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Business The Law - (Pages 749 To 816)

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CHAPTER 15

International Business

Simone Lockhart

THE BUSINESS CONTEXT

The rapid growth of international trade poses challenges for the regulation of international
business. This chapter examines strategies for international business operations and the procedures
devised by the world’s commercial community for the regulation of international trade.

[15.10] 15.1 GLOBALISATION AND INTERNATIONAL TRADE ......................................................... 702

[15.30] 15.2 THE WORLD TRADE ORGANISATION .......................................................................... 704
[15.100] 15.3 REGIONAL TRADE AGREEMENTS ................................................................................. 710
[15.150] 15.4 STRATEGIES FOR INTERNATIONAL BUSINESS OPERATIONS ..................................... 716
[15.160] Direct sales/exporting .......................................................................................... 717
[15.170] Intermediary arrangements: Distributors and agents ...................................... 717
[15.180] Licensing ............................................................................................................... 718
[15.190] Franchising ............................................................................................................ 718
[15.200] Branch offices, subsidiaries and foreign acquisitions ........................................ 719
[15.210] Joint ventures ........................................................................................................ 719
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[15.220] Strategic alliances ................................................................................................. 720

[15.230] 15.5 INTERNATIONAL SALE OF GOODS .............................................................................. 721
[15.240] Vienna Convention ............................................................................................... 721
[15.270] 15.6 INTERNATIONAL TRADE FINANCING .......................................................................... 727
[15.280] Payment in advance ............................................................................................. 728
[15.290] Documentary bills of exchange .......................................................................... 728
[15.300] Documentary letter of credit .............................................................................. 729
[15.310] 15.7 INTERNATIONAL INTELLECTUAL PROPERTY PROTECTION ....................................... 730
[15.330] 15.8 INTERNATIONAL COMMERCIAL DISPUTE RESOLUTION .......................................... 733

701

Andrew, Terry, and Giugni Des. <i>Business & the Law</i>, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4772280.
Created from wsudt on 2019-09-25 19:19:18.
Business and the Law

15.1 GLOBALISATION AND INTERNATIONAL TRADE

[15.10] The globalisation of business, which has become particularly apparent in recent
decades, has experienced exponential growth. There are a variety of reasons for this
including the rapid advance of communications technology. Long-term economic growth,
including in Australia, has also contributed signiﬁcantly. The “global village” now embraces
the “global market”.

Globalisation is a This process has led to a growing interdependency of the economies of individual countries.
process, or a
series of
From that interdependence flows demand for reduction of trade barriers – to allow the
processes, which actual transfer of goods and services – and demand for harmonisation and mutual
create and
consolidate a recognition of laws to simplify the administration of those transfers.
unified world
economy, a single
ecological system
The movement towards an international legal code gained momentum in 1998, when there
and a complex was a proposal to homogenise all commercial law across the Organisation for Economic
and dynamic
network of Cooperation and Development (OECD). The proposal was known as the Multilateral
communications Agreement on Investment (MAI) and originated in the OECD. The proposal, and its demise,
that covers the
world. The world, is described by David James in these terms (Business Review Weekly (27 October 2000)
thus, is p 108):
interdependent
and becoming
ever more On the face of it, what was proposed was the ceding of democratic control over commercial law
de-territorialised. to an international body. Signatories to the MAI would agree that, apart from some
Geographical, predetermined exemptions, they would adhere to an OECD-wide regime of commercial law.
social and
political
The intention was to replace the raft of bilateral treaties with a single treaty that would form the
boundaries basis of a global system of commercial law. Described as a necessary step in “deregulating”
definitely do not trade, it was, in fact, an attempt to establish a single regulatory regime.
disappear but they
are eroding. The MAI collapsed when the United States realised that it, too, would be subject to the
Duffield G and
treaty’s strictures. US negotiators responded by seeking to have all US federal, state and local
Suthersanen U,
Global law made exempt, a move that naturally spelt the end of the agreement. Since then, there has
Intellectual been a proliferation of bilateral and multilateral treaties to facilitate cross-border investments.
Property Law
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(Edward Elgar,
2008). Following the collapse of the MAI, initiatives continue to be proposed through the World
Trade Organization to bring about a set of common commercial laws for world trade.
The problem faced now, and previously by the MAI, is that a global approach involves
the fundamental weakening of important democratic structures – it involves a concession
of power from the local authority to the global.

702

WORLD TRADE ORGANISATION DIRECTOR CALLS FOR A FRESH

LOOK AT MUTLILATERALISM
[15.20] For 18 of the WTO’s 20 years, global generation IT products, trade in which is worth
trade negotiations have yielded few results. But around $1.3 trillion each year – that’s 10% of
two years ago we started to change all that. In global trade. Some of the products covered
2013 we successfully negotiated the ’Bali Package’ currently face very high tariffs. For example, in
which included the Trade Facilitation Agreement, some markets, the import tariff for video cameras
and last week at our ministerial conference in is 35%. For magnetic cards, it is 30%. This is
Nairobi we delivered another package of major much higher than the average global tariff of 9%.
negotiated outcomes. We are getting into the habit With this agreement, tariffs will be reduced to zero
of success. It’s time for the world to take a fresh – and legally locked-in at zero.
look at the World Trade Organization.
The expanded ITA will lower the costs of doing
These breakthroughs will have real-world business for companies of all sizes. It will support
economic effects which can help to improve lower prices – which will help many other sectors
people’s lives the world over. By streamlining, that use IT products as inputs – and, again, it will
standardizing and simplifying border processes help create jobs.
around the world the WTO’s Trade Facilitation
With these successes we are bringing the
Agreement will boost global trade by an estimated
negotiating work of the WTO into line with the
$1 trillion each year, helping to create up to
other parts of the organisation which already
20 million jobs. Meanwhile, the decisions taken in
function very effectively. 98 per cent of global
Nairobi just a few days ago include a range of
commerce now takes place under the WTO rule
measures to reform agricultural export subsidies,
book. The WTO’s 162 members monitor each
improve food security and the delivery of food
other’s practices and regulations against those
aid, and help the least-developed countries to
rules in order to improve transparency and avoid
beneﬁt from trade.
protectionism – and when conﬂicts arise, we have
The elimination of agricultural export subsidies is built one of the most effective dispute settlement
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

particularly significant. Developing countries have systems in the world to resolve them. The system
consistently demanded action on this issue due to is now dealing with its 501st case in just 20 years.
the enormous market-distorting potential of these We need to continue bringing this kind of
subsidies. In fact, this task has been outstanding discipline to reforming global trade rules.
since export subsidies were banned for industrial
The negotiating successes of recent years have
goods more than 50 years ago. Now it has been
been achieved despite some persistent and
dealt with once and for all, helping to level the
fundamental divisions between members – not
playing field for the benefit of farmers and
because those divisions have been solved. The
exporters, particularly in developing and least-
prolonged deadlock in advancing negotiations on
developed countries. It is the most significant
the WTO’s core negotiating agenda, the so-called
reform of agriculture trade in the WTO’s history.
’Doha Development Agenda’, has been a source of
Another big breakthrough came in Nairobi when a frustration for many, and it is one reason that
large group of members finalised a deal to expand countries have been putting their energy into other
the Information Technology Agreement (ITA). trade initiatives, such as bilateral and regional
This deal will eliminate tariffs on 201 new trade deals. We have to face up to this problem.

703

Ministers formally acknowledged their differing In recent months the international community has
opinions on the future of the Doha agenda in their agreed new sustainable development goals and
Nairobi declaration – and they instructed their steps to fight climate change, and it is putting
representatives in Geneva to find ways to advance elements in place to tackle the situation in Syria.
negotiations. Members must decide – the world Multilateralism is back. The WTO’s successes in
must decide – about the future of the Doha round Nairobi and Bali have shown that multilateral
and what path they want the WTO to take. trade negotiations can deliver as well – and that
Inaction on this point would itself be a decision, they are worth fighting for. That is what we must
and I believe the price of inaction is too high. It is do in 2016.
already harming the prospects of all those who
rely on trade today – and it will disadvantage all Roberto Azevedo is the Director General of the
those who would benefit from a reformed, World Trade Organisation.
modernized global trading system in future,
particularly in poorer countries.

15.2 THE WORLD TRADE ORGANISATION

If Australia or the [15.30] The World Trade Organization (WTO) is the principal international organization
US don’t
participate in the
for the management of international trade. The WTO was established on 1 January 1995 as
free trade the successor to the General Agreement on Tariffs and Trade (GATT 1947), which was set
movement, it will
be to those up in the wake of World War II by 23 governments, including Australia, to foster a stable,
countries’ rules-based trading system. GATT took provisional effect on 1 January 1948 and established
disadvantage
because the rest speciﬁc rules regarding tariff reductions and the removal of non-tariff barriers. From 1948,
of the world will successive rounds of trade negotiations extended the body of rules relating to international
free up trade. As
the world trade and improved market access through tariff reductions. The WTO emerged from the
globalises and 1986-1994 Uruguay Round of GATT negotiations. As at November 2015, the WTO has 162
trade barriers
drop, there is a members, following the accession of, Seychelles in April 2015 and Kazakhstan in
need for countries November 2015.
to recognise what
is their particular The WTO provides a forum for governments to negotiate trade agreements and to settle
strength and build
on that. Sam trade disputes and it operates a system of trade rules. At the core of the system are the
Walsh, Chief WTO’s multilateral trading agreements. The agreements comprise the Marrakesh agreement
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

Executive Rio
Tinto. which established the WTO (WTO Agreement) and its annexes including the General
Agreement on Tariffs and Trade (GATT 1994), the General Agreement on Trade in Services
(GATS) and the Agreement on Trade-Related Aspects of Intellectual Property rights
(TRIPS), which are negotiated and signed by all WTO members and ratiﬁed in their
domestic parliaments. The WTO agreements cover goods, services and intellectual property
and set out the important trade rights and obligations of all the WTO members. These
negotiated agreements are often called the WTO’s trade rules. As the WTO puts it:-
The multilateral
trading system at These documents provide the legal ground-rules for international commerce. They are
the beginning of essentially contracts, binding governments to keep their trade policies within agreed limits.
the 21 st century is Although negotiated and signed by governments, the goal is to help producers of goods and
the most
remarkable services, exporters, and importers conduct their business, while allowing governments to meet
achievement in social and environmental objectives.
institutionalised “Understanding the WTO. Who we are.” http://www.wto.org
global economic
cooperation that The WTO agreements are complex legal documents which cover a wide range of subject
there has ever
been. Martin
matters (including agriculture, textiles and clothing, banking and telecommunications, food
Wolf.
704

sanitation and intellectual property) and incorporate several important guiding principles
including thefundamental principles of non-discrimination in international trade – a country
should not discriminate between its trading partners (giving them equally “Most Favoured
Nation” status) and a country should not discriminate between its own and foreign products
and services (giving others the same treatment as one’s own nationals – “National
Treatment”).

[15.35]
WTO structure
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705

IN CONTEXT

Why “most-favoured”?
The most [15.40] This sounds like a contradiction. It suggests special treatment, but in the
destructive
economic
WTO it actually means non-discrimination – treating virtually everyone equally.
prejudice is trade
protectionism. This is what happens. Each member treats all the other members equally as
Christine Lagarde, “most-favoured” trading partners. If a country improves the beneﬁts that it gives to
Managing
Director, IMF one trading partner, it has to give the same “best” treatment to all the other WTO
(23 April 2015). members so that they all remain “most-favoured”.
…
In general, MFN means that every time a country lowers a trade barrier or opens
up a market, it has to do so for the same goods or services from all its trading
partners – whether rich or poor, weak or strong.
WTO, “Understanding the WTO – Principles of the Trading System” http://
www.wto.org

Occasionally the WTO Agreements are renegotiated

If you care about [15.50] Changes take place primarily through “rounds” of multilateral negotiations,
growth and
innovation; if you
involving all WTO members. Decisions are made on a consensus basis, and all members
care about jobs must agree to the proposals before they are adopted. Further, the separate agreements and
and the real
incomes of the commitments negotiated as part of a round are considered as a whole and indivisible
middle-class; if package – a “single undertaking” approach. Negotiations continue to take place under the
you care about
poverty reduction Doha Development Agenda, launched by WTO trade ministers in Qatar in November 2001.
and greater The Productivity Commission’s, Trade and Assistance Review 2013-2014 noted the
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

economic
fairness; if you do problems inherent with the single undertaking approach:
care about all
these things, you
While some progress was made on aspects of the long running Doha round of trade
need to be serious negotiations under the WTO, these negotiations continue to be hampered by the inherent
about fostering difficulties in reaching consensus among the 161 member countries under the requirement that
global trade. the package of associated measures must be agreed to collectively – the single undertaking
Christine Lagarde,
Managing approach.
Director, IMF
(23 April 2015). If countries think their rights under the WTO Agreements are
being infringed, they may bring disputes to the WTO
[15.60] The framework for the WTO’s internal dispute settlement system is set out in the
WTO’s “Understanding on the Rules and Procedures Governing the Settlement of Disputes”
(usually referred to as the Dispute Settlement Understanding “DSU”). The WTO describes
its dispute settlement system as “the central pillar of the multilateral trading system, and the
WTO’s unique contribution to the stability of the global economy.” (WTO, “Understanding
the WTO: Settling disputes: A unique contribution” http://www.wto.org).

706

The DSU aims to provide a fast, efficient, dependable and rule-oriented system to resolve
disputes between WTO members. The WTO states its “priority is to settle disputes, through
consultations if possible”. The dispute settlement system provides for alternative dispute
resolution methods (consultations, good offices, conciliation and mediation, and arbitration)
as well as judicial style processes with panels and appellate bodies. The Dispute Settlement
Body “DSB” is responsible for the administration of the rules and procedures of the DSU.
The WTO describes its dispute settlement process (WTO, “Introduction to the WTO dispute
settlement system: Functions, objectives and key features of the dispute settlement system”
http://www.wto.org): Trade deals
should not be
Typically, a dispute arises when one WTO Member adopts a trade policy measure that one or rushed to meet
more other Members consider to be inconsistent with the obligations set out in the WTO political
objectives because
Agreement. In such a case, any Member that feels aggrieved is entitled to invoke the their impact can
procedures and provisions of the dispute settlement system in order to challenge that measure. last decades.
If the parties to the dispute do not manage to reach a mutually agreed solution, the Industry wants a
balanced and
complainant is guaranteed a rules-based procedure in which the merits of its claims will be
comprehensive
examined by an independent body (panels and the Appellate Body). If the complainant prevails, agreement so the
the desired outcome is to secure the withdrawal of the measure found to be inconsistent with extra time should
the WTO Agreement. Compensation and countermeasures (the suspension of obligations) are be used to ensure
this happens.
available only as secondary and temporary responses to a contravention of the WTO Agreement Innes Wilcox,
(Article 3.7 of the DSU). AIG Chief
Thus, the dispute settlement system provides a mechanism through which WTO Members Executive.
can ensure that their rights under the WTO Agreement can be enforced. This system is equally
important from the perspective of the respondent whose measure is under challenge, since it
provides a forum for the respondent to defend itself if it disagrees with the claims raised by the
complainant. In this way, the dispute settlement system serves to preserve the Members’ rights
and obligations under the WTO Agreement (Article 3.2 of the DSU). The rulings of the bodies
involved (the DSB, the Appellate Body, panels and arbitrations) are intended to reﬂect and
correctly apply the rights and obligations as they are set out in the WTO Agreement. They must
not change the WTO law that is applicable between the parties or, in the words of the DSU, add
to or diminish the rights and obligations provided in the WTO Agreements (Articles 3.2 and
19.2 of the DSU).
[15.70] The WTO describes its functions and structure in the following terms (WTO, The system’s
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

overriding
“The WTO in brief: Part 2” http://www.wto.org): purpose is to help
Functions trade ﬂow as
freely as possible
The WTO’s overriding objective is to help trade ﬂow smoothly, freely, fairly and – so long as there
predictably. It does this by: are no undesirable
side effects –
• administering trade agreements because this is
• acting as a forum for trade negotiations important for
stimulating
• settling trade disputes economic growth
and employment
• reviewing national trade policies and supporting
the integration of
• assisting developing countries in trade policy issues, through technical assistance and developing
training programmes countries into the
international
• cooperating with other international organisations. trading system.
Structure “Understanding
the WTO” in
The WTO is run by its member governments. All major decisions are made by the WTO Annual
membership as a whole, either by ministers (who meet at least once every two years) or by their Report (2015)
p 4.

707

ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by
consensus. A majority vote is also possible but it has never been used in the WTO, and was
extremely rare under the WTO’s predecessor, GATT.
Decisions are made through various councils and committees, whose membership consists
of all WTO members.
The WTO’s top-level decision-making body is the Ministerial Conference which meets at
They all come least once every two years.
back to the same Day to day work in between Ministerial Conferences is handled by the General Council
thing: We have
got to decide (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from
what free and fair members’ capitals) which meets several times a year in the Geneva headquarters. The General
trade is all about,
and we’ve got to Council also meets under different terms of reference, as the Trade Policy Review Body and the
level the playing Dispute Settlement Body, to analyse members’ trade policies and to oversee procedures for
ﬁeld to be
competitive.
settling disputes between members.
These are the gut At the next level, three more councils, each responsible for the workings of the WTO
issues. Lee agreements dealing with their respective areas of trade, report to the General Council:
Lacocca.
• The Council for Trade in Goods (Goods Council)
• The Council for Trade in Services (Services Council)
• The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)

HISTORIC TPP TRADE DEAL SEALED

[15.90] 5 things you need to know about the The standardisation of international rules for goods,
Trans-Paciﬁc Partnership services and investment in the bloc, as well as licence
recognition and simply being allowed to operate in
Trade ministers from 12 Paciﬁc Rim nations
countries such as Malaysia, Vietnam, Mexico and
sealed a major regional trade and investment
Peru, will allow businesses to compete on a near
accord spanning 40 per cent of the global
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

level playing field with local firms for the first time.
economy, prising open new markets for Australian
services providers, manufacturers, farmers and The accord will set sweeping new rules across
investors. Australia, Brunei, Canada, Chile, Japan, Malaysia,
Mexico, New Zealand, Peru, Singapore, the US and
The Trans-Pacific Partnership agreement was
Vietnam. Bloomberg
finalised around 7am Monday in Atlanta following
five days of fraught around the clock ministerial The Turnbull government views the trade pact as a
negotiations. microeconomic reform that will help diversify the
economy as the mining boom fades.
Australian services providers in mining equipment,
finance, education, engineering and logistics will be In a surprise liberalisation on foreign investment, the
among the biggest winners from the lowering of trade threshold the Foreign Investment Review Board
barriers in the fast-growing Asia Pacific region that screens proposals will be quadrupled for investors
the Obama administration forecasts will have 3 billion from the 12 TPP countries to $1.094 billion, outside
middle class consumers by 2030. of sensitive sectors like media and

708

telecommunications. Canadian pension funds and • wine tariffs slashed to zero in Mexico, Canada,
Malaysian property investors stand to gain. Peru, Malaysia, and Vietnam over a decade
Australian firms investing in Canada will be • the elimination of tariffs for chilled and frozen
automatically given the green light for investments beef into Canada and Mexico within 10 and
below $C1.5 billion, while Japan, Brunei and Vietnam 11 years respectively, as well as the removal of a
will also relax rules for investments in assets sold by US beef “safeguard” built into the 2004 US-
the private sector. Australia free trade agreement
Trade and Investment Minister Andrew Robb said the • immediate removal of tariffs on iron ore, copper
TPP would lead to “far more seamless trade” across and nickel exports to Peru and elimination of
the region, cut red tape for exporters and reduce tariffs on energy exports to Vietnam
business costs.
• slashing of manufacturing tariffs in Vietnam,
“This agreement in my view is truly Mexico and Peru, for items such as steel,
transformational,” Mr Robb said in Atlanta, seated machinery, paper and pharmaceuticals,
beside the 11 other ministers at their closing press • an investor state dispute settlement mechanism,
conference. including a “safeguard” for legitimate government
“To have one set of rules for 12 destinations is going regulation of health and the environment, ensuring
to turbo charge regional supply chains and global “tobacco control measures are never open to
supply chains and reduce costs.” challenge”
Australian dairy farmers will be able to export more • retention of five years data exclusivity for
butter and cheese to Japan and the US. Sugar growers biologic medicines, that avoids increasing the
scored only modest new access rights to the protected cost of prescription drugs
US market, in the face of fierce lobbying by US sugar • removal of Japanese tariffs for some cheeses and
growers.
new quotas for butter and skim milk powder. In
The pact will slash Japanese beef tariffs for Australian, the US, dairy farmers won rights to sell 9000
American and other farmers to 9 per cent within extra tonnes of cheese, plus tariff elimination on
15 years, bettering the Abbott government’s free milk powers and Swiss cheese
trade deal with Tokyo last year that trimmed high
• more rice exports to Japan for the first time in
tariffs to 23.5 per cent for chilled beef and 19.5 per
two decades and the elimination of rice tariffs in
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cent for frozen beef.

Mexico
The lowering of trade barriers will be progressively
• an additional quota of 65,000 tonnes of sugar in
phased in over several years and in some cases more
the US, on top of the existing 87,000 tonnes out
than a decade.
of a total US market of 11 million tonnes.
Australia will be forced to cut some nominal tariffs Australia also scored a 23 per cent share of
on manufactured items like electronic goods and additional international sugar allocations into the
white goods, from around the current 5 per cent to US market, potentially doubling the average
zero.
annual exports of sugar to the US to 207,
Other key highlights of the deal for Australia 421 tonnes and as much as 400,000 tonnes by
according to the Trade Minister’s office include: 2020. Various cane products will be more easily
• the elimination of 98 per cent of all tariffs for the sold in Japan, Canada, Vietnam and Per
export of beef, dairy, wine, sugar, rice,
Australian Sugar Milling Council chief executive
horticulture, manufactured goods, resources and
energy Dominic Nolan said the TPP result was “bittersweet”.

709

“There are some clear wins, however the major “We each have our domestic processes we need to go
disappointment is with the USA maintaining their through,” Mr Froman said.
protectionist stance on market access for Australian
Canada’s opposition parties have left open the option
sugar,” he said.
to veto the TPP if they win the October 19 election,
The TPP, originally founded in 2006 by four prompting Canadian Trade Minister Ed Fast to warn
countries, is the largest trade deal since the Uruguay it would be the “height of irresponsibility” to welsh
Round in 1994 set up the General Agreement on on the international deal.
Tariffs and Trade for 123 countries.
US President Barack Obama faces a stern test
The accord will set sweeping new rules for trade,
progressing the TPP through Congress ahead of the
investment, intellectual property, labour, e-commerce,
November 2016 election, with labour-aligned
the flow and storage of data, state-owned enterprises
Democrats worried about the deal’s impact on blue
and the environment across Australia, Brunei, Canada,
collar workers and Republican Senate Finance
Chile, Japan, Malaysia, Mexico, New Zealand, Peru,
Committee chairman Orrin Hatch already criticising
Singapore, the US and Vietnam.
the deal as falling “woefully short” for America.
Underlining the importance of agreements that curtail
protectionist barriers, global trade went backwards in The TPP is a key part of the Obama administration’s
the first half of 2015, “rebalance” to Asia, to take economic advantage of
the rising middle class and to help offset China’s
Ministers shook hands on the deal after New Zealand
rising influence in the region.
Trade Minister Tim Groser finally agreed at 5am to a
deal with the US on a modest increase in quotas for The TPP is Mr Robb’s fourth and biggest trade deal,
Kiwi dairy products, a result the NZ dairy industry adding to pacts with Japan, China and South Korea.
lamented as “disappointing”.
One-third of Australia’s goods and services worth
The official text in the 30 chapters of the TPP text $109 billion went to TPP countries in 2014.
will be finalised by officials before being publicly
released in the coming weeks. Canada is eager to The talks were nearly the final opportunity to seal the
publish details ahead of the election this month, to TPP ahead of expected rising anti-trade rhetoric in
calm fears its dairy and automotive sectors will be the lead up to next year’s US presidential election.
hurt. Talks broke down without conclusion in Hawaii in
July and the Atlanta meeting was billed as a crucial
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The 12 TPP nations still need to pass the TPP through

event.
their legislatures. US Trade Representative Mike
Froman said the deal on Monday was an “important http://www.afr.com/news/politics/national/historic-
ﬁrst step in the process”. tpp-trade-deal-sealed-20151005-gk1vtv.

15.3 REGIONAL TRADE AGREEMENTS

[15.100] In the WTO, regional trade agreements (RTAs) are deﬁned as reciprocal trade
agreements between two or more partners. They include free trade agreements (FTAs) and
customs unions. In a customs union parties to the agreement eliminate tariffs and other trade
barriers between themselves and also maintain a common external tariff against non-parties.
In a free trade agreement parties agree to eliminate tariffs and other trade barriers between
themselves, but each country maintains its own tariff policy against non-parties. Normally,
establishing a RTA would signify a departure from a fundamental principle of the
multilateral trading system on non-discrimination – equal treatment for all trading partners

710

(“most favoured nation”). However, provided certain strict criteria are met, RTAs are
explicitly allowed for under the WTO rules. As the WTO explains (“Regionalism: friends or
rivals?” http://www.wto.org):
GATT’s Article 24 allows regional trading arrangements to be set up as a special exception,
provided certain strict criteria are met. In particular, the arrangements should help trade move
more freely among the countries in the group without barriers being raised on trade with the
outside world. In other words, regional integration should complement the multilateral trading
system and not threaten it. The WTO
Article 24 says if a free trade area of customs union is created, duties and other trade acknowledges that
RTAs encourage
barriers should be reduced or removed on substantially all sectors of trade in the group. closer economic
Non-members should not ﬁnd trade with the group any more restrictive than before the group integration among
was set up. participating
members and may
Similarly, Article 5 of the GATS provides for economic integration agreements in services. contribute to
Other provisions in the WTO Agreements allow developing countries to enter into regional or members’
global agreements that include the reduction or elimination of tariffs and non-tariff barriers on economic growth
trade among themselves. policies…..
However, …RTAs
[15.110] Although there is ongoing debate as to whether RTAs contribute to or detract cannot be a
substitute for the
from the multilateral WTO system, there has been a recent proliferation of FTAs at the multilateral
bilateral and regional level across the world, primarily due to the lack of progress in trading system as
many key issues
multilateral forums, particularly in the sensitive areas of agriculture, services, investment — such as trade
and intellectual property. facilitation,
services
Australia currently has ten FTAs in force, with: New Zealand, Singapore, Thailand, the liberalization, and
farming and
US, Chile, the Association of South East Asian Nations (ASEAN) (with New Zealand), ﬁsheries subsidies
Malaysia, Korea, Japan and China. The Department of Foreign Affairs and Trade (DFAT) — can only be
tackled broadly
reports as at January 2016 that the countries covered by these FTAs account for 67% of and efficiently
Australia’s total trade. through the WTO.
Furthermore, a
The most recent, the China-Australia Free Trade Agreement (ChAFTA), was formally multilateral
system ensures
signed in Canberra on 17 June 2015 by Australia’s trade minister, Andrew Robb, and the participation
China’s commerce minister, Gao Hucheng, .. The deal took 10 years and 21 rounds of of the smallest
and most
negotiations before talks between Australia and China were concluded in November vulnerable
2014. After the completion of domestic legal and parliamentary processes in both China countries and
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helps support the

and Australia, ChAFTA officially entered into force on 20 December 2015. integration of
developing
Australia is currently engaged in five other FTA negotiations – two bilateral FTA countries into
negotiations: India and Indonesia; and three plurilateral FTA negotiations: the Gulf global value
chains. WTO
Cooperation Council (GCC), the Pacific Agreement on Closer Economic Relations Briefing Note:
(PACER Plus), and the Regional Comprehensive Economic Partnership Agreement Regional Trade
agreements, Tenth
(RCEP). Negotiations on another plurilateral FTA, the controversial Trans-Pacific WTO Ministerial
Partnership Agreement (TPP), were successfully concluded on 6 October 2015. The TPP Conference,
Nairobi, 2015
is unprecedented in its size and scope. It encompasses 12 countries in the Pacific Rim (http://www.wto.org).
that account for 40% of global GDP: Australia, Brunei Darussalam, Canada, Chile,
Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, the United States and Vietnam.
The TPP seeks to create a free trade area in the Pacific, through the reduction of trade
barriers and consistency of laws and regulations between the 12 signatory countries. The
TPP allows other member countries to join in the future, which will only serve to
strengthen its impact. While negotiations have concluded, the TPP will not take effect

711

until it has been officially signed and ratified by each country using its own domestic
processes (which vary between signatory countries). Ratification, however, is not a
foregone conclusion and political sensitivities and opposition continue to pose challenges
in some countries. Some commentators have suggested that if the US does not ratify, the
TPP could collapse. As Prime Minister Malcolm Turnbull has noted:
As anyone who The principle challenge is its [TPP] ratification by the US Congress. Across the board, insofar
has been involved as there have been domestic concerns about the TPP, they appear to be most strongly expressed
in FTA
negotiations in the United States. That’s President Obama’s challenge and we obviously encourage all those
knows, getting a legislators in Washington to give the TPP their support.
FTA over the line
is never easy. “Malcolm Turnbull says US Congress biggest threat to TPP”, AFR 18 November 2015.
Compromise is
required by Australia’s current FTA negotiations areincreasingly focussed on the so-called “behind
parties to the
agreement and in the border” issues. As DFAT reports:
the end,
agreements are a
A range of factors such as standards, professional qualifications, intellectual property rights and
package of competition policies in trading partner countries may impact heavily on Australian companies
carefully balanced exporting to those markets. Such barriers are more of a problem for businesses than “border
interests. John measures” such as tariffs and quota restrictions which have been the focus of trade negotiations
Brumby, National
President of the traditionally but which have become relatively less important over time as average tariff levels
Australia China have decreased.
Business Council.
http://www.dfat.org.au.

IN CONTEXT

The Australia-US Free Trade Agreement (AUSFTA)

[15.120] The highly publicised, and in some quarters, controversial, AUSFTA
came into effect on 1 January 2005. The AUSFTA is a comprehensive agreement
addressing not only trade and investment but intellectual property which is the
largest and arguably the most important and controversial chapter of the
Agreement.
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10 years of Australian businesses making use of AUSFTA

Trade negotiators Minister for Trade and Investment, Andrew Robb, has welcomed the opening of
live in the real
world and in the
the Building our Future Prosperity conference in Sydney today, marking the 10 th
real world anniversary of the Australia-United States Free Trade Agreement (AUSFTA).
objectives must
be balanced by AUSFTA has proven its value to Australian businesses in the ten years since its
sensitivities …
The history books
entry into force.
of free trade are
ﬁlled with “The business community has experienced much lower tariffs on our exports to
agreements that the United States thanks to the agreement, and I encourage Australian exporters
successfully
balanced ambition to continue maximising the opportunities it provides,” Mr Robb said.
with sensitivities
and exclusions. Two-way trade in goods and services between Australia and the United States
Robert Zoellick, has increased from $41 billion in 2004, the year prior to AUSFTA’s entry into
former US Trade
Representative. force, to more than $60 billion in 2014.
In that time, the proportion of imports from Australia entering the United States
tariff-free has increased dramatically. In 2004, only 46% of imports from

712

Australia entered the United States tariff-free. By 2014, 90% of imports from
Australia entered the United States tariff-free. A further 6% of Australian imports
entered under preferential AUSFTA tariff rates.
On 1 January 2015, duties on a further 10.7% of US tariff lines were removed, The ChAFTA lays
a historic
and more reductions will ensue. By 2023, 98.4% of US tariff lines will be foundation for the
duty-free. next phase of
Australia’s
Two-way investment has more than doubled, from $642 billion in 2004 to over economic
relationship with
$1.3 trillion in 2014. The United States is the largest investor in Australia and China. Most
the number one destination for Australian investment abroad. significantly, the
unprecendented
market access
AUSFTA benefits also continue to flow to Australian importers and consumers. China has offered
As a result of AUSFTA, in 2014 $7.5 billion of US imports into Australia were Australia under
ChAFTA puts our
tariff-free, out of a total of $7.6 billion that used AUSFTA. firms at a
significant
DFAT, Media Release (2 July 2015). competitive
advantage. The
Hon Malcolm
Turnbull MP,
Prime Minister of
IN CONTEXT Australia.

Australia-China Free Trade Agreement

Historic China-Australia FTA enters into force 20 December 2015
[15.130] The competitive position of Australian exporters will be greatly
enhanced from today with the official entry into force of the landmark
China-Australia Free Trade Agreement (ChAFTA).
Minister for Trade and Investment Andrew Robb said from today more than As the Chinese
saying goes, it
86 per cent of Australia’s goods exports to China will enter duty free (worth takes 10 years to
more than $90 billion), while tariffs on billions-of-dollars-worth of other goods sharpen a sword,
so we are very
exports will be reduced. Once the agreement is fully implemented 96 per cent of glad to see that
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Australian goods will enter China duty free. after nearly

10 years of
negotiation our
Mr Robb said tariffs have been cut on a range of important Australian exports two sides have
including dairy, beef, lamb, wine, seafood, fruit and vegetables, processed foods, announced this
substantive
vitamins and health products. Tariffs on coking coal (with exports worth conclusion to the
$4.8 billion in 2014-15) have been eliminated, while the phased elimination of bilateral FTA
negotiation. This
tariffs on non-coking coal also starts today. will provide a
bigger market,
“This historic agreement with our biggest trading partner will support future more favourable
economic growth, job creation and higher living standards through increased conditions and
better institutional
goods and services trade, and investment. China, with its population of support for our
1.4 billion people and rapidly rising middle class, presents enormous cooperation.
Chinese President
opportunities for Australian businesses well into the future,” Mr Robb said. Xi Jinping.

“The Government’s determination to see ChAFTA’s commencement before the

end of this year will quickly produce a double beneﬁt for our exporters, with

713

another round of tariff cuts to follow on 1 January, 2016. This will significantly
enhance our competitive position in the Chinese market.”
Mr Robb said ChAFTA also opens up a range of new opportunities for
Australian service providers with significantly enhanced market access for
financial services companies, law firms, professional services suppliers, education
services exporters, as well as health, aged care, hospitality, construction and
manufacturing businesses.
The success of The agreement will also inevitably stimulate new levels of growth in the
the TPP
negotiations is
two-way investment relationship which is currently worth around $121 billion.
proof that a
diverse group of “ChAFTA will also help drive innovation as Australian businesses, big and small,
countries can increasingly exploit e-commerce and other emerging technologies to connect with
strike a deal on a
broad and Chinese consumers. For example, earlier this year, vitamin supplements
complex trade manufacturer Blackmores and meat exporter Sanger Australia each signed
agreement if the
political will and agreements with JD.com to sell their products on China’s largest online shopping
determination are website,” Mr Robb said.
there. Roberto
Azevêdo, WTO
Director-General. “ChAFTA, along with this Government’s ground-breaking trade deals with Korea
and Japan, forms a powerful trifecta of agreements with our three biggest export
markets. We encourage Australian businesses to take full advantage of the
opportunities they present,” he said.
Media Release 20 December 2015.
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NORTH ASIAN TRADE DEALS REFLECT COMPLEX HISTORY

[15.140] When Australia’s trade officials moved to extending existing agreements on both sides; avoiding
close the deal on up to 10 years of grinding but secret being disadvantaged by a competitor going ahead
negotiations with China, Japan and South Korea over with a deal; and weighing up the beneﬁts of cutting a
the past year, they always had to get past the ghost of deal now rather than slogging on in negotiations for a
deals past or planned in the same room. slightly better package some time in the future.
In theory the trifecta of deals offers Australian The deal texts typically run to more than 1000 pages.
businesses major opportunities to break into mostly An extract of some parallel provisions from the deals
faster-growing economies than Australia. But an
in the attached chart shows that businesses need to
analysis of the three deals by The Australian
carefully assess their provisions to decide where the
Financial Review highlights how much they vary.
best opportunities are and how they may vary over
That’s because bilateral trade deals reﬂect a complex time.
web of interlocking forces or building blocks:

714

Three’s a crowd
TPP is at the
heart of our
Variations in select trade deals shared vision for
the future of this
South Korea Japan China dynamic region.
Fresh beef 40% tariff 38.5% tariff falls to 12-25% tariff We want all
removed over 32.5% in the first removed over countries to
pursue their
14 years, 14 year year and then to 9 years, 14 year interests and
safeguard 23.5% within safeguard prosperity
peacefully, based
mechanism. 15 years, 10 year mechanism. on common rules
safeguard of the road on an
open, level
mechanism. playing ﬁeld – a
Bottled wine 15% tariff 15 or 125 yen/litre 14-20% tariff fair trade. And
removed tariff falls over to 0 removed over our countries
comprise nearly
immediately. over 7 years. 4 years. 40 percent of
Wheat 1.8% tariff on 55 yen/kg out of No change for global GDP, and
some one-third of
wheat/meslin quota tariff wheat. 18% wheat global trade. So
eliminated (equivalent to gluten tariff this isn’t about
boosting exports
immediately, 8% 219%) on feed eliminated in between our
tariff on wheat wheat eliminated 4 years. countries in the
gluten eliminated immediately; Asia Paciﬁc. The
TPP is also
immediately. more efficient helping to write
trading system for the rules of global
trade for the 21st
some varieties, century. This is
21.3% wheat the highest
standard and most
gluten tariff progressive trade
eliminated over deal ever
10 years. concluded. US
President Barack
Finance Can provide Can provide Improved access Obama
financial services financial services in banking, (18 November
2015).
on a “cross- on a cross- insurance, funds
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boarder” basis, boarder basis, management,

including investment including securities,
advice, portfolio investment advice securities,
management services and portfolio securitisation and
for investment management futures. Enhanced
funds, insurance and services. cooperation on
insurance-related private equity.
services. Commitment to a
“forward work
program” to deliver
ongoing market
access.

715

South Korea Japan China

Australian exports 84% tariff free at 19.8% tariff free at 85% tariff free at
start rising to start, with 97.5% start rising to 93%
99.8% within receiving within four years
19 years. preferential or and 95% within
duty-free access 11 years.
within 10 years.
Australian 86% duty free at 82.7% duty free at 82% duty free at
imports start rising to start rising to start rising to
100% in 7 years. 100% within 100% within four
7 years. years.
Car imports 5% tariff removed 5% tariff removed 5% tariff removed
within 2 years. within 2 years. within 2 years.

Source: Financial Review, DFAT.

15.4 STRATEGIES FOR INTERNATIONAL BUSINESS

OPERATIONS
[15.150] The organisation that wants to expand its business beyond its domestic
operations must make certain fundamental strategic decisions: which foreign markets to
enter, the timing of entry into those markets and the scale and most appropriate mode of
entry. There are a number of entry modes available for international expansion including:
• direct sales/exporting;
• intermediary arrangements: distributors and agents;
• licensing;
• franchising;
• branch offices, subsidiaries and foreign acquisitions;
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• joint ventures; and

• strategic alliances.
No nation was Charles Hill, International Business: Competing in the Global Marketplace (10th ed,
ever ruined by
trade. Benjamin McGraw-Hill Education, 2015), p 448, notes that:
Franklin. Each of these options has advantages and disadvantages. The magnitude of the advantages and
disadvantages associated with each entry mode is determined by a number of factors, including
transport costs, trade barriers, political risks, economic risks, business risks, costs, and firm
strategy. The optimal entry mode varies by situation, depending on these various factors. Thus,
whereas some firms may best serve a given market by exporting, other firms may better serve
the market by setting up a new wholly owned subsidiary or by acquiring an established
enterprise.

The overriding factor, of course, is the regulatory environment that will specify whether
and on what conditions and pursuant to which structure the foreign investment may be
made.

716

Direct sales/exporting
[15.160] An exporter may sell directly to customers in an overseas market. In fact, as Hill
points out (International Business: Competing in the Global Marketplace, (10th ed,
McGraw-Hill Education, 2015) p 454), “many manufacturing ﬁrms begin their global
expansion as exporters and only later switch to another mode for serving a foreign market”.
Exporting avoids the infrastructure costs of establishing manufacturing operations in the
host country and has the advantages of centralised production with signiﬁcant potential for
economies of scale from global sales volume. Possible disadvantages of exporting include
high transport costs and trade barriers which may make exporting uneconomical.

Intermediary arrangements: Distributors and agents

[15.170] As an alternative to exporting, a manufacturing ﬁrm which does not want a
physical presence in an overseas market may use intermediaries in the host country to
market and distribute the product. Intermediaries have a number of descriptive titles –
distributor, agent, representative – but in law the intermediary is either an agent or a reseller
(or distributor, to use the more common commercial description). The disadvantage of this
mode of entry, is that despite contractual obligations, an organization does not have
complete control over marketing and sales in the market.

The main difference between a distributor and an agent is that an agent sells the goods on
behalf of the exporter, bringing into effect a contract of sale between exporter and customer,
while a distributor buys from the exporter and sells to local customers in the overseas
country on her or his own account. Distributors will take their proﬁt from the difference
between the price at which they bought the goods from the supplier, and the price which
they will ask from the customer. Agents, on the other hand, obtain their income by way of
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

a commission paid to them by the exporter and based on the sales made by the agent.
Another difference between the two is that, in the case of the distributor, property in the
goods which they buy from the exporter/supplier passes to them and is subsequently passed
to their customer when they ﬁnally sell the goods. In other words, they own the goods from
the time they pay the exporter/supplier for them until they sell them. The agent, however,
does not own the goods; they merely have possession of them from the time they receive
them from the exporter, until they hand them over to the buyer.

717

Licensing
[15.180] Licensing is a common strategy for commercialising intellectual property. It is a
contractual arrangement under which the owner of intellectual property (the licensor) grants
to another party (the licensee) the right to use that intellectual property in a particular place,
for a particular time, for a particular price and subject to whatever other provisions – quality
controls, improvements, confidentiality and so on – are agreed upon. Firms are increasingly
using licensing as a strategy for international business operation for reasons clearly
explained here (Pryles M, Waincymer J and David M, International trade law (Law Book
Company, 1996)):
By granting to a licensee the right to exploit the patent in the foreign country in return for
royalty payments, the licensor saves itself the trouble and expense of manufacturing and
marketing goods in an unknown environment, while harnessing the local knowledge, business
contacts and expertise of the foreign licensee. By selling licences rather than products, the
licensor can concentrate its commercial efforts on the production of technology in its home
country, without the need to market the products of that technology. The licensee, on the other
hand, can benefit from a developed and tested technological process without having to invest in
research and development. For these reasons, licensing agreements are often used as a means of
transferring the benefits of technology from developed to developing countries.

Franchising
Don’t overlook [15.190] Franchising, which is discussed in detail in Chapter 13 is a more sophisticated
the importance of
worldwide form of licensing which, in its business format mode, is characterised by the franchisor
thinking. A granting to the franchisee not only the right to use the franchisor’s intangible property,
company that
keeps its eye on usually trademarks, but also the right to use an entire business format in accordance with
Tom, Dick, and which the franchisee must carry on its business. As with licensing, the franchisor typically
Harry is going to
miss Pierre, Hans, receives a royalty payment, which amounts to some percentage of the franchisee’s revenue.
and Yoshio. Al
Ries.
Over the last two decades there has been a dramatic increase in the internationalisation of
franchising which provides an effective and efficient vehicle for internationalising business.
Franchising is currently practised in virtually every region of the world and has extended its
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

inﬂuence to virtually all consumer goods and services and for many businesses and
quasi-professional services.

The most common commercial vehicles for international expansion of franchise systems
are:
• direct franchising (through the franchisee in the home country granting franchises in the
host country, or through development agreements with a local entrepreneur to open
outlets in the host country or through the establishment of a branch office or foreign
subsidiary);
• master franchising under which the franchisor appoints an entrepreneur in the host
country who sub-franchises the system in that country; and
• joint venture arrangements.

718

Branch offices, subsidiaries and foreign acquisitions

[15.200] An exporter may determine that an intermediary – agent, distributor or licensee
– cannot demonstrate sufficient dedication to the product and that a greater local
commitment is necessary. Establishing a wholly owned subsidiary provides an organization
with tight control over its operations in a particular foreign country or network of countries,
however, it is the most costly method of servicing a foreign market in terms of capital
investment. Establishing a wholly owned subsidiary can be achieved by either setting up a
completely new operation in that country (a “greenfield venture”) or by acquiring an
established local firm in that country.
The Australian export manual comments that despite the imposition of contractual
obligations on intermediaries, “in practice no contract can give the same degree of control
as can equity” and adds that “equity investment in distributors, agents, and licensees also
comes with the benefit of giving the exporter access to downstream profits” (Sacks P &
Malbon J (eds) Australian export manual (FT Law & Tax Asia Pacific, 1992)):
If the exporter can accomplish his objectives overseas through a wholly-owned subsidiary, this
may be the best of all worlds. Owning a subsidiary-intermediary gives the exporter complete
commercial control over the intermediary without any need to share any profits with anyone.
An exporter could start up a subsidiary anew, employing local people with the requisite skills to
accomplish the technical and commercial objectives of the company, such as market
knowledge, market access, managerial skills, contacts and the like. Establishing a subsidiary
anew may sometimes not be the best commercial way of proceeding. This may take too long or
may be too expensive in the long term. It may ultimately be less costly and less risky, and it is
certainly quicker, to acquire an existing company with the attributes desired by the exporter,
such as existing distribution chains, established manufacturing facilities, substantial managerial
and technical skills, market knowledge and market power.

Joint ventures From Montreal to

Munich to
[15.210] The organisation that requires a greater degree of control over, or commitment Melbourne, the
world is too large
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to, its operations conducted through an intermediary in an offshore jurisdiction or who faces and ﬁlled with too
many diverse
commercial, legal or regulatory obstacles to starting up or acquiring a subsidiary in a people and ﬁrms
foreign country will frequently solve these obstacles through a joint venture with a local for any single
marketing strategy
partner. An intermediary’s commitment may be less than the exporter may have expected to satisfy
and controls exercised through a contract are limited to the terms negotiated and enshrined everyone. David
L Kurtz.
in the agreement. A subsidiary may not be a viable option because of commercial obstacles
(which may include the unavailability of a suitable company for acquisition or the
inefficiency and cost of establishing a subsidiary) and legal or regulatory obstacles
(primarily restrictive foreign investment laws which may limit or prohibit the acquisition or
establishment of subsidiaries in that country: a restriction often found in the laws of
developing and newly industrialised countries). In these circumstances a joint venture is the
usual mode of entry.

719

Although the term “joint venture” is widely used it does not refer to any particular type of
structure. Schmitthoff describes a joint venture as a common undertaking created by two or
more participants for a specific purpose, usually of a commercial nature. The common
undertaking formed by the participants may be carried on in various legal forms and does
not necessarily result in the creation of a separate legal entity (see Murray C, Holloway D
and Timson-Hunt D, Schmitthoff’s The Law and Practice of International Trade (12th ed,
Sweet & Maxwell, 2012) p 4).
Most common are equity ventures and contractual or cooperative ventures. In an equity
venture the common object is carried out in a corporate form with respective interests in the
joint venture determined by the party’s equity shareholding. In a contractual or cooperative
venture no separate corporate legal entity is created and the details of the joint venture will
depend on the terms of the joint venture contract through which it is established.
In a joint venture the parties work together sharing risks, rewards and control of the
operation. Joint ventures offer a number of advantages. They offer a great deal of flexibility
in what they do and how they operate and they can usually be adapted to meet the
commercial, regulatory and legal needs of the parties. Other advantages include the
possibility of achieving the critical mass needed to compete in the marketplace of the
importing country. The advantage of access to the local knowledge of the joint venturer
helps avoid barriers caused by cultural differences and unfamiliar business customs and
practices. A joint venturer may well make the difference between whether or not a party has
any problems obtaining financing facilities from the banks in the overseas country. The
main advantage of a joint venture is the sharing of risk that is lowered for both parties. The
greater the complementary skills and resources of the participants, the greater is the
potential for success. Joint ventures nevertheless have disadvantages, in particular the
weakness in decision making caused by the sharing of management responsibilities. Joint
ventures can be difficult to manage because of the differing goals and degrees of control of
the participants. Other disadvantages include the weakness of the franchisor’s position
because of cultural and geographic distance, problems repatriating profits, and difficulties
selecting an appropriate joint venturer.
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Strategic alliances
If you make [15.220] Hill describes strategic alliances as cooperative agreements between potential
believe that ten
guys in
or actual competitors for various strategic purposes. The term is not a term of art, and
pin-striped suits strategic alliances encompass formal joint ventures, in which two or more firms have equity
are back in
kindergarten class stakes, through to short-term contractual agreements in which two companies agree to
playing with cooperate on a particular task (such as developing a new product). Recent decades have
building blocks,
you’ll get a rough seen a large rise in the number of strategic alliances: Hill C, International Business:
idea of what life Competing in the Global Marketplace (10th ed, McGraw-Hill Education, 2015) p 465).
in a corporation is
like. Lee Iacocca. The essence of a strategic alliance is cooperation in a limited form in return for a share of
profits arising out of the alliance. The risks are limited to the areas of mutual cooperation, as
are the potential rewards.
Strategic alliances have a number of strategic commercial advantages – they may facilitate
entry into a foreign market, allow the sharing of fixed costs and associated risks in

720

developing new products or processes, bring together complementary skills and assets that
neither company could easily develop on its own and help a firm establish technological
standards for the industry that will benefit the firm. Strategic alliances also have a number
of potentially significant disadvantages (such as alliance partners giving away technological
know-how and market access to the other partner) which can be reduced if partner selection,
alliance structure and management of the alliance are carefully addressed.

15.5 INTERNATIONAL SALE OF GOODS

[15.230] The contract for the sale of goods is not only the most common legal transaction
within Australia and other similar economies, but is the most common instrument for
international trade. An international business transaction incorporates a number of elements
– sale, ﬁnancing and carriage – which are beyond the scope of this chapter. However, the
sale of goods component of the international transaction operates in a similar manner to the
Australian sale of goods legislation.

Vienna Convention
[15.240] A decade of negotiations throughout the 1970s resulted in the United Nations There have been
many definitions
Convention on Contracts for the International Sale of Goods being adopted in Vienna in of hell, but for
1980 (the Vienna Convention) The United Nations Commission on International Trade Law the English the
best definition is
(UNICTRAL) states that the purpose of the Vienna Convention is to provide a modern, that it is a place
uniform and fair regime for contracts for the international sale of goods. where the
Germans are the
police, the
The Vienna Convention is in force in all Australian jurisdictions (under the Sale of Goods Swedish are the
(Vienna Convention) Acts) which were enacted throughout Australia in 1986 and 1987. comedians, the
Italians are the
Most of Australia’s major trading partners have become parties to the Convention. As defence force,
Frenchmen dig
6 September 2015, the UNICTRAL website identifies 83 States as parties to the Vienna the roads, the
Convention. Belgians are the
pop singers, the
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Spanish run the

Where an international contract for the sale of goods is entered into between parties in railways, the
countries which are members of the Vienna Convention, that law governs their contract. In Turks cook the
food, the Irish are
other cases, the parties must specify in a “choice of law” clause which country’s laws the waiters, the
govern the transaction – an often difficult negotiating point because each party will want its Greeks run the
government, and
own country’s laws to govern the relationship. the common
language is
Under the Vienna Convention, the parties retain a large degree of freedom to substitute their Dutch. David
Frost.
own agreement for standard provisions or vary the effect of any of the provisions of the
Convention.

721

The Vienna Convention is complemented by the United Nations Convention on the Use of
Electronic Communications in International Contracts (2005), which is an enabling treaty
whose effect is to establish the requirements for functional equivalence between electronic
and traditional written form.

This summary of the major features of contracts under the Vienna Convention is extracted
from Kennedy, “The Vienna Convention: An international trap for local players” (1997) 71
LIJ 47 at 50:

More commonly known as “The Vienna Convention” or in some quarters as “CISG”, the
Convention governs the formation of contracts of sale and the rights and obligations of buyer
and seller arising from the international contract. It is not concerned with the validity of the
contract or the effect it has on the property in the goods. Nor is it concerned with ownership
claims of third parties and public liability claims for death and personal injury.
The Convention is self-inclusive, so it must be dealt with by express exclusion or else by
proper consideration. If it is not excluded and if the contract falls under the umbrella of the
Convention, then to the extent that individual clauses in the contract do not contradict the
Convention it forms part of your contract.
Application
If you speak three The aims of the Convention are to:
languages, you
are trilingual. If • bring uniformity to the rules which govern contracts for international sale of goods;
you speak two
languages, you • remove legal barriers in international trade; and
are bilingual. If
• promote the development of international trade.
you speak one
language, you’re
American. It applies, ﬁrst, if both parties to the contract are from countries which have ratiﬁed the
Anonymous. Convention (“contracting states”) and, second, when the rules of private international law lead to
the application of the law of a contracting state

...

It is important to note that many of Australia’s trading partners have accepted the Convention.
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Notably, the United Kingdom has deliberately opted out (it has instead adopted the Convention
relating to a Uniform Law on the International Sale of Goods (1964) (Hague Sale of Goods
Convention).

As it says, the Convention applies to “goods”. It does not apply to sales of goods bought for
personal use, sales by auction, stocks, shares, investment securities, negotiable instruments, money,
ships, hovercraft, vessels, aircraft or electricity, but it applies to everything else bought and sold
between parties whose businesses are in contracting states.

Effect on contracts
...

722

Article 11 states that a contract of sale need not be evidenced by writing and may be proved by
any means including witnesses. However, Article 96 makes provision for a country to accept the
Convention with the rider that Art 11 (and other provisions requiring formalities) does not apply. It
would be prudent for lawyers to encourage clients to include or assert, in their initial negotiations,
that they will not be bound until a written document is signed.
Part 2 of the Convention is entitled “Formation of the Contract”. It establishes:
• when a proposal constitutes an offer;
• what constitutes a sufficiently deﬁnite proposal;
• when a proposal is an invitation to make an offer;
• when an offer is effective;
• when an offer may be withdrawn;
• when an offer can and cannot be revoked;
• what constitutes acceptance;
• when an acceptance becomes effective or is not effective (acceptance can be indicated by the
performance of an act established by usage);
• what constitutes a counter-offer and what does not;
• the commencement point for time-based offers;
• the effect of last day of offer term falling on a non-business day;
• late acceptance;
• withdrawal of acceptance; and
• conclusion of contract.
...

IN CONTEXT
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Obligations under the Vienna Convention

[15.260]
Generally the obligations of buyers are relatively simple. The buyer must pay the
price of the goods and take delivery of them (Article 53). This is the essential
obligation, although the Convention proceeds to provide other requirements for the
buyer to ﬁll gaps where the parties may not have speciﬁed terms such as weight of
the goods (Article 56), place of payment (Article 57), time of payment, (Article 58)
and other details for taking delivery, and remedies for breach of contract by the buyer.

723

The weight of the performance is substantially on the seller, as is the traditional

position, to assure that the goods meet the order. It is in this area where the condition
and quality of the goods are regulated by the Convention. For the seller, the critical
issue is what complies with proper performance. Do the goods meet the required
quality and purpose? The obligation of the seller is to deliver goodswhich are of the
quality, quantity and the description required by the contract (Article 35). The goods
must be packaged as required by the contract. Unless agreed otherwise, the Vienna
Convention prescribes specific requirements in order for goods to conform to the
contract. Goods do not conform to the contract unless they are fit for the purposes for
which goods of the same descriptions would ordinarily be used (Article 35(2)(a)). If
made known to the seller at the time of the contract, goods are to be fit for the
particular purpose, expressly or impliedly made known to the seller, except in
situations where the buyer did not rely on the seller’s skill and judgment or where it
was unreasonable for him to do so (Article 35(2)(b)). Goods must have the
qualitieswhich the seller held out to the buyer as a sample or model (Article 35(2)(c)).
The buyer may not rely upon these required qualities if he knew or could not have
been unaware of lack of conformity at the time of the contract (Article 35(3).).
The Convention deals with the time when conformity is required. The seller is
liable only until the risk passes to the buyer that the goods conform to the Convention
requirements, even though lack of conformity becomes apparent only after that time
unless there is a guarantee for a period of time which the goods will remain fit for
ordinary purposes or for some particular purpose or will retain specific qualities or
characteristics (Article 36).
Damages for breach of contract include the loss, including lost profit, suffered as a
consequence of the breach, but may not exceed the loss which the party in breach
foresaw or should have foreseen at the time of the contract (Article 74). The duty to
mitigate damages in the case of breach is specified by the Convention, requiring that
a party who relies on breach of contract take measures that are reasonable under the
circumstances to mitigate the loss (Article 77).
While not called force majeure, the Convention provides exemptions from
performance based on frustration of contract concepts and excuses liability for
performance when a party is unable to perform due to an impediment beyond his
control that he could not reasonably be expected to have taken into account at the
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time of the contract, or to have avoided or overcome it or its consequences

(Article 79).
The Convention also recognises the concept of the common law implied duty not
to prevent performance of the other party. A party may not take advantage of the
failure of the other party to perform if that failure was caused by an act or omission
of the ﬁrst party (Article 80). An act or omission within your control that prevents
performance cannot be the basis for a claim against the other party.

by Glower W Jones, “Impact of the Vienna Convention in drafting international

sales contracts”, International Business Lawyer, (September 1992).

724

IN CONTEXT

Incoterms® rules
[15.260] International sale of goods contracts are facilitated by the use of the
Incoterms® rules which provide internationally accepted deﬁnitions and rules of
interpretation for the most common commercial terms used in contracts for the sale
of goods that need to be transported. The Incoterms® rules do not attempt to cover
all aspects of the commercial agreement between a buyer and a seller. Rather, they
clarify the obligations, costs and risks undertaken by each party in the delivery of
the goods.

The Incoterms® rules are created and published by the International Chamber of
Commerce (ICC) and are revised from time to time to represent contemporary
commercial practice. The most recent revision is the Incoterms® 2010 rules which
came into effect on 1 January 2011.

The Incoterms® 2010 revision contains 11 rules which are presented in two
distinct classes:
(a) rules that can be used irrespective of the mode of transport selected and
irrespective of whether one or more than one mode of transport is used
(including where a ship is used for part of the carriage); and
(b) rules for sea and inland waterway transport, which should only be used for
maritime transport (where the point of delivery and the place to which
goods are carried to the buyer are both ports).

Set out below from the ICC website are short descriptions of the various trade
terms contained in the Incoterms® 2010 rules. These should be read in the context
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of the full official text of the Incoterms® 2010 rules which is available from the
ICC Business Bookstore: (http://www.store.iccwbo.org/incoterms-2010).
1. Rules for any mode or modes of transport
• EXW Ex Works:
“Ex Works” means that the seller delivers when it places the goods at the
disposal of the buyer at the seller’s premises or at another named place (ie
works, factory, warehouse, etc). The seller does not need to load the goods
on any collecting vehicle, nor does it need to clear the goods for export,
where such clearance is applicable.

725

• FCA Free Carrier

“Free Carrier” means that the seller delivers the goods to the carrier or
another person nominated by the buyer at the seller’s premises or another
named place. The parties should specify as clearly as possible the point
within the named place of delivery, as the risk passes to the buyer at that
point.
• CPT Carriage Paid To
“Carriage Paid To” means that the seller delivers the goods to the carrier or
another person nominated by the seller at an agreed place (if any such place
is agreed between parties) and that the seller must contract for and pay the
costs of carriage necessary to bring the goods to the named place of
destination.
• CIP Carriage And Insurance Paid To
“Carriage And Insurance Paid To” means that the seller delivers the goods to
the carrier or another person nominated by the seller at an agreed place (if
any such place is agreed between parties) and that the seller must contract
for and pay the costs of carriage necessary to bring the goods to the named
place of destination. The seller also contracts for insurance cover against the
buyer’s risk of loss of or damage to the goods during the carriage. Under
CIP the seller is required to obtain insurance only on minimum cover.
Should the buyer wish to have more insurance protection, it will need either
to agree as much expressly with the seller or to make its own extra
insurance arrangements.
• DAT Delivered At Terminal
“Delivered At Terminal” means that the seller delivers when the goods, once
unloaded from the arriving means of transport, are placed at the disposal of
the buyer at a named terminal at the named port or place of destination.
“Terminal” includes any place, whether covered or not, such as a quay,
warehouse, container yard or road, rail or air cargo terminal. The seller bears
all risks involved in bringing the goods to and unloading them at the
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terminal at the named port or place of destination.

• DAP Delivered At Place
“Delivered At Place” means that the seller delivers when the goods are
placed at the disposal of the buyer on the arriving means of transport ready
for unloading at the named place of destination. The seller bears all risks
involved in bringing the goods to the named place.
• DDP Delivered Duty Paid

726

2. “Delivered Duty Paid” means that the seller delivers the goods when the
goods are placed at the disposal of the buyer, cleared for import on the
arriving means of transport ready for unloading at the named place of
destination. The seller bears all the costs and risks involved in bringing the
goods to the place of destination and has an obligation to clear the goods not
only for export but also for import, to pay any duty for both export and
import and to carry out all customs formalities.Rules for Sea and Inland
Waterway Transport [should only be used for maritime transport]
• FAS Free Alongside Ship
“Free Alongside Ship” means that the seller delivers when the goods are
placed alongside the vessel (e.g., on a quay or a barge) nominated by the
buyer at the named port of shipment. The risk of loss of or damage to the
goods passes when the goods are alongside the ship, and the buyer bears all
costs from that moment onwards.
• FOB Free On Board
“Free On Board” means that the seller delivers the goods on board the
vessel nominated by the buyer at the named port of shipment or procures the
goods already so delivered. The risk of loss of or damage to the goods
passes when the goods are on board the vessel, and the buyer bears all costs
from that moment onwards.
• CFR Cost and Freight
“Cost and Freight” means that the seller delivers the goods on board the
vessel or procures the goods already so delivered. The risk of loss of or
damage to the goods passes when the goods are on board the vessel. The
seller must contract for and pay the costs and freight necessary to bring the
goods to the named port of destination.
• CIF Cost, Insurance and Freight
“Cost, Insurance and Freight” means that the seller delivers the goods on
board the vessel or procures the goods already so delivered. The risk of loss
of or damage to the goods passes when the goods are on board the vessel.
The seller must contract for and pay the costs and freight necessary to bring
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the goods to the named port of destination. The seller also contracts for
insurance cover against the buyer’s risk of loss of or damage to the goods
during the carriage. Under CIF the seller is required to obtain insurance only
on minimum cover. Should the buyer wish to have more insurance
protection, it will need either to agree as much expressly with the seller or to
make its own extra insurance arrangements.

15.6 INTERNATIONAL TRADE FINANCING

[15.270] A typical export transaction involving an Australian supplier of goods involves The further he
went West the
complex legal relationships. Apart from the sale itself, there are aspects of carriage, more convinced
insurance, compliance with industrial and revenue regulations, and provision for payment. he felt that the
Wise Men came
The nature of the physical transaction implies that there will usually be a period in which from the East.
Sydney Smith.

727

one party is offering credit to the other. Most frequently that credit will be supplied by the
manufacturer/vendor of goods to the purchaser, who may not pay until the goods are
delivered to it. One of the risks borne by the vendor during this period is that of an adverse
currency movement. The risk of the buyer defaulting, or of a signiﬁcant change in the laws
of the country of the buyers, should also be addressed.
Instruments for ﬁnancing exports and imports have developed over many years to deal with
a problem that can be acute in international trade – a lack of trust that occurs when one
party must put faith in an unfamiliar party. As Hill puts it (International Business:
Competing in the Global Marketplace (10th ed, McGraw-Hill Education, 2015) p 497-498):
Firms engaged in international trade have to trust someone they may never have seen, who
lives in a different country, who speaks a different language, who abides by (or does not abide
by) a different legal system, and who would be very difficult to track down if he or she defaults
on an obligation … Neither party to the exchange completely trusts the other. This lack of trust
is exacerbated by the distance between the two parties – in space, language, and culture – and
by the problems of using an underdeveloped international legal system to enforce contractual
obligations. …Unless there is some way of establishing trust between the parties, the
transaction may never occur. The problem is solved by using a third party trusted by both –
normally a reputable bank – to act as an intermediary.

The principal methods of ensuring payment for exported goods include the following:
• payment in advance;
• documentary bills of exchange; and
• documentary letters of credit.

We have to Payment in advance

recognise that
Australia and [15.280] This, of course, is the preferred option of the vendor, but one which in practice
Australians have
always … needed may be difficult to negotiate.
outside capital to
develop the great
projects in the Documentary bills of exchange
great country we
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have. Andrew [15.290] A bill of exchange is defined in s 8 of the Bills of Exchange Act 1909 (Cth) as:
Forrest,
Chairman, An unconditional order in writing, addressed by one person to another, signed by the person
Fortescue Metals giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or
Group. determinable future time, a sum certain in money to or to the order of a specified person, or to
bearer.
This simple bill of exchange will, in a typical export transaction, be accompanied by a
set of documents, generally a bill of lading which proves shipment of the goods, an
invoice for the goods, and a certificate of insurance. It is then known as a documentary
bill of exchange.
The procedure requires the seller to draw a bill of exchange on the buyer for payment,
either at sight (immediately) or upon the expiration of a term. The bill is normally
delivered by the seller to its bank which will in due course present it to the buyer for
acceptance, in the case of a term bill, or for payment, in the case of a sight bill. If a term
bill is presented for acceptance by the buyer the bank may be instructed to deliver the

728

documents to the buyer on acceptance (and the bill will be marked D/A) or to deliver the
documents on payment at the expiration of the term (D/P). The seller’s bank will
frequently arrange collection through its agency in the country of the purchaser. An
advantage of a bill of exchange is that it may be discounted so that, for example, the
seller’s bank may make immediate payment of a discounted amount to the seller and
then wait to recover full payment from the buyer upon maturity of the bill.

Documentary letter of credit

[15.300] Letters of credit are the most common method of payment for goods in the
export trade and have been described in English courts as “the life blood of international
commerce” (Schmitthoff, The Law and Practice of International Trade (12th ed, Sweet &
Maxwell, 2012) p 190).

While there are various types of letters of credit, essentially a letter of credit isa document
issued by the buyer’s bank in favour of the seller. The buyer will instruct its bank (the
issuing bank) as to times of payment and the documents to be obtained prior to payment. It
will be usual for the seller to submit a bill of exchange, with relevant documents, to the
issuing bank which, when the buyer’s instructions to it have been satisﬁed, will pay the
seller. The buyer’s account with the issuing bank will be debited with the relevant amount
and the buyer will take possession of the documents and, through them, the goods.

As Schmitthoff points out (at p 190):

The documentary character of this type of bankers’ credit, as used in international trade, cannot
be over-emphasised. The paying bank is prepared to pay the exporter because it holds the
documents as collateral security and, if necessary, can have recourse to the issuing bank, which
in turn can have recourse to the buyer as instructing customer.
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Banking practice relating to letters of credit is standardised by the Uniform Customs and
Practice for Documentary Credits (UCP), which are a set of rules issued by the ICC,
which aims to simplify dealings in letters of credit. Schmitthoff (at p 191) notes that after
more than 80 years of effort and periodic revision, the UCP now have almost universal
effect. The current version, UCP 600, took effect on 1 July 2007. The UCP only apply if
the parties have expressly incorporated them into their contract and parties are free to
exclude the operation of speciﬁc provisions.

729

15.7 INTERNATIONAL INTELLECTUAL PROPERTY

PROTECTION
Intellectual [15.310] The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights
property plays an
increasingly vital (TRIPS), which came into effect on 1 January 1995, is the most comprehensive
role in global international treaty governing the recognitition, protection, administration and enforcement
trade and
economic of intellectual property (IP) rights. TRIPS sets out a number of general principles and the
development. minimum IP standards with which WTO member nations must comply in respect of the IP
Globalisation of
trade means that rights covered by the Agreement:
intangible
informational • Copyright and related rights;
resources are now
produced, • Trademarks, including service marks;
exchanged and
consumed
• Geographical indications;
anywhere and • Industrial designs;
everywhere
defying • Patents;
jurisdictional
borders. Duffield • Layout-designs (topographies) of integrated circuits; and
G and
Suthersanen U, • Undisclosed information, including trade secrets.
Global
Intellectual
Property Law WTO members determine themselves how best to implement these minimum IP standards
(Edward Elgar, in their domestic legislation and may chose to implement more extensive protection
2008).
provided it does not conﬂict with the provisions of the Agreement (TRIPS, Art 1.1).
Existing obligations under other major IP conventions, including the Paris Convention for
the Protection of Industrial Property (Paris Convention) and Berne Convention for the
Protection of Literary and Artistic Works (Berne Convention), are incorporated in TRIPS by
way of reference and additional obligations imposed on WTO members where the
pre-existing conventions were seen as being inadequate (TRIPS Arts 2.1 and 9.1).

Intellectual TRIPS acknowledges that IP protection is not an end in itself but is aimed at broader public
property is
important, but the
policy objectives. The general scope of TRIPS and its signiﬁcance is outlined by DFAT e, as
appropriate follows (http://www.dfat.gov.au/trade/topics/intellectual-property).
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

intellectual
property regime TRIPS is intended to maximise the contribution of intellectual property systems to economic
for a developing growth through trade and investment by:
country is
different from that • establishing minimum standards for intellectual property rights protection in the national
for an advanced systems of WTO members
industrial country.
The TRIPS • prescribing agreed elements of an effective mechanism for administration and enforcement of
scheme failed to
recognize this. In intellectual property rights
fact, intellectual • creating a transparency mechanism – each WTO member is required to provide details of their
property should
never have been national intellectual property laws and systems, and to answer questions about their
included in a intellectual property systems
trade agreement
in the ﬁrst place, • creating a predictable, rules-based system for the settlement of disputes about trade-related
at least partly
because its
intellectual property issues between WTO members
regulation is • allowing for mechanisms that ensure that national intellectual property systems support widely
demonstrably
beyond the accepted public policy objectives, such as stamping out unfair competition, facilitating transfer
competency of of technology, and promoting environmental protection.
trade negotiators.
Joseph Stiglitz.
730

Some regional trade agreements (including those to which Australia is a participant) have
provided, or are seeking to provide, more stringent protections than the minimum IP
standards set by TRIPS. The Productivity Commission in its Trade and Assistance Review
2013-2014 (at [4.3]) commented that –
For individual countries, the impact of these provisions will directly depend on whether they
are net exporters or importers of different forms of IP material. More broadly, the impact of the
provisions will depend on how they affect the level and growth in economic activity in partner
economies …
The relevance of trade related IP issues for Australia has gained even greater prominence
because of the potential reach of the proposed TPP in this area. Potentially, the IP chapter in the
TPP could be extensive and go beyond the provisions contained in the TRIPS Agreement and
AUSFTA. For example, based on US media access to the current draft text, it appears likely Many rich
that the TPP will include obligations on pharmaceutical price-determination arrangements in countries used
weak IPR
Australia and other TPP members, of an uncertain character and intent. The history of IP protection in their
arrangements being addressed in preferential trade deals is not good. Indeed, to the extent that early stages of
the return to IP holders awarded by more stringent IP laws outweighed the beneﬁts to the industrialization
to develop local
broader economy, the provision would also impose a net cost on both partners, lowering trading
technological
and growth potential across the bloc. bases, increasing
For such reasons, the Commission has previously recommended that: protection as they
approached the
… Australia’s participation in international negotiations in relation to IP laws should focus leaders. S Lall.
on plurilateral or multilateral settings, and that its support for any measures to alter the
extent and enforcement of IP rights should be informed by a robust economic analysis of
size and distribution of the resultant beneﬁts and costs.[Productivity Commission, Research
Report on Bilateral and Regional Trade Agreements 2010, p 264]

TRADE HELD HOSTAGE TO RIGHTS PROTECTION

[15.320] Now that the intellectual property the Uruguay round, for the ﬁrst time put signatories
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chapter of the Trans-Paciﬁc Partnership has been under an obligation to introduce and enforce
leaked, our worst fears are conﬁrmed — IP in TPP intellectual property rights protection, and to make
is OTT. payments to IP producers.
This would be bad enough on its own. What is less Arguably it is better for the world as a whole to
well-recognised is that the trade liberalisation have some IP protection, rather than none. But in
agenda is being held hostage to the IP agenda, and my view it is highly unlikely that the TRIPS-plus
the result is inimical to development. provisions being pushed since will lead to global
gains. These TRIPS-plus measures are only a little
Intellectual property rights protection, as
bit concerned with providing additional incentives
introduced into the last two rounds of WTO
for new IP to be created that might not be
negotiations, no longer guarantees that under a
otherwise.They are greatly concerned with
cooperative settlement everyone will be made
expanding the ongoing transfers of economic rents
better off.
from the consumers to the producers of IP that
The Agreement on Trade-Related Aspects of already exists (and hence needs no further
Intellectual Property Rights (TRIPS), adopted in incentives).

731

Although it may arguably have led to a net global of most benefit to US beef consumers. The key
gain on its own, the TRIPS agreement did not point is that by offering preferential access to
generate gains for every WTO member. It was Australia, the US retains the ability to bundle beef
accepted as part of the Uruguay round settlement liberalisation with higher IP standards when
because it was packaged together, in a single approaching other potential trade partners.
undertaking, with measures such as the dismantling
When the game is only in tariffs, the need for
of the Multi-Fibre Arrangement, which were of
discrimination in order to retain negotiating coin is
benefit to many net IP importers.
mercantilist nonsense; when countries are also
Even tougher IP provisions are on the table as part trying to “sell a pup”, these requirements are
of the Doha round. But one key problem (among deadly serious.
many) is that the Doha round lacks any definitive
The WTO rules allow trade concessions in free
offset. Agricultural liberalisation was supposed to
trade agreements to be made preferentially, even
be the clincher. The trouble is that the terms of
though they must be non-preferential in the WTO
trade effects were shown to be so big that poor net
itself. While ever this is so, preferential market
food importers would lose, even in an otherwise
access will be used as a side-payment to sell IP
ideal Doha round settlement.
provisions. As a result, trade liberalisation is no
And for net food exporters, world markets have longer considered on its own merits but is held
already delivered large price increases, taking the hostage to the IP agenda. And the main proponents
heat off trade negotiations (and coincidentally of the IP provisions have no incentive to change
confirming the worst fears of net food importers). the WTO rules.
It is clear that for private sector interests in the It is high time that the economic debates about
United States, increasing the rents accruing to free trade agreements move beyond concerns
existing IP is the main game. Since the game about noodle bowls — in my view this is a
cannot be played successfully in the WTO, it is second-order issue. The real question is about
being played in free-trade agreements. bundling, underpinned by current WTO rules.
Should WTO rules allow developing countries an
Countries that are trying to preserve and expand
opportunity for phased reforms, or are they to be
international rent transfers need to rely on
subjected to discriminatory punishment unless and
bundling, so that they can sell the good with the
until they are prepared to take on the whole
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bad. In the WTO, bundling was ensured by the

package, be it the EU acquis or its US equivalent,
single undertaking; in free-trade agreements,
with the sometimes dubious provisions contained
bundling is ensured by offering market access
therein?
concessions on a discriminatory basis. For
example, imagine the United States trying to It is anti-development to expect developing
persuade Australia to accept tighter IP protections, countries to forgo the beneﬁts of market access
including a longer term of copyright. until they are ready to take on the so-called
platinum provisions of IP protection and so on, as
The United States could offer Australia an
part of the bundle. We need WTO rules that
expansion of its beef export quota into a still-
facilitate unbundling, so that trade reform can
protected US beef market, or it could offer open
once again be considered on its merits.
competition in a US beef market that was fully
liberalised. For the United States, the key concern Dee P, Australian Financial Review (9 December
is not which type of beef market liberalisation is 2013)

732

15.8 INTERNATIONAL COMMERCIAL DISPUTE

RESOLUTION
[15.330] International commercial disputes are settled through four major means:
• consultation or negotiation;
• conciliation or mediation;
• arbitration; and
• litigation.
Occasionally countries resort to economic sanctions or “trade wars”, but military force as a
means to resolving a commercial dispute is, fortunately, rare today.
Each means of dispute resolution has its own advantages and disadvantages and the parties
should choose the procedure most suitable for their purposes. This requires consideration of
a number of issues including the court’s jurisdiction over foreign parties, international
conventions and institutions, applicable domestic legislative regimes for international
litigation and arbitration, the likelihood of enforcement as well as other cross-cultural
considerations.
Disputes are usually best resolved by informal mechanisms of negotiation or mediation, but
if they fail it may be necessary to arbitrate or litigate despite their very real disadvantages of
time, cost and damage to the business relationship.
• Consultation and negotiation refer to an informal and unstructured process under which
the parties resolve their dispute by direct contact and exchange of opinions. This is the
most common method of dispute resolution both domestically and internationally. It
will lead to a negotiated settlement (which is legally binding only if the parties want it
to be) or, if unsuccessful, to another, more formal method of dispute resolution. There is
no set procedure. The process is initiated and controlled by the parties themselves and is
based on continuing cooperation. If this does not exist, a more formal system of
resolution is necessary. The obvious advantage of consultation and negotiation are
continuing cooperation and savings in time and money. I have two rules –
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

never do business
• Conciliation and mediation refer to a process of third-party dispute settlement where with any country
procedural rules are very flexible or do not exist at all. It is, in effect, a structured form that has green in
its flag or where
of negotiation involving an independent third-party conciliator or mediator who is not they don’t wear
overcoats.
empowered to make a decision and who simply endeavours to assist the parties to reach Sir Benjamin
a settlement, or who may make a recommendation or report at the end of the process. Slade, company
director.
Conciliation and mediation are particularly valuable for settling disputes between
parties involved in a long-term continuing relationship as they negotiate a win-win
solution that preserves their relationship rather than the imposed resolution of a court or
arbitration tribunal. International mediation has been facilitated by the development of
rules that parties may adopt for the conduct of their dispute resolution process (see eg
the UNCITRAL Conciliation Rules).
• Arbitration involves the use of an impartial and competent person as a referee to
arbitrate a dispute. It is characterised by flexibility and the freedom of the disputing
parties to choose the forum, rules and arbitrator. In practice parties usually choose a seat

733

of arbitration that is neutral as concerns the parties and which has a legal framework
that is conducive to arbitration. Arbitration is private, relatively speedy (in comparison
to litigation) and there is a lesser likelihood of, or opportunity for, an appeal from an
arbitral tribunal than from a court. Arbitration is becoming an increasingly popular
alternative to traditional court litigation for resolving international commercial disputes
because of the greater ease of enforcing arbitration awards (pursuant to the procedures
set out in the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (1958) (New York Convention)). In addition, the wide use in international
contracts of clauses incorporating ICC or UNCITRAL arbitration rules has created a
large degree of uniformity in the international arbitration process. This has led to greater
efficiency and the avoidance of “conﬂict of laws” problems that can arise between
unrelated domestic legal systems.
• Litigation is the traditional means of dispute resolution. It involves the use of a court of
law for settling a dispute and is characterised by the formality of the procedures under
which the court conducts its business and the power of the court, backed by the
sanctions of the state, to enforce its decisions. If the parties to an international
commercial contract cannot resolve a dispute informally or if arbitration is not provided
for in the contract or agreed upon when the dispute arises, litigation will be the only
option. Indeed in some cases litigation will be the preferred option when an injunction
is required (eg to prevent removal of assets from the jurisdiction when a debt is owed)
or to resolve important and complex legal rather than factual issues. There is no system
of international commercial litigation but simply the settlement of international
commercial disputes by domestic courts. This raises important questions of the
governing law, the appropriate jurisdiction and the enforcement of foreign judgments.
Litigation is slow, costly, formal, and win-lose thus being detrimental to business
relationships, but it has the advantage that there is no need to obtain the consent of the
other party for submitting a dispute to the court.
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

QUESTIONS
1. Why was the WTO established and how effective is it?
2. What are regional free trade agreements and how do they impact on the
system of multilateral trade regulation established by the WTO?
3. Outline the general scope of TRIPS and its importance in international
business.
4. Discuss the relative advantages and disadvantages of the processes
available for international commercial dispute resolution.

734

WEB REFERENCES

Department of Foreign Affairs and Trade http://www.dfat.gov.au

International Chamber of Commerce http://www.iccwbo.org
Productivity Commission http://www.pc.gov.au
United Nations Commission on International Trade Law http://www.uncitral.org
United Nations Conference on Trade and Development http://www.unctad.org
World Trade Organization http://www.wto.org
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735

Graham Raffell

THE BUSINESS CONTEXT

Students of business and law should understand and be able to identify the processes and types
of business cessation and the legal obligations that play a role in either the termination of a
business entity following its failure or its rehabilitation from critical care. Those who control
companies (and their professional advisers) should also understand the implications of their
ﬁduciary duty under the Corporations Act 2001 (Cth) to prevent companies from engaging in
insolvent trading.

[16.10] 16.1 CESSATION OF BUSINESS ............................................................................................. 738

[16.40] 16.2 PERSONAL INSOLVENCY (BANKRUPTCY) ................................................................... 739
[16.40] Bankruptcy Act 1966 (Cth) ................................................................................... 739
[16.50] Bankruptcy administration .................................................................................. 739
[16.60] The occasion of bankruptcy ................................................................................ 740
[16.70] Acts of bankruptcy ............................................................................................... 740
[16.90] Distribution of the bankrupt’s estate ................................................................. 740
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

[16.130] Relation back and avoidance of certain transactions ....................................... 742

[16.160] Release from bankruptcy ..................................................................................... 742
[16.170] 16.3 ALTERNATIVES TO BANKRUPTCY ................................................................................. 743
[16.180] Part IX Debt agreements ..................................................................................... 743
[16.190] Part X Personal insolvency agreements: Arrangements with creditors without
sequestration ........................................................................................................ 743
[16.200] 16.4 CORPORATE INSOLVENCY ............................................................................................ 743
[16.210] Cross-border insolvency ...................................................................................... 744
[16.215] Meaning of insolvent ........................................................................................... 744
[16.220] Winding up/liquidation ....................................................................................... 744
[16.300] Professional standards ......................................................................................... 747
[16.320] Avoidance of pre-liquidation transactions ......................................................... 747

737

[16.340] Insolvent trading by directors ............................................................................. 748

[16.360] Priorities ................................................................................................................ 749
[16.370] Claims on the insolvent estate ............................................................................ 749
[16.400] 16.5 ALTERNATIVES TO LIQUIDATION ................................................................................. 750
[16.400] Receivership .......................................................................................................... 750
[16.450] Schemes of arrangement .................................................................................... 752
[16.470] Voluntary administration ..................................................................................... 753

16.1 CESSATION OF BUSINESS

[16.10] This chapter is concerned with cessation of a business through the legal paths of
personal insolvency (known as bankruptcy) and corporate insolvency (known as liquidation
or winding up), and the rescue regimes that are alternatives to cessation. The cessation of
insolvent partnerships and sole traders is governed by the Bankruptcy Act 1966 (Cth). At the
end of the process, the individuals previously conducting the business as partners or sole
traders still exist. Companies are governed by the Corporations Act 2001 (Cth) when they
are solvent and until they are wound up, through insolvency or otherwise. When the
liquidation has been completed, the company ceases to exist.
Money isn’t Subject to those essential differences the laws of personal and corporate insolvency are
everything;
usually it isn’t
analogous. In the United States the word “bankruptcy” is applied to both. Australian
enough. Anon. insolvency law however is based on the English model, which has traditionally emphasised
the rights of creditors, whereas American law (although broadly similar) has tended to be
more accommodating to debtors.
[16.20] An inherent aspect of a business failing is that there are not enough assets
available to pay the debts owed by the business. The United Nations Commission on
International Trade Law (UNCITRAL), Legislative Guide on Insolvency Law (2004) lists
the key objectives of an effective and efficient insolvency law as follows:
1. Provision of certainty in the market to promote economic stability and growth
2. Maximising the value of the assets
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3. Striking a balance between reorganisation and liquidation

4. Ensuring equitable treatment of similarly situated creditors
5. Providing for timely, efficient and impartial resolution of insolvency
6. Preservation of the insolvent estate to allow equitable distribution to creditors
7. Providing for a procedure that is transparent and predictable and contains incentives for
gathering and dispensing information
8. Recognising existing creditors’ rights and establishing clear rules for ranking of
priority claims
9. Establishing a framework for cross-border insolvency.
[16.30] Australian insolvency legislation is regularly reviewed and reﬁned to give
effect to these policy objectives. Business failure triggers procedures designed to protect
creditors, employees and others, and to prevent the debtor behaving fraudulently or
conferring unfair advantages on particular creditors. The Explanatory Memorandum to
Cross-border Insolvency Bill 2007 (Cth) states:

738

Insolvency laws are among the most important laws governing market conduct. A
well-designed insolvency regime will enhance certainty in the market and promote economic
stability and growth, by allowing market participants to accurately assess credit risk. It will
provide for restructuring of viable businesses, and the efficient closure and transfer of assets of
failed businesses.
Having noted the broad analogy between personal and corporate insolvency, this chapter
will now examine the steps to be taken and the consequences of business failure
according to each.

16.2 PERSONAL INSOLVENCY (BANKRUPTCY)

Bankruptcy Act 1966 (Cth)
[16.40] Personal insolvency, also called bankruptcy, is a mechanism for protecting
insolvent individual traders from harassment by their creditors. It also ensures the greatest
return to creditors from the identiﬁcation, sale and equitable distribution of the bankrupt’s
assets and property. Bankruptcy is governed by the Bankruptcy Act 1966 (Cth). Provided
the bankrupt person complies with the Act during the bankruptcy, he or she is able,
generally after three years, to secure release from bankruptcy and from the debts which
caused it. That is, the Act allows for the possibility of a fresh start for bankrupts.

The Act is reformed periodically to address people’s changing habits, and in response to the [Bankruptcy is]
a means of
unintended consequences of other legislation. For example, in 1992 amendments, known as ensuring fairness
the “Skase amendments”, were introduced to combat the propensity of failed entrepreneurs amongst the
to seek refuge offshore. The 1992 amendments tightened the administration of bankrupt creditors of the
bankrupt inter se
estates and instituted a requirement for the bankrupt to obtain court approval for overseas and to afford the
travel. The Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) addresses bankrupt the
prospect of a
the conﬂict which often occurs between the rights of creditors in a bankruptcy and the rights new start after
of a non-bankrupt spouse and the children of a marriage under the Family Law Act 1975 discharge, that
would be
(Cth). The Family Law Amendment (De Facto Financial Matters and Other Measures) Act beneﬁcial for the
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2008 (Cth) introduced a comparable regime for de facto (including same-sex) couples. The bankrupt
personally,
Family Court of Australia has jurisdiction in bankruptcy to deal with this legislation. consequently for
the family of the
Bankruptcy administration bankrupt, and
also for society
and the economy
[16.50] The Inspector-General in Bankruptcy administers the Act through an agency more generally.
attached to the Commonwealth Attorney-General’s Department called the Australian Coventry v
Financial Security Authority (AFSA). Official Receivers (there are currently two) located Charter Paciﬁc
Corp [2005]
throughout the Commonwealth, have administrative responsibilities. The Official Trustee in HCA 67 at [118]
Bankruptcy takes charge of the bankrupt’s assets and administers the bankrupt estate unless per Kirby J.
a private registered trustee is appointed. A private trustee will often be appointed in larger
bankruptcies where creditors agree to permit the trustee to spend money pursuing assets of
the bankrupt and tracing recent dealings. The progress of all individual bankruptcies is
recorded on the freely accessible NPII database (National Personal Insolvency Index),
which is maintained by AFSA.

739

The occasion of bankruptcy

[16.60] An individual becomes bankrupt in one of two ways: either voluntarily by way of
a debtor’s petition, or involuntarily as a result of a court order (known as a sequestration
order) granted in response to a creditor’s petition. It vests the bankrupt’s assets in either the
Official Trustee in Bankruptcy, or a trustee privately appointed for the purpose, who then
realises and distributes the bankrupt’s assets among the creditors. Any surplus is returned to
the debtor. The actual point in time when the individual becomes bankrupt is the point at
which an Official Receiver accepts the debtor’s petition or the court makes a sequestration
order.

If you owe the Acts of bankruptcy

bank $100, that’s
your problem. If [16.70] Before a court will declare a person bankrupt, one or more creditors must show
you owe the that the debtor has committed an act of bankruptcy in the six months preceding the
bank
$100 million, lodgment of the creditor’s petition. Section 40 of the Bankruptcy Act speciﬁes those events
that’s the bank’s which constitute acts of bankruptcy. They include the debtor absconding, taking steps by
problem. J Paul
Getty. which bankruptcy is conceded or failing to pay debts as they fall due. The act of bankruptcy
most commonly relied on is a debtor’s failure to comply with a bankruptcy notice (under
s 40(1)(g) of the Act). A creditor, who is owed money and has a judgment entered by a court
for an amount owed, arranges for an Official Receiver to issue a bankruptcy notice calling
for payment of the money. The debtor’s failure to pay constitutes an act of bankruptcy.
Great care must be exercised in the preparation of a bankruptcy notice as inaccuracy,
especially as to the amount owing, can render the notice invalid. An application to the
courts under s 306 of the Bankruptcy Act can save a bankruptcy notice from being deemed
invalid if the defect relates to something the courts determine was only a formal defect or an
irregularity unless substantial injustice has been caused.
[16.80] If the court is satisﬁed that the grounds for declaring a debtor bankrupt are
established it will make a sequestration order against the debtor’s estate. The debtor
becomes a bankrupt. Upon the order being made, the bankrupt’s existing property vests in
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the Official Trustee or a private registered trustee, if one has been appointed, as does
property acquired by the bankrupt later during the course of the bankruptcy. A statement of
affairs of the bankrupt estate is then prepared and a meeting of creditors is called if
requested. The creditors may seek the appointment of a different trustee and may appoint a
committee of inspection to assist the trustee. If required, the bankrupt may be examined
publicly by a Federal Circuit Court registrar or judge. It is the duty of the bankrupt to assist
the trustee in the administration of the estate and to provide all relevant information,
including documents, books of account and so forth. It is also the bankrupt’s duty to make
reasonable contributions to the bankrupt estate from her or his earnings while he or she is
bankrupt.

Distribution of the bankrupt’s estate

[16.90] Priority is given to the payment of speciﬁed debts as set out in s 109 of the
Bankruptcy Act, including some monies due to employees. When the bankrupt employer’s

740

assets do not even cover the employee entitlements, under the Fair Entitlements Guarantee
Act 2012 (Cth), the government may pay the employee in which event it becomes
substituted as a creditor in the bankruptcy.
Bankruptcy does not affect any security held by a creditor so that a secured creditor is Bankruptcy is a
legal proceeding
entitled to rely on the security and then claim on the estate, as an ordinary creditor, for any in which you put
balance owing. your money in
your pants
[16.100] pocket and give
your coat to
your creditors.
Debtor’s petition and creditor’s petition: A comparison Joey Adams.
Debtor’s petition Creditor’s petition
Voluntary Bankruptcy Involuntary bankruptcy
Commenced by debtor Commenced by creditor(s)
No debt minimum Debt owed must be at least $5,000
No act of bankruptcy required to be Act of bankruptcy in the preceding six
proven months required to be proven
Must provide a statement of affairs Proof of debtor’s insolvency required
(summary of debtor’s financial
circumstances) with petition
If petition accepted bankruptcy is Sequestration order granted or
automatic declined

[16.110] In order to establish their entitlement to share in the bankrupt’s estate, creditors
must lodge a proof of debt setting out the relevant details of their claim. The trustee will
then distribute the estate rateably among the creditors.
When appraising the bankrupt’s property available for payment of the debts, it must be
remembered that “property” does not necessarily include all of the debtor’s property nor is
it conﬁned to property owned by the bankrupt at the date of bankruptcy. The “date of
bankruptcy” is the date of either the sequestration order for a creditor’s petition, or for a
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debtor’s petition, the date that an Official Receiver endorses her or his acceptance of the
petition. Note that the “date of bankruptcy” is not the same date as the “commencement of
bankruptcy”, which is explained at [16.130] under the doctrine of relation back.
[16.120] What constitutes property available includes, but is not conﬁned to:
• all property owned by the bankrupt at the commencement of the bankruptcy:
Bankruptcy Act 1966, s 116(1)(a);
• all property acquired by the bankrupt after the commencement of the bankruptcy and
before discharge: s 116(1)(a);
• where the bankrupt has discretionary powers in respect of property which may be
exercised in the bankrupt’s favour, any property so controlled: s 116(1)(b); and
• generally speaking, choses in action (rights of action) other than personal injury actions.
Some property is not available to the creditors. This includes property held on trust, some
household property, property used in earning income by personal exertion up to a value of

741

$3,700, property valued at up to $7,600 used by the bankrupt as a means of transport,

insurance policies and superannuation funds subject to the Bankruptcy Legislation
Amendment (Superannuation Contributions) Act 2007 (Cth). Australians are able to pay
large lump sums of money into their superannuation accounts with tax beneﬁts. This
opportunity could have been abused if the bankruptcy law had not been amended to permit
the trustee in bankruptcy to review out-of-character payments.

Relation back and avoidance of certain transactions

Capitalism [16.130] In the bankruptcy regime, the property available for distribution to creditors
without may be increased by the doctrine of relation back. That doctrine deems a debtor’s
bankruptcy is
like Christianity bankruptcy to have commenced at the time of the commission of the earliest act of
without Hell. bankruptcy within the six months immediately prior to the presentation to the court of a
Frank Borman.
creditor’s petition: Bankruptcy Act, s 115. The doctrine of relation back thus causes assets
that may have been disposed of within that period, to form part of the bankrupt estate. In the
words of Lukin J in Re K B Docker (1938) 10 ABC 198 at 245:
From the time the bankruptcy commences all the property of the bankrupt in theory belongs to
the trustee of the estate. Every payment of money, every transfer of property made by the
bankrupt is an alienation of property that belongs, not to him, but to his trustee. Every such
transaction is, therefore, liable when the debtor becomes a bankrupt, to be set aside.
[16.140] Another form of relation back relates to the trustee’s rights to reverse the
effect of preference payments and other pre-bankruptcy transactions. Broadly speaking
transactions entered into in good faith and in the ordinary course of business are not
affected by either form of relation back: Bankruptcy Act, s 123. A transfer of property for
less than full value or a payment of money by the bankrupt within the two years prior to the
commencement of bankruptcy may be set aside: Bankruptcy Acts 120. Any such assignment
made more than two years but less than ﬁve years prior to the commencement of the
bankruptcy may also be set aside as void, unless the bankrupt was solvent at the time of the
transaction: s 120(3).
[16.150] Section 122 of the Bankruptcy Act relates to preferences. Generally speaking
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any payment made by a bankrupt within six months prior to bankruptcy which has the effect
of giving preference to one creditor over the other creditors is voidable. The preferred
creditor must rank pari passu (on an equal footing) with all the other unsecured creditors in
the bankruptcy. Any disposition made at any time with the intention of placing assets
beyond the reach of creditors can be set aside by a bankruptcy trustee: s 121.

Release from bankruptcy

[16.160] Bankruptcy ultimately comes to an end. That end is reached automatically after
three years, unless an objection is lodged by the trustee with an Official Receiver upon one
of the grounds set out in s 149D of the Bankruptcy Act 1966 (Cth). The effect of discharge
is to release the bankrupt from the bankruptcy itself and from the debts which caused it. But
the bankrupt must continue to assist the trustee in the ﬁnalisation of the bankrupt estate:
s 152.

742

16.3 ALTERNATIVES TO BANKRUPTCY

[16.170] The advantages of an agreement made outside bankruptcy are that the debtor The Act …
seeks to achieve
avoids both the stigma and the ramiﬁcations of bankruptcy. The alternatives are found in a balance
Pts IX and X of the Bankruptcy Act. between the
public interest in
creditors of an
Part IX Debt agreements insolvent being
paid rateably
[16.180] An insolvent debtor may avoid formal bankruptcy by proposing to an Official from the
Receiver a debt agreement that is accepted by the majority of their creditors in value. The property of the
insolvent and the
debt agreement must meet the criteria set out in s 185C(2) of the Bankruptcy Act 1966 public interest,
(Cth), including containing a repayment schedule that is realistic and sustainable. To be as well as the
private interest
eligible to contemplate a debt agreement, a debtor must: of the debtor, in
• not have been bankrupt, utilised a debt agreement or given an authority under s 188 of the debtor not
being reduced to
the Bankruptcy Act in the past 10 years; or a mendicant.
ASIC v Forge
• have after-tax income of more than $81,122; or (2003) 133 FCR
• have unsecured debts of more than $108,162; or 487 at 488 per
Branson and
• have property that would be divisible among creditors if the debtor were bankrupt Stone JJ.
valued at more than $108,162.
Once it is in place, the debt agreement is recorded on the National Personal Insolvency
Index (NPII).

Part X Personal insolvency agreements: Arrangements with

creditors without sequestration
[16.190] Part X of the Bankruptcy Act (ss 187-232) offers another alternative to
bankruptcy whereby a person in ﬁnancial difficulty may make a binding agreement with
creditors to deal with outstanding debts.
The procedure commences with the signing of an authority under s 188 authorising a
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registered trustee, a solicitor or the Official Trustee to call a meeting of creditors and take
control of the debtor’s property. The advantages of a Pt X personal insolvency agreement (if
accepted by the creditors) are that it gives the debtor an opportunity to trade out of ﬁnancial
difficulties and provides a ﬂexible approach to dealing with debt for both the debtor and the
creditors.

16.4 CORPORATE INSOLVENCY

[16.200] The Australian Parliament and courts have made it clear that the directors of a
company must not continue trading and incurring debts when it is insolvent. A company in
ﬁnancial difficulty, and its creditors, have various options under the Corporations Act 2001
(Cth). The choice of the option to be pursued will depend on the seriousness of the ﬁnancial
distress, the prospect of recovery, the strategic objectives of the directors, the cooperation of

743

the creditors and whether or not creditors hold security for the debts owed by the company.
The nature of charges issued by companies to secure repayment of debt is discussed in
Chapter 9.

Cross-border insolvency
[16.210] Cross-border insolvency is an increasingly significant aspect of business failure.
The twenty-first century company is likely to trade and thus to own assets and incur
liabilities in Australia and overseas. The Cross-Border Insolvency Act 2008 (Cth) has been
enacted to give effect to the United Nations, Model Law on Cross Border Insolvency (1997).
Countries including the British Virgin Islands, Eritrea, Great Britain, Japan, Mexico,
Montenegro, New Zealand, overseas territories of the United Kingdom, Poland, Romania,
Serbia, South Africa and the United States of America have also given effect to the Model
Law.
The Cross-Border Insolvency Act 2008 (Cth):
• encourages cooperation between courts and insolvency practitioners in different
jurisdictions;
• clarifies the rights of foreign creditors to participate in Australian insolvency
proceedings; and
• allows for the co-ordination of insolvency proceedings across jurisdictions.

Failure is the Meaning of insolvent

opportunity to
begin again [16.215] In the law, insolvency describes the situation when there is (Sandell v Porter
more
intelligently.
[1966] HCA 28 at [15] per Barwick CJ):
Henry Ford. … an inability to pay debts as they fall due … but the debtor’s own monies are not limited to
his cash resources immediately available. They extend to monies which he can procure by
realisation, by sale or by mortgage or pledge of his assets within a relatively short time –
relative to the nature and amount of the debts and to the circumstances, including the nature of
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration
of the debtor’s ﬁnancial position in its entirety and generally speaking ought not to be drawn
simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such
cash resources as he has or can command through the use of his assets, to meet his debts as
they fall due which indicates insolvency. Whether that state of his affairs has arrived is a
question for the court.

Section 95A(1) of the Corporations Act provides that a person is solvent if, and only if, the
person is able to pay all the person’s debts as and when they become due and payable. If a
person is not solvent, then under s 95A(2), they are insolvent.

Winding up/liquidation
[16.220] “Winding up” or “liquidation” are terms used to describe the same process. The
terms historically had some distinctions but are now synonymous and used inter-
changeably.

744

Voluntary winding up Bankruptcy [ie

Liquidation] is
[16.230] A voluntary winding up may be classiﬁed as either: the belief that
the souls of a
• a members’ voluntary winding up; or corporate entity,
• a creditors’ voluntary winding up. the equity
holders, do not
The difference between the two types of winding up relates to whether or not the directors just vanish when
their corporeal
are able to make a declaration of solvency. form dies.
Rather, they
Members’ voluntary winding up learn from the
mistakes of a
[16.240] A members’ voluntary winding up is commenced by a special resolution passed previous
by the company under s 491 of the Corporations Act. The members at a general meeting incarnation and
can once again
appoint the liquidator under s 495 if the company is solvent. The necessary declaration of live on the earth
solvency is made after an inquiry into the affairs of the company, and if the directors have in corporate
formed the opinion that all debts will be paid in full within 12 months of the resolution. form. True, they
may suffer for
Section 494 imposes severe penalties on directors who make a declaration of solvency the sins of
without reasonable grounds. previous
incarnations and
have trouble
Creditors’ winding up raising venture
[16.250] There will be a creditors’ winding up if the directors cannot make a declaration capital, but such
is the karmic
of solvency or if during the members’ winding up the liquidator discovers that the company burden. With
cannot in fact pay all the debts. In such a situation, the liquidator must immediately call a luck, some day a
corporation may
creditors’ meeting. The creditors may vote to change the liquidator from the person achieve
appointed by the members or to continue with the member-appointed liquidator (s 497). enlightenment
and reach a
Another way in which a company can cease to exist voluntarily is by applying for plane of eternal
de-registration, or allowing the Australian Securities & Investments Commission (ASIC) to bliss and nirvana
– the Fortune
de-register it administratively, under Pt 5.1 of the Act 500. In Re Gary
Aircraft Corp
Compulsory liquidation 698F 2d 775
(1983) per
[16.260] The court-ordered compulsory liquidation requires the plaintiff (the person who Goldberg J.
applies to the court) to specify a ground (reason) for placing the company into liquidation.
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The persons who can apply to the court for a compulsory liquidation order are listed in
s 462 of the Corporations Act as being:
• the company;
• a creditor;
• a contributory (this is the name of a member/shareholder on a winding up);
• a liquidator (including a provisional liquidator ie someone appointed as a liquidator
temporarily in matters of urgency to maintain the status quo);
• ASIC; or
• Australian Prudential Regulation Authority (APRA).

Grounds
[16.270] The grounds for applying to the court for an order for compulsory liquidation
are stated in s 461 and are as follows:

745

• company passes a special resolution;

• company did not commence business within one year of registration or suspends
business for one year;
• company has no members;
• the affairs of the company are being conducted in a way which is oppressive, unfair,
unjust or otherwise against the interests of its members;
• ASIC or APRA has prepared a report that the company should be wound up; or
• the court is of the opinion that it is just and equitable that the company should be wound
up.

The seeds of The most common ground for an application to wind up a company is insolvency for failure
every company’s
demise are to comply with a statutory demand for a debt of at least $2,000. The Corporations Act
contained in its provides that once a statutory demand has been made for the debt, if it is not paid, then a
business plan.
Fred Adler
rebuttable presumption of insolvency is created: s 459C.
Company
Director. Disputing the debt
[16.280] The debtor company’s ability to dispute the debt and have the demand set aside
for technical errors are limited. A company has 21 days to pay the debt or to apply to the
court to have the demand set aside if the substantiated amount is less than $2,000, or if the
demand is defective and there would be a “substantial injustice”. Although the procedure for
issuing a statutory demand is clear, it is often quite difficult for a creditor to know whether
late or part payment of an amount owing is evidence of insolvency, a cash ﬂow problem or
simply a slow payer who may have calculated that the debt to the creditor is incurring
interest at a lesser rate than other available sources of credit (see Schaeffer R, “Just because
I haven’t paid you, it doesn’t mean I’m insolvent” (2007) 8(4) INSLB 51).

Discretion of the court: “Just and equitable”

[16.290] As already noted, under s 461(1)(k) of the Corporations Act, the court retains a
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

residual discretion to order the winding up of any company on the ground that it is “just and
equitable” to do so. This ground was relied on in Australia in Re Dalkeith Investments Pty
Ltd (1984) 9 ACLR 247, where there was an atmosphere of animosity following the marital
separation of the company’s chairman (Mr Smith) from his director-wife. Smith was late for
a general meeting, at which various resolutions were passed in his absence. The resolutions
had the effect of diluting his shareholding or forcing him to invest more money in the
company whose shareholders were hostile to his interests. The court decided not to wind up
the company, but the unfairly prejudicial conduct against Smith entitled him to have his
shares purchased at an appropriate value.

The majority of compulsory liquidations will be based on insolvency. The most

controversial ground for winding up appears to be under the court’s residual “just and
equitable” power. There is an overlap between the oppressive or unfairly prejudicial ground
in s 461 and the same provisions found in s 233 which provides for various other forms of
relief for an oppressed minority of shareholders.

746

Liquidators appointed by the court are officers of the court and are bound by a number of
special duties. ASIC must be informed of the appointment of a liquidator and all company
documents must include the words “in liquidation” after the company name (s 541).
Liquidators also have a number of reporting duties to the members (the company’s
shareholders), creditors and ASIC.

Professional standards
[16.300] A company that is required to comply with Accounting Standard AASB 101.25 It used to be
said that two
must assess whether the entity is able to continue as a “going concern”. It is important to be fires and a
aware that a company, including a public company, may be insolvent for the purposes of the bankruptcy could
Corporations Act but may still legitimately be categorised as a going concern under set you up for
life. It can now
Australian Auditing Standard 570 if the managers of the company have satisfied the auditors be said that one
that going-concern status requirements have been satisfactorily addressed. They may satisfy long trial and a
royal
auditors if, for example, an investor has agreed to inject sufficient capital into the company commission will
to enable it to continue trading. Because the cash injection is due in the future, the auditors ensure the
lawyer fame and
determine how reliable the prediction is and proceed with the audit accordingly. fortune. Willard
Estey J, Supreme
As soon as an auditor determines that accounts cannot be prepared on a going-concern Court of Canada.
basis, then the accounts have to be prepared on a liquidity basis. This means the accounts
are prepared as if all assets were to be sold in a “fire sale”, rather than assets being valued
on historic book value.
Public companies are required to be audited but proprietary companies are not required to
be audited in order to comply with the Corporations Act or with Accounting Standards.
However, this does not absolve a company’s directors from the responsibility of knowing
about the entity’s financial status. They may be required to represent that their entity is
solvent to meet the requirements of other legislation. For example, franchisors are required
to provide a director’s certificate of solvency as part of a franchise disclosure document
under the Competition and Consumer (Industry Codes – Franchising) Regulations 2014
(Cth). Hence, it is important to be aware of the differing triggers and measures of
insolvency in accounting and law.
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[16.310] Insolvency practitioners (including liquidators) must comply with a Code of

Professional Practice. A copy of this Code can be found on the website of the Australian
Restructuring Insolvency and Turnaround Association (ARITA): http://www.arita.com.au
/about-us/arita-publications.

Avoidance of pre-liquidation transactions

[16.320] Liquidators have powers to avoid certain types of transactions. These powers
are mainly contained in s 588FE of the Corporations Act, which allows for certain
transactions to be declared void if they are “insolvent transactions” and:
• the transaction occurred within the last six months before the winding up commenced;
• the transaction was an “uncommercial transaction” (ie a reasonable person in the
company’s position would not have entered into such a transaction) within the last two
years before the winding up commenced;

747

• the transaction was with a related entity to the company, within the last four years;
• the transaction was entered into so as to interfere with the rights of creditors within the
last 10 years;
• it was an unfair loan (extortionate interest or charges) to the company at any time prior
to winding up;
• it was an unreasonable director-related transaction within the last four years.
My problem lies Insolvent transactions are defined as “unfair preferences” or uncommercial transactions that
in reconciling
my gross habits
cause the company to become insolvent or which occur while the company is insolvent.
with my net
income. Errol An unfair preference is defined as a transaction (typically a cash payment) with a creditor
Flynn. which puts the creditor in a better position than the creditor would have been in, if left
simply to rank pari passu (on an equal footing) with all the other (unsecured) creditors.
[16.330] ASIC investigates “phoenix” companies where directors leave one company
insolvent and then start another company in the same or a similar business. ASIC receives
thousands of complaints each year, but can only investigate a fraction of them. ASIC has the
power to disqualify a person from acting as a director for five years if the person was a
director of two companies which were wound up in insolvency within seven years:
Corporations Act, s 206F.

Insolvent trading by directors

[16.340] The Corporations Act imposes a duty on directors to prevent insolvent trading.
Under s 588G, a director will be personally liable for the debts incurred by the company if
there are reasonable grounds for “suspecting” that the company is insolvent and it continues
to trade. This is an objective test and the judge will decide whether a reasonable person in
a like position would continue to trade. In civil proceedings there is a general defence
available for default under the Act to those who have “acted honestly … and ought fairly to
be excused” (s 1318). In considering such a defence in Williams v Scholz [2007] QSC 266
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Chesterman J observed (at [73]) that:

The defendants may have acted honestly but the evidence makes it impossible to conclude that
[sic] ought fairly to be excused from the consequences of contravention of s 588G. The
discretion to relieve the defendants, wholly or in part, from the liability which the section
would otherwise impose is to be exercised in the context of a claim, brought on behalf of
unsecured creditors who will otherwise go unpaid, to recover the amount of their debt from
directors who allowed the Company to incur those debts knowing or suspecting that it would
not pay them. It is no doubt right as was said in Daniels v Anderson (1995) 37 NSWLR 438
(525) that:
The purpose of the section is to excuse company officers from liability in situations where it
would be unjust and oppressive not to do so, recognising that such officers are businessmen
and women who act in an environment involving risk in commercial decision making and
the courts have a wide discretion to relieve in whole or in part.

Under s 588V, holding companies can now be held liable for the debts of their
subsidiaries if they are engaged in insolvent trading.

748

[16.350] There is a defence to insolvent trading in s 588H of the Corporations Act. It

states that directors need to have had reasonable grounds to expect that the company was
solvent at the time or that a competent and reliable subordinate was monitoring the position.
A leading case is Commonwealth Bank v Eise & Friedrich (1991) 6 ACSR 1, where the
honorary chairman was held liable for $97 million for insolvent trading even though there
was no question of dishonesty. The contravention of s 588G may be either a civil or
criminal act, resulting in creditors being paid, as well as a punitive ﬁnancial penalty and a
director’s disqualiﬁcation as in ASIC v Waterwheel Holdings Ltd [2004] FCAFC 253.

Priorities
[16.360] One of the most difficult areas for a liquidator of an insolvent company is the
order of payments to creditors. Section 556 sets out the order for the ranking of payments
between secured, priority unsecured and general unsecured creditors. The priority of
secured creditors is determined subject to the Personal Property Securities Act 2009 (Cth)
which came into effect on 30 January 2012. It provides that a charge over a company’s
assets will only be valid, as against a liquidator (ie rank ahead of the unsecured creditors) if
it was registered under the Act at the time when the winding up commenced. Otherwise,
within each class of debt, all creditors rank equally as prescribed by s 555. This is the pari
passu principle. Thus, if there are insufficient assets for a particular class, each creditor must
be paid proportionally which is expressed as “cents in the dollar” of debt. The government
has passed special provisions (Pt 5.8A) to deal with employee rights, especially where the
company and its officers have attempted to avoid paying their employees’ entitlements
(s 596AB).

Claims on the insolvent estate To open a shop

is easy; the
[16.370] Creditors with security over speciﬁc assets of the insolvent company are able to difficult thing is
seize and sell those assets. Any money still owing to the creditor that could not be recovered to keep it open.
Chinese proverb.
by sale of the assets becomes an unsecured debt and entitles the creditor to make a claim
with other unsecured creditors. Priority among the unsecured creditors is given to
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liquidator’s fees and other costs of administering the insolvency. Employees have some
priority for relatively small amounts of unpaid entitlements. When the company in
liquidation assets do not even cover the employee entitlements under the Fair Entitlements
Guarantee Act 2012 (Cth), the government may pay the employee, in which event it
becomes substituted as a creditor in the liquidation.
In addition to the predictable categories of creditor, shareholders have emerged as a class of
creditors that may be able to claim, in suitable circumstances, to rank pari passu with
unsecured creditors under s 553(1) of the Corporations Act rather than having their claims
postponed until all other debts to unsecured creditors have been paid.

749

SONS OF GWALIA V MARGARETIC

[16.380] Sons of Gwalia v Margaretic [2007] HCA 1
Mr Margaretic, a shareholder who had bought his shares through the market, successfully claimed that the
company misled and deceived him. This was held to fall under s 553 of the Corporations Act and not under
the usual provision that required shareholders’ claims to be postponed until other debts and claims have been
satisﬁed pursuant to s 563A.

[16.390] Recent amendments to the insolvency legislation include provisions to: improve
outcomes for creditors; deter corporate misconduct; improve regulation of insolvency
practitioners; and ﬁne-tune voluntary administration. Business failure laws are continually
being re-examined as business and investment models evolve, and in turn pose new
challenges and problems for insolvency regulation.

16.5 ALTERNATIVES TO LIQUIDATION

Receivership
ASDA Dairies [16.400] A receiver may be appointed by a court but is usually appointed by a creditor
Ltd (in secured by a charge, to take control of the assets charged. The receivership may take one of
receivership)
which is to be two forms: either the appointment of a receiver for a specific asset, or the appointment of a
sold as a going “receiver and manager” who has control over all assets. This is governed by ss 416 – 434G,
concern. This
well-established which comprise Pt 5.2 of the Corporations Act.
and profitable
business … NZ The company entering receivership must be served with notice of the appointment of a
Herald receiver and ASIC must be notified. The receivership is also published in the
(2 September
Commonwealth Gazette. Furthermore, the directors and company secretary must make a
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1995).
report on the affairs of the company to the receivers within 14 days of the notice of
receivership being served.

Receiver and receiver and manager

[16.410] There is a difference between the appointment of a receiver and the appointment
of a receiver and manager. The receiver is responsible to the creditor that has appointed it to
realise enough of the asset(s) subject to the charge to repay the secured debt. The receiver
and manager (more often appointed under a ﬂoating charge and covering all the assets) has
the power to manage the company’s affairs, must be aware of all creditors and must be
careful not to damage any of the assets that are not covered by the security. The distinction
was clearly drawn over a century ago by Sir George Jessel MR when he said in Re
Manchester & Milford Railway Co (1880) 14 Ch D 645 at 653:
“A receiver” is a term which was well known in the Court of Chancery, as meaning a person
who receives rents or other income paying ascertained outgoings, but who does not, if I may

750

say so, manage the property in the sense of buying or selling or anything of that kind … We
were most familiar with the distinction in the case of a partnership. If a receiver was appointed
of partnership assets, the trade stopped immediately. He collected all debts, sold the
stock-in-trade and other assets, and then under the order of the court, the debts of the concern
were liquidated and the balance divided. If it was desired to continue the trade at all, it was
necessary to appoint a manager or a receiver and manager … He could buy and sell and carry
on the trade. So that there was a well-known distinction between the two. The receiver merely
took the income, and paid necessary outgoings, and the manager carried on the trade or
business in the way I have mentioned.

Appointment
[16.420] The appointment of a receiver may be made either by the court, on an
application from creditors, or privately, where the creditor directly appoints a receiver under
the security document. The security document (a debenture or a mortgage) is the contract
that provides for the ﬁxed and/or ﬂoating charge.

Powers and duties Wealth is not

without its
[16.430] Receivers have a number of powers and duties that are set out in s 420 of the advantages, and
Corporations Act, and following sections. These include the power to: the case to the
contrary,
• enter into possession and take control of property; although it has
often been made,
• lease, let, hire, or dispose of property; has never proved
widely
• borrow money on security of property; persuasive.
• convert property to money; Galbraith JK,
The Affluent
• execute any document, bring or defend any legal proceedings in the name of the Society (Mentor
Books, 1958).
company; and
• make or defend an application for the winding up of the company.
Under s 422, the receiver has an obligation to report to ASIC any misconduct by the
company in receivership. Moreover, at common law, the receiver has a duty to act in good
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faith: Downsview Nominees Ltd v First City Corp Ltd (1992) 11 ACLC 3101. The deed of
appointment of a receiver is crucial and it sets out what action a receiver may and may not
take while in possession of the relevant assets.
The receiver and manager replaces the company’s existing management and owes a duty to
inform ASIC if the previous management is suspected of any form of misconduct. If a
controller, whose powers are listed in ss 419 and 419A of the Corporations Act, is unsure
what decisions to make, he or she may apply to the court for speciﬁc directions under s 424.
The term “controller” includes a receiver or any other authorised person under the
Corporations Act.

The effect of receivership

[16.440] The fact that a receiver has been appointed to the corporate assets does not
unseat the board of directors. Their powers of management will clearly be severely
curtailed, however, where the receiver exercises powers of management. It is important to

751

note that during receivership the directors must still comply with the various administrative
and other obligations imposed upon them by the Corporations Act. The practical effect of
receivership was described by Justice Street of the NSW Supreme Court in Hawkesbury
Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 at 790 as follows:
The order sought Receivership and management may well dominate exclusively a company’s affairs in its
[court dealings and relations with the outside world. But it does not permeate the company’s internal
appointment of a
domestic structure. That structure continues to exist notwithstanding that the directors no longer
receiver] … was
one with have authority to exercise their ordinary business-management functions. A valid receivership
extremely grave and management will ordinarily supersede, but not destroy, the company’s own organs through
consequences for which it conducts its affairs. The capacity of those organs to function bears a direct inverse
the defendants. relationship to the validity and scope of the receivership and management.
Putting to one
side a winding A receiver appointed by a creditor, although generally an agent of the company and thus
up order, which
will in the owing duties to it, has the principal duty and function of protecting the interests of those
normal course who appointed her or him. However, in acting to further creditors’ interests there is a
ultimately result
in a company’s
duty not to recklessly sacriﬁce the interests of the company itself. It follows that a
being given its receiver must exercise reasonable care in ensuring that a proper price is paid for assets
quietus, we sold. If, as sometimes happens, a liquidator is appointed (in the interests of unsecured
cannot for the
moment think of creditors) as well as a receiver, the receiver ceases to be the agent of the company; this
an order of role is then assumed by the liquidator.
greater
consequence to a
company than
one which …
Schemes of arrangement
robs it of its [16.450] A scheme of arrangement is a process whereby a number of difficult problems
own assets and
business. Bond can be resolved at one time. It is an alternative to either a voluntary administration or
Brewing liquidation of the company, and is carefully controlled by ss 410 – 415 (Corporations Act,
Holdings Ltd v
NAB (1990) 8
Pt 5.1). It can be used for two distinct purposes. First, it can be a special provision with
ACLC 330 at creditors to enter a compromise agreement that is binding on all parties. Second, a scheme
341 per Kaye, may be used as part of a ﬁnancial reconstruction of the company. Schemes may be put
Murphy and
Brooking JJ. forward as either creditors’ or members’, depending upon the solvency of the company and
the proposed outcomes.
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Under a creditors’ scheme of arrangement, creditors may be given the opportunity to accept
a proposed scheme of arrangement and compromise their existing claims, rather than wait
for a liquidator to wind up the whole entity. For example, a creditor may be more willing to
accept a $750,000 payment immediately, rather than have to wait for an unknown
proportion of a million dollar loan to be repaid at the direction of a liquidator at some
uncertain point in the future.
The scheme of arrangement that is to be used for a reconstruction by members may involve
a variation of the company’s share capital, such as conversion of debt and preference shares
into ordinary shares. A members’ scheme may also be used for the transfer of one entity’s
assets for the issue of new shares in another entity. This is particularly beneﬁcial to
amalgamate a group of companies into a single entity.
[16.460] ASIC will examine a proposed scheme prior to the application that must be
made to the court. The court must order a creditors’ meeting for the scheme to be fully
explained. Furthermore, the scheme must be approved by 75% in number and value of the

752

parties entitled to vote. Once approved by the members and creditors, the scheme must still
be put forward to the court for approval. The scheme of arrangement, upon approval by the
court, binds all the creditors or members. It is this fact that makes it of use for companies
with debt problems, as it will bind all the creditors and members to a compromise or an
arrangement.
Schemes of arrangement are relatively slow and costly to implement. There is a lot of
detailed documentation that must be provided and the scheme is always subject to court
approval under s 411 of the Corporations Act.
For insolvent companies, they have in practice been replaced by deeds of company
arrangement which can arise from the voluntary administration process introduced into the
corporations legislation in 1993; they do not require court approval.

Voluntary administration As a method of

providing a
[16.470] The voluntary administration procedure arose out of the report of the Australian reliable guide to
Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) (Harmer individuals’
behaviour
Report). One of the findings of the Harmer Report was that (p 28-29): patterns or to
future … trends
apart from conclusions that might be suggested by statistical evidence, the legislative approach the predictions
to corporate insolvency in Australia is most conservative. There is very little emphasis upon or of an actuary
encouragement of a constructive approach to corporate insolvency by, for example, focusing on can be only a
the possibility of saving a business (as distinct from the company itself) and preserving little more
accurate and
employment prospects.
certainly less
It therefore recommended (p 28-29): entertaining than
those of an
the introduction of a new voluntary procedure for insolvent companies which integrated the astrologer. Auty
procedures for the voluntary winding up of a company and a scheme of arrangement. The v National Coal
procedure proposed was designed with the aim that it would be: Board [1975] 1
WLR 784 at
• capable of swift implementation; 800-801, per
Oliver LJ.
• as uncomplicated and inexpensive as possible;
• flexible, providing alternative forms of dealing with the financial affairs of the company.
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[16.480] The introduction of Pt 5.3A (ss 435A – 451D) into the Corporations Act in
1993 established a new procedure for companies in ﬁnancial difficulty. The law enables the
appointment of an administrator (who is a registered liquidator with ASIC) to take control
of a company and investigate its affairs so that a recommendation might be made to
creditors as to the future of the company. The administrator will determine whether a deed
of company arrangement can be executed or whether the company should be wound up.
[16.490] Section 435A of the Corporations Act states that the object of voluntary
administration is to provide for the business, property and affairs of an insolvent company
to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business,
continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence, results
in a better return for the company’s creditors and members than would result from
an immediate winding up of the company.

753

Appointment of an Administrator
[16.500] The administrator may be appointed by directors in which event they should
ﬁrst resolve either that the company is insolvent or is likely to become insolvent
(Corporations Act, s 436A); by a company’s liquidator or provisional liquidator (s 436B);
or by a creditor who is entitled to enforce a charge on the whole or substantially the whole
of the company’s property (s 436C). The administrator is deemed to be the company’s agent
and thus has a wide range of powers in order to carry on the company’s business.

Effect of Appointment
[16.510] In order to give the administrator time to devise a plan to restructure the
company in difficulty, s 440A of the Corporations Act grants a moratorium on the
enforcement of debts during the period of the administration. During this period, the
company cannot commence a voluntary winding up and the court will not order a winding
up if it is not in the creditors’ interests. The intention is to enable an insolvent company to
maximise its chances of trading out of ﬁnancial difficulties and to maintain itself as a going
concern as stated in s 435A. The Federal Court, in Dallinger v Halcha Holdings Pty Ltd
(1995) 60 FCR 594, held that there does not have to be some prospect of saving the
company from liquidation when the administration commences.
A secured creditor will not be able to enforce a charge or take possession of assets without
the court’s leave or the written consent of the administrator but this does not apply to a
creditor who has a charge over substantially all the company’s property or a secured
creditor who commenced enforcement prior to the appointment of the administrator.

Meetings
[16.520] The Corporations Act imposes various procedural duties on the administrator.
Within eight business days of appointment, the administrator must hold the ﬁrst meeting of
creditors to decide whether to appoint a committee of creditors and this meeting may also
vote to replace the administrator with someone else. Within 25 business days (usually) of
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the commencement of administration, the administrator must hold a second meeting of

creditors at which the administrator’s report on the company and opinion as to its future
conduct will be discussed. At that meeting the creditors may resolve: that the company
execute a deed of company arrangement; that the administration should end; or that the
company be wound up. This meeting may be adjourned but not for more than 45 business
days.
The voluntary administration procedure is intended to be expeditious and to bring about an
early resolution as to the company’s future one way or the other. Part 5.3A is therefore
replete with time limits for meetings and other steps. Extensions of time are available but
not granted as readily as in many other branches of the law. In Diamond Press Australia Pty
Ltd [2001] NSWSC 313, on an application to extend the time for the second meeting of
creditors, Barrett J referred to the need to balance the requirement for a speedy and
summary administration and the need to accommodate sensible and constructive actions by
the administrator designed to maximise the return for creditors.

754

Deeds of company arrangement

[16.530] If a deed of company arrangement is agreed to, it must be executed within 15
business days. All the company creditors, officers, members and the administrator are bound
by it (Corporations Act, s 444D). A secured creditor is only bound by the terms of the deed
to the extent that the court orders or the creditor agrees. If the creditors decide the company
should be wound up the administration is effectively converted into a creditors’ voluntary
winding up.
If the creditors accept a deed of arrangement, an administrator of the deed is appointed,
usually the initial administrator. The deed will endeavour to deal with corporate debt in a
way that allows continued trading whether by delay, payment, acceptance of a lesser
amount or conversion of debt into equity. During the period of the deed’s life, the company
will attempt to resolve its difficulties. If it is unsuccessful the company will again proceed
from administration to winding up.

QUESTIONS
1. The Federal Government “Innovation Statement” released in December
2015 proposes that current insolvency law will be amended to strike “a
better balance between encouraging entrepreneurship and protecting
creditors.” The government will reduce the current default bankruptcy
period from three years to one year; introduce a “safe harbour” to protect
directors from personal liability for insolvent trading if a restructuring
adviser is appointed to help turn the company around; and make “ipso
facto” clauses that terminate contracts solely on an insolvency event,
unenforceable if a company is being restructured. “Our current insolvency
laws put too much focus on penalising and stigmatising the failures”, the
government said.
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What is your opinion of these proposals?

2. What are Pt IX and Pt X agreements under the Bankruptcy Act 1966 (Cth)
and how may they beneﬁt both the debtor and the creditors?
3. Should recipients of sequestration or involuntary bankruptcy face harsher
penalties than those who voluntarily claim bankruptcy and avoid further
debts? Why or why not?
4. What provisions have been made for employee entitlements in the case of
bankruptcy or insolvency? In the scheme of repayments, where do
employees’ entitlements rate? Is this fair?

755

WEB REFERENCES

Australian Financial Security Authority http://www.afsa.gov.au

Australian Prudential Regulation Authority http://www.apra.gov.au
Australian Restructuring, Insolvency & Turnaround Association http://
www.ipaa.com.auAustralian Securities and Investments Commission http://
www.asic.gov.au
Australian Stock Exchange http://www.asx.com.au
Australian Treasury http://www.treasury.gov.a
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756

Patty Kamvounias

THE BUSINESS CONTEXT

Since the introduction of the Australian Consumer Law (the ACL) on 1 January 2011, consumer
protection has become a particularly signiﬁcant issue for all Australian businesses and their
employees. The era of caveat emptor – let the buyer beware – has been consigned to the history
books. On that date a fragmented mishmash of federal, State and Territory consumer protection
law was replaced by a single consumer law of national application.
This chapter traces the decline of caveat emptor, the rise of the consumer movement, and the
development of a comprehensive regulatory regime of consumer protection and its enforcement
that has been substantially restructured by the ACL.
Business in Australia operates in one of the strongest regulatory regimes in the world for
consumer protection. It is powerful not only in its scope but also because provisions designed to
protect consumers can be enforced by competitors as well as by consumers and the regulatory
agencies – furthermore, the law is continuing to evolve and, in some contexts, the protections
originally designed for consumers have been extended to small business owners.
Civil, criminal and administrative consequences in addition to unwelcome media attention and
business disruption provide strong incentives for businesses to develop compliance programs to
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minimise, if not prevent, the possibility of contravention of the ACL.

[17.10] 17.1 CONSUMERS, CONSUMERISM AND THE LAW .......................................................... 760

[17.10] The decline of caveat emptor ............................................................................. 760
[17.20] The rise of consumerism ...................................................................................... 761
[17.100] 17.2 THE REGULATORY FRAMEWORK .................................................................................. 764
[17.100] The role of the common law .............................................................................. 764
[17.110] The role of legislation .......................................................................................... 764
[17.140] Legislative reform ................................................................................................. 766
[17.180] 17.3 THE AUSTRALIAN CONSUMER LAW ............................................................................ 769
[17.280] 17.4 CONSUMER PROTECTION, FAIR TRADING AND COMPETITION ............................ 775
[17.300] Consumer protection and fair trading ............................................................... 776

759

[17.310] 17.5 ENFORCEMENT OF THE AUSTRALIAN CONSUMER LAW .......................................... 777

[17.370] Public and private enforcement ......................................................................... 779
[17.380] 17.6 THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION ....................... 780
[17.450] 17.7 ADMINISTRATIVE REMEDIES ......................................................................................... 785
[17.460] Enforceable undertakings .................................................................................... 785
[17.500] Substantiation notices ......................................................................................... 786
[17.520] Public warning notices ........................................................................................ 788
[17.540] Infringement notices ............................................................................................ 790
[17.580] 17.8 OFFENCES ...................................................................................................................... 792
[17.630] 17.9 CIVIL REMEDIES .............................................................................................................. 796
[17.630] Pecuniary penalties .............................................................................................. 796
[17.660] Injunctions ............................................................................................................ 798
[17.690] Damages ............................................................................................................... 799
[17.700] Compensation orders for injured persons and non-party consumers ............ 799
[17.720] 17.10 OTHER REMEDIES ........................................................................................................ 800
[17.720] Non-punitive orders ............................................................................................. 800
[17.760] Disqualification orders ......................................................................................... 802
[17.780] Country of origin representations ...................................................................... 804
[17.790] Remedies relating to guarantees ........................................................................ 804

17.1 CONSUMERS, CONSUMERISM AND THE LAW

The decline of caveat emptor

[17.10] The contemporary marketplace is obviously very different from its nineteenth-
century origins, both in the prevailing economic theory and in the transactions that take
place in it. The changes in Canada described below have obviously been mirrored in
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Australia and elsewhere (Ziegel JS, “The future and Canadian consumerism” (1973) 51
Canadian Bar Review 191 at 191):
From a predominantly agrarian society we have moved into a predominantly urbanised society.
The simple wants of yesteryear have been replaced by the modern supermarket with its more
than 7500 items. The products of the agrarian society were for the most part uncomplicated,
produced or manufactured locally, and buyer and seller dealt with each other on a basis of
relative equality.
All this too has changed. Modern technology has placed at the disposal of the Canadian
consumer a bewildering variety of highly complex products, consumable and non-consumable,
many of which were unknown before the war. The notion of the consumer bargaining from a
position of equal strength has become a ﬁction in any but the most attenuated sense. The
contract of adhesion has replaced the handshake and a multi-billion dollar credit industry is
threatening to make the cash transaction a museum curiosity. The merchant himself has largely
become a conduit pipe for goods manufactured and prepackaged often thousands of miles from
the place of sale. The “medium is the message” accurately describes the modern salesman as a

760

sophisticated advertising industry first creates the mass consumption markets and then sustains
them by claims and images often far removed from reality.
The first major cracks in the doctrine of caveat emptor – let the buyer beware – appeared
with the enactment of sale of goods legislation over a centuary ago. The Sale of Goods
Act 1893 (UK) – the model for the sale of goods legislation of the Australian States and
Territories – among other things, implied terms into contracts for the sale of goods.
Purchasers were protected by the implication of terms to the effect that goods were eg of
merchantable quality and reasonably fit for their purpose. Although vendors were given the
right to exclude the implied terms in certain circumstances, this rudimentary protection
nevertheless became known as the “consumers charter”.

The rise of consumerism

[17.20] Consumer protection issues took many years to achieve the level of public Consumerism, as
recognition and support necessary to sustain a political movement and ultimately to a movement of
articulate aims,
influence the legislators. As with many other public policy issues the efforts of a committed is a recent
individual provided the catalyst for the development of a powerful movement. Much of the phenomenon. An
anonymous
credit lies with Ralph Nader, the US consumer rights activist whose book, Unsafe at any student has
speed (Grossman, 1965), documented evidence as to alleged defects affecting safety in described it as
“a bandaid on
certain vehicles manufactured by General Motors. The main boost to the consumer the malignancy
movement came not from the book itself but from the gross over reaction of General of capitalism”.
Layton and
Motors, which lost much public confidence in its attempt to destroy Nader’s credibility. The Holmes
groundswell of public opinion was translated into political action; and politicians, conscious Australian
Quarterly (no 2)
that consumers were an influential constituency, responded accordingly. (1974).
On 15 March 1962, US President John F Kennedy delivered an address to the US Congress
(Special Message to the Congress on Protecting the Consumer Interest (15 March 1962))
setting out his vision of consumer rights that would become the guiding philosophical tenets
of the consumer movement:
Consumers, by definition, include us all. They are the largest economic group in the economy,
affecting and affected by almost every public and private economic decision … But they are the
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

only important group in the economy who are not effectively organized, whose views are often
not heard. … If consumers are offered inferior products, if prices are exorbitant, if drugs are
unsafe or worthless, if the consumer is unable to choose on an informed basis, then his dollar is
wasted, his health and safety may be threatened, and the national interest suffers.
President Kennedy’s vision included the following consumer rights:
1. The right to safety – to be protected against the marketing of goods which are
hazardous to health or life.
2. The right to be informed – to be protected against fraudulent, deceitful, or grossly
misleading information, advertising, labelling, or other practices, and to be given the
facts needed to make an informed choice.
3. The right to choose – to be assured, wherever possible, access to a variety of
products and services at competitive prices; and in those industries in which
competition is not workable and Government regulation is substituted, an assurance
of satisfactory quality and service at fair prices.

761

4. The right to be heard – to be assured that consumer interests will receive full and
sympathetic consideration in the formulation of Government policy, and fair and
expeditious treatment in its administrative tribunals.

IN CONTEXT

World Consumer Rights Day

[17.30] The signiﬁcance of this ﬁrst ever statement on consumer rights by a
world leader is recognised by the fact that 15 March is celebrated each year as
“World Consumer Rights Day” (WCRD) by Consumers International (CI), an
independent “global voice for consumers”. The theme chosen each year for this
day highlights an area of concern for consumers everywhere.
In recent years, CI has focused on:
• Consumer Justice Now! to expose the damage caused by poor or non-existent
consumer protection (WCRD 2013)
• Fix our Phone Rights! to highlight consumer issues that are undermining the
success of mobile phone services (WCRD 2014)
• Helping Consumers Choose Healthy Diets to focus on consumers’ rights to
healthy food (WCRD 2015).
http://www.consumersinternational.org

Consumers do [17.40] Over the years, the consumer movement has built on these basic rights and later
not want to be
manipulated,
generations have asserted further consumer rights including (see http://
hornswoggled or www.consumersinternational.org):
lied to. They
want truth, not 1. The right to satisfaction of basic needs – to have access to basic, essential goods and
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

just in lending, services; adequate food, clothing, shelter, health care, education, public utilities,
labelling and
packaging, but in water and sanitation.
everything in the
whole, vast, 2. The right to redress – to receive a fair settlement of just claims, including
bewildering compensation for misrepresentation, shoddy goods or unsatisfactory services.
market place.
Furness B, What 3. The right to consumer education – to acquire knowledge and skills needed to make
is consumerism?
informed, conﬁdent choices about goods and services, while being aware of basic
consumer rights and responsibilities and how to act on them.
4. The right to a healthy environment – to live and work in an environment that is
non-threatening to the well-being of present and future generations.
[17.50] These consumer rights have been incorporated into the United Nations Guidelines
on Consumer Protection (1985) (updated in 1999) to assist consumers, consumer groups
and governments achieve and maintain adequate consumer protections. The UN Guidelines
are currently under review to ensure that they remain relevant to the changing marketplace.

762

New guidelines have been proposed, for example, on the treatment of online consumers,
protection of consumer privacy and international cooperation. Following extensive
consultation over a number of years, the ﬁnal report on the revision of the Guidelines is due
to be submitted for consideration at the 2015 review meeting of UNCTAD (United Nations
Conference on Trade and Development).
[17.60] In the 1980s, many consumer organisations recognised consumer responsibilities
to complement consumer rights, including (see Consumers International http://
www.consumersinternational.org):
1. Critical awareness: consumers must be awakened to be more questioning about the
provision of the quality of goods and services.
2. Involvement or action: consumers must assert themselves and act to ensure they get
a fair deal.
3. Social responsibility: consumers must act with social responsibility, with concern
and sensitivity to the impact of their actions on others.
4. Ecological responsibility: consumers must have a heightened sensitivity to the
impact of consumer decisions on the physical environment.
These initiatives are important to ensure consumers are not lulled into a false sense of
security that they need not take responsibility for their actions.
[17.70] The future for consumer protection in Australia and elsewhere is assured. The motor
vehicle industry
Consumerism is now a political movement and lawmakers realise that the consumer is a faces increasing
legitimate, worthy and demanding subject for protection from the pitfalls of an increasingly costs,
complex marketplace. consumerism,
inﬂation,
punitive
The consumer voice in Australia is most widely represented by CHOICE an independent legislation and
consumer organization founded in 1959 to protect and empower consumers by providing intrusions from
both information and advocacy services to change laws and business conduct where needed. all levels of
government.
Consumer
The media also now takes an active interest in consumer affairs, and consumer protection protection is
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

issues sustain a number of current affairs programs and newspaper and magazine columns. both necessary
and worthwhile
but when it is
applied with
[17.90] Any discussion of the need for consumer protection should be balanced by hysterical
acknowledging that there is a cost to consumer protection and this cost may ultimately be fervour it clearly
works against
borne by consumers through higher prices. For example, exhaust emission technology is consumers to a
expensive and increased liability for defective products has to be covered by insurance. degree never
Businesses can continue to operate only if such costs can be recovered. envisaged by the
original
The question as to the appropriate level of consumer protection is undoubtedly difficult and legislators.
Donaldson DI,
controversial. It can nevertheless be suggested with conﬁdence that responsibility for President,
consumer protection cannot be delegated exclusively to the legislature. Consumers and Chamber of
Automotive
businesses have vital roles to play. Consumer protection measures must be supported by Industries,
initiatives which encourage consumers to be informed, educated and discerning and which 29 August 1975.
encourage business to respond more effectively to consumer needs. Consumer protection
measures must also be supported by administrative reforms which enable consumers to gain

763

access to the consumer laws enacted for their protection.

17.2 THE REGULATORY FRAMEWORK

The role of the common law
[17.100] The development of a comprehensive regulatory framework for consumer
protection is obviously beyond the capacity of the common law and, not surprisingly, the
contemporary consumer looks primarily to legislation for protection from the excesses of
the marketplace.
Advertising is Before the legislative framework is examined it is nevertheless appropriate to acknowledge
the rattling of a the contribution made by the common law. In Carlill v Carbolic Smoke Ball Co [1893] 1
stick inside a
swill bucket. QB 256 and Donoghue v Stevenson [1932] AC 562, the common law delivered stunning
George Orwell. victories to the unhappy consumers of, respectively, defective smoke balls and contaminated
ginger beer. The names of Mrs Carlill and Mrs Donoghue will survive for as long as the law
of contract and the law of tort are part of our law because of the massive contribution these
cases made to the development of the common law. However, it is the underlying principles
of these cases (discussed in Chapters 6 and 8, respectively) that are of most interest today.
The judicial contribution has, of course, been more profound than these landmark cases and
much of the recent development of the law of contract has been driven by the imperative of
substance over form – of broad equitable principles of good conscience prevailing over
legal artiﬁce, of good faith in contracting prevailing over freedom of contract.
The judicial contribution has also extended beyond substantive rights to extending the
remedies for their contravention. For example, in Jarvis v Swan Tours Ltd [1973] 2 QB 233,
the court recognised that in some circumstances damages for injury to feelings can be
awarded in a contractual action.
Under a statutory regime of consumer protection, the courts, of course, retain a crucial
interpretative role. Indeed, with provisions as broad and general as those prohibiting
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

“misleading or deceptive” conduct (Australian Consumer Law (ACL), s 18) or

“unconscionable” conduct (ACL, s 21) the role of the courts more closely resembles the
traditional role of developing the common law rather than simply interpreting legislation.
The source of consumer protection law today is nevertheless almost exclusively statutory.

The role of legislation

[17.110] Until relatively recently, consumer protection laws in Australia were a complex
statutory mix of federal, State and Territory legislation.
Traditionally the States and Territories dealt with consumer protection – there being no
speciﬁc “consumer protection” head of power in the Commonwealth Constitution. The
equation changed in 1974 with the enactment of the TPA which signalled the dramatic entry
of the Commonwealth into this ﬁeld – a role assumed not only because of the desirability of
a uniform national regime but also because of the States’ apparent reluctance to develop a
comprehensive protectionary regime appropriate for the late twentieth century.

764

The justification for the comprehensive consumer protection provisions was spelt out in the
Attorney-General’s second reading speech introducing the Trade Practices Bill (Senator the
Hon LK Murphy QC, Senate Parliamentary Debates, 30 July 1974, Hansard, vol 60,
pp 540-541):
In consumer transactions unfair practices are widespread. The existing law is still founded on Especially in the
the principle known as caveat emptor – meaning “let the buyer beware”. That principle may last 15 or
have been appropriate for transactions conducted in village markets. It has ceased to be 20 years the
doctrine of
appropriate as a general rule. Now the marketing of goods and services is conducted on an caveat emptor
organised basis and by trained business executives. The untrained consumer is no match for the has been eroded
businessman who attempts to persuade the consumer to buy goods or services on terms and to the point that
conditions suitable to the vendor. The consumer needs protection by the law and this Bill will a new doctrine
governs the
provide such protection. relationship of
seller and buyer
[17.120] The key consumer protections in the TPA were found in provisions in the of goods,
following Parts: namely, caveat
venditor. This is
• Part IVA Unconscionable Conduct (prohibiting unconscionable conduct “within the especially so in
meaning of the unwritten law, from time to time, of the States and Territories”: s 51AA; the case of sales
to consumers,
unconscionable conduct in “consumer” transactions: s 51AB; and unconscionable and reflects the
conduct in “business” transactions: s 51AC. trend of
legislative
• Part V Consumer Protection (dealing with unfair practices: Div 1; pyramid selling: intervention
Div 1AAA; country of origin representations: Div 1AA; product safety and product today
occasioned, no
information: Div 1A; conditions and warranties in consumer transactions: Div 2; and doubt, by the
actions against manufacturers and importers of goods: Div 2A. increasing mass
production of
• Part VA Liability of manufacturers and importers of goods goods, advance
in technology,
The main head of power in the Commonwealth Constitution that formed the constitutional extensive
advertising
basis for the consumer protection provisions of the TPA was the power in s 51(xx) of the campaigns and
Constitution that conferred on the Commonwealth Parliament, the power to make laws for the creation of
“foreign corporations and trading or financial corporations formed within the limits of the mass retail
outlets, notably
Commonwealth”. This legislative power extends to the power to regulate the trading the supermarket
activities of these types of corporations so includes the power to regulate activities affecting and the chain
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

store. Lockhart
consumers. This is why each of the consumer provisions was prefaced with the words “A J, Australian
corporation …” In certain circumstances, the application of the consumer protection Law News
(March 1985).
provisions was extended to individuals by s 6 which utilised other constitutional heads of
power such as the interstate trade and commerce power (s 51(i)); the Territories’ power
(s 122); and the postal, telegraphic, telephonic and other like services power (s 51(v)).
[17.130] The federal legislation cast the net very widely – especially having regard to the
predominant role of corporations in distributing goods or services – but gaps undoubtedly
remained in relation to eg sole traders or partnerships falling outside the constitutional reach
of the Commonwealth. These gaps were ﬁlled by the enactment in each State and Territory
of Fair Trading Acts which mirrored the unfair practices provisions of Div 1 of Pt V of the
TPA. While the federal TPA was the most important piece of legislation, because of its
constitutional limitations, it was not the only piece of consumer protection legislation in
Australia. The relevant State and Territory legislation being: Fair Trading Act 1992 (ACT);
Fair Trading Act 1987 (NSW); Consumer Affairs and Fair Trading Act 1990 (NT); Fair

765

Trading Act 1989 (Qld); Fair Trading Act 1987 (SA); Fair Trading Act 1990 (Tas); Fair
Trading Act 1999 (Vic); Fair Trading Act 1987 (WA). This “mirror” State and Territory
legislation extended the reach of the unfair practices provisions by directing the prohibitions
at “persons” (a formula which includes all legal persons whether individual or corporate).

Where industry In some cases, the States and Territories included in their Fair Trading legislation consumer
or companies
can demonstrate protection provisions beyond those located in Div 1 of Pt V of the TPA. All State and
that they are fair Territory Fair Trading legislation prohibited unconscionable consumer contracts and
dinkum about
being included enforcement and remedies provisions mirroring those found in the TPA. Most
consumer- jurisdictions enacted product safety and product information provisions which incorporated
responsive and
taking care of parts of Div 1A of the TPA. But very few jurisdictions included provisions along the lines
their fair-trading of Div 2 (conditions and warranties in consumer transactions) and Div 2A (actions against
responsibilities
seriously, there manufacturers and importers of goods) in their legislation. The Fair Trading Acts of the
would be less States and Territories were therefore not exclusive statements of the consumer protection
need for
intervention by
laws of those jurisdictions. Each State and Territory had a Sale of Goods Act as well as a
governments and long list of speciﬁc legislation dealing with particular aspects of consumer protection such
regulators. Fels as door-to-door selling and motor vehicle sales.
A, Chairman of
the Trade
Practices
Consumer protection in relation to ﬁnancial services is covered by the Australian Securities
Commission, and Investments Commission Act 2001 (Cth) (ASIC Act).
Australian
Financial Consumer protection law thus became a complex statutory mix of federal, State and
Review
(22 October Territory legislation and a far from seamless regulatory regime which imposed both cost
1993). and inconvenience on both consumers and business. Comparative consumer law tables and
charts were commonly included in legal guides and textbooks to assist businesses,
consumers and law students understand consumer law obligations and rights in different
jurisdictions in Australia.

to replace the overlapping and sometimes inconsistent laws which operated at federal, State
and Territory level was widely acknowledged. Proposals to reform Australia’s consumer
policy framework have a long heritage. The federal Attorney General’s Department noted in
“The Justice Statement” (1995) that:
As Australia is now a single market for many goods and services, it is difficult to justify the
expense associated with local variations in consumer protection laws. Australian consumers
believe they should have a fair go wherever they live; they should have access to the same
rights and remedies regardless of their location. A uniform law would reduce confusion in
cross-border transactions and make it easier for consumer affairs enforcement agencies to
cooperate and to educate consumers and business alike.
In its 2008 paper, “Towards a Seamless Economy: Modernising the Regulation of
Australian Business”, the Business Council of Australia, commented that:
Despite the uniﬁed image we present to the world, doing business across Australia is made
unnecessarily confusing, complex and costly by the inability of governments to make adequate
progress in harmonising and rationalising existing regulation.

766

However, the major impetus for reform was the Productivity Commission’s, Final Report of
the Review of Australia’s Consumer Policy Framework published in May 2008 which was
highly critical of the then current dysfunctional arrangements. In a comprehensive review of
Australia’s consumer policy framework, the Productivity Commission recommended the
introduction of a single generic consumer law to apply across all States and Territories. The
Commission report found that while Australia’s consumer policy framework had
considerable strengths, there were also some signiﬁcant weaknesses, including:
• the division of responsibility between the Commonwealth and State and Territory
Governments, which led to variable outcomes for consumers, added costs for business
and lack of responsiveness in policy making; and
• gaps and inconsistencies in the policy and enforcement tool kit and weaknesses in
redress mechanisms for consumers.
The Commission was of the view that these deﬁciencies made it difficult to respond to The buyer needs
a hundred eyes,
rapidly changing consumer markets and meant that the associated costs for consumers and the seller but
the community would continue to grow. The Commission saw a pressing need to put in one. Italian
place institutional arrangements that are more compatible with the increasingly national proverb.

nature of Australia’s consumer markets and that would deliver more timely and effective
policy change than the current regime.
The Commission also considered that a set of clear objectives and supporting principles was
required to anchor the future development of consumer policy. The overarching objective
should be to improve consumer wellbeing by fostering effective competition and enabling
the conﬁdent participation of consumers in markets in which both consumers and suppliers
can trade fairly and in good faith.
[17.150] The Productivity Commission’s key recommendations included:
• a single national generic consumer law, based on the TPA, which would apply in all
Australian States and Territories;
• identifying unnecessary or costly consumer regulation that only applies in a few States
and Territories, or to one industry, and either removing them or, if justiﬁed, introducing
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

nationally consistent rules;

• transferring regulation of credit providers and ﬁnance brokers to the Australian
Government, with the Australian Securities and Investments Commission (ASIC) as the
regulator;
• national laws to tackle unfair terms in consumer contracts;
• a national approach to product safety laws and enforcement;
• improved alternative dispute resolution processes and greater scope for regulators to
undertake class actions on behalf of consumers;
• new redress and enforcement powers for consumer regulators, including the ability to
seek redress for non-parties, civil pecuniary penalties, banning orders and substantiation
notices; and
• an enhanced role for the Australian Government in consumer policy development and
enforcement.

767

The Commission estimated that the proposed reform package could provide a net gain to
the community of between $1.5 billion and $4.5 billion a year. Most of the benefits would
come from improving the effectiveness of existing measures and their enforcement, or
lowering compliance costs for business.
Advertising Following the release of this report Australia’s peak intergovernmental forum – the Council
befuddles our
experience not
of Australian Governments (COAG) – charged the Ministerial Council on Consumer Affairs
because (MCCA) with developing a package of reforms based on the Productivity Commission’s
advertisers are recommendations. The MCCA () is comprised of all Commonwealth, State, Territory and
liars, but
precisely New Zealand Ministers responsible for fair trading and consumer protection laws.
because they are
not. Advertising [17.160] The MCCA agreed to the following operational objectives to support a national
fogs our daily consumer policy:
lives less from
its peculiar lies • to ensure that consumers are sufficiently well informed to benefit from and stimulate
less than from
its peculiar effective competition;
truths. Boorstin , • to ensure that goods and services are safe and fit for the purposes for which they are
The image
(1962). sold;
• to prevent practices that are unfair;
• to meet the needs of those consumers who are the most vulnerable or are at the greatest
disadvantage;
• to provide accessible and timely redress where consumer detriment has occurred; and
• to promote proportionate, risk-based enforcement.
In May 2008, the MCCA announced a commitment to meeting COAG’s deadline for
developing enhanced national processes to improve the consumer policy framework,
drawing on the Commission’s final report. Ministers also agreed to adopt a common
overarching objective for Australian consumer policy based on the Commission’s
recommendations.
[17.170] In July 2009, the Commonwealth, State and Territory governments signed an
Copyright © 2016. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.

intergovernmental agreement which provided for the ACL to be introduced as a Schedule to

the Competition and Consumer Act 2010 (Cth) (CCA) (the renamed TPA) and for each state
and territory to adopt it as a law of its respective jurisdiction so that the same provisions
would apply across Australia.
It was primarily to address the complications of consumer protection in a federal system
that the ACL was introduced. The ACL is a single national law which has allowed the
repeal of the disparate state and territory equivalent provisions formerly necessary to ensure
a haphazard national coverage for consumer protection given the realities of Australia’s
Constitution.
The Minister in introducing the ACL reforms described the former consumer law
framework as a “complex array of 17 national, state and territory generic consumer laws
along with provisions scattered throughout many other laws”: Dr Craig Emerson, Second
Reading Speech on the Trade Practices Amendment (Australian Consumer Law) Bill (No 2)
2010, 17 March 2010.

768

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