Interpreting commercial contracts: principles you need to know

January 19, 2016

This article considers a recent decision of the High Court and its restatement of the proper approach to the construction of commercial contracts.

In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37 the High Court referred to the relevant principles of interpreting contracts by reference to a number of preceding statements of law.

Principles of contract construction

First, the rights and liabilities of a party under any provision of contract are to be determined objectively. That is, you must look at the entire text of the contract, the context and the purpose of that contract.

Second, you must ask what a ‘reasonable businessperson” would have understood the terms of the contract to mean. That is, what a reasonable person in the position of a party to the commercial contract would have understood. According to the High Court, a commercial contract should be given a ‘businesslike interpretation’. This requires a consideration of the language used by the parties, the commercial circumstances and the objects of the contract.

There are situations where you may need to go outside the four corners of a contract and refer to surrounding circumstances in order to decipher the meaning of a term. However, the High Court has said that if the meaning of an expression used in a contract is clear and subject to only one meaning then there is no need to refer to surrounding circumstances. Accordingly, there is an assumption that in the overwhelming majority of cases the written words of a contract will have a fixed meaning.

Third, you cannot admit evidence of the parties’ statements and actions reflecting their actual intentions prior to entering the contract. This is because the actual intentions of the parties are contained and expressed in the contract itself.

Finally, the interpretation of a contract that is preferred is the interpretation that makes commercial sense. That is, there is an assumption at law that the parties to a commercial document intended to produce a commercial result.

Overview of the High Court case

The Mount Bruce case arose out of a dispute concerning the interpretation of a clause in a commercial contract. Mount Bruce Mining Pty Limited was required to pay royalties to Wright Prospecting Pty Limited on iron ore won from what the contract termed as the “MBM area”. The High Court was asked to consider what the meaning of the terms “MBM area” meant in the contract. It held that the starting point was the language used by the parties in the contract and determined that the “MBM area” referred to a physical area. The High Court held that this meaning was the natural and ordinary understanding of the language used, and that this was consistent with the commercial circumstances and purpose of the contract.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

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Crowdfunding: the legal implications of using the crowd

January 19, 2016

The last couple of years has seen crowdfunding become an international phenomenon. The idea that you can raise funds through an online ‘open-call’ has seen start-ups become multi-million dollar companies overnight. While crowdfunding has its unique advantages, it also carries a number of risks.

Types of crowdfunding models

The application of the law depends on the type of crowdfunding model adopted by the entrepreneur. In this regard, there are four types of crowdfunding models in the market today, with the latter two models gaining the most traction in our global economy: charity, lending, rewards-based and equity.

Rewards-based crowdfunding

Rewards-based crowdfunding allows people to contribute towards a product or service that is yet unbuilt. The funds are made in the form of a donation or advance-purchase in return for a reward or intangible benefit.

Regardless of the amount of reward a funder may receive, the crowdfunding becomes a ‘deal’ that attracts obligations under Australian Consumer Law (ACL). Accordingly, entrepreneurs must appreciate that they have just entered a legal contract with the funders. Like any contract, a rewards-based crowdfunding project is based on promises that an entrepreneur must keep. A breach of a promise may amount to misleading or deceptive conduct under the ACL.

Equity-based crowdfunding

Equity-based crowdfunding allows investors to own a share of the pie. In other words, money is raised by offering equity to investors. But unlike traditional investment options, crowdfunding provides an added level of complexity. One of the major issues facing private company start-ups looking for crowdfunding is the limit of 50 shareholders in the Corporations Act 2001 (Cth). If a private company breaches the limit of shareholders it will be forced to convert to a public company and comply with significant additional governance, disclosure and reporting requirements.

Accordingly, there has been a recent call for the need to ease securities regulation regarding equity-based crowdfunding in Australia. The Australian Government introduced the long-awaited Corporations Amendment (Crowd-sourced Funding) Bill 2015. While this Bill falls short of legitimising equity-based crowdfunding for private companies, it allows start-ups to incorporate as unlisted public companies with reduced governance and other reporting requirements for the first five years.

Other legal implications

Entrepreneurs must look out for intellectual property protection in circumstances where the project involves an invention or a unique service. Registration for trademarks and patents are just some of the risks associated with seeking public funding from the crowd.

Last but not least, entrepreneurs must also be aware of their tax obligations. Unless your crowdfunding is a hobby, financial contributions received may form part of your assessable income and attract income tax. Entrepreneurs should also look out for the goods and services tax (GST) particularly if the reward that is provided to funders is a taxable supply and other crowdfunding activities are subject to the GST.

Disclaimer: This article contains general information only and is not intended to be a substitute for obtaining legal advice.

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Employment law update: triangular sham contracting

January 11, 2016

The sham contracting provision in the Fair Work Act 2009 (Cth) and what you need to look out for as an employer, employee or an independent contractor

An employer cannot convert employees into independent contractors using a third party company. This method, known as “triangular contracting”, was recently analysed by the High Court in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 and found to be in breach of section 357(1) of the Fair Work Act 2009 (Cth).

Known as the sham contracting provision, section 357(1) of the Fair Work Act provides that an employer must not represent to an employee that his or her employment (contract of services) is an independent contracting arrangement (contract for services). In effect, the purpose of the provision is to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status.

Until the date of the High Court’s decision, there was no prohibition against employers avoiding the sham contracting provision using triangular contracting. Under this arrangement, the employer uses a third party company to hire employees but only as “independent contractors”.

In the case before the High Court, Quest South Perth dismissed two of its employees (housekeepers) in order to enter a triangular contracting arrangement with Contracting Solutions Pty Ltd. Under this arrangement, the two housekeepers would be engaged as independent contractors by Contracting Solutions Pty Ltd while performing the same housekeeping work for Quest South Perth. Accordingly, the housekeepers were no longer employees of Quest South Perth. The Fair Work Ombudsman appealed to the High Court from a decision of the Full Court of the Federal Court of Australia.

In conclusion, the High Court held that section 357(1) of the Fair Work Act prohibited the misrepresentation of an employment contract as a contract for services under which independent contractors would be engaged by a third party, such as Contracting Solutions Pty Ltd in this instance.

The effect of the High Court decision is that employers can no longer escape the sham contracting provision by disguising the employment relationship as an independent contracting arrangement through a third party.

Accordingly, employers, employees and independent contractors should ascertain the nature of their contractual relationship and seek expert advice regarding sham arrangements and contracts of employment generally.

Disclaimer: This blog contains general information only and is not intended to be a substitute for obtaining legal advice.

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Hoverboards and the Law

January 11, 2016

While it might look like the perfect Christmas gift, you may need insurance and a number plate for that ‘hoverboard’

Last week a charging hoverboard nearly burnt a family home to the ground in Strathmore. This prompted the Minister for Consumer Affairs, Jane Garrett, to issue a Public Warning Notice warning consumers to look out for hoverboards and the safety incidents that could arise from chargers used to power such devices.

What is a hoverboard?

A ‘hoverboard’ is also known as a self-balancing scooter, glider or modboard. It is an electrical two wheeled ride on device with a single axle. It is controlled by subtle shifts of balance by the rider and has, in some states and territories, been legally classified as a ‘motor vehicle’.

The Public Warning Notice

The Public Warning Notice was issued by the Minister for Consumer Affairs on 5 January 2016, pursuant to section 288 of the Australian Consumer Law and Fair Trading Act 2012.

It warns consumers against recalled brands of hoverboards because of concerns that they could “cause a fire” or “electrotute someone” due to non-compliant battery chargers. In addition it provides a link to the national recalls website http://www.recalls.gov.au/ to help consumers check their hoverboards.

Can a hoverboard be a motor vehicle?

According to the Road Safety Act 1986 (Vic) and the Road Safety Rules 2009 your hoverboard may be defined as a “motor vehicle”. Any hoverboard with a motor output of 200 watts or more is regarded as a motor vehicle.

While hoverboards can be used on private property, as soon as they are out on public roads, footpaths or road-related areas they will treated like any other motorbike, car or truck. Accordingly, hoverboard owners will need to meet all Victorian registration and licensing requirements. This includes the display of a vehicle number plate in accordance with the Motor Vehicle Standards Act 1989 (Vic).

Arguably, hoverboards can also be used in local parks or off-road, but this depends on the laws in place in each Local Council.

The future of hoverboards in Australia

Not only are hoverboards restricted in Victoria, they are also banned in other states and territories in Australia such as Western Australia and New South Wales. While non-compliance with the road rules result in a fine, there are also serious safety concerns regarding the use of hoverboards.

It follows that the success of the Back to the Future devices depends not only on its legality, but also on its ability to meet minimum safety vehicle standards.