Corporate Advisory

Impact of COVID-19 on your contract: The Doctrine of Frustration

23 March, 2020

ASIC’s successful dismissal of the judicial review of its first use of the Product Intervention Power, in Cigno Pty Limited v ASIC [2020] FCA 479, opens the door to its wider application.

It must have caused some disappointment, with ASIC at least, when the target of ASIC’s first use of the new Product Intervention Power filed an application for judicial review with the Federal Court back in September 2019. The Federal Court’s decision on 14 April 2020, however, has confirmed ASIC’s approach and that the Power’s scope of use should be subject to a broad interpretation.

Product Intervention Power

The Product Intervention Power commenced on 6 April 2019, as part of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. It was introduced, following recommendations by the Financial System Inquiry in 2014, to enable ASIC to take a proactive approach to reducing the risk of customer detriment, rather than being restricted to only pursuing actions after the event.

An important prerequisite to ASIC’s use of the Product Intervention Power is that it must be satisfied that a financial product or a class of financial products “has resulted in, or will or is likely to result in, significant detriment to retail clients” 1. Once that hurdle is cleared, ASIC may use the power in a variety of ways, from prohibiting sales of the product through to making sales subject to a variety of conditions. Whether that hurdle had been met was the subject of the Federal Court’s consideration.

Cigno Case

Cigno Pty Ltd (Cigno) and Gold-Silver Standard Finance Pty Ltd (GSSF) operated a “short-term lending model” that had been on ASIC’s radar since early 2014. Under the model, GSSF provided short term credit to retail customers under a facility which met the requirements of the short-term credit exemption in the National Credit Code. One of the terms of that exemption is that the provider must receive fees and charges of no more than 5% of the credit provided. GSSM met that requirement.

Cigno, however, provided collateral services to GSSM’s customers under a separate service agreement, to facilitate the credit and to “fast-track applications”, and charged additional fees for those services. In that way, the companies together received income in excess of the short-term credit exemption cap.

After issuing a consultation paper, as it is required to do, ASIC issued a Product Intervention Order which imposed a condition on the provision of short-term credit to retail clients that the total amount of credit fees and charges, both for the credit and under any “collateral contract”, must not exceed the National Credit Code cap.  The Order had the effect of preventing Cigno for charging for its collateral services; and would likewise apply to any other short-term lenders using a similar model.

Cigno disputed the decision and applied for judicial review.

Scope of “significant detriment”

Cigno contended that ASIC had failed to reach the requisite state of “satisfaction” required to issue the Product Intervention Order, because it had wrongly focused on the detriment of the short-term lending model as a whole, rather than any detriment in relation to the specific financial product; in this case, the short-term credit facility. As Justice Stewart stated:

“The question is really as to the narrowness or breadth of what it is that must “result in” the “significant detriment”; is it:

(1)    narrowly, the class of financial products, or a financial product within that class, “itself”; or

(2)    more broadly, the class of financial product, or a financial product within that class, in combination with something else that is not a financial product (in this case, the collateral contract with its fees and charges)?

Put differently, must the financial product or the class of financial products directly cause the significant consumer detriment, or is indirect causation sufficient?

The question is an important one, in relation to insurance as well as for other financial products. If a narrow interpretation were to apply, ASIC’s use of the Product Intervention Power would be quite limited in scope. It would be restricted to a consideration of whether significant detriment had, would or was likely to result from the financial product or class of products itself. The fact that there is another extraneous factor involved, for instance through an administrative arrangement which is not, of itself, a financial service, would need to be put aside.

The Federal Court Decision

Justice Stewart found that the broader interpretation should apply. He noted that there are a number of indications in the legislation that it need not be the financial product or class of products that “itself” directly causes the detriment and that detriment caused indirectly, for instance as to how the product is made available to retail customers, could also be considered. He held that the test that should, as a result, be applied is as follows:

The causal requirement is satisfied if the detriment would not have occurred but for the financial product or the class of financial products being made available in those circumstances.

The decision is a sensible one, even if it does not arise as clearly from the terms of the legislation as it might have. Subject to Cigno lodging an appeal, it will allow ASIC to conclude the draft Regulatory Guide ASIC released in June 2019 setting out its approach to applying the Product Intervention Power2 and to move forward with its proposed uses of the power.

For the insurance industry, the only such proposal put forward to date is to make the sale of Add-on insurance and warranty products through motor dealers subject to requirements to apply a form of suitability test and deferred sales model3 . While the conditions proposed by ASIC in that case raise some questions that still need to be resolved, the Cigno decision will give the regulator comfort that its use of the power in cases such as that will not founder for a lack of jurisdiction.

For more information on the operation of the Product Intervention Power, please contact insurance advisory principal, Mathew Kaley, or on matters of judicial review and civil procedure, litigation and dispute resolution principal Chiara Rawlins

1 ss.1023D(1)(b) and 1023D(3)(b) of the Corporations Act 2001
2 ASIC Consultation Paper 313 Product Intervention Power, 26 June 2019
3 ASIC Consultation Paper 324 Product intervention: The sale of add-on financial products through caryard intermediaries, 1 October 2019

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Canadian Court elevates thumbs-up emoji to signature status

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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. 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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." 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Published by Foez Dewan
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Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

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