News
Gift duty is to be abolished
25th August 2011
Gift duty has been a feature of New Zealand's law since
1885. But it is about to be abolished.
Gift duty was originally intended to buttress the former estate
duty regime by discouraging the gifting of assets prior to
death. While estate duty was repealed almost 19 years ago,
gift duty was retained as an interim measure in the hope it would
to limit tax avoidance and because it was viewed as providing some
protection to creditors.
Many New Zealanders have underway a program of annual gifting
whereby each year they make a gift to their trust, free of gift
duty. This is part of their planning to see that wealth which
would otherwise be personally theirs is owned by their trust, for
the protection that separate ownership brings.
Last week Parliament passed amending legislation abolishing the
liability to pay duty on a gift. That law is likely to come
into force on 1 October this year. Once in force there will
no limit upon the amount of money that can be gifted to a trust
free of duty.
This presents an opportunity
The abolition of gift duty will be relevant to you if you have
transferred property to a trust and a debt is still owed to you by
the trust in connection with the transfer. Currently, the
debt owed to you by the trust can be forgiven over time at a rate
of $27,000 (per donor) for every 12 month period, without incurring
any liability for gift duty. Gifts of more than $27,000 in
any 12 month period attract gift duty. A gift statement must
be signed every time a gift is made and, where the gift is made by
way of a reduction or release of debt, a deed is also required.
Once the gift duty repeal comes into effect, you will have a
choice to do one of three things with the remainder of the debt
your trust owes you.
One response will be to do no further gifting and leave in place
the present remainder of the debt owing to you by your
trust.
A second response will be to gift-off in a single final gift the
entire remaining debt balance owing to you.
The third possible response will be to continue on with a
progressive gifting program of the type you have undertaken to
date.
If you elect option two or three, no gift statement need be
filed with Inland Revenue as has been the case until now, but a
formal deed of gift will be necessary and the annual financial
accounts of your trust must record the gift undertaken during the
year concerned.
There are important implications to consider before
making your election
Before you decide which of the three options you will elect to
exercise when this new law comes into effect, you should take
professional advice as to the implications of electing one of the
various responses.
Why? Because there are significant considerations to take
into account, including relationship property, creditor protection,
income tax and welfare considerations. In certain
circumstances it may well be appropriate to continue with a regular
gifting program (the third option we refer to above).
Each person or couple faced with this opportunity will place
different weight upon the various considerations, depending upon
their circumstances. So it will not be a case of simply
forgiving all the debt in a single action now (without specific
advice on the point), as if a loose end was being tidied up.
So if you have a trust and it still owes a debt to you, we
encourage you to take advice on this before making your
election.
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Joint Misadventures
22nd August 2011
Joint ventures are widely used in New Zealand business.
The size of our country and constraints on access to capital mean
that this type of collaboration is often essential for business
expansion. A joint venture arrangement will typically involve
each joint venture partner bringing their respective expertise and
resources together for a common business purpose, often exploited
through a new company owned by the joint venture
partners.
A recent decision of the Court of Appeal has highlighted the
dangers for joint venture partners in expanding a joint venture
business without final documentation or a considered eye for the
future. The case also serves as useful reminder for current
or prospective joint venture partners of the obligations they may
owe to each other even in the absence of formal corporate
structures or contracts.
Background
The joint venture business in this case started from a New
Zealand company involved in commercialisation of the Habode
portable home concept. The two principal shareholders of the
company were Mr Gibson (who provided design expertise) and Mr
Curtis (who provided finance and marketing expertise).
In 2004, the parties began with great gusto to document their
intended arrangements for a New Zealand and international joint
venture business. But inertia soon set in. Only a
limited number of contracts were ever concluded and signed
(primarily in relation to the New Zealand business) and the stuff
of day-to-day business then took over. Mr Gibson spent
significant time in China developing a Habode prototype while Mr
Curtis took care of business in New Zealand and began to explore
licensing opportunities in Australia. Additional Habode
companies were incorporated by Mr Gibson and Mr Curtis in Hong Kong
and by Mr Gibson in Australia.
The wheels then started to fall off. By 2006, the New
Zealand business was facing cashflow difficulties and there were
doubts about the solvency of Habode NZ. This company was
placed into liquidation by a group of unsecured creditors and the
New Zealand business was swiftly brought to an end. This also
spelled the end of the business relationship between Mr Gibson and
Mr Curtis.
Undeterred, Mr Gibson picked up on developments in Australia and
in short order secured a significant deal for the sale of a
minority interest of the business in Australia. This deal was
secured using contacts who had previously dealt with Mr
Curtis. This windfall was in turn the impetus for Mr Curtis
to bring the court action against Mr Gibson.
What did the Court of Appeal decide?
The general position under New Zealand law is that a joint
venture arrangement of the nature established by Mr Gibson and Mr
Curtis gives rise to fiduciary duties of loyalty, trust and
confidence on each joint venture partner approaching the
seriousness of those owed by a trustee to his/her
beneficiaries. A joint venture can exist if the parties are
dependent on each other to make progress towards a common
objective, regardless of whether all the necessary details have
been agreed.
The Court found that the formal corporate structure for New
Zealand provided both a model for the Australian side of the
business and a platform from which expansion into Australia could
occur. Although the arrangements for a joint venture company
were never finalised in Australia (i.e. they never progressed
beyond the incorporation of the company by Mr Gibson), the Court
held that it was intended by the parties that a company would be
used in Australia to market and distribute the Habode concept and
that the ownership of that company would be owned equally by Mr
Gibson and Mr Curtis.
Upon termination of a joint venture, any assets of the joint
venture, whether tangible or intangible, are held on trust for the
former joint venture partners pending agreement between them on the
wind up of the joint venture. For this reason, the Court of
Appeal held that information gained with respect to the business
opportunity in Australia was gained during the course of the joint
venture and constituted confidential information belonging to the
joint venture.
The net result was that Mr Gibson could not exploit any
confidential information of the joint venture in Australia for his
own benefit to the exclusion of Mr Curtis. Mr Curtis was
therefore entitled to a share of the profits made by Mr Gibson in
Australia. The case has been referred back to the High Court
to decide the share of the profit that should be paid to Mr
Curtis.
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What's this current publicity about "trust-busting" and is your trust still worth having?
29th June 2011
Do family trusts still serve your best
interests?
The answer in most cases will continue to be a very definite
"Yes". Many of us continue to want the flexibility a fully
discretionary family trust provides.
Our wish may be to manage the transfer between generations of
wealth within a family using an ownership vehicle (the trust) which
sees family wealth passing to the next generation in a sheltered
manner. It may also be to quite lawfully
shelter assets from the claims of future creditors, future
relationship property claimants and other third parties.
In years gone by income tax minimisation and death duty
minimisation were major drivers for many clients to settle wealth
on a trust. Additionally, some people have been able to use a
trust to shelter wealth from rest-home subsidy claw-back, in days
when the Treasury was under less pressure than it is now. We
are now on notice that our wealth whatever/wherever it is will have
to be used first to fund our old age care.
So while Government initiatives from time to time may adversely
impact upon the degree to which trusts can be used to successfully
shelter wealth, there remain good reasons for many to want to have
wealth owned by a trust for their benefit and their family's
benefit, and that is not likely to change in the foreseeable
future. After all, trusts have been a feature of our legal system
here in New Zealand for 170 years now and a feature of England's
legal system for hundreds of years before 1840.
So why this current talk of
"trust-busting?"
"Trust-busting" activity is being spoken of quite often in the
media today. What's that all about?
This expression is not entirely accurate, but essentially it is
used to describe a wealth recovery effort that has been possible
for many years.
Historically, people who sought unlawfully to
avoid their legal obligations to the IRD or to their creditors or
to an existing wife or partner by transferring personal wealth into
a trust have always faced the possibility of that transfer being
reversed by a Court on the basis that the wealth concerned should
not have been transferred to the trust in the first place. That's
not a new development.
Clearly there should be a recovery remedy if a person is shown
to have impoverished himself or herself by transferring wealth into
a trust (or into any other type of ownership vehicle) at a time
when he or she is unable to pay their debts. Current
insolvency law provides a remedy for a creditor when that
circumstance can be established.
Similarly, if a spouse transfers wealth across to a trust when
his or her spouse has a relationship property interest in that
wealth, the aggrieved spouse is able to attack the transfer and
recover his or her share of that wealth. That is not a new
development either.
Note though in these instances it's not so much the trust that's
being busted, but the transfer of the wealth. This is
why we say the expression "trust-busting" is something of a
misnomer.
Instances like this are grabbing the attention of the press at
present (mostly in relationship property claim circumstances) not
because the transfer of wealth to a trust is suddenly wrong or
illegitimate, and not because trusts are being "busted"; rather the
media considers reports of "trust-busting" legal proceedings will
catch the attention of the casual reader.
Here's a further heads-up on that topic. Once the
Government abolishes gift duty we expect it will become more common
for creditors to chase wealth thereby moved into the trusts
concerned, if New Zealanders start gifting-off large trust debts
willy-nilly (that is, without regard to the impact of that gift
upon their personal solvency).
We can advise you if you wish about the ramifications of
effecting large scale duty free gifts, before you do so, if gift
duty is abolished.
In the meantime, for those of us who have family trusts, they
continue to remain an important part of our asset planning.
If you would like to speak with us about this or any other
aspect of your estate planning, please do so.
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Consumer Law Reform - slow and steady wins the race
3rd June 2011
After extensive consultation by the Ministry of Consumer
Affairs throughout 2010, a Consumer Law Reform Bill has recently
been introduced into Parliament. The Government intends to
pass the Bill into law before the election.
The Bill aims to revise, update and consolidate New Zealand's
consumer laws. Core consumer law statutes such as the Fair
Trading Act 1986 and the Consumer Guarantees 1993 will survive
intact (subject to the changes noted below), but lesser known
statutes such as the Door to Door Sales Act 1967, Layby Sales Act
1971 and Unsolicited Goods and Services Act 1975 are to be
repealed, with their provisions modified and transferred into the
Fair Trading Act.
Apart from this consolidation and the changes noted below, the
underlying principles behind New Zealand's consumer laws have been
retained. Despite the detailed commentary from Ministry
officials on the need for harmonisation with Australian consumer
laws, the introduction of changes such as unfair contract term laws
(i.e. minimum requirements for standard form consumer law
contracts) have been parked by the Government pending further
review in 2014. The Government has adopted an 'it ain't
broke, don't fix it' approach, noting that the existing consumer
laws already provide significant protections for consumers.
We agree.
The most notable changes for businesses are the proposed
amendments to the Fair Trading Act. These amendments
include:
- The introduction of mandatory disclosure requirements for the
sale of extended warranties.
- New prohibitions on making unsubstantiated
representations.
- New product safety and product recall provisions.
- Extension of the jurisdiction of the Disputes Tribunal to hear
some claims for breaches of the Fair Trading Act.
The other important change for businesses is the introduction of
provisions that allow businesses to contract out of the Fair
Trading Act in business-to-business agreements, subject to certain
requirements of fairness and reasonableness. This change has
come from left-field and was not mentioned in any discussion papers
issued by the Ministry of Consumer Affairs.
Sophisticated commercial entities will often seek to limit their
liability for pre-contractual representations by including 'entire
agreement' clauses in their contracts. These clauses seek to
limit the liability of the parties solely to those representations
(often in the form of warranties) set out in the contract.
The courts have generally upheld the validity of these clauses
except in cases of fraud.
However, the courts have in many cases also had to deal with
(and reconcile) 'extra contract' claims brought by an aggrieved
company alleging that representations made by another company prior
to entry into a business-to-business agreement amount to misleading
and deceptive conduct in breach of the consumer-focused provisions
of the Fair Trading Act. This has created anomalous
situations where a contractual claim for misrepresentation has been
denied (as there has been no fraud) but a claim for misleading and
deceptive conduct has been upheld (as parties cannot expressly
contract out of the Fair Trading Act). The changes will bring
greater certainty to this issue and limit the circumstances in
which claims for breaches of the Fair Trading Act arising from
business-to-business contracts will be justified.
If you require any further information on these amendments or
any other aspects of the Consumer Law Reform Bill, please contact
Alfred Harford, David Moorman or Patrick Casey.
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Look-Through Companies and the Demise of LAQCs
10th March 2011
The days of a LAQC will soon be at an end. Law changes
mean LAQC's will no longer be able to attribute losses to
shareholders.
A new entity, called a Look-Through Company
("LTC"), will become a reality as from 1 April
2011 and may become the structure of choice for many of the
companies currently operating under the Qualifying Company
("QC") rules. An LTC is a transparent entity
for tax purposes in that income and expenditure will be taxed to
the LTC owner at their marginal tax rate. The LTC owner will
be able to offset tax losses to the extent the losses reflect the
owner's economic loss (i.e. money at risk). This will be a
stricter regime when compared to LAQCs.
Your Options if you have an existing QC or
LAQC
You have several options to choose from 1 April 2011. For
instance, you can, without a tax cost:
• do nothing and continue as a qualifying company (QC)
without the ability to attribute losses (the default option);
or
• be taxed as an ordinary company by revoking your LAQC
election, or
• elect to become a LTC; or
• use the new transition rules to become a limited
partnership, an ordinary partnership or a sole trader. You
will need to restructure your business and either make the company
non-active or wind it up if you choose this option.
Key Criteria
In order to be a LTC, a company must meet the following
criteria:
• The company must be a New Zealand tax-resident (under
both the NZ income tax legislation also any relevant Double
Taxation Agreement)
• There must be 5 or fewer "look-through counted owners"
(the ownership interests of relatives are combined)
• The company must have one class of shares, with all
shares having the same rights
• The shareholders must be either individuals, trustees, or
other LTCs
• The company must meet the eligibility criteria for the
whole of the income year.
Limitation of Losses
Losses of the LTC owner are limited to the investment/money that
the LTC owner has at risk. Any loss that cannot be used is
carried forward and may be claimed in future years, subject to the
loss limitation rules and/or special rules that apply if the LTC
owner sells their shares or if the LTC ceases to be an LTC.
The "at risk" component includes security given by a LTC owner over
debts incurred by the LTC (e.g. a personal guarantee of a bank debt
incurred to buy a rental property).
Before LAQC shareholders elect into the LTC regime, they will
need to carefully review how any losses are funded to ensure they
are entitled to claim the LTC's losses. Failure to plan could
result in the ring-fencing of losses against future profits.
In many respects the loss limitation rules for LTCs are similar
to those for limited partnerships ("LPs"),
although extend slightly further. Importantly, the LTC entity
retains its limited liability status and corporate obligations
under company law, and LTC shareholders will be able to take an
active role in managing a LTC while retaining limited
liability.
Key Decisions
A transitional period will apply that will allow time for
decision making, but some key decisions do need to be made.
Factors to consider include:
• If operating through a loss-making LAQC, whether access
to those losses is still required.
• If an existing QC/LAQC will transition to a normal
company, a LTC, a partnership or become a sole trader,
consideration should be given to who should be the QC/LAQC
shareholder(s) to achieve the desired transition result.
• If an existing profitable QC has substantial tax-paid
retained earnings, then consideration should be given to whether
there is a benefit in transitioning on a no tax cost basis to a LTC
- there will then be no further layer of tax on entry into the LTC
regime, or on the subsequent payment of those earnings to a LTC
owner.
• How much money at-risk does a shareholder in a QC/LAQC
transitioning to a LTC have, and will it allow all losses to be
used by the new LTC owner?
• Does an existing QC/LAQC have or expect to have any
realised capital gains that it wishes to distribute without
liquidating the company? Also, is any associated person
capital gain expected?
• Will the QC/LAQC be better to opt out of the QC rules and
become a normal company for tax purposes - resulting, among other
things, in profits being taxed at the 28 percent company tax rate
as from 1 April 2011?
If you're a shareholder in a QC or LAQC, we recommend that you
seek advice as soon as possible from a tax specialist as to the
best tax structure that will suit your business going forward.
The foregoing is intended only as a summary of the new regime,
and different factors will apply in individual cases, for which
specific advice should be sought.
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Proposed consumer law reform - unfair contracts
19th January 2011
The Ministry of Consumer Affairs (Ministry) has
concluded an extensive review of consumer laws in New
Zealand. This has been a priority of the Ministry for some
time.
The review was based on an earlier wide-ranging discussion
paper of the Ministry's that focused on the possible simplification
and consolidation of existing consumer laws (including the Fair
Trading Act 1986) intended to achieve harmonisation with Australian
consumer law.
Despite the "if it ain't broke, don't fix it" response from many
business groups (and lawyers) to the Ministry's discussion paper,
the Ministry appears fixed upon reform. The latest
indications are that a decision on the final nature of the reform
will be made very shortly, with legislation to be introduced
early this year.
Unfair Contract Terms
One of the Ministry's initiatives in this reform is to introduce
into current Fair Trading legislation, the concept of unfair
contractual terms.
Regulation of unfair contract terms has been in place for some
time in the United Kingdom, and also forms a key part of the
Australian Consumer Law. The typical nature of unfair
contract terms regulation is as follows:
- A term of a contract will be void if the term is
unfair and the contract is a standard form
contract.
- A term is unfair if it causes a significant
imbalance in the party's rights and obligations and if it would
cause detriment to a party if relied upon. Examples include a
clause that allows one party (but not the other party) to terminate
the contract or unilaterally vary the terms of the contract, and
certain limitations or exclusions of liability.
- Any business which contracts on standard terms and conditions
of trade will be affected by this type of reform. While the
Ministry has primarily focused on the rights of consumers to
challenge unfair contract terms, it has also raised the possibility
that this right could apply to small businesses. The Ministry
is undertaking further consultation on this issue, but any
extension of this nature would have significant implications for
'big business' in New Zealand.
Be Prepared
The present Government has shown a willingness to act very
quickly in passing legislation. The fact that the Ministry
has already undertaken extensive consultation and prioritised this
work means an abbreviated select committee process may also apply
in this instance. For these reasons, businesses should:
- be prepared for the likelihood of a revised Fair Trading Act in
2011 that includes prohibitions on unfair contract terms;
- identify the manner in which they currently contract with
consumers and other businesses and the relevant standard form
contracts that may be affected by these reforms; and
- be ready to react and implement necessary changes to standard
form contracts and internal compliance policies, and take legal
advice as part of this process.
Malloy Goodwin Harford will continue to closely monitor
developments in this area and update clients as the reforms
unfold.
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Fall Out from Earn Out
12th October 2010
A recent decision of the High Court in I-Health Limited v
iSoft NZ Limited has highlighted the care that is required in
the drafting of earn out provisions and related liability
limitations under sale and purchase agreements.
Background
I-Health and iSoft are both health information technology
companies. In December 2003, I-Health and iSoft entered into
a sale and purchase agreement under which iSoft agreed to purchase
the business and assets of I-Health. The purchase price was
to be not less than $1,475,000 and was subject to an earn out
arrangement linked to software revenue made by the iSoft group from
the sale of I-Health products over a subsequent five year period.
During this period, iSoft was required to use all reasonable
endeavours to promote, market and distribute the I-Health
products. iSoft was also obliged to market the software
products at a market price.
Ultimately, iSoft did not achieve the anticipated revenue, and
only paid I-Health the base purchase price of $1,475,000.
I-Health issued legal proceedings and alleged a breach by iSoft of
the 'best endeavours' clauses under the agreement and claimed $14.5
million in damages. However, the parties sought the
determination of a preliminary issue before trial as to the
validity of a limitation of liability provision under the
agreement.
Limits on Liability
In a variation to the sale and purchase agreement negotiated
shortly before settlement, the parties agreed a monetary cap on
iSoft's total liability under the agreement. The relevant
section of the limitation clause read as follows:
"The maximum
aggregate liability of the Purchaser and/or Group
(including legal costs and expenses incurred in defending a claim
from a third party) under or in relation to this
Agreement (including without limitation for negligence and
other torts) is limited to $5,000,000. This limitation of
liability does not apply to the Purchaser's
liability to pay the Purchase Price or to make
payments due to the Vendor for Software Revenue received by the
Group." (emphasis added)
The second sentence of the limitation clause (i.e. the exception
to the liability cap) was the sentence in dispute. The
critical issue before the Court was whether or not the $5,000,000
limitation on liability applied to the claim for breach of the
'best endeavours' clauses.
The Court held that while the 'best endeavours' clauses were
included under a heading in the agreement marked 'Payment', they
had nothing directly to do with the act of payment of the purchase
price. The purpose of the clauses was to impose a positive
contractual duty on iSoft to promote and market the I-Health
products (and therefore to maximise the purchase price),
not to make payment of the purchase price.
The Court held that iSoft's liability to pay involved a different
concept from iSoft's liability for breach of an obligation to use
'best endeavours' and therefore this meant the limitation on
iSoft's liability applied to any breach of the 'best endeavours'
clauses.
In coming to its decision, the Court was mindful not only of the
'ordinary meaning' of the words used in the limitation of liability
provision but also the communications between the parties in the
lead up to agreement on the provision. Consistent with the
recent Supreme Court decision in Vector Gas v Bay of Plenty
Energy, the Court held that evidence of prior negotiations can
be admissible if it sheds an objective light on the meaning of a
contractual provision. Of particular relevance in this case
were communications from iSoft during negotiations that made
I-Health aware of a previous transaction in which iSoft had been in
dispute over a 'best endeavours' clause. iSoft gave this as
its principal reason for requiring the limitation of liability
clause. The Court held that the concern to limit liability
was therefore known to both I-Health and iSoft and the various
drafts of the relevant clause in the lead up to execution of the
Agreement reflected this purpose. In the Court's view, an
objective reading of the communications would lead an objective
observer to say "but of course, the limitation clause is intended
to limit iSoft's liability for breach of the best endeavours
clauses".
Lessons from the case
There are a number of important lessons from this case. In
particular:
- Earn outs are a common way for sellers and buyers of businesses
to reach a compromise on the price to be paid for a business.
This is especially relevant in a tough economic environment.
However, they are often complex and contentious, especially where
the seller will not retain the ability to influence the performance
of the business (e.g. through a management position following
settlement). One suspects I-Health's inability to directly
influence the iSoft business may have been at the heart of the
dispute in this case.
- Care must also be taken to ensure earn out clauses are not
simply used as a 'fudge' to get the deal done. Earn out
clauses need to be tailored to each transaction. This
requires legal and accounting advisers and the parties to work
together to consider how the earn out mechanism should operate and
to reflect this in the sale and purchase agreement. It is
beyond the scope of this article to consider all the risks and
pitfalls in earn out clauses. However, combining clear and
measurable goals with clear and unambiguous drafting will go a long
way to mitigating many of the risks and pitfalls.
- Best endeavours' clauses are also common but often
flawed. The more contentious the issue in negotiations, the
more flawed they often become, and they should not be used as the
sole parameter for measuring performance. There is no
substitute for clear, objective obligations that seek to avoid the
inevitable dispute that will follow the use of 'best endeavours'
clauses.
- The courts will increasingly look beyond the contract to prior
negotiations if there is any uncertainty in the objective meaning
of a disputed provision, such as a limitation of liability
clause. Time spent in justifying a position in negotiations
(including through e-mail correspondence) may be beneficial if the
provision is ever litigated.
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Fair Trading Act claim leads to a sticky end
16th August 2010
The recent decision of the High Court in WaikatoLink Limited v
Comvita New Zealand Limited has reinforced the power of the Fair
Trading Act 1986 in contractual disputes. The case contains
some valuable lessons about the care that must be taken when making
representations before entering into contracts.
Background
The case concerned progress towards discovery of a compound or
molecule found in manuka honey known as Unique Manuka factor
(UMF). The compound has a unique
antibacterial activity that is potentially applicable to various
medicinal and cosmetic products.
The UMF molecule's relevance in the case was through an
intellectual property (IP) agreement entered into
between Comvita (which creates and sells honey-based healthcare
products) and WaikatoLink (the commercialisation and technology
transfer company for the University of Waikato). Comvita
alleged that before entering into the agreement, WaikatoLink
falsely represented that it had made a discovery placing it on the
brink of discovering the UMF molecule, and that Comvita acted in
reliance upon this representation. This amounted to a
contractual misrepresentation that induced Comvita to enter into
the IP agreement. Comvita also alleged that this amounted to
misleading and deceptive conduct in breach of the Fair Trading
Act.
A sticky start
In December 2005, the parties agreed to commence negotiations to
formalise a joint venture between them. Negotiations around
the possible joint venture continued for a number of months, with
exchanges of information between the parties.
However, in early July 2006, the University's lead professor
formed the view that he may have identified the UMF molecule and
communicated this 'brilliant news' to relevant WaikatoLink
staff. A flurry of activity followed that culminated in
WaikatoLink ceasing its joint venture negotiations with Comvita and
re-commencing negotiations for an IP agreement on different terms,
including increased licence fees. Despite an initially
unfavourable reaction by Comvita to WaikatoLink's change of tack,
negotiations continued and the parties entered into the IP
agreement.
The Court heard detailed evidence from the parties as to the
communications between them around the time of WaikatoLink's
decision to cease joint venture discussions.
The Court held that WaikatoLink's representations as to the
nature of the professor's breakthrough and the increased value of
the IP were false, misleading and deceptive. The professor's
July 2006 discovery and communication of 'brilliant news' was in
fact a false alarm, something which the professor recognised
himself within a fortnight. The professor communicated his
second thoughts to relevant WaikatoLink staff but his messages were
lost in translation within WaikatoLink and then in transmission to
Comvita. WaikatoLink continued to represent the original
position that the professor was on the brink of a
breakthrough. This inevitably also meant that the
representation as to increased value of the IP was wrong.
The return to the beehive
The IP agreement recorded an acknowledgement that the parties
did not rely on any representation, agreement, term or condition
that was not set out in the IP agreement (entire agreement
clause). While the Court accepted it was fair and reasonable
that the entire agreement clause should be conclusive between the
parties for the claim of contractual misrepresentation, the Fair
Trading Act claim was less clear cut.
The Court held that while Comvita did exercise its own judgment
when deciding to enter into the IP agreement, it was not satisfied
that this factor superseded or overrode the cumulative effect of
WaikatoLink's assurances to Comvita. In order to achieve
justice between two sophisticated commercial entities, however, the
Court held that Comvita should bear 50% of its own loss, reducing
its liability for licence fees owed to WaikatoLink to
$1m.
Key Lessons
This case continues the Courts' attempts to reconcile the
application of the Fair Trading Act as consumer legislation to
commercial transactions entered into between sophisticated
entities. There are some valuable lessons for contracting
parties:
- Each case will ultimately fall on its own (often complex)
facts.
- Care must always be taken in making any representations that
are not fully grounded in fact before entering into a
transaction. If circumstances change, so must any
representation. This will not always be an easy task in the
midst of contractual negotiations and particular care will be
required.
- Entire agreement clauses can be very useful in dealing with
claims of misrepresentation. However, there is no guarantee
that an entire agreement clause will negate a Fair Trading Act
claim.
- The Fair Trading Act will continue to be a powerful tool in
contractual disputes. However, the Courts will typically seek
to achieve an overall balance between sophisticated commercial
entities, whether in apportioning liability or fixing
compensation.
The case also brings into question the need for any 'principle
based' reform to the Fair Trading Act as recently tabled by the
Ministry of Consumer Affairs (see
http://www.consumeraffairs.govt.nz/legislation-policy/policy-reports-and-papers/disscussion-papers/consumer-law-reform-a-discussion-paper).
The Ministry's discussion paper is wide ranging and outlines a
possible shift to principle-based law, including the addition of a
purpose statement to the Fair Trading Act that refers to consumers
and suppliers acting in good faith.
The Ministry fails to present a compelling case for why change
is required. The clear risk is that introducing vague
concepts of good faith would introduce further uncertainty, and
make the FTA even more pervasive in contractual disputes.
Given the considered approach of the Courts to FTA claims, one can
only hope that the Ministry will leave this area of law to evolve
on a case-by-case basis without further complication.
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Termination of Franchise Agreements
7th May 2010
Franchising is one of the most popular ways to do business in
New Zealand. Generally, things go well for both the
franchisor and the franchisee: the franchisor receives the
benefit of ongoing fees from the franchisee and the franchisee
receives the benefit of the hard work done by the franchisor in
developing a business concept and building up goodwill in the
brand.
Often, however, things do not go quite so well, and this can be a
particular problem for a franchisor where the term of the franchise
agreement is long, often up to 10-20 years. With such long
terms, it may not be practical for the franchisor to wait out the
term of the agreement if there is a problem with a
franchisee. The question arises for franchisors as to how to
terminate successfully in such a situation.
Clearly, the franchise agreement will be the first port of call to
determine the franchisor's rights and remedies. A well
drafted agreement should contain certain clauses for the franchisor
to be able to terminate readily, including if:
- the franchisee fails to pay any money to the franchisor (eg
franchise fees or contributions to an advertising fund);
- the franchisee fails to reach and maintain minimum
standards;
- the franchisee attempts to assign its interest in the franchise
agreement without the franchisor's consent;
- the franchisee is convicted of any criminal offence;
- the franchisee becomes mentally incapacitated;
- the franchisee breaches any of the terms of the franchise
agreement (where the breach is not remedied within a specified
remedy period);
- the franchisee damages the franchisor's brand;
- a receiver is appointed to the franchisee company.
Whatever the cause of termination, it is important that the
franchise agreement clearly provides for the franchisor to retain
control of the business in the event the franchise agreement comes
to an end. This can be achieved by:
- ensuring the return of all documents supplied (eg manuals and
client lists or any material bearing the franchisor's trade
marks);
- requiring that the franchisee stop trading using the business
systems and the franchise name;
- providing for the franchisor to have control of telephone
numbers and other contact details so that clients can directly
contact the franchisor;
- restricting the franchisee from engaging in any competitive
activity for a period of time after termination (ie a restraint of
trade);
- permitting the franchisor to take back stock - the franchise
agreement should set out a mechanism for determining the price that
should be paid for such stock.
Depending upon the nature of lease arrangements for the outlets
from which the franchisee carries on business, the franchise
agreement should also entitle the franchisor to take up a lease of
relevant premises, or cancel any sublease to the franchisee.
A franchisee can also find itself in a position where it wishes to
terminate a franchise agreement. Many franchise agreements
will not have specific provisions providing for termination by the
franchisee and the franchisee's only remedy where the franchisor is
in breach of the franchise agreement is to terminate pursuant to
the Contractual Remedies Act 1979. Often the franchisor will
not negotiate on the terms of the franchise agreement but if the
franchisee does have some ability to negotiate, then clauses can be
included to allow the franchisee to terminate where:
- the franchisor has breached the franchise agreement by failing
to carry out its obligations as franchisor and fails to remedy that
breach within a specific period of time;
- the franchisor is placed in liquidation or receivership.
The franchisee should also consider the consequences of
termination. Will the franchisee be entitled to a refund or
rebate of any franchise fee payable? Will the franchisee be
permitted to operate a similar business post termination
notwithstanding a restraint of trade in the franchise
agreement? Will the franchisee be able to sell stock and
other assets on hand to recoup some of its investment?
If the franchisor has been placed in liquidation, a franchisee's
ability to recover any refund or rebate may be limited.
Any restraint of trade contained within the franchise agreement
should arguably not apply where the franchisee has terminated the
franchise agreement for cause. Likewise, a franchisee should
have freedom on termination to sell stock and other assets to
generate funds to cover bank and other debt.
While a franchisor and franchisee should be committing to a
franchise arrangement with confidence that it will succeed, it is
important that careful thought be given to the consequences of any
necessary termination. For those involved in franchising, the
question should be asked - how good is your franchise agreement and
does it contain the clauses you need?
Naturally, the same applies to similar types of commercial
arrangement (eg a supply, distribution or licence agreement) and
similar issues should be considered.
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Confidential Information
14th April 2010
Every business thrives by keeping a variety of types of
information secret: manufacturing processes, marketing strategies,
contact lists and employee remuneration packages, to name a few.
Collecting or generating information takes time, effort and money.
The value of this investment can be significantly affected by
deliberate or unexpected disclosure. This can happen, for example,
when:
- A company you have been negotiating with tries to use your
information to compete with you;
- A former employee divulges information to a new employer or
attempts to use it for his own gain; or
- Your information is in the hands of a government department and
becomes subject to an official information request.
In each of these circumstances, a court's view on the protection
of your confidential information depends to a significant degree on
the way you treat the information yourself.
Treatment of Confidential Information
To obtain an injunction preventing disclosure or to obtain an
award for damages to compensate for the loss caused by improper
disclosure of confidential information, it is crucial to be able to
show that the information concerned has been consistently treated
as confidential. In some cases, plaintiffs have been surprised to
find that information they thought was obviously confidential, such
as details of employee remuneration, could not be protected because
they themselves had shared that information with a number of
people.
To ensure that your valuable information stays secret, it
assists to have appropriate contractual arrangements in place that
require the maintenance of confidentiality and prohibit
unauthorised disclosure. Where that involves entering into
non-disclosure agreements or putting confidentiality clauses into a
contract, it is important for you to consider with care the clauses
that are appropriate in the particular circumstances. It also
assists to have effective day to day information handling practices
and to limit access to information of a confidential nature.
Fatal Mistakes
Marking a document 'confidential' does not make it so, but
failing to mark it 'confidential' can be fatal. Why should a judge
grant an injunction or damages to protect information belonging to
someone who did not even go to the trouble of marking the
documents? Of course, this does not mean that every piece of paper
in the office should have a confidential stamp on it!
Overuse of this technique could undermine its value. What is
necessary is a careful review of what information needs protection
and then putting consistent practices in place for marking
documents, keeping them in 'confidential' envelopes and circulating
them only to those who need to see them.
Maintain Physical and Electronic Security
The following steps are helpful in maintaining security of
confidential information:
- Make sure employees use passwords to gain access to electronic
systems, update their passwords regularly and prohibit employees
from sharing their passwords.
- Shred documents rather than leaving them in a bin where third
parties could find them. Keep confidential documents locked in
cabinets.
- Ensure that computers can be locked and implement a policy that
requires employees lock computers upon leaving their
workstations.
- Only transport confidential information that is appropriately
marked and sealed.
- Do not leave confidential information in a part of your office
or workplace where customers or members of the public might walk
past.
- Monitor employee communications, but remind employees that
their email communications will be subject to employer scrutiny.
Wide scale dissemination of confidential information can be
achieved intentionally or unintentionally at the click of a
button.
- If circumstances arise where it appears that information is
going to be disclosed, remind others of their obligations.
Conclusion
The need to treat information as confidential continues
throughout the process of generating, gathering, using and storing
information. At the outset, get advice about whether to obtain
relevant legal protections (eg to seek a patent), have appropriate
contracts signed, store executed contracts carefully, and update
them when circumstances change. In the course of using information,
make sure it is marked and stored with care. Lastly, when you think
others might use or disclose the information, remind them of their
obligations.
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Imputation Credits and the importance of the 31 March 2010 deadline
1st March 2010
The lowering of the corporate tax rate from 33% to 30% affected
the ratio at which a company can attach imputation credits to
dividends from 1 April 2008.
A company receives imputation credits equal to the amount of tax
it pays. Prior to the change in the corporate tax rate, a
company was entitled to attach these imputation credits to the
dividends it declared at a ratio of 33:67 (ie a company could
attach $33 worth of credits to each $67 of dividends paid) and as a
result the shareholders received a credit on the income tax on the
dividends received. As a result of the change in the
corporate tax rate, the ratio changed from 1 April 2008 to
30:70.
Imputation credits are often distributed in a different tax year
from when the relevant tax was paid and to implement the change of
ratio immediately would have disadvantaged some shareholders where
a company still held credits relating to tax paid at 33%. The
Government therefore introduced a transitional period from 1 April
2008 to 31 March 2010 to allow companies to attach imputation
credits at the old 33:67 ratio, but only to the extent that the
company had imputation credits resulting from tax paid prior to the
change in the corporate tax rate (ie: the imputation credits were
earned on tax paid at the 33% rate).
The last date a company can distribute dividends imputed at the
33:67 rate is 31 March 2010.
If your company still holds any imputation credits earned prior to
the increase in the corporate tax rate then you should consider
declaring a dividend prior to 31 March 2010 to ensure the
shareholders receive the benefit of a full tax credit of 33 cents
for every dollar of gross dividend. After 31 March 2010, the
shareholders will only be able to enjoy a tax credit of 30 cents
for every dollar of gross dividend even if the company has paid tax
on the income at 33%.
The decision whether or not to declare a dividend may be
influenced by the nature of the company's shareholders and the
extent to which personal tax rates may change in the May
Budget. If the majority of shareholders are individuals and
are on the 38% marginal tax rate, there may be some benefit in
deferring declaration of the dividend if personal tax rates are
seen as likely to drop below 35% as a result of the Budget.
If you require assistance in declaring a dividend or require any
further information, please contact us or your accountant.
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Wills Act
2nd February 2010
A new Wills Act was passed in 2007. It replaced the Wills
Act 1837 of the U.K. Parliament. It applies to persons who
die after 1 November 2007 even if their will was made earlier,
subject to certain exceptions and qualifications set out in the
Act. No substantial changes have been made to the law but the
previous very strict regime has been relaxed somewhat.
Persons over 18 years of age can make wills; younger persons can
make valid wills in a variety of circumstances.
If you marry or enter into a civil union, then in most
circumstances your will needs to be remade.
If your marriage or civil union is dissolved or certain Court
Orders are made between spouses/partners, then your will remains in
force but in most circumstances it will be read and administered as
if your former spouse/partner had not been mentioned. All
wills should be reviewed regularly and upon any major change in the
will-maker's personal or financial circumstances.
If the will-maker has a family trust, it is important for the
will and family trust to be integrated. Settling a family
trust and naming it as the beneficiary of your will instead of
naming the family members as beneficiaries can confer many benefits
upon those family members.
It is timely to remind everyone that it is desirable to have a
will, otherwise your estate is distributed according to the scheme
of division set out in the Administration Act which might not be
what is wanted.
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