corporate & commercial insight
july 2008
Change in the law relating to the meaning of ‘consequential loss’
The recent Victorian Court of Appeal
decision in Environmental Systems Pty
Ltd v Peerless Holdings Pty Ltd has
seen a change to the law concerning the
meaning of the phrase ‘consequential
loss’ in contracts.
· where losses arise naturally, according
Background
· where losses were contemplated by
In 1997, Peerless Holdings Pty Ltd
(Peerless) entered into a contract with
Environmental Systems Pty Ltd
(Environmental Systems) to acquire a
system for reducing odour emissions.
The system did not function as required
under the agreement, and as a result
Peerless brought proceedings against
Environmental Systems. Significantly,
the contract between the parties
contained the following exclusion clause:
“As a matter of policy, Environmental
Systems does not accept liquidated
damages or consequential loss…”
Previous legal position
Australian courts have previously used
the principle outlined in the United
Kingdom case of Hadley v Baxendale
that loss could be recovered under 2
limbs, namely
to the usual course of things, as a
result of the breach; or
the parties, at the time that the parties
made the contract, as being the
probable result of the breach.
It has previously been accepted that the
phrase ‘consequential loss’ in exclusion
clauses fell within the second limb of the
rule stated above. Consequently, the
courts have in the past ruled that a mere
reference to ‘consequential loss’ in an
exclusion clause was not sufficient to
exclude liability for loss such as profits
lost or expenses incurred through breach
of the contract.
Current legal position
The decision of the Victorian Court of
Appeal in Environmental Systems
appears to have changed this previous
authority.
The final judgement contends that the
term ‘consequential loss’ should be
given its ‘ordinary natural meaning’ and
that the ‘true distinction is between
‘normal loss’, which is loss that every
plaintiff in a like situation will suffer, and
‘consequential losses’, which are
anything beyond the normal measure,
such as profits lost or expenses incurred
through breach.’ As a result, the court
held that because previously awarded
costs were beyond the ‘normal’ losses,
they were ‘consequential losses’, and as
such fell within the scope of the
exclusion clause in the contract.
What this decision means
This decision means that, in general, an
exclusion of consequential loss will be
interpreted to exclude all losses beyond
the normal measure (including lost
profits) unless the contract indicates the
parties intended the loss to be construed
as ‘normal loss’. As a result it remains
good practice to define precisely what is
meant by ‘consequential loss’ when used
in an exclusion clause.
Breach of Contract - Intermediate terms
The recent High Court case of
Koompahtoo Local Aboriginal Land
Council v Sanpine Pty Ltd is significant
in establishing which categories of
contractual obligations, if breached,
could entitle the other party to terminate
the contract. Particularly relevant is the
confirmation that a contract may be
repudiated by the breach of an
“intermediate” term.
Background
Sanpine Pty Ltd (Sanpine) entered into
a joint venture agreement with
Koompahtoo Local Aboriginal Land
Council (Koompahtoo). Under the terms
of the agreement, the aboriginal land
council contributed the land to be
developed whilst Sanpine Pty Ltd
provided the expertise. Ultimately
however, the joint venture failed and an
administrator was appointed on behalf of
Koompahtoo. In the course of the
administrator’s enquiries, attempts were
made to obtain financial information from
Sanpine relating to the position of the
joint venture, an account of which they
were required to maintain under the
terms of the agreement. It turned out
that proper bookkeeping and financial
records had never been kept. The
2
administrator endeavoured to terminate
the agreement by alleging Sanpine had
breached its obligations. Essentially the
issue before the court was whether the
term breached constituted an “essential
term of the contract” (giving rise to a
right to terminate), an “intermediate”
term (also potentially giving rise to a right
to terminate) or neither.
The decision of the High Court of
Australia
The High Court upheld Koompahtoo’s
right to terminate the contract, ruling that
certain breaches of the agreement on
the part of Sanpine had been
established. The majority held that an
"intermediate" term will have been
breached where default in respect of a
non-essential term is so significant as to
go "to the root of the contract". Whether
a breach goes "to the root of the
contract" is said to depend upon "the
nature of the contract and the
relationship it creates, the nature of the
term, the kind and degree of the breach,
and the consequences of the breach" as
well as whether or not damages would
provide appropriate relief in the
circumstances. The court held that
Sanpine had committed sufficiently
serious breaches of intermediate terms
that went to the “root of the contract”,
depriving Koompahtoo substantially of
the whole benefit of the agreement.
What this means
This case affirms that a contract may be
repudiated by the breach of an
“intermediate” term. It was not until this
decision that the Australian High Court
had confirmed the Australian common
law position in this regard.
Repudiation of contract and the contractual effect of
correspondence between parties
The recent decision of Jobern Pty Ltd v
BreakFree Resorts (Victoria) Pty Ltd in
the Federal Court offers valuable
instruction to parties to a ‘Heads of
Agreement’ (HOA) when negotiating the
more precise terms of a transaction,
namely that they must appreciate the
potentially binding effect of their
correspondence.
Background
In 2004, Jobern Pty Ltd, trading as
Latitude Development Group, entered
into a HOA with BreakFree Resorts
(Victoria) Pty Ltd, concerning the
development and construction of the
Erskine Resort development in Lorne,
Victoria.
Following a break down in negotiations,
BreakFree purported to terminate the
HOA by relying on the non-satisfaction of
a condition precedent to performance
contained in the heads of agreement. In
response, Latitude argued that
BreakFree’s conduct amounted to a
repudiation of the HOA and sued for
damages alleging breach of contract.
Latitude contended that following a
series of email and telephone
communications, the parties had
ultimately reached a point where the
condition precedent had been mutually
abandoned.
Decision of the Federal Court
In determining contractual intention the
courts adopt an objective approach. In
his assessment of Latitude’s submission,
Justice Gordon commented that “the
only objective characterisation of the
exchanges is that they record the mutual
giving up of the capacity to terminate for
the failure to satisfy the deposits
condition precedent”. The Court agreed
that BreakFree’s purported termination
of the HOA did amount to a repudiation
for which Latitude was entitled to an
award of damages.
Implications
Preliminary contracts such as HOA are
commonly used during the process of
negotiating a more formal contract,
where certain specific terms have been
discussed and agreed to, but may be
subject to further agreement of more
complete terms in the future. Depending
on the precise terms of a HOA it may
create a legally binding arrangement
between the parties.
From a practical perspective, this
decision is an important reminder that
correspondence between parties can
have significant contractual implications,
particularly when following a negotiated
and binding HOA. The courts will
consider the objective intention of each
party as evidenced by all relevant events
and communications.
3
New Draft Merger Guidelines 2008
The ACCC has issued its Draft Merger
Guidelines 2008 (Guidelines) for public
deliberation. They are intended to
replace the original Merger Guidelines
published in 1999.
The Guidelines are intended to provide
an explanation of the framework the
ACCC will apply when assessing
whether a merger or proposed merger
constitutes a substantial lessening of
competition, for the purposes of section
50 of the Trade Practices Act 1974 (Cth)
(TPA).
The Merger Guidelines are not law, but
offer useful guidance as to how the
ACCC will consider merger applications
under section 50 of the TPA.
Key changes
The most important changes under the
new Guidelines include:
· the removal of the “safe harbour”
thresholds
· introduction of new thresholds for the
voluntary notification of mergers to the
ACCC
· application of a stricter policy
regarding divestiture undertakings
· use of internal company documents in
the assessment of the likely
competitive impact of a merger
Replacement of the ‘safe harbour’
thresholds
The 1999 Guidelines set out “safe
harbour” thresholds to assist parties
when deciding whether a merger was
likely to be reviewed by the ACCC. If a
proposed merger fell within the scope of
a pre-determined “safe harbour” it would
generally be unlikely to necessitate any
further investigation.
In the proposed new Guidelines, the
ACCC has abolished these “safe
harbours” in favour of new market
concentration indicators. They will now
measure market concentration by
reference to market shares, firm
concentration ratios and the Herfindahl –
Hirschman Index (HHI).
Voluntary notification thresholds
Currently, there is no compulsory
notification requirement for mergers in
Australia under the TPA. However, the
new Guidelines propose to introduce
new thresholds for the voluntary
notification of proposed mergers to the
ACCC should any one of the following
criteria apply:
· the merged firm would operate in at
least one market that is concentrated
on the basis of a HHI calculation; or
· a substantial number of customers
consider the products of the merger
parties to be particularly close
substitutes such that the merger
parties represent customers’ first and
second choices; or
· the target firm has shown a recent
rapid increase in market share, has
driven innovation or has tended to
charge lower prices than its
competitors in one or more markets in
which the merged firm would operate;
or
· the merged firm would have a
significantly higher market share than
any of its rivals in one or more
markets; or
· the ACCC has indicated to a firm or
industry that notification of proposed
mergers in a specific industry would be
advisable, given past history in that
industry or the level of acquisitive
authority.
Divestiture process
Divestiture undertakings are the most
common form of structural remedy
accepted by the ACCC. As outlined in
the proposed Guidelines, a divestiture
seeks to remedy the competitive
detriments of a merger by either creating
a new source of competition or
strengthening an existing source of
competition. The draft Guidelines make
clear that the ACCC prefers all
divestiture undertakings to occur on or
before the completion of a merger.
Examination of internal company
documents
The Guidelines make clear that the
ACCC intends to increase merger
inspection by utilising internal company
documents, such as board papers,
internal plans, financial accounts and
independent audit reports amongst other
things, to help determine whether
merged parties would otherwise be likely
to be effective competitors in the future.
Conclusion
The Draft Guidelines offer a welcome
update to the 1999 Guidelines. We shall
wait to see whether any submissions
presented to the ACCC translate into
further changes to the Draft Guidelines.
4
Criminalising cartel conduct
The new Labor government has acted
swiftly in an endeavour to fulfil its election
promise to criminalise cartel conduct by
releasing for public comment the exposure
draft of the Trade Practices Amendment
(Cartel Conduct and Other Measures) Bill
2008. The Bill seeks to create a new
criminal regime in addition to redefining the
current civil liability provisions relating to
cartel conduct under the Trade Practices
Act 1974 (Cth) (TPA).
If the proposed legislation is enacted
Australian cartel law will be bought into line
with jurisdictions such as the United States
and the United Kingdom where cartel
conduct is already criminalised.
The new regime – key elements
The Bill proposes a dual criminal and civil
liability regime relating to cartel conduct.
The new provisions will operate in
conjunction with the current prohibition on
collective boycotts known as the
‘exclusionary provisions’ under section 4D
of the TPA.
The proposed legislation will create an
offence to make or give effect to a
contract, arrangement or understanding
(CAU) that contains a “cartel provision”.
The term “cartel provision” is extensively
defined under the Bill but in simple terms is
a provision which has the purpose, effect
or likely effect of:
· fixing prices for the supply, re-supply or
purchase of goods or services;
· restricting or limiting production of goods
or capacity to supply goods or services;
· allocating customers, suppliers and
geographical areas in connection with
the supply or purchase of goods or
services; or
· bid-rigging, by parties that are, or are
likely to be, in competition with each
other.
The concept of “dishonesty” is the prime
means of differentiating between the
criminal and civil regimes relating to cartel
conduct. That is, the Bill seeks to impose
a criminal offence if a CAU containing a
cartel provision is made with the intention
of dishonestly obtaining a benefit.
conduct. However, individuals who are
convicted under the criminal provisions are
also liable to face up to 5 years
imprisonment.
The criminal cartel offences and civil
penalty prohibitions would apply to
corporations as well as individuals who
engage in the proscribed conduct.
Further, a word of warning for related body
corporates of companies that enter into
CAUs containing cartel provisions - they
will be deemed to be a party to the CAU.
A draft memorandum of understanding
(MOU) between the ACCC and the
Commonwealth Director of Public
Prosecutions (DPP) was released
alongside the Bill. The MOU sets out the
policy for enforcement of the new offences
and the roles of, and the relationship
between, the ACCC and DPP. The ACCC
will be responsible for investigating and
gathering evidence of any alleged criminal
cartel conduct while the DPP will be
responsible for prosecuting the new
criminal cartel offences. The ACCC will
continue to prosecute the civil cartel
offences.
Defences and penalties
The proposed criminal and civil offences
will not apply to cartel provisions that are
subject to the collective bargaining
notification regime or authorisation
process, nor to CAUs between related
bodies corporate. The Bill also creates a
defence to the civil penalty provisions for
joint ventures that do not substantially
lessen competition. Curiously, this
defence is not mirrored for the criminal
offences.
Under the Bill, corporations found liable
under the criminal or civil regimes will be
subject to a fine. The fine will not exceed
the greater of $10 million, 3 times the
value of the benefit from the cartel or,
where the value of the benefit cannot be
determined, 10% of the annual turnover of
the Australian corporate group. It is
unclear why the maximum fines for the civil
penalties are the same as those for
criminal cartel conduct. A more illogical
feature of the Bill is a maximum fine for
individuals convicted of contravening the
criminal cartel offences of $220,000 - less
than half the maximum pecuniary penalty
of $500,000 for the contravention of the
civil penalty prohibitions. This is
inconsistent with the Government and the
ACCC’s purported views that criminal
cartel conduct offences are more serious
than other cartel or anti-competitive
Investigation and prosecution of the
proposed new offences
Where to from here?
While the long-awaited release of the Bill
indicates that the new Government is
committed to taking cartel conduct
seriously, there is room for improvement.
The Government has expressed an
intention to legislate the Bill this year but
commentators concerned with its
perceived shortcomings have stressed the
importance of the Government considering
submissions closely and not acting hastily
in its legislative response.
If the Bill is legislated, the changes to the
TPA will be complex and far-reaching with
cartel conduct being defined in more
specific ways than under the existing
legislation.
5
Variation of Class Order [CO 98/1418]
ASIC has issued Class Order [CO
08/11]: Variation of Class Order CO
98/1418. This Class Order makes minor
variations to ASIC Class Order [CO
98/1418] of the Corporations Act 2001,
which gives financial reporting relief to
wholly-owned subsidiaries, by removing
some requirements which are
considered to impose compliance
burdens on group entities seeking to rely
on the relief.
Relief under Class Order 98/1418
Under Class Order [CO 98/1418], certain
wholly-owned subsidiaries may be
relieved from the requirement to prepare
and lodge audited financial statements
under Chapter 2M of the Corporations
Act 2001, where they enter into deeds of
cross guarantee with their parent entity
and meet certain other conditions.
The main changes
The main changes to [CO 98/1418]
effected by [CO 08/11] are:
· the removal of the requirement for a
3
year compliance history with the
financial reporting requirements of the
Corporations Act 2001
· replacement of the requirement to
lodge an annual notice concerning use
of the class order with a requirement to
lodge a notice when the relief is first
applied or the group holding entity
changes, and another notice when the
company ceases to apply the relief
· reduction of the matters which must be
addressed in the certificate required
under [CO 98/1418]
· removal of the requirement for a
statutory declaration when first
entering into a deed of cross
guarantee
· removal of the requirement to lodge
solvency statements by directors and
simplification of the signing
requirements for those statements
These changes were effective from 31
March 2008, and will ultimately make it
quicker and easier for groups to access
this relief.
key contacts
melbourne
Michael Linehan
Partner
t +61 (0)3 9321 9807
e michael.linehan@holdingredlich.com.au
Daniel Marks
Partner
t +61 (0)3 9321 9992
e daniel.marks@holdingredlich.com.au
sydney
David Walker
Partner
t +61 (0)2 8083 0446
e david.walker@holdingredlich.com.au
Ian Robertson
Partner
t +61 (0)2 8083 0401
e ian.robertson@holdingredlich.com.au
brisbane
David Purvis
Partner
t +61 (0)7 3135 0682
e david.purvis@holdingredlich.com.au
disclaimer
The information in this publication is of a
general nature and is not intended to
address the circumstances of any particular
individual or entity. Although we endeavour
to provide accurate and timely information,
we do not guarantee that the information in
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received or that it will continue to be accurate
in the future.