Preparing for redundancies as JobKeeper payments reduce

30 September, 2020

For some time now it has been recognised that joint ventures (JVs) are on the rise in Australia and internationally.  Historically, particularly if assessment is made of the advancement of the multi-unit firm during the 20th Century, corporate growth primarily occurred through acquisition.

The narrative on economic history focuses on rapid corporate expansion in the US and Europe during the second half of last Century driven by the desire for vertical integration – forward into distribution to secure sales volume and backward into raw materials to ensure throughput of inputs.[1]  However, in modern business, JVs and strategic alliances are seen by many as a more promising alternative to acquisition or merger transactions, particularly in times of economic uncertainty.

Our experience underscores this evolution.  In a post-GFC economy, we are now seeing more clients negotiating and forming JV agreements with domestic partners and internationally (particularly when doing business in China).  This approach is not limited to big business.  Start-up and other growing small businesses view JVs as an opportunity to expand into new markets and new products.  For many, a JV seems to present an ideal solution: the parties can pair their complimentary skill set to achieve common objectives that they otherwise couldn’t fulfill on their own.

But despite the perceived advantages, JV arrangements often fail – the objectives of the JV are not achieved; the underlying project does not conclude; irreconcilable differences between the JV parties emerge.  While this is not the case for every JV, in our experience, JV arrangements are poorly understood and regularly end in dispute.  Our firm has acted on 5 significant JV-related disputes in the last 2 years. These disputes are time-consuming, expensive and take a toll on all parties to the arrangements.

What is a JV?

A JV has been defined in case law as an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually, but not necessarily, contributing money, property or skill.[2]

Despite this conceptual definition, generally speaking (and subject to our observations in relation to fiduciary obligations below), there are no strict limitations on how the relationship between JV parties can be structured.  The underling JV agreement can establish a unique set of rights and obligations that the parties wish to govern their relationship.  Furthermore, JV’s may be incorporated or unincorporated.  Typically, an incorporated JV involves the JV parties incorporating a new company, holding shares in that company and entering into a shareholders’ agreement that governs the operation of the JV company.  Under an unincorporated JV structure, the parties remain separate and enter into a JV agreement that sets out how their relationship will be governed.  The flexibility of these attributes adds to the perceived attraction of using a JV structure.

However, it is well settled at law that the terms of a JV agreement may produce a fiduciary relationship between the parties.[3]  Contrary to the position with respect to partnerships, the existence and scope of fiduciary obligations owed by JV parties to one another is determined by examining the unique circumstances of their relationship and, in particular, whether a party has undertaken to act in the interests of another (and not just in their own interests).  Given the nature and purpose of JVs, this will be the case in most JV arrangements.

As a result, JV parties usually owe each other a higher standard of care when compared to other contractual relationships.  Furthermore, while the contractual obligations may be clearly set out in a JV agreement, the nature and scope of the fiduciary duties owed to one another may be broad reaching and commercially difficult to define.  These variables can be dangerous when the relationship breaks down.

Why do they fail?

Despite all that they promise, our experience (and anecdotal evidence when assessing recent cases passing the Equity Lists of the NSW Supreme Court and courts of other jurisdictions) indicates that JVs have a high tendency to fail and end in dispute.  Due to the often complicated legal relationship between the parties (and, sometimes, poorly drafted JV agreements) the consequences of failure can be devastating.

So why don’t JV’s work?  In our opinion, in the case of JVs, it is the very thing that creates potential that simultaneously weakens the structure.  While JVs present businesses with an opportunity to combine different (yet complementary) skills sets and resources to achieve common goals, the bringing together of these separate organisations (with different structures, cultures and, importantly, discordant end-game objectives) to work towards a particular outcome is typically the catalyst of most JV failures.

This inherent feature of JV relationships is often exacerbated when the JV parties and JV agreements also fail to properly address how differences of opinion, direction or priorities are to be managed.

Considerations for successful expansion

While JVs are (and will continue to be) a popular option to expand into new markets, significant care needs to be taken when: (1) determining whether a JV is the right structure in the circumstances; and, if it is, (2) preparing a JV agreement that appropriately mitigates the inherent risks in using a JV structure.

The parties should strongly consider whether alternative structures, such as a partnership or a particular strategic contract, may be a more appropriate way to govern the commercial relationship (and avoid the risks often presented with using a JV structure).  Where it is decided that the parties will proceed with a JV structure, it is essential that the JV agreement incorporates a clear and effective dispute resolution mechanism.  This will require a lot of thought (and negotiation) between the parties at the outset.

Our top tips for those considering or negotiating a JV structure are:

  1. Explore all the options. Don’t simply settle on another party’s suggestion that a JV is the right structure.  You should always do your research and obtain appropriate structuring advice before agreeing that the JV structure is the best option.
  2. Consider each party’s culture and whether they may (or may not) be compatible.
  3. Clearly set out the key objectives of the JV in the JV agreement. This will assist in resolving potential divergences and disputes between the parties later on.
  4. Make dispute resolution a priority when negotiating how the structure will work. Most joint venturers do not ever expect that a dispute will arise and, therefore, fail to properly turn their mind to how any such dispute would or could be resolved if, and when, one arises.  This often results in a JV agreement that doesn’t provide guidance as to how differences of opinion or direction will be resolved or fails to do so in a manner that actually assists in resolving the problem.

[1] See, for example, Chandler “The Visible Hand: The Managerial Revolution in American Business” (1977) and various subsequent economic historians.

[2] United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10.

[3] Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 97.

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Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract.   Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship.   Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest.   What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan
29 August, 2023

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty.  The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes
18 August, 2023
Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.

Published by Justin Pennay
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