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Dev

Variation of Leases: Tips and Traps

May 12, 2016 by Dev

Against a background of the High Court’s imprimatur of the contractualisation of leases, a lease variation agreed by the parties could be viewed simply as a variation of contract.

However, as stated in Halsbury’s “at common law an agreement to vary the terms of the lease was characterised, depending upon the circumstances, as either a collateral personnel agreement between the parties, or as a surrender of the existing lease and entry into a new lease which incorporated the terms as varied”.

In an English decision in 1970, Russell LJ for the Court of Appeal said:

“The “surrender of by operation of law” takes effect whether or not the parties to the new lease intend it to take effect.  Moreover, even if there is no express grant of a new lease the old lease will be surrendered by operation of law if the arrangements made between the landlord and the tenant are such as can only be carried out so as to achieve the result which they have in mind if a new tenancy is in fact created”.2  

The rule was derived from estoppel principles and the parties’ intention was considered irrelevant.

In a 1991 English decision the court said:

“The lessee [was] estopped from disputing the validity of the new lease to which he had agreed, and from denying that he had surrendered the old lease.  The rationale is that the landlord cannot have validly granted the new lease without having first procured a surrender of the old one.  The rule does not depend upon the actual intention of the parties, but upon the impossibility of the two demises co-existing”.3  

But even as far back as 1970 there was some disquiet about the rule.  In the same case I referred to earlier Russell LJ considered a situation where parties to an existing lease wished to increase the rent without altering the land and he said:

“Viewing the matter apart from authority, it is difficult to see why the fiction of a new lease and a surrender by operation of law should be necessary in this case; for by simply increasing the amount of rent, and providing the additional rent shall be annexed to the reversion one is not altering the nature of the pre-existing item of property.  Further, if one looks to convenience, it would be most unfortunate if in these days, when arrangements for increase of rent are so common that the increase should be taken to involve of necessity a legal fiction which, although in most cases it may do no harm, may in some cases have serious repercussions.”

In this paper, I will look at some of the repercussions of this surrender principle after examining what types of variations might constitute a surrender and re-grant and what types may not.

Surrender and re-grant

The main issue is whether the variation is so substantial, or deals with particular topics so that it will be deemed a surrender by operation of law of the existing lease and a new lease creation.

Variation of rent 

    • A number of cases have established that where the rent is reduced it could be seen as a voluntary forbearance, or as the grant and acceptance of a new demise.Whether this “surrender principle” applies may depend on the effect of the alteration.

If a rent review clause is included in a lease, there is no alteration to the terms of the lease and so if the rent is reviewed under the clause, the surrender principle cannot apply.

Correction of Errors or Omissions

    • A variation to correct an error or omission in the lease, will be a supplementary agreement only although material deleted by the supplementary agreement may be used to construe the remaining parts of the lease.

5 

Term of Lease 

    • An alteration of the duration of the lease, by increasing the lease term or adding further options for renewal, is contentious but cases establish that either will affect a surrender of the original lease and the re-grant of a new lease.

In a 1960 decision, a supplemental deed extended a lease for seven years to a lease for 11 years and the surrender principle was held to apply.  And in a 1989 decision involving the inclusion of an option for renewal for a further term a Commissioner said

“In my opinion, a demise with a covenant of renewal is an estate or interest in the land that is different from a demise containing no covenant of renewal, and this is so regardless of whether the covenant of renewal is in a form which provides for the enlargement of the existing term, or is in a form which provides for the grant of a new lease.  I would, therefore, hold that the introduction into a lease by a deed of variation of an option of renewal works a surrender of the old lease by operation of law and a grant of new lease.”

So as stated in Halsbury, “where the term of the lease is altered it is difficult to satisfy the court that there has been a mere variation.”

The duration of the lease may be reduced but this will affect a surrender.8

A change to the leased premises

As Lang has pointed out there are three possible changes:

      1. An addition to the existing premises
      2. A reduction of the existing premises 
      3. Substitution of an entirely different premises, like on a relocation of a tenant within a shopping centre.9  

The Redfern and Cassidy text 10 says the position with (1) is not clear, while Lang says generally (1) and (3) involve the surrender principle. 

As to (2), in Penny v Craber11, the leased premises were reduced (although only the grounds around the leased dwelling) and this was held not to be a surrender by operation of law.  And in Jenkin R Lewis & Son Ltd v Kerman12 the leased premises (and rent) were reduced without constituting a surrender.

So the safest course would seem to be that any addition to the area of the premises will bring in the surrender principle.

Changes to covenants

It has been accepted that an assignment can alter the identity of the parties and therefore the surrender principle doesn’t apply. 

In the Happy Century Pty Ltd v Nezville Pty Ltd decision13 a landlord purported by re-entry to forfeit a lease, and in the subsequent VCAT proceedings a deed of settlement was entered into which restored the lease and varied its terms.  This was treated as a mere variation of the lease without a surrender because the Deputy President found, at paragraph 31: 

“Had the parties intended that there be a step as significant as a surrender and re-grant, it would seem likely that they would have provided for a separate deed to give effect to that intention as well, rather than have it effected or purportedly effected by a clause in terms of settlement executed only by counsel.” 

The Deputy President placed reliance on the fact that there was no variation to the term of the lease and that a provision making Happy Century Pty Ltd provide an additional security deposit by way of bank guarantee when viewed against the totality of the obligations constituted by the lease, was “relatively trivial”. 

In a recent situation in which a client landlord of mine was involved, a tenant had, without the landlord’s consent or knowledge, applied for and obtained a liquor licence for the premises.  I took the view that the lease needed to be amended by including provisions to deal with that.  I treated the matter as involving the surrender principle. 

Other issues which practitioners may need to consider include agreements about the removal of fixtures, internal alterations of works, adding a guarantor or bank guarantee or security deposit provision or altering them on a transfer of the lease. 

Also, and very current after Justice Garde’s VCAT’s opinion, practitioners might need to consider the position if a lease is amended to make clear the landlord’s and the tenant’s responsibilities for essential safety measures. 

So as a general overview, some variations can be made without invoking the surrender principle, and it has been suggested that if the variations are minor “it may be inferred that the parties did not intend a surrender.  In other cases, the alterations may be so numerous or fundamental that an intention to surrender and regrant will be inferred.  For surrender to occur in these circumstances it would not be necessary for other parties to appreciate the effect of the transaction; it would suffice that they intended to create a new relationship”.14  

Why is this important? 

If a new lease is created by a variation it may then become a retail premises lease, whereas the prior lease may not have been. 

Practitioners should consider carefully the position where a lease is not subject to the Retail Leases Act, either because when it commenced a tenant was a public company or a subsidiary of a public company, or the lease was for more than a 15-year term.  If a variation of a lease is entered into when the tenant at the time is other than a public company, and the balance remaining in the term is less than 15 years, the lease may well become a retail premises lease. 

If so, the rights and entitlements of landlord and tenant will necessarily be altered.  The tenant’s position will be substantially improved.  Among other things, the tenant will not have to pay land tax and will have the benefit of the landlord covenants in section 52 of the Retail Leases Act requiring the landlord to maintain the structure of, fixtures in and the plant and equipment at, the premises in a condition consistent with the condition of the premises when the lease was entered into. 

As well the landlord must provide the tenant with a new disclosure statement.  The Small Business Commissioner in a guide has confirmed that a new disclosure statement is required when a retail premises lease is varied.15 If the landlord does not so provide a disclosure statement then under section 17 of the Retail Leases Act, the tenant, no earlier than seven days and no later than 90 days after entering into the lease, can give the landlord written notice that the tenant has not been given the disclosure statement. If the tenant gives the notice, then the tenant may withhold payment of rent until given the disclosure statement; is not liable to pay rent for that period and can give a notice of termination “at any time before the end of seven days after the landlord gives the tenant a disclosure statement”.

Registered leases

In Victoria following an amendment to the Transfer of Land Act in 2014, a registered lease can be varied by a registrable instrument in an approved form. 

But in Victoria amendments cannot be made to the parties, or the term or the area of the registered lease.16 

It follows that if a new area is to be added, a new registered lease must be entered into.  If the area is to be reduced then a partial surrender of the existing lease must be lodged. 

Alternatively, if the variation is not to be registered, a caveat can be lodged to give notice of it.

Now in Victoria by an amendment made to the Transfer of Land Act inserting section 87C, which became effective on 24 September 2014, if a registered mortgagee does not consent to the variation of a lease, that lease variation is not binding on the registered mortgagee or annuitant.17 

So a landlord and tenant must obtain a mortgagee’s consent to any lease or variation of a lease, whether or not it is to be registered.   

If the landlord doesn’t do so it will almost certainly be in breach of its mortgage. 

If a lease which is granted while the premises are unencumbered is then surrendered and a new lease entered into, after the landlord has granted a mortgage, the mortgagee will not be bound by that new lease.  So the new lease will only be enforceable by the parties to it in equity. 

The celebrated case of the Commonwealth Bank of Australia v Figgins Holdings18 is a very good illustration of a mortgagee not being bound by a variation of a lease by the landlord and tenant  (in that case varying the rent to $1.00) when the mortgagor/landlord was in default under the mortgage. 

While a mortgagee can now rely on section 87C, Lang at paragraph 17-050 suggests a mortgagee should:

      1. “Include mortgage covenants prohibiting variation in lease terms during the continuance of the mortgage without the mortgagee’s consent and 
      2. Add in any consent to a lease by the mortgagee that the consent is to the lease in that form and reiterating that the mortgagee’s consent is required to any subsequent variation of the lease.”19

Guarantors

Despite a clause in a deed of guarantee that the guarantor of a lease will be bound by any variation to the lease, it would be prudent to have the guarantor acknowledge their continuing guarantee of the obligations of the tenant as so varied. 

If a variation of a lease is made by an assignee of a lease (new tenant) and the landlord and is so significant that the surrender principle applies, the landlord may lose any rights to sue the assignor (former tenant) unless the assignor (former tenant) has consented.20    

Practitioners also need to be very careful when dealing with a transfer of lease which also includes variations and to consider whether those variations are of sufficient significance or detail to attract application of the surrender principle.  I note the Law Institute of Victoria form of Transfer of Lease does cater for variations of a lease at the same time as a transfer takes place.

The form of variation of a lease

A lease, even if made by deed, may be varied by an agreement which is not a deed21 but prudence says it should be, and any mortgagee’s consent obtained either as a party to the deed or in a separate instrument.  The same applies to all interests registered before the variation. 

The variation should include a provision binding and benefitting successors and assigns of the landlord and the tenant. 

This is particularly important given the protection provided by section 42(2)(e) of the Transfer of Land Act.

The variation should also be expressed as supplemental to the lease so as to pick up section 58 of the Property Law Act 1958 which is as follows:

Provisions as to supplemental instruments 

“Any instrument (whether executed before or after the commencement of this Act) expressed to be supplemental to a previous instrument, shall, as far as may be, be read and have effect as if the supplemental instrument contained a full recital of the previous instrument, but this section shall not of itself operate to give any right to an abstract or production of any such previous instrument, and a purchaser may accept the same evidence that the previous instrument does not affect the title as if it had merely been mentioned in the supplemental instrument.” 

The wording of the variation is extremely important.  This is illustrated by the Price Brent case22 noted by Lang as follows: 

“A firm of solicitors leased three floors of an office building in Melbourne.  Under the lease, the lessee was required to pay a share of the lessor’s operating expenses for each year of the lease.  The parties agreed to cut short the five year lease term by seven months and entered into a variation of lease to give effect to that agreement.  The variation operated from 30 June 1992 and said the lessee was to pay “the sum of $64,479 as a final contribution to outgoings (final outgoing contribution). 

The lessee had not paid its share of the outgoings for the year ending January 1992.  The lessor sought payment of those accrued outgoings in addition to the sum of $64,479 which it said was solely for the outgoings that, but for the variation, would have been payable in the last seven months of the lease.  The lessor’s contentions were dismissed. It was held that, although accrued liabilities under a lease are not generally extinguished on a surrender, the phrase “final outgoings contribution” in the variation of lease was intended to cover not only future outgoings, but past outgoings also.”23 

Precedents for variations are to be found in Lang and Redfern and Cassidy24

A recent decision illustrating why the surrender principle is important

In Richmond Football Club Limited v Verraty Pty Ltd [2011] VCAT 2104 a lease was entered into prior to the introduction of the Retail Leases Act in 2003.  But in 2004 a variation was made making significant change to that lease.  The changes included reducing the rent, amending the rent review and bank guarantee provisions, introducing an obligation to pay GST and, importantly, extending the term of the lease by 10 years to 18 May 2018. 

The senior member of VCAT held that, after referring to Halsbury, the evidence disclosed the parties intended to change the leasing arrangements between them.  The member held that the substantial changes to the original lease operated at law to effect a surrender and a re-grant on substantially the same terms as the original lease as amended by the 2004 variation. 

The significance of this was that the lease then became subject to the Retail Leases Act 2003 and accordingly the Richmond Football Club was able to obtain an order for repayment of land tax that it had paid under a mistake and contrary to section 50 of the Retail Leases Act.  The member also referred to section 94 of the Retail Leases Act which he said operated to include provisions in the agreement. 

The case is recommended reading for lawyers in this area because the Counsel acting for the landlord raised just about every possible defence that could be raised to the football club’s claim.  The defences included estoppel (because the RFC had not sought to enforce new rights arising under the Retail Leases Act until December 2009 being more than six years after the 2004 variation. 

The member examined whether estoppel by convention would apply.  The member observed that where a transaction was found to be invalid for non-compliance with the provisions of the Retail Leases Act, that non-compliance cannot be circumvented by reliance upon the doctrine of promissory estoppel.  At paragraph 53 the member did not accept that RFC was estopped from relying upon the provisions in the Retail Leases Act. He did not find on the facts that RFC represented that it would not so rely. He considered that section 94 operated to negate a defence based on promissory estoppel, in circumstances where nothing more is done than execute a document which, on its face, contains provisions which are contrary to the Retail Leases Act.

Fortunately for the RFC the “re-granted lease” was for a term of less than 15 years and so a further defence raised by Counsel acting for the landlord that Ministerial Order S184 (which says certain leases for more than 15 years are not retail premises leases) applied to the circumstances was dismissed.

The landlord’s Counsel then raised unconscionable conduct and suggested there was good consideration for the payments and relied upon the Dog Depot decision25  to elaborate on the latter point.  Counsel submitted that the landlord was entitled to compensation for lost land tax under a counter-restitutionary claim for use and occupation.  The member said however that it couldn’t be said that RFC has been unjustly enriched by not having to pay the landlord’s land tax in circumstances where it never had an obligation to do so. 

The last line of defence raised by the landlord’s Counsel was that the action brought by RFC, or at least part of it, was statute barred and he referred to the Limitation of Actions Act 1958.  Here Counsel was successful and the claim for money the landlord had received was statute barred insofar as it related to the first payment of land tax made on 1 April 2004 when the proceeding was filed in the Tribunal on 29 October 2010.  The final order was that the landlord was obliged to repay RFC $125,320 being money the landlord had received for land tax mistakenly paid after 29 October 2004.

A drafting suggestion

A possible way to address the issue may be to include wording like the following in a lease:

“If there is a variation of this lease the lease continues and the variation does not constitute a surrender of this lease and a regrant of a new lease.”

However, the concentration by the Senior VCAT Member in the RFC case referred to above on the intention of the parties perhaps means this clause may assist a defence argument that a variation should not be treated as a surrender and regrant.

Further, to assist with an estoppel argument, perhaps a further warranty or covenant by a tenant that it agrees that any variation of the lease will not be a surrender of the lease and a regrant of a new lease could also be included.

However if there are significant variations to a lease, like an extension of the term or an addition to the area of the premises, the nature of those variations may mean a court or tribunal would have difficulty in finding that the intention of the parties was not to surrender the lease and enter into a new lease, despite the warranty or a covenant.

So no guarantee is given by the author that the suggested wording above will be successful in subsequent proceedings.

References

      • Bradbrook, Croft & Hay, “Commercial Tenancy Law” 3rd Edition.
      • “Lang’s Commercial Leasing in Australia”.
      • Redfern & Cassidy “Australian Tenancy Practice & Precedents”.
      • WD Duncan, “Commercial Leases in Australia” 6th Edition.
      • Halsbury’s Laws of Australia, paragraphs 245-1620 and following.
      • “Leases and Mortgages – A Guide to Contemporary Issues in Property Law”, Leo Cusson Institute November 1997, Chapter 6 “The Protection of Leases in Victoria” at page 177 and following.

Footnotes

    1. Halsbury’s Laws of Australia – 245 Leases and Tenancies, “Variation of Lease Terms” [245-1620] at 7/3/2016.
    2. Jenkin R Lewis & Son Ltd v. Kerman [1970] 3 All E.R. 414 at 419.
    3. Capolingua v Phylum Pty Ltd (1991) 5 WAR 137.
    4. See the cases referred to in “Commercial Tenancy Law”, Bradbrook, Croft & Hay, 3rd Edition, page 510. Note the forbearance doesn’t alter the terms of the lease and also see Central London Property Trust Ltd v High Trees House Ltd    [1956] 1 ALL ER 256.
    5. Centrepoint Custodians Pty Ltd v Lidgerwood Investments Pty Ltd [1990] VR 411.
    6. O F Gamble Pty Ltd v Whitemore Pty Ltd (1989) 2 WAR 327.
    7. See Halsbury above.
    8. Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272.
    9. “Lang’s Commercial Leasing in Australia” para 17-020.
    10. “Australian Tenancy Practice and Precedents” [13 05].
    11. (1967) 1 NSWR 683.
    12. Referred to above – see footnote 2.
    13. (2000) V ConvR 58-546.
    14. See footnote 12 above.
    15. See www.vsbc.vic.gov.au/faq.
    16. Section 67A of the Transfer of Land Act.
    17. Section 87C of the Transfer of Land Act.
    18. (1994) ANZ Conv R 633.
    19. Lang paragraph 17-050.
    20. See CPT Custodian Pty Ltd v Ironbark Hills Pty Ltd [2011] QDC 4 where an extension of the term released the assignor from rent payments when the assignee defaulted.
    21. Plymouth Corporation v Harvey (1971) 1 ALL ER 623 at 627.
    22. National Mutual Life Association of Australia Ltd v Price Brent Services & Ors. [1995] VSC 277 (unreported).
    23. Lang paragraph 17-100.
    24. See footnotes 9 and 10 above.
    25. Dog Depot Pty Ltd v. Ovidio Carrideo Nominees Pty Ltd [2003] VCAT 1990.

Filed Under: Property, Victoria Tagged With: lease variation, Retail Leases Act, variation of contract

New Lending Protections for Small Business

March 17, 2016 by Dev

ASIC releases guidance on new protections for small businesses against unfair lending contract terms.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 extends the protections contained in the Australian Consumer Law against unfair contract terms to small business as from 12 November 2016.

While the new protections apply to small business generally, the focus of this article is on how they will apply to, and influence, lending activities.

The Australian consumer law, contained at Schedule 2 in the Competition and Consumer Act 2010 (Cth), currently gives “consumers” protection against unfair contract terms contained in standard form loan contracts.

The new changes will extend the scope of the Australian Consumer Law to capture lending to small business (explained later) where a loan is made pursuant to a “standard form contract”. Changes have also been made to the Australian Securities and Investments Commission Act 2001 (Cth).

In February 2016 ASIC released an information sheet (INFO 211) foreshadowing the imminent changes and giving guidance on the new protections available for small business in circumstances where they borrow.

The extension of the Australian Consumer Law reflects an attempt by the Government to offer some protection to small business against unfair contract terms which unfortunately seem to be prevalent in the Australian lending market. Philosophically for the Government, this is a more acceptable way of proceeding rather than seeking to regulate lending to small business directly. Earlier proposals to regulate business lending were put on hold (abandoned?) some time ago.

What does this mean for lenders?

If a lender makes or varies a standard form loan contract involving a small business borrower as from 12 November 2016, the lender will need to make sure that the standard terms and conditions of the loan contract do not contain any provisions which might be considered to be “unfair contract terms”.

1. Application of the new legislation

The new unfair contract terms protections will apply to all standard form contracts used by lenders entered into or renewed on or after 12 November 2016. For the protections to apply at least one party to the contract must be a “small business”.

2. What contracts are covered?

The unfair contract terms legislation only applies where a “standard form” contract is involved. Most lending to small businesses involves use by lenders of “standard form” contracts. Realistically, the new provisions will apply to most transactions involving loans to small business.

3. What is a small business?

For the purposes of the Australian Consumer Law a small business is a business employing less than 20 people and where the contract is worth up to $300,000 in a single year or $1,000,000 if the contract runs for more than one year. (Refer section 23(4) of the Australian Consumer Law and section 12BF(4) of the ASIC Act.)

4. What is a standard form contract?

As ASIC points out in its information note, a standard form contract is one which has been prepared by one party to the contract and is not subject to negotiation between the parties – that is, it is offered on a “take it or leave it” basis. If a small business asserts that a contract is a standard form contract, then the contract is presumed to be so unless proved otherwise. There are various matters that can be taken into account by a court in determining whether or not a lending contract is a standard form contract and it must take the following matters into account whether:

  • One of the parties has all or most of the bargaining power relating to the transaction.
  • The contract was prepared by one party before any discussion relating to the transaction occurred between the parties.
  • Another party was, in effect required either to accept or reject the terms of the contract in the form in which they were presented.
  • Another party was given an effective opportunity to negotiate the terms of the contract.
  • The terms of the contract take into account the specific characteristics of another party or the particular transaction.

5. Who determines whether or not a term is an unfair contract term

The first step is for the allegation to be made by a small business that the contract is a standard form contract and a contract term is unfair. When that allegation is made the onus of proof then reverses and it is for the lender to demonstrate that the contract is not a standard form contract.

ASIC states in its information sheet that ultimately it is for the court to determine whether or not a contract term is unfair. While that might be correct in theory, in practice most matters do not reach the courts. ASIC, ACCC and State and Territory consumer offices all have jurisdiction in this area and have traditionally taken an active stance in this area with consumer contracts.

ASIC and other Government regulators have many weapons in their armoury to use in circumstances where unfair contract terms or practices are in play. What this means in practice is that it is not often a court is called upon in this area to adjudicate on such matters. Most outcomes are negotiated or subject to quasi-judicial procedures.

6. Not all contract terms will be covered

It is important to note that not all standard form lending terms fall within the ambit of the unfair contract terms legislation. The protections do not cover:

  • Terms that define the main subject to the contract.
  • Terms that set the upfront price payable.
  • Terms that are required or expressly permitted by law of the Commonwealth, or a State or Territory.
  • In information sheet 211, an example is given as to what is meant by the upfront price payable for a consumer contract. ASIC states
    • “the upfront price payable for a loan includes the amount borrowed (principal), the interest payable and any fees disclosed at the time the contract is entered into. It does not include contingent fees, such as fees arising from a default on the loan.”

7. Review of small business loan contracts

It is now important that lenders to small business undertake a comprehensive review of their loan and security documentation to ensure that they are not open to challenge under the unfair contract terms legislation as from November 2016. Areas which may warrant particular attention include:

  • Obligations imposed upon borrowers during the currency of the loan
  • Default provisions and how they operate
  • Fees and charges payable after default has occurred
  • Review of any right to unilaterally vary terms of the loan contract.

8. Broader implications for lenders

Small business lending relies upon lenders being able to take speedy and effective action against borrowers in circumstances where there is a default.

The freedom of lenders to small business to continue to act as they have in the past may well be limited in the future. In addition, the area of fees charged to borrowers after default has occurred has often been an area of some consternation for small business and this is an area also likely to come under scrutiny.

Lenders to small business need to treat these impending changes seriously. In the past ASIC, ACCC and the State and Territory Government, consumer authorities have not been shy in taking action and becoming involved in situations where they consider there is an unequal bargaining power situation and one party is acting in an “unfair” manner to another party. The mobile phone market is an example where involvement by consumer authorities has resulted in vastly different principles of contracting in this area.

Similar changes occurred in the fitness industry with their standard form contracts.

9. Further resources

While most of the information published to date is related to unfair contract terms insofar as they affect consumers, the principles enunciated are still relevant. In addition to ASIC Information Sheet 211, refer to A guide to the unfair contract terms – law (jointly published by relevant Government authorities).

Filed Under: Australia, Banking and Finance, Corporate and Commercial, Mergers and Acquisitions Tagged With: unfair contract terms

Hutchison Ports Dispute a Timely Reminder to Review Terms and Conditions

September 2, 2015 by Dev

Few industries are impacted by industrial action as often or as significantly as freight and logistics. Industrial action slows supply chains, increase costs and can cause significant losses. Now the dust has settled on the recent Hutchison industrial dispute, the key question is: will your terms and conditions protect you from claims by your customers?

How could you be liable?

When goods cannot be cleared through a port there are three main potential areas of liability:

  • Storage, container detention and other charges associated with the delayed clearance of the goods
  • Economic costs incurred by the consignee of the goods from not having access to the goods and
  • Loss of perishable goods caused by the delayed clearance.

As a broker/forwarder you may be directly contractually liable to the service provider for the storage and other fees associated with the delay.  You will of course try to pass these fees onto your client.

You may also be directly liable for claims by the consignee or owner of the goods for losses they suffer associated with the delay.  These claims are likely to be based on what service/delivery times you contractually promised -for instance, if you promised to deliver  the goods by a certain date or for a certain price.

There may also be potential exposure in negligence.  This exposure is not great in the case of losses caused by industrial action unless you knew of the industrial action and did not take any reasonable measures to reduce its impact (such as changing the discharge port).

It seems unfair that the broker/forwarder could be liable

It is inherently unfair that a broker/forwarder could be liable for the impact of industrial action.  However, your client will think it is just as unfair that they carry the loss.  The individual workers will not be sued and the port operator will almost certainly have contractually excluded their liability.  In these circumstances, it may come down to a fight between you and your client.

How to manage the risk

These risks are not new and your terms and conditions should address these risks as follows:

  • Clearly state that you enter into contracts with third parties as the agent of your client and it is your client that is liable for third party charges; or alternatively
  • Clearly state that your client must indemnify you for costs you incur in performing the services, such as third party costs
  • Exclude all liability for losses caused by industrial action (often included as part of the force majeure clause) or
  • Exclude liability for losses caused by delays, your negligence or actions of others that are outside your control.

These clauses will often be effective in limiting your liability, provided you can prove that the terms and conditions formed part of the agreement with the customer.

In the case of the recent Hutchison industrial dispute, it is worth noting that the picket line was formed by workers and members of the community.  Terms and conditions should be reviewed to ensure they exclude community protest action, not merely “industrial action”.

Do your T&Cs form part of the contract?

Almost all brokers/forwarders have written terms and conditions.  They may appear on your website or be printed on the back of invoices.  However, these acts alone will rarely result in the terms and conditions being binding on your customer.

Merely sending a copy of your terms and conditions to your client is not enough. It is necessary to prove that your customer was aware of your terms and conditions and accepted them before your services were performed.

An effective way of ensuring this is by:

  • Providing your clients with a letter enclosing your terms and conditions and advising that all services will be carried out pursuant to those terms and conditions
  • Requiring the client to sign a letter acknowledging the receipt and acceptance of the terms and conditions
  • Retaining a copy of the signed acceptance of the terms and conditions on file and
  • You objecting to any client terms and conditions that may be provided to you (such as on a client purchase order).

It is hard to predict in advance the events, like industrial action, which will have you running for a copy of your terms and conditions.  However, it is clear that many in the logistics sector base their pricing on a low-liability service offering.  If you couldn’t offer your current pricing and carry all associated risks, you cannot afford to take chances with your terms and conditions.

Filed Under: Customs and Global Trade, Transport and Logistics Tagged With: T&Cs, terms and conditions

Proposed Changes to Unfair Contract Term Laws and How They Impact Customs Brokers/Forwarders

March 26, 2015 by Dev

The Federal Government recently announced that laws protecting consumers against unfair contract terms will be extended to provide protection to the small business sector. This raises a number of issues for customs brokers and freight forwarders, particularly in respect to exclusions of liability, situations where carriage of goods can be avoided and penalties for breaching the contract.

What’s the issue?

Many businesses operate on the basis that their customers accept a standard form contract, that is, a contract that is not negotiated and presented on a take it or leave it basis. These contracts are commonly one-sided. Often terms may be included excluding any liability for negligence, allowing the supplier to take payment but avoid supplying the services or allows the supplier to unilaterally change contract terms, including the price for services.

Where consumers enter into these contracts, provisions exist allowing a Court to declare a term unfair and make it unlawful for the supplier to reply on that term. Following a review, the Federal Government has announced that the unfair contract provisions will be extended to protect small businesses.

What is the impact for brokers and forwarders?

You supply small businesses

Almost all brokers/forwarders will supply services to small businesses through the use of a standard set of terms and conditions. This contract is likely to be covered by the new law in situations where you have most of the bargaining power and your T&Cs are offered on a “take it or leave it basis”.

A term in those standard T&Cs will be potentially unenforceable against a small business customer where it is considered unfair. Terms will be considered unfair where they:

  1. cause a significant imbalance in the parties rights and obligations
  2. are not reasonably necessary to protect the interests of the advantaged party and
  3. would cause detriment to the small business if relied on.

Examples may be a clause that requires the small business to indemnify the broker/ forwarder even where the loss was caused by the negligence of the broker/forward or a clause that enables the broker/forwarder to amend the terms of the contract without the consent of the small business.

You are a small business

If you are a small business you may be subject to unfair contract terms in standard form contracts that may in the future be unenforceable. Standard form contracts are often used by energy providers and telecommunication companies.

It is not clear yet whether supplies by small businesses will be covered. For example, if you supply clearance services to a listed company and it provides the standard form contract, will you be able to avoid unfair contract terms within that contract? The current consumer provisions only apply to acquisitions by the consumer.

Exclusion of shipping contracts

The current unfair contract provisions applying to consumers do not apply to shipping contracts. This may be reviewed as part of a broader review of the Australian competition and consumer law. However, if this exception remains, it is important for brokers/forwarders to consider whether their terms and conditions should have separate provisions that apply to shipping contracts only (not covered by the law) and other provisions which apply to customs clearance, storage, land transport and advisory services.

Issues to be determined

The recent announcement leaves many questions unanswered. Most importantly, what is a small business for the purpose of this law? Will it be based on staff numbers (15 or less?), annual turnover ($2 million or less?) or the size of an individual transaction ($40,000 or less?).

Will the provisions apply to contracts where a small business is supplying a large business? For example, where a small business supplies one of the large supermarket chains and must accept their terms and conditions. The current consumer provisions naturally only apply to acquisitions by the consumer.

Will the provisions apply to supplies by one small business to another small business? It may be thought that in this scenario there is not an imbalance of bargaining positions and legislative protection is not needed. If the provisions do extend to such transactions it may cover situations where a freight forwarder engages a broker to perform services.

Impact on the industry

Standard form T&Cs are common in the customs and transport industry. Most often these T&Cs are one-sided and reflect pricing that is based on zero liability. It also reflects the reality that often some part of the services will be performed by third parties who will also expect zero liability.

Such limitations on liability have allowed extremely competitive pricing. If the ability to fully exclude liability is removed, but pricing pressures remain, the industry will be placed under even greater pressure.

The introduction of the consumer provisions ultimately saw an improvement in standard form consumer contracts. Clearer language was used, and unfair terms that were not necessary for the protection of the service provider were often removed. There will undoubtedly be some brokers/forwarders who adopt this approach and others who prefer to keep their T&Cs as is and rely on them until a Court says otherwise.

This proposed change is yet another significant reason why such a review of your terms and conditions is important.

Filed Under: Customs and Global Trade Tagged With: T&Cs, terms and conditions, unfair contract terms

Worldwide Survey on Taking Security over Personal/Moveable Property and Collateral

March 11, 2015 by Dev

Interlaw Ltd, an Elite* global law firm network, is delighted to present this survey of how practices differ across the world when a lender takes security or collateral over moveable property.  Terminology can be an issue here – some talk of “security”, others of “collateral” or “charge”; some call the assets in question “moveable”, others talk of “personal property”; and that’s before we bring other languages into consideration. By whatever name called, we’re considering taking security for finance over such things as vehicles, plant and equipment, receivables, contractual rights – in other words both tangibles and intangibles, but generally not land and buildings.

With the globalisation of commerce and finance, it is of vital importance to lenders and other financiers to understand that the opportunities for taking collateral in their home jurisdictions may not exist in other jurisdictions or indeed that they may be greater in other jurisdictions.  While no one can be an expert in all jurisdictions, it will be helpful to have some advance feel for what might be on offer elsewhere.

This survey has been prepared by Interlaw member law firms that participate in the network’s banking and finance special business team.  It is written in in layman’s terms for the finance professional.

We start with some teaser questions – ” Lenders Beware – Did you Know?” – highlights of what seems normal in one jurisdiction but which may cause consternation in another.

In some jurisdictions, for example, a lender can take a floating charge, valid as a security overall a debtor’s assets from time to time without the need to specify those assets individually.  Other jurisdictions would regard that as anathema.  The Interlaw member firms can guide you through this labyrinth wherever you are or your debtor’s assets are.

Five questions are then answered for each jurisdiction:

  • How do you secure moveables (also known as personal property, moveable assets or collateral) both tangible and intangible in your jurisdiction?
  • What, generally, is the priority of different types of security available for these types of assets?
  • What taxes, duties or other fees are payable on these securities?
  • What, generally, is the method of enforcement of these securities?
  • What other issues should be considered when looking at securing such assets?

We hope you find this useful as a quick reference guide.  But it is only a guide.  Nothing in what follows should be relied on as legal advice; it is not intended as such.  However, each contributing firm would be delighted to hear from you and expand on the simplified summaries given in this survey.

* Chambers & Partners ranks Interlaw as an “Elite” Global Law Firm Network, the highest ranking awarded.

Filed Under: Banking and Finance Tagged With: moveable property

Isolated Genetic Material: Invention or Land Grab? The D’Arcy v Myriad Genetics Case

January 7, 2015 by Dev

Key points

  • The Full Federal Court has upheld the lower court decision in the BRCA 1 and 2 gene patent cases, the 5 appeal judges holding unanimously that genetic materials in their isolated form (whether DNA (genomic or cDNA) or RNA) are patentable in Australia.
  • This places the Australian and US position directly at odds on the question of whether or not an isolated gene sequence is or is not currently patentable.
  • The policy debate continues about whether amendments to the Patents Act 1990 (Cth) are needed in light of the Australian decisions.
  • The High Court has yet to hear an application for leave to appeal from this decision so watch this space.

How we got here, biotechnically-speaking

When the writer was studying biochemistry as an undergraduate, it was in the days when the techniques for isolating human genetic material has just been developed, and it was before the whole human genome had been sequenced.

It was, in fact, thought at that time that it would be many years hence that computing power would have the capacity to map the whole human genome.

History has shown that the Human Genome Project was in fact completed years earlier than originally predicted1. Both before and after that time the process of mapping various mutations in human genes and uncovering their significance continued apace.

The diagnostic implications of this new technology are, of course, huge, as are the implications for treatment of a wide range of illnesses and ailments based on gene therapy. The impetus for large-scale investment in these technologies is the potential commercial rewards to be delivered via patenting it.2

The argument against granting these patents is on the basis that since genes are naturally occurring substances it should not be possible to obtain a patent over a gene sequence that one discovers to have special significance, as in the case of the BRCA1 and BRAC2 genes, (the patents for which incidentally expire in August and December next year respectively).

The Australian story to date

In our last article on this topic3 we predicted that the full Federal Court in the landmark Australian appeal case of D’Arcy v Myriad Genetics Inc (D’Arcy)4 (5 September 2014) would not overturn the decision of Nicholas J 5 at first instance. Indeed, they did not. The enlarged bench of five judges were, in fact, unanimous in their dismissal of the appeal.

We also argued the wind had largely gone out of the whole debate — with patent filings related to isolated human gene sequence patents declining sharply since 2003, new filings tending to be based on modified gene sequences or method claims,6 and the BRCA1 and BRCA2 genes patents heading for expiry. In this we appear to have been mistaken as the lawyers for the appellant have recently announced that they will be seeking leave to appeal this decision to the High Court.7

Why the US position is so different

Perhaps encouraging them is the fact that, as we have previously canvassed, the position in the US remains starkly at odds with the above. The leading decision there remains that of the Supreme Court in Association for Molecular Pathology v Myriad Genetics 8 of last year.

As we have previously pointed out, the tests to determine patentability in the US and Australia are different and in the US, the question of whether or not the isolated DNA is a “product of nature” is akin to asking whether human genes are more like chemicals, or computers,9 and is by its nature a more philosophical question. The question of whether the isolated DNA is an “artificially created state of affairs”, which is the question that our courts are considering, seems altogether a more practical question to answer, and allows consideration of the methods and techniques that are developed and used to isolate the gene or genes in question.

The Court in D’Arcy was at pains to point out that “expressions such as ‘the work of nature’ or ‘the laws of nature’ are not found in (our) statute; nor are they useful tools of analysis”. 10 The Court felt that these expressions could in fact “fairly be employed to challenge almost any patent”.11

The Court made the point that the claims in the US cases and the Australian cases were markedly different, the US claims focusing on the genetic information itself, whereas the Australian claims focus on the preparation of a polypeptide product.

It must also be said that the Court was more persuaded by the reasoning of Lourie J in the earlier decision of the Court of Appeals for the Federal Circuit,12 in which he considered that the breaking of the covalent bonds in the isolation of the gene had the effect of producing a markedly different compound than that which was “found in nature”. The judgment also refers with some approval to her Honour Moore J’s judgment in that regard.13

It must also be remembered that even the US Supreme Court decision does not generally apply to cDNA versions of naturally occurring genes, which are accepted as synthetically produced molecules that are not naturally occurring (except where they are short strands of DNA that may be indistinguishable from naturally occurring DNA).

The differences between the approach of the US Supreme Court and the Australian courts will be discussed in more detail in a forthcoming Australian Intellectual Property Law Bulletin article. 

What has been exposed by these two different lines of cases is a patent system which has at its core concepts which could be described as somewhat philosophical (the US) and our patent system which is more rooted in the concepts of innovation and manufacturing, rather than philosophy.

The policy question which then arises is which is the more appropriate? If one accepts that the purpose of a functioning patent system is to encourage investment into invention and innovation by granting patent monopolies, then we would argue the more pragmatic considerations in the Australian system are the more proper considerations.

As long as the “discovery” is also a product which can also be described as an “artificially created state of affairs which has economic significance” 14 and has the requisite elements of “utility, ingenuity and inventiveness”,15 or as more commonly expressed, novelty and inventiveness, then why should it not be worthy of a patent?

Why the Full Federal Court decision is unlikely to be overturned

The unanimous judgment is carefully worded and relies on a number of factual findings about the patent, based on a detailed analysis of the scientific background, including that:

  • The isolated nucleic acid (gene) should be considered a chemical compound which is a product,16 and should not be considered merely as information or a code. This is “consistent with patent law, and persuasive”.17
  • Once isolated from the cell, the compound has structural and, more importantly, said the Court,18 functional differences from that nucleic acid as it exists in the human body. The Court gave the example of a cap and poly-A tail which exist in naturally occurring mRNA but are absent in isolated mRNA. This chemically alters that nucleic acid, as “the cap protects the mRNA molecules from any genetic degradation and assists in transport to the cytoplasm where translation occurs”.19
  • The compound has valuable economic use, as it contains a sequence identified by “comparison with tables created following extensive epidemiological research which describes the location of the mutations or polymorphisms as they exist in DNA” and “The DNA was constructed and these locations identified by the work of the inventors”.20
  • The National Research Development Corp (NRDC) principles and Australian law require that the “analysis should focus on differences in structure and function effected by the intervention of man and not on the similarities”.21
  • Naturally occurring DNA and RNA as they exist in human cells cannot be patentable subject matter, but material derived from it such as the isolated compounds under consideration can be.

The Court eschewed the nevertheless “customarily persuasive”22 argument presented by David Catterns, QC, counsel for the appellant, that the process of isolation of the nucleic acid should be viewed as a metaphorical microscope enabling one to see into the relevant gene of a particular subject whose vulnerability or susceptibility to cancer was being assessed.

The Court also expounded on the worthiness of not setting the boundaries of “the conception of patentability” by reference to the scientific knowledge of a particular age and asserted that this “explained the broadening concept of patentability since the first quarter of the 17th century”.23 Their Honours had no problem basing their analysis on the principles expounded in the NRDC case,24 the principles of which have been applied in many cases over the years involving new technologies not even conceived of in 1959.25

As a long-ago student of biochemistry, the reasoning of the Court relating to the fact that “a fragment of a DNA sequence has different properties to the parent molecule from which it is derived” by virtue of the fact that DNA is a polymer, with “a different molecular charge, different chemical bonds and a different chemical composition as compared to the monomers in aggregate”, has a particular appeal for this author.26

As the Australian Law Reform Commission (ALRC) commented in its report into gene patenting back in 2004 that a ban on gene patenting was not advisable, because, among other things, it may fail to deliver the anticipated benefits as “many pure and isolated genetic sequences do not exist in exactly the same form in nature — for example, patented sequences may not contain the introns that are found in the naturally occurring material”.27

The decision appears to be consistent with this type of thinking.

The Court did not accept Ms D’Arcy’s submission that the NRDC principles were inapplicable to this case, and commented that the submission failed to recognise that the NRDC principles were applicable to products like the isolated nucleic acid in this case, as well as to processes.28

Why the Full Federal Court decision is of limited application

This case only considered:

  1. the patent29 claims that related to the genetic material itself (claims 1–3) and
  2. the narrow threshold question of whether that genetic material is prima facie patentable within the meaning and boundaries of s6 of the Statute of Monopolies.

In relation to 1 above, the patent also included claims for methods of diagnosis, and these were not considered, but the judgment does mention the 2013 High Court decision of Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd30 which reaffirmed that a method or process for treatment of the human body is just as prima facie patentable as a product for the same.

As to 2 above, the patent law concepts of novelty and inventiveness in the context of patenting isolated genetic material were not considered in this case, as novelty was not challenged and there was no dispute that an inventive step was involved in the inventions.31

Why the Patents Act is unlikely to be amended as a result of this decision or others like it

The most compelling policy argument for exempting isolated genetic material from the Patents Act is that to allow such patents will restrict the right of medical researchers to access them.

The new s 199C to the Act, introduced by the Raising the Bar reforms of 2012, of course is intended to address this issue, and we have commented on it in a previous article.32

The text of the section is set out below:

119C infringement exemptions: acts for experimental purposes

  1. A person may, without infringing a patent for an invention, do an act that would infringe the patent apart from this subsection, if the act is done for experimental purposes relating to the subject matter of the invention.
  2. For the purposes of this section, experimental purposes relating to the subject matter of the invention include, but are not limited to, the following:
  • determining the properties of the invention
  • determining the scope of a claim relating to the invention
  • improving or modifying the invention
  • determining the validity of the patent or of a claim relating to the invention and
  • determining whether the patent for the invention would be, or has been, infringed by the doing of an act.

As far as patenting the human body itself is concerned, the Act has recognised this as an area unsuitable for patenting for some time. Section 18(2) of the Act reads as follows:

Human beings, and the biological processes for their generation, are not patentable inventions.

Specific exclusion of genes from patentability has been considered by both the ALRC (in 2004) and Parliament (in 2010) and it has not occurred.

Conclusion

The reasoning in D’Arcy, with its emphasis on the “work and effort”33 involved in both obtaining the isolated product and in creating the cDNA sequence to which it is to be compared for the purpose of the diagnosis, chimes with other Australian appellate court decisions in the field of copyright, in which the “sweat of the brow” expended in, say, the compilation of a database,34 was of primary significance in deciding the threshold question of subsistence of copyright. The pragmatic jurisprudence of the Australian courts is consistent in both strands of authority.

On a more fundamental and factual level, the Court in D’Arcy simply did not agree with either of the metaphors which appear to have found favour in the US line of cases, in particular the one in which an isolated nucleic acid is akin to a branch that has been snapped off a tree. The Court in D’Arcy held that:

That is inapposite. The branch has not changed — it is simply divorced from the tree, whereas the chemical and physical makeup of the isolated nucleic acid renders it not only artificial but also different from its natural counterpart.35

The Court went further and said this means that the US Supreme Court was wrong when it held that the isolated nucleic acid is a “product of nature”, however “in any event that exclusion is not in accordance with the principles of patent law in Australia and has been specifically rejected as a reason for exclusion in NRDC.”36

That is a conclusion with which this former student of biochemistry respectfully concurs.


  1. The Human Genome Project was completed in 2003.
  2. Centre for International Economics Final Report: Economic Analysis of the Impact of Isolated Human Gene Patents May 2013.
  3. C Lau and C Logan “Patentability of genetic material — where does it stand today?” (2013) 26(3) Australian Intellectual Property Law Bulletin.
  4. D’Arcy v Myriad Genetics Inc (2014) 313 ALR 627; 107 IPR 478; [2014] FCAFC 115; BC201407309
  5. Cancer Voices Australia v Myriad Genetics Inc (2013) 99 IPR 567; [2013] FCA 65; BC201300552.
  6. Above, n 2.
  7. Maurice Blackburn Lawyers, Maurice Blackburn files leave to appeal  to  High  Court  in  breast  cancer  gene  patent  case, 17 September 2014, accessed 1 December 2014, http:// www.mauriceblackburn.com.au/about/media-centre/media- statements/2014/maurice-blackburn-files-leave-to-appeal-to- high-court-in-breast-cancer-gene-patent-case/.
  8. Association for Molecular Pathology v Myriad Genetics (2013) 569 US 12-398.
  9. A Selleck “Human Genes: chemicals or computers?” (2010) 23(3) Australian Intellectual Property Law Bulletin.
  10. D’Arcy v Myriad Genetics Inc (2014) 313 ALR 627; 107 IPR 478; [2014] FCAFC 115; BC201407309 at [13].
  11. Above, n 10, at [115].
  12. Association for Molecular Pathology v United States Patent and Trademark Offıce and Myriad Genetics, Inc, (2012) 689 F.3d 1903.
  13. Above, n 10, at [145]–[149].
  14. This type of product was held in the leading case of National Research Development Corp v Cmr of Patents (1959) 102 CLR 252; [1960] ALR 114; [1961] RPC 134; BC5900480 to be included in the definition of “method of manufacture”.
  15. Above, n 10, at [12].
  16. Above, n 10, at [143].
  17. Above, n 10, at [155].
  18. Above, n 10, at [212].
  19. Above, n 10, at [177].
  20. Above, n 10, at [210].
  21. Above, n 17.
  22. Above, n 10, at [6].
  23. Above, n 10, at [10].
  24. Above, n 10, at [106]–[110].
  25. For example, in Re Sheng-Ping Fang (2011) 96 IPR 134; [2011] APO 102, about a patent application for a system to represent and identify prizes for an online award or loyalty program
  26. Above, n 10, at [146].
  27. Extract from ALRC report as quoted in D’Arcy, above, n 9, at [158].
  28. Above, n 10,at [166].
  29. Patent number 686004
  30. Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (2013) 304 ALR 1; 88 ALJR 261; [2013] HCA 50; BC201315312.
  31. Above, n 10, at [206].
  32. P Ng and W Liu “Raising the bar? The new patent law reforms and their impact on patentability of genetic material” (2011) 24(4) Australian Intellectual Property Law Bulletin.
  33. Above, n 10, at [8].
  34. See IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458; 254 ALR 386; [2009] HCA 14; BC200902942 and also Telstra Corp Ltd v Phone Directories Co Pty Ltd (2010) 194 FCR 142; 273ALR 725; [2010] FCAFC 149; BC201009581.
  35. Above, n 10, at [211].
  36. Above, n 10, at [217].

 

This article was first published in the Lexis Nexis Australian Intellectual Property Law Bulletin (newsletter) Dec 2014

Filed Under: Intellectual Property Tagged With: human genome, isolated genetic material, patents

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