any reason to consider action on a restraint of trade, and require urgent advice, contact us for assistance.
Answer: Not very hard!
A party who is claiming a debt from a company will often want to consider the quickest and most cost-effective way for recovery. A drawn out court case over many months can often lead to a very unsatisfactory result, including lost time and legal fees. For these reasons, many will consider the use of a Statutory Demand under Section 459 of the Corporations Act 2001 which basically entails making a demand in a prescribed form and which allows 21 days to resolve the matter of the debt, or face a winding up on the grounds of insolvency. Properly used, it can be a fast and effective way to recover debts.
However, this process is often misused by parties particularly where the issue is not solvency of the company, but a genuine dispute as to the existence of the debt claimed.
The recent decision of ABC Constructions No 1 Pty Ltd v. Bonelli Constructions Pty Ltd  QSC 35 (4 March 2016) is an illustration of this point.
Bonelli issued a statutory demand against ABC for monies it claimed were due and payable as a consequence of a payment claim made under a building contract. ABC applied to the Court to set the Demand aside. At issue was whether there was a genuine dispute about the existence or amount of the debt that was the subject of the demand, and whether there was a genuine off-setting claim.
ABC claimed that the debt claimed under the statutory demand was genuinely in dispute. Bonelli had failed to submit documentary evidence supporting its progress claim; the debt has been the subject of a Principal’s Notice to Show Cause with a subsequent termination of the building contract by the applicant; and there are differences between separate progress claims issued by the respondent, at a relevant point in time.
ABC also contended that under the building contract it had a right to claim delay costs subject to a specified procedure, which had not been followed by ABC. ABC expressly disputed Bonelli’s right to make any claim for delay costs prior to service of the statutory demand.
Finally, ABC claimed that the statutory demand was issued in circumstances where there was a pre-existing dispute between the parties resulting in a termination of the contract by it.
On all of its arguments, ABC asserted a genuine dispute existed and that the Statutory Demand should be set aside with costs.
The Court agreed and set aside the Statutory Demand and ordered that Bonelli pay the costs of the application.
In reviewing the well-established principles and cases, the Court had no hesitation in finding a genuine dispute existed. Importantly, the court emphasised the relatively low threshold required to show a “genuine dispute”:
“No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised.”
The Court quoted with approval the decision of TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd in which Dodds-Stretton J said:
“As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile… it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less.”
In other words, a party does not need to actually prove their case to show that a “genuine dispute” exists, but it should show the basis or grounds do actually exist. This usually requires the presentation of an affidavit that exhibits relevant correspondence and documents, and setting out of relevant facts to show a credible basis for a genuine dispute.
This recent decision is another of many examples where a party has been punished with a costs order for issuance of a statutory demand where a clear genuine dispute existed.
It illustrates the need to have good legal advice and to choose an appropriate way to resolve disputes, and particularly those which may involve the Court having to decide questions of fact and the meaning and effect of contracts and credit of witnesses. Such disputes are clearly not able to be decided under a Statutory Demand process.
If you have any reason to consider recovery of a debt or have received a statutory demand, and require urgent advice, contact us for assistance.
An Employer’s Liability as an accessory for misuse of confidential information by its own employees.
It is commonly the case that executives and senior managers seeking to jump ship from one employer to another either by themselves or through recruitment agents, actively promote themselves with promises that they can bring significant business with them thereby adding to their value and increasing their worth to a prospective employer.
The recent decision of Lifeplan Australia Friendly Society Limited v Ancient Order of Foresters in Victoria Friendly Society Limited  FCAFC 74 is a stark reminder of the risk to not just those employees who take and purport to misuse confidential information of former employers but also to the new employer.
In the Foresters decision, the court ordered that the new employer (Forester) should account for profits generated by business developed and managed by two former employees of Lifeplan.
The former employees of Lifeplan that joined Foresters in senior roles implemented business plans and drew clients away from their former employer. The court found that they did so whilst still employed by Lifeplan and had used and misused highly confidential information to do so.
On appeal, the court found that there was a causal relationship between the breach of the employee’s duties and the profits generated in their new employer. Further, the court found that Forrester’s as the second employer had knowingly acted upon the information, were implicated in the steps taken by the employees before jumping ship to join their company. As a consequence, the profits made by Forrester’s relied entirely upon the employees misusing the confidential information taken from their former employer and with the assistance and complacency of the new employer. Accordingly, the court ordered that Forrester’s pay damages in the sum of $6,200,000.00 representing profits made from the breaches of their employees against the former employer.
The court also discussed the provisions of section 79 of the Corporations Act 2001 (Cth) (“the Corporations Act”) which provides that a person may be involved in a contravention if and only if the person:
a) has aided, abetted, counselled or procured the contravention; or
b) has induced, whether by threats or promises or otherwise, the contravention; or
c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
d) has conspired with others to effect the contravention.
The importance of this section lies in the fact that the former employees were claimed to have breached various provisions of the Corporations Act as officers of their former employer and they had been obliged in their capacity to exercise their powers and discharge their duties with a reasonable degree of care and diligence in good faith and in the best interests of the corporation and for proper purposes without improperly using their position to gain advantage or cause the corporation detriment and as officers they had obtained information that they were obliged not to use improperly or to gain advantage or to cause the corporation detriment. Those were civil penalty provisions of the Corporations Act section 180, 181, 182 and 183 and by section 79 of the Corporations Act, accessorial liability was established.
In fact, the court found that on the facts before it, “there was no doubt that the board of Forrester’s was actually aware, had actual knowledge, of the taking and using in breach of duty of confidential information. The board was not a passive observer of this; it did not prepare it but it used it in its decision-making process and after employing FPA in the governance process of checking performance. Likewise, Mr … knew of the clearly wrongful solicitations of funeral directors as the business venture was being agreed”. The court found that given the actual knowledge of the Forrester’s board in its participation of breached of the Corporations Act by the former employees, it would “not draw back from a conclusion that Forrester’s was knowingly concerned in those breaches”.
The decision is a stark and practical reminder of the risk in taking on new employees who promise to bring business and work from their former employer. Often, the promise of such new work proves irresistible to the new prospective employer, and the risks are either overlooked or ignored. The decision dealt with above clearly shows that the risk of damages are real.
If you have any queries in respect of these matters please do not hesitate to contact us for timely advice which may save expensive and troublesome litigation.
The recent decision of the Federal Court by the ACCC in its case against Servcorp a large serviced office provider is a timely reminder for all businesses to review their terms of trade and to remove any terms which may go beyond protection of legitimate business interests-especially in dealing with a smaller business interest. The consumer law as applies to unfair contracts was extended to cover B2B contracts in 2016.
The Court declared by consent that 12 terms in contracts used by Servcorp subsidiaries are unfair and therefore void.
The specific contract terms declared unfair included those:
- that had the effect of automatically renewing a customer’s contract;
- allowing Servcorp to increase the contract price;
- permitting Servcorp to unilaterally terminate contracts;
- unreasonably limiting Servcorp’s liability; and
- permitting Servcorp to keep a customer’s security deposit if a customer failed to request its return.
ACCC deputy chair Mick Keogh said “Businesses can no longer impose contract terms that create a significant power imbalance between parties, are not necessary to protect their legitimate interests, and which would cause significant financial detriment to a small business.”
“While penalties do not apply for unfair contract terms, the ACCC will continue to take matters to court to ensure these terms are declared void and protect businesses.”
Following the Court’s declaration, Servcorp was required to pay the ACCC’s costs and establish an unfair contract terms compliance program.
If you have any concerns about the fairness of any of the terms of any contract affecting your business interests, please contact us for advice.
What happens when the intentions of the testator are not reflected in the will?
This situation can arise from many reasons-but more commonly from poor drafting or miscommunication.
This arose in Rose v Tomkin & Ors (2017) QCA 157, where the Court had to consider the terms of a will dealing with the residuary estate.
The current rectification power is contained in s 33 of the Succession Act 1981 (Qld) which provides:
S.33 Court may rectify a will
(1) The court may make an order to rectify a will to carry out the intentions of the testator if the court is satisfied that the will does not carry out the testator’s intentions because—
(a) a clerical error was made; or
(b) the will does not give effect to the testator’s instructions.
In order that the power to rectify a will be enlivened under s 33 of the Act, a party is required to satisfy the Court that the Will did not carry out the testator’s intentions because the terms of the Will did not give effect to their instructions and wishes. That intention must be examined as at the date of the will, not the date of death.
The legal principles in respect of the rectification power in s 33(1)(b) of the Act may be summarised as follows:
- The Court must ascertain the testator’s intention, that is, the actual intention of the testator reflected in the instructions given by the testator, not what would probably have been the intention in the circumstances that eventuated.
- The Court must construe the provision of the will sought to be rectified.
- The Court is required to compare the relevant provision of the will properly construed with the testator’s intention as ascertained.
- The Court must be satisfied the relevant provision of the will does not carry out the testator’s intentions because it does not give effect to the testator’s instructions and that rectification in the terms sought would give effect to those instructions.
- The Court must be so satisfied on the balance of probabilities, on clear and convincing proof.
The Court found after reviewing the evidence before it, as to the instructions given for the will that “the Will did not carry out Ms Jones’ intentions because it did not give effect to her instructions that her half interest go to her children. The Will was only capable of achieving the result that her children received a half interest in the event that her partner’s will was (and remained) in the same terms. The Will as drafted was not capable of guaranteeing that a half interest pass to them. But it is evident that Ms Jones’ instructions were to safeguard her children’s inheritance without qualification. That is consistent with the advice given to her by her solicitor to sever the joint tenancy.”
Having found that there was clear and convincing proof that the will did not carry out the testatrix’s intentions because it failed to give effect to her instructions, the Court ordered that the will be rectified
If you have any queries in respect of these matters please do not hesitate to contact us.
Shareholder Disputes- Case Study
In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd & Ors  QCA 48, a dispute had arisen between the shareholders of a company, Samgris Pty Ltd which was incorporated to undertake coal exploration in Queensland.
The minority shareholders in the company claimed that the affairs of the company had been conducted in a manner which was oppressive or unfairly prejudicial to, or unfairly discriminatory against, them as the minority and further or alternatively claimed that the company’s affairs had been conducted in a manner which was contrary to the interests of the members as a whole.
The relief sought was for an order for the winding up of the company under s461 of the Corporations Act 2001 (Cth), or, alternatively, that the majority shareholder purchase their shares at a price to be determined by the court once the court had decided that they should have that relief under s233 of the Corporations Act 2001 (Cth).
Here, the company was well and truly solvent. Its draft financial accounts for the year ended 31 December 2015 showed net assets of in excess of $18 million before having any regard to a disputed $33 million.
In the first instance, the trial judge (Bond J) held that the relationship between the appellant and the respondents, as the shareholders of the company should be characterised as a “quasi-partnership” or “a majority controlled business requiring mutual cooperation and a level of trust”. He found that the relationship between the parties had irretrievably broken down and that this had been caused by the majority shareholder’s conduct. He further held that the conduct had been oppressive and unfairly prejudicial to, or unfairly discriminatory against, the minority within the meaning of s232(e) and that the respondents had established an entitlement to a remedy also under s232(d) and ordered a winding up of the company.
He found that the company was a “quasi-partnership” and was:
“..not functioning, and cannot reasonably be expected in the future to, in the way intended and … There is no real prospect that the directors nominated by the two sides can work together sensibly to reach the necessary agreement to be able to conduct the company’s business in the future. In the circumstances of this case, in the absence of any other remedy, it would be just and equitable that Samgris should be wound up.”
In this instance, the majority shareholder appealed the decision of the trial judge, but the appeal was unanimously dismissed.
In this instance, the court of appeal also reflected that:
“the critical considerations are that not only would the valuation of the respondents’ shareholding be an extensive, expensive and time consuming process, but there is also a real uncertainty as to whether the appellant would be willing and able to pay the price which is ultimately determined.”
In the face of such uncertainty-the court could not impose a buy-out order, affirming the original decision to order a winding up.
This decision reaffirms the approach taken when a dispute between shareholders is to be characterised as a quasi- partnership and the appropriateness of a winding up order.
It further highlights that if a party involved in a shareholder dispute wishes a buy-out order to be made, then it needs to demonstrate not only the appropriate basis for such an order-but the financial capacity and willingness to meet such an order.
If you are involved in or wish to obtain advice on have any aspects of shareholder disputes, then please contact us.