Commercial Directions

Welcome to the August edition of Moray & Agnew’s quarterly newsletter, Commercial Directions.

There is no doubt that the importance of social media in business continues to grow. We examine a recent case concerning a person’s liability for statements made online about one of its competitors. We highlight the potential risks which should be considered when publishing statements or comments on social media.
Recent amendments to legislation governing the charitable and not-for-profit sector are likely to have a huge impact on the way that companies operating in that sector carry out their business. We address some of the main changes brought about through the enacting of the Australian Charities and Not-forprofits Commission Act 2012 (Cth) and suggest that businesses must be ready to adopt new accounting and reporting practices.
As the world becomes increasingly globalised, it is important that businesses are aware of their rights and obligations in the area of international arbitration. In this edition, we explore some of the issues commonly arising where international parties agree to resolve their dispute through arbitration. We examine a recent High Court decision which makes clear that it is only in rare circumstances that Australian Courts will refuse to enforce an international arbitration award.
Marissa Dimarco
Companies face greater risks when using social media 
The recent Federal Court decision of Seafolly v Madden [2012] FCA 1346 has highlighted the importance of exercising caution before posting comments on social media. This decision has shown that the standards which apply to advertising and marketing also apply to social media.
Leah Madden is the designer of White Sands Swimwear. She posted an album of photos on her personal Facebook page, under the heading ‘The most sincere form of flattery?’. This album contained photographs of Seafolly garments, under which Ms Madden captioned the name of one of her own garments with a question mark.
In addition, Ms Madden made a number of comments on her personal Facebook page which alluded to Ms Madden’s belief that Seafolly had sent a dummy buyer to photograph her White Sands Swimwear collection, and that the new Seafolly range was ‘almost an entire line rip-off’ of White Sands Swimwear Collection.
Ms Madden also sent an email to a number of media outlets, attaching photographs of Seafolly Swimwear alongside White Sands Swimwear, with each set of photographs bearing captions ‘White Sands as seen at RAFW in May – Seafolly September 2010’ or ‘White Sands 2009 – Seafolly 2010’.
Seafolly commenced proceedings against Leah Madden in the Federal Court of Australia, alleging that she had engaged in conduct that was misleading and deceptive and was likely to mislead and deceive. Seafolly claimed that Ms Madden’s conduct was such as to mislead consumers to believe that it had copied Ms Madden’s swimwear designs.
Ms Madden claimed that she was not alluding that Seafolly had copied her designs outright, she was simply pointing out the similarities and expressing her opinion. Ms Madden had taken the photos down from Facebook within approximately 30 hours of them being posted.
Ms Madden cross claimed for defamation and misleading and deceptive conduct by Seafolly, as a result of Seafolly alleging in their press statement that her statements were made with the malicious intent of damaging Seafolly.
As more facts came to light it was apparent that Ms Madden had posted the photos just hours after seeing the Seafolly designs in print, making no attempt to ascertain when the designs of Seafolly actually became publicly available. In fact, more than two-thirds of the Seafolly garments had been on the market prior to the date upon which Ms Madden alleged the copying occurred.
Misleading or deceptive conduct?
The court found that Ms Madden:
  • Made a false representation that Seafolly had copied Ms Madden’s designs
  • Made a false representation that Seafolly was not the creator of their designs
  • Made a false representation that Seafolly had used underhanded means to obtain photographs of Ms Madden’s designs with the intention of copying them.
While Ms Madden submitted that she was expressing an opinion rather than explicitly accusing Seafolly of copying, the combination of statements and photographs left it to the reader to make comparisons and draw that conclusion.
Ms Madden submitted that a statement of opinion could not be held to be misleading or deceptive if it was honestly held by her.
The court held that the statement of opinion could amount to misleading and deceptive conduct, as Ms Madden formed this opinion recklessly and without undertaking any research to establish facts to support her statements. The court found that Ms Madden’s intentions were not relevant; the key factor was the conclusions drawn by her audience.

In trade or commerce?
To satisfy the requirements of misleading and deceptive conduct, the statements must have occurred ‘in trade or commerce’. The court found that these statements were made ‘in trade or commerce’, as Ms Madden was the principle of White Sands, which was a direct competitor of Seafolly. Ms Madden, in making the statements in question, was seeking to influence the attitude of customers and deter consumers from purchasing Seafolly.
Seafolly was unable to prove that the misleading and deceptive conduct resulted in a loss of sale or other business losses. Regardless, the court ordered that Ms Madden pay $25,000 for damage to Seafolly’s reputation.
The court stated that ‘the allegations made by Ms Madden were a serious assault on Seafolly’s business integrity’.
Businesses should note that the Australian consumer protection laws are applicable to social media in the same way they apply to other forms of marketing and advertising.
While social media may be seen as a casual forum, businesses should take the same care when posting comments or opinions as they would with all other forms of media. In this case, the comment was only available online for 30 hours but this was held to be long enough to cause a significant amount of damage, resulting in serious consequences for the business that made the offending statements.
This article was prepared by Wendy Meredith with the valuable assistance of Grace MacPherson, law clerk.
*Seafolly Pty Ltd v Madden [2012] FCA 1346
Wendy Meredith
T +61 2 4911 5430
Implications of the Australian Charities and Notfor- profits Commission on the charity sector
Not-for-profit and charitable organisations are large contributors to the Australian economy, injecting approximately $43 billion to the Australian economy each year and accounting for 8% of all employment in Australia. As many profitable organisations are actively involved with not-for-profits on a long term basis, an understanding of how not-for-profit organisations are regulated is important for all.
From 1 July 2013 entities registered with the Australian Charities and Not-for-profits Commission (ACNC) must comply with new governance standards. Following industry consultation, the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (‘the Act’) was enacted on 3 December 2012. The Act has made a number of changes to the charity and not-for-profit sector, including the creation of the ACNC.
What is the ACNC?
The ACNC is an independent agency which will report directly to Parliament through the Assistant Treasurer. The ACNC is intended to function as a ‘one stop shop’ for charities and not-for-profit organisations, replacing what had previously been a complex web of regulatory bodies.
Despite its name, the ACNC will not immediately be a national regulator for all not-for-profit organisations. To be regulated by the ACNC, the organisation must currently be a charity with a charitable purpose. If an organisation undertakes both for profit and not-for-profit activities then it may be able to register with the ACNC if the profits generated are used in furtherance of the entity’s charitable purposes.
The ACNC will be responsible for a wide range of
issues, including:
  • Overseeing registration of charities and not-forprofit organisations
  • Issuing warnings to registered entities
  • Investigating and gathering information in relation to compliance with regulatory requirements
  • Directing registered entities to avoid or to take particular actions
  • Disqualifying those who have breached the legislation from being responsible persons (including directors of companies)
  • Imposing penalties for providing false and misleading statements or failing to lodge documents
  • Revoking the registration of an entity.
The collaboration of for profit and not-for-profit companies is an important feature of the Australian economy. The aim of the ACNC is to promote accountability, transparency and good governance in the charitable and not-for-profit sector. In turn, this should increase the confidence of other for profit companies collaborating with the not-for-profit sector.
The new Governance Standards
The Governance Standards require charities to:
  • Be not-for-profit and work towards their charitable purposes
  • Be accountable to their members
  • Comply with Australian Laws
  • Ensure that their responsible persons are not disqualified from managing a corporation or disqualified from being a responsible person by the ACNC Commissioner
  • Make sure that their responsible persons carry out the following duties:
  • To act with reasonable care and diligence
  • To act honestly in the best interests of the charity and for its charitable purposes
  • Not to misuse their position as a responsible person
  • Not to misuse information they gain in their role as a responsible person
  • To disclose conflicts of interest
  • To ensure that the financial affairs of the charity are managed responsibly
  • Not to allow the charity to operate while it is insolvent.
Additional regulatory requirements
In addition to the creation of the ACNC, the Act requires that registered charitable and not-for-profit entities comply with a number of additional regulatory requirements, including:
Annual information statements – all entities which are registered with the ACNC must lodge an annual information statement with the Commissioner by 31 December each year. The information within this statement will relate to the entity’s compliance with the ACNC legislation and tax laws. The first annual information statement will be due on 31 December 2013 unless an alternate accounting period is used by the registered entity
Financial reporting – small registered entities do not need to lodge annual financial reports with the ACNC, however, medium and large registered entities do need to lodge a report. Small entities must still keep records of their transactions and financial position for at least seven years. Financial reporting requirements apply to the 2013/14 financial year. The first financial report is due on 31 December 2014 unless an alternate accounting period is used by the registered entity.

Revoking ACNC registration
In certain situations the Commissioner may revoke an organisation’s registration, including:
If the organisation contravenes the legislation, a governance standard, or an external conduct standard applicable to charities operating outside of Australia
If, in its registration application, the organisation provided information that was false or misleading
If the organisation becomes bankrupt or insolvent.
When registration is revoked, the entity will lose any associated tax concessions and other benefits which are conferred upon charities under Commonwealth legislation.
Benefits can certainly be seen in the creation of the ACNC as the sole regulatory body for not-for-profit organisations. However, whether this approach will be efficient and reach the desired outcomes remains to be seen.
This article was prepared by Nicola Arvidson with the assistance of Grace MacPherson, law clerk.
Nicola Arvidson
Special Counsel
T +61 2 4911 5456
High Court confirms recognition and enforcement in Australia of arbitral awards
Advantages of arbitration include the speed at which disputes are resolved, and the confidential nature of the process. However, difficulties can arise in arbitration proceedings once the arbitrator has made a determination and the successful party seeks to enforce the award against the unsuccessful party, particularly in cases where the parties are based in different countries. In Australia, amendments made to the International Arbitration Act 1974 (Cth) (‘IA Act’) have attempted to alleviate some of those difficulties.
In the recent case of TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5, the High Court of Australia considered the constitutional validity of the IA Act and the outcome confirms the importance of commercial arbitration as a means of international dispute resolution. Furthermore, the High Court’s decision arguably acknowledges Australia as being an ‘arbitration friendly’ jurisdiction.
The plaintiff, TCL Air Conditioner (Zhongshan) Co Ltd (‘TCL’) was a company registered in China. It entered into a distribution agreement with the second defendant, Castel Electronics Pty Ltd (‘Castel’), an Australian company. The distribution agreement provided that commercial arbitration in Australia would be the avenue taken to settle disputes arising between the parties. 
A dispute arose in July 2008 between TCL and Castel which resulted in Castel exercising the arbitration clause. In the subsequent arbitration in Australia, Castel was awarded over $4 million against TCL. However, TCL failed to pay Castel the awarded amount.
Under the IA Act, a successful party to an arbitration may apply to the Federal Court of Australia to have the arbitral award enforced as an order of the court. Accordingly, Castel applied to the Federal Court of Australia for the award to be enforced.
In response, TCL, amongst other steps, challenged the jurisdiction of the Federal Court to enforce the award. That challenge was rejected by the trial judge. TCL then lodged an application to the High Court, seeking to quash the orders made by the trial judge on the basis that provisions of the IA Act were unconstitutional.
Constitutional challenge made in the High Court
The IA Act provides a process by which an award made by an arbitrator may be enforced by the Federal Court of Australia as though the arbitrator’s award was a judgment of the Federal Court. The process contained in the IA Act only allows the Federal Court very limited grounds to refuse to enforce an award notwithstanding the award may be based on legal error. It was this aspect of the regime that TCL argued was contrary to the Constitution.
The two grounds of TCL’s challenge can be summarised as follows:
  • Objection A – the IA Act requirement that the Federal Court enforce arbitral agreements despite the prospect that those awards contained legal error substantially impaired the institutional integrity of the Court
  • Objection B – by making the arbitrator’s decision final and decisive of the issues in dispute, the IA Act impermissibly conferred judicial power upon the arbitrator.

Decision of the High Court

Objection A
The High Court rejected this objection. It considered that TCL’s challenge ran contrary to the autonomy of the parties who had expressed a preference for a private determination without review rather than to have their dispute before a court where appeal processes would be available.
Further, the effect of the arbitral award was to extinguish the original cause of action and substitute new rights as a result of the award. It is only then that judicial power is enlisted. This did not impair the institutional integrity of the Court.
Objection B
The High Court also rejected objection B. It held that a distinction must be drawn between the making of an arbitral award by an arbitrator (which does not involve the exercise of judicial power) and the application to the court for recognition of thearbitral award as a judgment of the Federal Court(which does involve the exercise of judicial power).
The exercise of power of a private arbitrator did not involve the exercise of the sovereign power of the State to determine or decide controversies. The High Court affirmed the position that judicial power is exercised independently of the consent of the parties and results in a judgment or order that is binding of its own force. In a private arbitration, the arbitrator’s powers depend on the agreement of the parties and the award is not binding of its own force but rather its effect depends on the law which applies to it.
The commercial value of arbitral awards is dependent on the enforcement procedures available to the successful party. In this regard, the IA Act provides the parties to an arbitration with a robust enforcement mechanism drawing upon the powers of the Federal Court of Australia.
In this case the High Court reaffirmed the law permits parties to agree to the private decision making process embodied in an arbitration. Once that process is concluded, Australian law facilitates the enforcement of the award.
This article was prepared by Richard Midgley with the valuable assistance of Robert Malcolm, legal office assistant and Sophocles Kitharidis, Paralegal.
Richard Midgley
T +61 3 8687 7365
60 seconds with…
Nell McGill
What is your area of specialisation?
I’m a lawyer practicing in insolvency and dispute resolution
What was your very first job and what did it teach you?
Working as a receptionist at a law firm with a name that was very difficult to pronounce. It taught me if you’re going to work somewhere with a tricky name, don’t be the receptionist.
If you hadn’t become a lawyer, what would you be?
Always having been a bit of an actress, I’d probably have tried to make that my career. So these days I’d probably be trying to sell steak knives or cleaning products in late-night infomercials.
What keeps you awake at night?
At the moment, the Ashes.
What’s your next big challenge?
Short term: winning the local Law Society trivia night. Long term: completing the Insolvency Education Program.
What’s your most embarrassing moment?
Far too many to mention, quite a few of which were at that first job (see above).
What’s your philosophy to life?
Take your work seriously, but not yourself.
60 seconds with…
Nigel Sellens
What is your area of specialisation?
Property law and conveyancing.
What is your greatest achievement?
I don’t know – I haven’t finished yet.
If you hadn’t become a conveyancer, what would you be?
Ideally, I would be doing something that evoked creativity and imagination.
What is your favourite destination and why?
Subject to the final question below, my home. There’s no place I would rather be right now.
Who do you most admire?
My family and my friends. Inspiration and admiration comes from much closer than we think.
What is your favourite movie and why?
Choosing one would be impossible. Even choosing a dozen would be impossible. Why limit yourself? I couldn’t name a movie that I didn’t enjoy in some way or another or didn’t take something from, whether it be action, adventure, drama, comedy, historical, fantasy / sci-fi, musical, mystery, romance or animation. I could live without horror and slasher flicks though…
What you are most optimistic about?
I am going to change this question to, ‘What are you trying to be most optimistic about?’ The answer: The builder completing our new home before Christmas.
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