Category: Commercial

In the recent Court of Appeal case of Bishop Warden Property Holdings Limited v Autumn Tree Limited, a director of a property development company, Tina, entered into an agreement to sell the company’s major property asset at a price significantly below value.  At some stage before signing, the purchaser checked the Companies Office register for the company, which apparently showed that Tina was the sole director of the company.  The parties signed the agreement at approximately 6pm on 3 August 2017.

However earlier that day, the company had registered another director, Anna.  This meant that at the time the agreement was signed, only one of two directors had signed it.  Tina claimed that she was the sole director at the time the agreement was signed and that she had full authority to sign it.  The purchaser, which was attempting to prove that the agreement was valid and gave rise to interests in the property, agreed with Tina’s assertion.

Authority to contract

The Court of Appeal noted that in most circumstances, a party entering into a contract with a company will be entitled to assume that the company has complied with all its internal procedures to authorise its entry into the contract, and that the agreement is valid.

Section 18 of the Companies Act 1993 was enacted for this very purpose – it provides that a company cannot assert non-compliance, lack of authority or invalidity of a document against a third party on the basis that the company did not comply with the Act or its constitution, or that a person named as a director on the register or held out by the company as a director has in fact not been appointed and did not have authority to enter into the document.

Simply put, a company cannot use its own failure to comply with its own procedures as an excuse to get out of an agreement with a third party, if it has represented that the transaction is otherwise valid.

However in the Autumn Tree case, the Court found that the purchaser could not rely on this assumption to protect the validity of the agreement.  While a sole director may enter into a significant contract on behalf of the company, a director who is one of multiple directors would not customarily have authority to do so, without express authorisation from the company to the contrary, such as a directors’ and/or shareholders’ resolution, depending on the transaction.  In the case of “major transactions”, shareholder approval will generally be required.

At the time the agreement was signed, Tina was not the sole director of the company as Anna had already been registered as a director.  The company had held out (by virtue of the Companies Office register entry) that both Anna and Tina were registered as directors.  One of two directors of a property development company would not customarily have authority to unilaterally enter into a significant property transaction, and Tina did not have any other express authority from the company to enter into the agreement alone.

Exceptions – actual and constructive knowledge

It makes sense that a person will not be able to rely on section 18 if they have actual knowledge of a defect in authority.  The Court in Autumn Tree noted that actual knowledge went so far as to include “wilful blindness” – where a person is sufficiently aware that something is wrong, but deliberately avoids further investigation.

There is a further exception to the protections of section 18 on the basis of constructive knowledge of a defect, found in the proviso: “unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge …”.

The Court in Autumn Tree confirmed the prior approach by the High Court in Equiticorp, that if a person has an ongoing relationship with a company and by virtue of that relationship knows or ought to know that, for example, a signing director does not have authority, or that someone being held out by the company as a director is actually not one, that person cannot rely on section 18 to protect a contract.

Buyer beware

This case serves as a red flag to parties dealing with a director of a company who is flying solo – whether they are the only director or one of several is a critical point to check before entering into a contract.  If they are a sole director, make sure you are working from the most up-to-date Companies Office register entry.  If they are one of multiple directors purporting to act alone on behalf of the company, it is not unreasonable to ask for further evidence of sufficient actual authority of the company.  One director signing on behalf of a company with a board of several, even with a witnessed signature, may not be enough.

Jessica is a Senior Solicitor in our Commercial Team and can be contacted on 07 958 7436.

Since the passing of the Health and Safety at Work Act 2015 (“HSWA”), there has been some confusion as to how the Court should approach health and safety sentencing.  After a number of inconsistent decisions in the District Court, Stumpmaster v WorkSafe New Zealand has provided helpful clarification, maintaining the existing model for fines under the previous legislation and Department of Labour v Hanham & Philp Contractors Ltd , and clarifying the extent of discounts applied to fines for mitigating factors.

The case will be of particular interest to clients operating in industries such as forestry, construction and mining where higher-risk activities are often undertaken.

Approach to sentencing

The Court set out four steps to sentencing under the HSWA:

• Assess the amount of reparation to be paid to any victim;
• Fix the amount of the fine by reference to culpability bands, and then adjust that amount for any aggravating and mitigating factors;
• Determine whether any further orders available under the HSWA are required (such as orders for the payment of WorkSafe’s costs, adverse publicity orders, training orders, restoration orders or project orders); and
• Make an overall assessment of the proportionality and appropriateness of the total imposition of reparation and fine on the defendant, including consideration of the defendant’s financial capacity.

Fines

The previous District Court decisions had differed in the number of culpability bands used to identify a starting point for a fine.  The appellants in Stumpmaster criticised the District Court decisions as being excessive and lacking principle in their approach.  The High Court retained similar proportionate levels as under Hanham & Philp Contractors Ltd, but set out four new guideline bands for fixing the fine:

• Low culpability (up to $250,000);
• Medium culpability (between $250,000 and $600,000);
• High culpability (between $600,000 and $1,000,000); and
• Very high culpability ($1,000,000 plus).

Mitigating factors

The High Court also provided further clarification as to in what circumstances large discounts should be made available.  Large discounts of 30% will only be provided in cases that exhibit all mitigating factors to a moderate degree, or one or more mitigating factors to a high degree.  Mitigating factors include payment of reparation, remorse and co-operation with WorkSafe, remedial actions, and favourable safety records.

Conclusion

Employers should respond immediately and appropriately to any incident.  It will be important for an employer to show the extent to which it assisted the people affected by an incident.

If you would like further information please contact Renika Siciliano on 07 958 7429.

An amendment to the Commerce Act 1986, the Commerce (Cartels and Other Matters) Amendment Act 2017 (the “Act”) came into force on 15 August 2017, after six years before Parliament.  The Act enhances New Zealand’s protections against anti-competitive behaviour and expands the scope of what can be considered as illegal cartel conduct under the Commerce Act.

Cartel provisions

Section 30 of the Act provides that no person may enter into a contract or arrangement that contains a cartel provision, or give effect to a cartel provision.  A cartel provision includes the following in relation to the supply or acquisition of goods or services in New Zealand:

• Price fixing;
• Restricting output; or
• Market allocating.

“Price fixing” remains unchanged in this amendment, and includes agreements between competitors that fix or provide for the fixing of the price for goods and services supplied or acquired, or for the discount, allowance, rebate or credit in relation to any goods or services supplied or acquired.

The term “restricting output” has been expanded to not only include agreements between competitors that limit or restrict the production of goods or capacity to supply services, but also to agreements between competitors that limit or restrict the supply or acquisition of goods or services.

“Market allocating” includes agreements that allocate, between competitors, the consumers or suppliers of the goods or services in which they compete, or the geographic areas in which they compete.

Generally, a competitor relationship may exist between two parties where they carry on business:

• At the same functional level (i.e. wholesale or retail); and
• Within the same geographic area; or
• Be readily capable of both.

The Act provides a number of exceptions for entering into cartel provisions.  These include:

• Where at least two of the parties to an agreement are involved in collaborative activity, and the cartel provisions are reasonably necessary for the purpose of collaborative activity.  Collaborative activity means an enterprise or other activity in trade that is carried on in co-operation by two or more persons, of which its dominant purpose is not to lessen competition between the parties.
• Where a vertical supply contract exists.  A vertical supply contract exists between a supplier and customer when the cartel provision relates to the supply of goods or services to that customer and do not have the dominant purpose of lessening competition between the parties to the contract.
• Where there are joint buying or promotion agreements.  A provision in an agreement will not have the effect of price fixing where that provision relates to:
  • The price for goods or services that will be collectively acquired or collectively negotiated;
  • The joint advertising of the price; or
  • An intermediary taking title to goods to resell or resupply.

The Act also introduces a clearance regime in which parties can seek clearance from the Commerce Commission for proposed agreements that potentially contain a cartel provision falling under the collaborative activities exemption.  Having received a clearance, a party can proceed with the confidence of knowing they will not later be found in breach of the Act.

Penalties

The financial penalties for a party found in breach of the new cartel provisions are substantial.  Fines may be issued for the higher of:

• $10 million;
• Three (3)  times the commercial gain made from the breach; or
• 10% of the offending party’s annual turnover.

Implications for business

The Act is likely to affect suppliers and resellers as well as franchisors or franchisees as these traders typically rely on arrangements that include territorial allocation clauses and restraints of trade.

Common cartel provisions in supply agreements include clauses which:

• Set resale prices;
• Allocate geographical territories or a specific type of customer or reseller; or
• Prevent a reseller from also selling a competitor’s product.

Common cartel provisions in franchise business arrangements include clauses which:

• Allocate geographical territory to franchisees;
• Require franchisees to purchase stock from an approved supplier;
• Set the price at which a franchisees can sell at; or
• Restrict franchisees from carrying on other business activities.

There is a nine month transition period for existing contracts and arrangements to be updated to meet the new requirements.  Businesses should take care to ensure that any arrangements they have in place are compliant before this period expires on 14 May 2018.  Any new contracts or arrangements are immediately subject to the provisions brought about by the Amendment.

The collaborative activity exemption will likely be important for many businesses.  This exemption will cover arrangements like joint ventures, strategic alliances, syndicated loans and consortium bidding so long as the arrangement’s dominant purpose is not anti-competitive and the cartel provision is reasonably necessary to achieve that purpose.  The onus falls on the applicant to prove that an exemption applies.  The Courts and the Commerce Commission will likely look to business documentation as well as oral evidence in assessing whether a particular conduct is prohibited under the Act.  It is unclear at this stage the approach the Courts will take in applying the new provisions.

If you would like further information please contact Laura Monahan on 07 958 7479.

The past year has seen a number of Court decisions in the charities area which may impact on your charity.  As has long been established, only charities that advance exclusively charitable purposes (or non-charitable ancillary purposes) can remain registered charities under the Charities Act 2005.  For a purpose to be charitable it must advance the public benefit in a way that is analogous to cases that have previously been held to be charitable, thus it is important to be aware of recent decisions and consider how they may impact your charity or its purposes.

The role of the independent Charities Registration Board is to maintain the integrity of the Charities Register by ensuring that entities on the Charities Register qualify for registration.  The Board can direct charities to be removed from the Charities Register when they do not advance a charitable purpose for a public benefit and if it would be in the public interest to remove them.

ICE Foundation

The ICE Foundation owned two charitable companies that were deregistered.  There was also a significant amount of debt owed to the ICE Foundation.  In order to maintain charitable status the two companies restructured in order to operate to fundraise for the ICE Foundation and ensure its charitable purpose remained paramount to their operation.

This case shows the importance of distinguishing business activities from charitable purposes, especially in cases where charities are seeking to raise funds through their business activities.  To do this, the entity must show that the business is capable of making a profit that goes towards charitable purposes, and that the charity does not provide any resources to the trading body at less than market rates.

Kiwis Against Seabed Mining

Any non-charitable purpose, or means of achieving that purpose that is not “ancillary” to achieving a charitable purpose, will mean the requirements for registration as a charitable entity will not be met.

The Charities Registration Board in this case considered the Society’s purpose of advocating for the prevention of seabed mining in New Zealand as non-charitable.  This was due to the potential consequences of preventing seabed mining until all environmental impacts could be understood and mitigated, thus the Board could not determine a sufficient charitable public benefit.  Following this reasoning, the advocacy of a certain point of view regarding controversial issues is unlikely to be considered as having a charitable purpose due to an inability to determine the public benefit.

This case shows the difficulty in determining whether political purposes such as advocacy are charitable at law.  The Supreme Court decision of Re Greenpeace is referred to as binding the Charities Board to consider both the ends the Society is seeking to achieve and the means and the manner in which the Society is seeking to achieve the end.

Family First

This case provides that Courts generally do not find public benefit in advocacy cases involving the promotion of a particular point of view.  As such, purposes such as the one in this case are unlikely to be considered charitable.

It was considered that Family First sought to persuade the reader of their material to a particular point of view rather than educate them on the matter.  This meant that their publications lay outside the scope of the advancement of education as a charitable purpose.  This affirmed the approach taken in the Australian case of Aid/Watch Incorporated, in that reaching a conclusion of public benefit may be difficult where the activities of a society largely involve the assertion of its views.

This case cautions charities that are looking to rely on the Re Greenpeace decision in order to show that their advocacy is a charitable purpose.  While Greenpeace does establish that the advocacy of a charitable purpose is capable of being considered charitable, it cautions that “advancement of causes will often be non-charitable”.  This is because it is often not possible to say whether the views promoted will benefit the public in a way that is recognised as charitable.

The Family First case summarised the relevant case law and established what must be considered in order to determine whether research reports seek to promote a point of view, or advance genuine educational research.  This includes:

• The nature of the research;
• Whether it has been reviewed by objective third parties; and
• How the views are disseminated to the public.

Auckland Observatory Trust

This case concerned an application for an order of the High Court under s 33 of the Charitable Trusts Act 1957 for approval of a scheme varying the trust deed in relation to trustee appointments and powers.  The proposed amendments were to:

• Require the three longest standing trustees to be replaced each year;
• Allow removal of a trustee by unanimous resolution;
• Allow decisions to be made by written resolution signed by all trustees; and
• Allow the trust deed to be varied for administrative purposes without Court approval.

Section 33 requires that to vary the powers of trustees of a charitable trust the variation must make the administration or operation of the trust easier.  It was held that such changes would enable the Board of Trustees to conduct the Trust’s affairs in a more streamlined manner than had previously been the case, meaning the application was granted.

Foundation for Anti-Aging Research

It is interesting to note that this case found that if research is likely to advance the sum of human knowledge then the research is considered useful in a charitable sense.  Even in cases such as the one at hand, where the end goal may only be achieved in the distant future, the pursuit of such a goal is likely to yield useful knowledge along the way regardless of whether the endpoint is ever achieved.

If you would like further information please contact Jessica Middleton on 07 958 7436.

Charity deregistration tax

Current tax rules for when an entity ceases charitable purposes only apply to registered charities under s HR 12 of the Income Tax Act 2007 (“the Act”).  This excludes non-registered charities that cease being charitable at law.

The Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill (“the Bill”) proposes, in clause 90, a replacement for section HR 12.  The proposed amendment would extend deregistration tax rules to any entity that derives exempt income under section CW 42 of the Act.  These entities are those who:

• RHR Carry out charitable purposes in New Zealand;
• When income is derived, have trustees who are a tax charity; and
• Have no person with control over the business able to direct an amount to the benefit of anyone other than the trust or in the interests of the trust.

When a registered charity ceases to be carried on for charitable purposes, that entity is subject to the deregistration tax rules.  The Bill adds that any non-registered charity which ceases the undertaking of charitable purposes is then subject to deregistration tax rules also, as they no longer meet the requirements of section CW 42 of the Act.

Further, the current law sets out that assets that have been “distributed or applied” can be ignored in determining deregistration tax.  However, this may allow for some deregistered charities to escape payment of tax.  The Bill amends the words used, to clarify that assets to be excluded from this calculation will only be those “disposed of or transferred”.  Such assets must have been disposed of or transferred:

• For charitable purposes;
• In accordance with the entity’s rules; and
• Within one year of deregistering.

Payment of volunteers

Section CO 1 of the Act states that any amount received by a volunteer for voluntary activity is taxable income.  However, this is overridden by section CW 62B, which differentiates between payments that are a reimbursement or payments which are an honorarium.

IRD defines volunteers as “people who freely undertake activity in New Zealand that has been chosen either by them or a group of which they are a member”.  The activity must provide some kind of public benefit and not be for the private gain of the volunteer.

Reimbursement payments are paid to volunteers to cover expenses that have been incurred in carrying out voluntary activities.  These payments will be considered tax-exempt income under section CW 62B if:

• They are based on actual expenses incurred through voluntary activities; or
• They are based on reasonable estimates of the expenses likely to be incurred through voluntary activities.

Honoraria payments are paid to volunteers in return for services that would not normally receive payment, and are generally paid at less than the market rate for such services.  These types of payments are subject to withholding tax which, until 31 March 2017, meant a tax rate of 33%.  However, from 1 April 2017, the tax rate for contractors (IR330C) form allows volunteers to choose their own tax rate starting from 10%.

Combined payments are partially reimbursement and partially honoraria payments.  With such payments, if the component parts can be clearly identified then the reimbursement payment will be tax-exempt and the honoraria will be subject to withholding tax.  If a clear distinction cannot be made, the entire payment will be considered honoraria and will therefore constitute taxable income.

If you would like further information please contact Jessica Middleton on 07 958 7436.

Introduction

The purpose of the proposed plan change is to improve the water quality in the Waikato and Waipa rivers over an 80 year time frame so that both rivers are swimmable and safe for food collection along their entire lengths.  The proposed plan change has had two years of closed door development and was notified to the public on 22 October 2016.  The Waikato Regional Council is open for submissions;  submissions close at 5pm on 8 March 2017.  If the change is approved, then all rules will be back dated to the date of notification.

Catchment and the basics of the rules

Healthy Rivers encompasses the Upper and Lower Waikato River catchments and the Waipa river catchment.  Sub-catchments within the area have been assigned a priority ranking to determine the dates by which the properties in the sub-catchments need to be on board.

Rules 1 and 2 are permitted activities which allow properties with low risk factors to continue to operate but must be registered with the Waikato Regional Council by the date specified by that property’s sub-catchment priority date.  Rule 3 is for properties which do not fit under Rules 1 or 2 but are still a permitted activity.  Activities under Rule 3 must be registered to a Certified Industry Scheme and have a Farm Environment Plan.  Rule 4 is a controlled activity and all properties under this rule must have a Farm Environment Plan and a Nitrogen Reference Point.  Commercial vegetable production will now be a controlled activity under Rule 5 and all properties under this rule must have a Farm Environment Plan.  Rule 6 covers all farming activities that are not covered by Rules 1-5 and is a restricted discretionary activity.  Rule 7 is for non-complying activities and land use changes (Figure 1) and will therefore require consent.

Farm Environment Plans (FEP)

Schedule 1 of the plan changes sets out the requirements for a FEP and a FEP must be certified by a Certified Farm Environment Planner.  Variations of FEPs have already been established, like Fonterra’s Sustainable Milk Plans or the Nutrient Management Plans which are included in most Federated Farmers leases.  All properties that come under Rules 3-6 must have a FEP in place by their priority dates.

An FEP should include the identification and assessment of risks to the environment on the farm and the actions that will be taken to mitigate the environmental impacts.  In the long run, implementing a FEP may yield business improvements due, for example, to improved sustainability and environmental awareness.  The FEP might also include a long term maintenance plan and on-farm development plan.

The FEP that is required under the Proposed Plan Change 1 must include:

• Identification of areas of concern, including critical source areas for sediment and nutrient loss, erosion and effluent;
• Assessment of the management practices for nutrients, pasture, cropping and stock and then set out improvement options;
• A spatial risk map and a nutrient budget;
• A description of the actions that will be taken to mitigate the identified risks;
• A description of actions and time frames to ensure that the diffuse discharge of nitrogen from the property does not increase beyond the property’s Nitrogen Reference Point – using a five year rolling average annual nitrogen loss;
• Further requirements are outlined in Schedule 1 of the plan for FEPs for commercial vegetable production.

Certified Industry Scheme (CIS)

The purpose of Rule 3 being a permitted activity, coupled with the requirement that both a FEP and CIS are in place, is to allow farmers to continue their farm activities and to give some flexibility in the actions they take to mitigate the environmental impact of the farm activities.  The CIS is designed for the farmer to be able to carry out their permitted activity while still being under the same level of scrutiny as would be applicable under a resource consent.

Schedule 2 of the plan change sets out the requirements for a CIS.  A CIS will be a more administrative scheme than an FEP.  There are currently no restrictions on who can develop and implement a CIS, but they must all be approved by Waikato Regional Council.

Changes to rules for harvest operations

Forestry harvests now need to notify Waikato Regional Council at least 20 days prior to commencing harvest operations within the Waikato and Waipa catchments.  There must also be a documented harvest plan which includes a harvest plan map and a description of the controls that are in place to manage the harvest and risk to water bodies.

Practical implications of the Healthy Rivers plan change

The biggest implication of the proposed plan change is the financial burden that it will place on farmers and the region.  A case study undertaken by Federated Farmers and Fonterra showed that on-farm costs for an FEP and associated compliance costs could range from $1,000 to $350,000, with some farms in the study incurring annual costs as well.

The cost of the Nitrogen Reference Point (NRP), as calculated by Overseer (or other approved model) will also have an impact on how farms and other activities are run.  For activities requiring a NRP under the proposed change the higher NRP of the reference period of either the 2014/2015 season or the 2015/2016 season will be used and for commercial vegetable growers the period from 1 July 2006 to 30 June 2016 will be used.  This may have the potential to severely limit the future production of land as the dairy down turn greatly affected the 2015/2016 season.

As a short term implication of the plan, the decreased opportunities for land use changes could potentially impact the value of some land and the terms of future sales or purchases.  While the plan change is still in its initial stages, it is important to keep the practical implications and rules in mind when considering selling or buying land in the Waikato or Waipa catchments.

Leases, sharemilking agreements and other farm contracts will also be affected due to the requirement that some farms have an FEP or be part of a CIS.  This will need to be considered when entering a new agreement or renewing an old one.

Dale is a Managing Associate in our Commercial Team and can be contacted on 07 958 7428.

Introduction

In domestic (New Zealand) trading arrangements, ownership and risk in property will often pass from the seller to the buyer at the same point in time – for example when the buyer either collects the goods from the purchaser or when the seller has delivered the goods to the buyer’s business premises.  This is particularly the case when the goods are paid for in advance, rather than on credit.

The approach with international shipping can be very different.  In arrangements for the carriage of goods overseas, it is common for the transfer of ownership and risk to be treated separately and for these to occur at different points.

International carriage of goods

In most cases, the starting point for establishing the rules around ownership and risk is the terms of the contract for the sale and international carriage of goods – often the seller’s standard terms of trade.  In most cases the terms of trade will naturally favour the seller.  These terms of trade are often incorporated into normal business procedures such as an online sales purchase process or an account application form.

Where the goods are particularly valuable it would be prudent for a prospective buyer to review the terms of trade carefully.  In particular, the buyer should satisfy itself that it is comfortable with the arrangements for the transfer of risk and ownership.  The buyer should pay close attention to any provisions relating to insurance of the goods;  if the buyer is to take the risk in the goods then it should ensure that adequate insurance is in place.  Your insurance broker may be able to advise on the appropriate insurance arrangements.  Ideally such discussions should take place before you contract for the goods.

The buyer should also review the terms of trade from a practical perspective, for example to ensure that the delivery/collection arrangements are workable.

Having considered these issues, in some circumstances it may be necessary for the buyer to negotiate some amendments to the terms of trade – although a seller may take the opportunity to seek a change in price to reflect the altered risk allocation.

Incoterms 2010 rules

As an alternative to individual terms of trade, contracting parties (particularly those involved in international transactions) might consider the International Commercial Terms (commonly referred to as “Incoterms”).  Incoterms are a set of commercial terms published by the International Chamber of Commerce.  The Incoterms govern how costs and risks are to be allocated between the parties to a contract for sale of goods.  They came about as a means of providing clarity for businesses engaged in complex transactions, where the meanings of certain terms can often vary across different industries.  They govern the costs, risks and practical arrangements for the sale of goods.

Incoterms are commonly used amongst shipping and logistics industries and are recognised worldwide.  Incoterms specify: which party has the obligation to make carriage or insurance arrangements;  when the seller is to deliver the goods to the buyer;  the allocation of costs between each party (including transportation, insurance, taxes and duties); and when the risk of loss or damage transfers from the seller to the buyer.

The agreed Incoterms may be incorporated into the contract negotiated between seller and buyer.  The Incoterms do not regulate issues such as payment, ownership transfer, consequences for breach of contract, the mechanisms for settling disputes and governing law – these matters should still be addressed separately in the contract.

Incoterm rules are expressed by three-letter acronyms, and are grouped into four categories – denoted by the first letter of the acronym.  In order for Incoterms to apply to an agreement, the chosen rule should be explicitly stated in the contract (it is also crucial to indicate which edition of the Incoterms rules apply – the current rules were issued in 2010).  A summary of each category is as follows:

• E term (EXW):  where the seller only makes the goods available to a buyer at the seller’s premises.  Risk transfers to the buyer when the goods are made available to them, and they must also arrange for carriage of goods.
• F Term (FCA, FAS and FOB):  where the seller delivers the goods to a buyer-appointed carrier, from which point the buyer takes on all risk and costs.
• C Term (CFR, CIF, CPT and CIP):  where the seller has to contract for carriage, but does not assume risk of damage or loss to goods after shipment or dispatch.  Risk is transferred to the buyer after export clearance.
• D Term (DAT, DAP, and DDP):  where the seller bears all costs and risks necessary to bring the goods to the place of destination.

Each category brings with it its own merits.  A buyer should bear in mind that Incoterms which involve the seller paying freight and insurance costs will likely result in an inflated contract price.  Guidance notes are published for each rule, to assist with selecting the most appropriate arrangements.

Conclusion

Whether parties are contracting for goods domestically or internationally, it pays to review the ownership and risk provisions carefully.  Whilst these provisions are often glossed over by parties as just “boilerplate” provisions, in the event of loss or damage to goods they may have significant implications.

If you would like further information please contact Laura Monahan on 07 958 7479.

Introduction

As technology continues to become further integrated into our lives, it is increasingly the norm for documents to be prepared and reviewed entirely in their digital format.  Generally speaking, however, the use of electronic signatures has not yet replaced the practice of signing documents by hand.  This article summarises some key aspects of the law in New Zealand relating to the use of electronic signatures on legal documents and also compares the approach in other jurisdictions.

The Electronic Transactions Act 2002

The Electronic Transactions Act 2002 (the “Act”) was introduced in New Zealand as a means of facilitating the use of electronic technology.  Its aim (with certain exceptions) was to promote:

• “Functional equivalence”, meaning the law will not discriminate between paper-based transactions and electronic transactions; and
• “Technological neutrality”, meaning the Act does not specify or favour any particular technology platform.

So long as certain requirements are met, an electronic signature will be considered just as valid as a written signature.

Under the Act, an electronic signature can meet the legal requirement for a signature (other than the signature of a witness) if:

• It adequately identifies the signatory and adequately indicates the signatory’s approval of the information to which the signature relates;
• It is as reliable as is appropriate given the purpose for which, and the circumstances in which, the signature is required; and
• The person receiving the signed information consents to receiving a signature of that nature.

If there is a legal requirement for a signature to be witnessed, that witness can sign by electronic signature if:

• It adequately identifies the witness and adequately indicates the signature has been witnessed;
• It is as reliable as is appropriate given the purpose for which, and the circumstances in which, the witness’ signature is required; and
• The person requiring the witnessing consents to receiving the signature of the witness in electronic form.

For the purpose of the Act, an electronic signature is deemed reliable (subject to rebuttal) if:

• The means of creating the electronic signature is linked to the signatory and to no other person;
• The means of creating the electronic signature is controlled by none other than the signatory;
• Any alteration made to the electronic signature after time of signing is detectable; and
• Where the requirement for a signature is to provide assurance as to the integrity of the information, any alteration made to that information after the time of signing is detectable.

There are some significant general exceptions to the application of the part of the Act that deals with meeting legal requirements by electronic means (Schedule to the Act, Part 3).  Some of the key exceptions comprise:

• Affidavits, statutory declarations or other documents given on oath or affirmation;
• Powers of attorney or enduring powers of attorney; and
• Wills, codicils or other testamentary instruments.

These (and other) important categories of document must still be on paper.

Case law on electronic signatures

The validity of an electronic signature has yet to be fully examined in the New Zealand Courts.  However, the case of Welsh v Gatchell [2009] 1 NZLR 241 demonstrated the Court’s desire to accommodate the use of technology in meeting legal requirements.  In that case, it was held a fax header printed using a fax machine’s capacity to add writing to a document as it is copied and sent could satisfy the legal requirement for a signature if there is evidence that it was specifically inserted for the transaction concerned.

Some comparisons – the Commonwealth approach

Electronic signatures are generally considered valid across a wide number of international jurisdictions.  Australia takes a similar approach to New Zealand in that it requires the person receiving the information to consent to receiving that information in an electronic format.

The framework for electronic signatures in England & Wales is provided by Regulation (European Union) No 910/2014 (otherwise known as the “eIDAS Regulation”), effective in member states of the EU from 1 July 2016.  It establishes that a “qualified legal signature” will have the equivalent legal effect of a handwritten signature.  A qualified legal signature is defined by the eIDAS Regulation as an advanced electronic signature that is created by a qualified electronic signature creation device, and which is based on a qualified certificate for electronic signatures.

Previous to this regulation, the validity of electronic signatures was not codified in English legislation.  It was an established rule of common law that a deed must be in writing.  It is the opinion of leading English counsel that, in light of the eIDAS Regulation and the Courts’ willingness to interpret statutory requirements for writing to include where a document is executed with an electronic signature, deeds can now be signed electronically.  It is still best practice, however, to have witnesses physically present when necessary.

Digital signature software

The most technologically secure signature is a digital signature (popular digital signature technology packages includes DocuSign and RightSignature).  An electronic signature (sometimes referred to as an e-signature) is an electronic symbol or reference that captures the user’s intent, and is commonly used in email software as a means of signing off.  A digital signature is different from an e-signature; a digital signature is a form of encryption technology that is created and verified by code, and provides a platform from which a secure electronic signature can be built.  Its purpose is to provide verification of the authenticity of a signed record.

As robust digital signature software is not available free to users, the cost of obtaining and maintaining a digital signature can be high and may not be viable for lower value and/or lower risk transactions.  However, where a document of significance is to be signed by electronic means, a digital signature offers the highest level of security and reliability, provided the statutory requirements have also been met.

Conclusion

As will be seen from this article, New Zealand law provides a mechanism for the use of electronic signatures on a variety of legal documents.  In most circumstances an electronic signature is a valid way of creating a legal signature where a handwritten written signature would otherwise be used.  For the purposes of security, it is best practice to use encrypted signing software.  There are some significant categories of document where electronic signatures are not yet recognised by the law.  Regardless of the preferred method for signing agreements (whether by hand or electronically), appropriate care should be taken and advice sought before assuming legally binding obligations.

If you would like further information please contact Laura Monahan on 07 958 7479.

Introduction

Aksentijevic v Department of Internal Affairs [2016] NZHC 226 is a recent decision of the New Zealand High Court in relation to breaches of the Unsolicited Electronic Messages Act 2007 (“the Act”).  The District Court (“DC”) found Aksentijevic (“A”) breached sections 9, 10 and 11 of the Act.  The DC imposed a $12,000 penalty under section 45 of the Act.  A appealed to the High Court (“HC”).

Factual background

The key purposes of the Act were to:

• Prohibit the sending of unsolicited commercial electronic messages with a New Zealand link;
• Require that commercial electronic messages have a functional unsubscribe facility and include accurate information about the sender of the message; and
• Prohibit address-harvesting software or a harvested-address list from being used to send unsolicited commercial electronic messages in contravention of the Act.

An unsolicited “commercial electronic message” was defined in section 4 of the Act as a commercial electronic message that the recipient has not consented to receiving.

In the case, the Department of Internal Affairs (“DIA”) had received various complaints regarding electronic messages individuals had received.  These messages contained links to Google Play, CrazyTilt (an app A developed), and included statements about the benefits of CrazyTilt and others which were disparaging about other apps.  A said he had sent the messages in response to an abusive campaign against him – 2,230 messages had been sent.  The DIA obtained and carried out a search warrant of A’s home.

There was no argument that the emails were electronic messages, sent from A, and contained a New Zealand link.  The issue on appeal was whether the DC was correct in concluding that the messages were unsolicited “commercial electronic messages”.

Finding

Were the electronic messages “commercial electronic messages”?

Section 6(a) of the Act defined a “commercial electronic message” as an electronic message that markets or promotes goods or services or a business/investment opportunity, or which assists or enables a person to dishonestly obtain a financial advantage or gain from another person.  The HC found that the word “commercial” was not intended to colour the meaning of “commercial electronic message”, but rather the words were a label, with meaning to be determined from the definition.

While section 6 of the Act contained no definition of “market” or “promote”, the HC found that both were words with reasonably plain meanings.  “To market” could be “to offer for sale”, while “to promote” was to present something as worthwhile.  On those terms and based on the electronic messages A had sent, CrazyTilt had been promoted on the Google website.

The HC found that the purposes of the Act:

• Supported a broad interpretation of “to market” and “to promote” – had Parliament wanted a narrow meaning, to the effect of “sale” or “exchange for value”, it would have used such wording; and
• Were not expressed so as to restrain unsolicited electronic messages designed to sell goods or services, but rather were protective in relation to recipients of messages and organisations transmitting messages, with a further objective of reducing costs to businesses in the wider community.

The HC referred to the Electronic Messages Bill 2005 (281-1) (“Bill”), which provided that the definition of “commercial electronic message” in the Bill was “an electronic message that has, as its primary purpose … marketing or promoting” of goods or services.  While the Bill provided that promotional electronic messages could be sent, there had to be provision for the recipient to later opt out.  As enacted, the definition of commercial electronic message had been broadened, but the opt out feature had been removed.

The HC was satisfied that proof of a commercial/business objective, or an intention to make money, or a requirement for A to be engaged in trade, was not required.

Did the recipients of the messages consent to receiving them?

Section 9(1) of the Act prohibited a person from sending, or causing to be sent, unsolicited electronic messages with a New Zealand link.  Section 9(3) of the Act provided that the onus of proof in respect of consent lay with the person who contended that a recipient had consented to receiving a commercial electronic message.

As such, A had to prove, on the balance of probabilities, one of the three alternatives in the definition of “consented to receiving” set out in section 4, being:

• Express consent had been given by the relevant electronic address-holder;
• Consent had been reasonably inferred through the conduct, business and other relationships of the persons concerned; or
• Deemed consent was present, which applied where an electronic address was consciously published by a person in their official business/capacity, the publication was not accompanied by a statement requesting that unsolicited electronic messages not be sent, and the message was relevant to the person’s official business/capacity.

A had to establish consent existed from all 439 individual recipients in respect of all emails received.  There was no proof of consent from them and consent could not be inferred from the parties’ relationship.  In cross-examination, A acknowledged that the recipients had not wanted to receive the messages.  The absence of consent could be inferred from the abusive nature of A’s messages (i.e. inferred consent could not extend to such abusive emails).  It was no defence that A may have received abusive emails from the recipients first.  The HC was satisfied there was no error by the judge in his conclusion that section 9(1) was established.

Section 14 of the New Zealand Bill of Rights Act 1990 (“NZBORA”)

A argued the DIA breached section 14 of NZBORA, being A’s right to freedom of expression.  The HC found that A was not entitled to any relief from the proceedings based on this, which extended to actions taken by the DIA in issuing and prosecuting the proceeding.

Sections 10 and 11 of the Act

Section 10 of the Act required that accurate sender information be included in each message.  None of the 2,230 messages included such information – A was not clearly identifiable as the person who had authorised the sending of the messages, and there had been no way to contact him.  This information had to be contained in the message itself – it did not matter what could be obtained through the link.  The HC found that if it accepted the contrary, this would have significantly extended the scope of section 10 beyond what the clear words indicated, undermining the objectives of the Act.

Section 11 required that every commercial electronic message sent contain a functional unsubscribe facility.  The Court was satisfied section 11 was breached as none of the messages included a facility that recipients could use to instruct A that they did not want to receive further emails.  The facility could not be sent in a separate email, but had to be included in the message itself.

Validity of the search warrant

A argued the DIA’s search warrant did not satisfy section 6 of the Search and Surveillance Act 2012 (“SS Act”), requiring that suspected offences by punishable by imprisonment.  He believed the warrant was issued under section 51 of the Act, meaning section 6 had no application.

Section 51 of the Act makes provision for an enforcement officer to apply for a search warrant under the SS Act.  A contended that, because of this reference, and section 107 of the SS Act, section 6 of the SS Act did not apply.  A had misinterpreted its application.  Section 107 prescribes when a search warrant is invalid and is directed to two types – those issued by police for offences punishable by imprisonment, and those issued pursuant to other enactments, which includes section 51 of the Act.  Section 51 of the Act is the provision determining invalidity, while section 6 of the SS Act has no application.

Penalty

Section 45 of the Act allowed the HC to order a person pay a pecuniary penalty (maximum $200,000) for “a civil liability event”, being a breach of sections 9(1), 10 or 11(1).  Section 49 provided that such proceedings were civil proceedings, with the standard of proof being the balance of probabilities.  In the alternative, the DIA could have issued a civil infringement notice.

A’s appeal against the penalty was an appeal against a civil proceeding decision.  Such an appeal was only allowed where there was an error of principle, relevant considerations were not taken into account, irrelevant considerations were taken into account, or the decision was wrong.  The HC also took account of A’s submissions and financial means.

Regarding the gravity of the breach, the first enquiry was in relation to the number of messages sent and addresses to which those messages were sent.  These were mandatory considerations.  2,230 emails were sent to 439 addresses.  The HC described these numbers as “trifling” in comparison to other cases such as:

• Mansfield – 1,000,000 emails sent to 80,000 addresses, starting point was $100,000.
• Atkinson #1 – 2,000,000 emails sent, with the defendant taking a $1.6 million commission.  Starting point was $200,000 with a penalty of $100,000 given.
• Image Marketing – 45,000 texts sent in a month and 519,000 emails the next year.  Starting point was $160,000, which was reduced due to co-operation.

An assessment required that numbers be viewed in absolute terms and comparatively with other cases.  The HC referenced using percentages based on the above comparative figures.  Using that method, the HC thought that the DC imposed starting point of $12,000 for A was too high – it compared A’s case with Mansfield and calculated that the messages sent by A were only 0.25% of that in Mansfield, with 0.25% of the Mansfield $100,000 starting point being $250.

Further, there was no evidence A had sought to make money, which either substantially reduced the gravity of offending, or was a significant mitigating circumstance.  The evidence was that A was having an argument with a small number of people, which was a long way removed from the activity the legislation was directed at.

In the alternative, the DIA could have issued a civil infringement notice, which the HC saw as being more relevant to the assessment of penalty.  The HC looked at the penalties for a civil infringement notice, being $200 for an individual and $500 for a company, which was further indication that the DC $12,000 starting point was too high.  Taking this all into account, the HC considered the maximum penalty should be $1,000, but given that it was low level offending and A had modest financial means, the penalty was determined at $250.

Conclusion

A’s appeal against the liability decision was dismissed, but the appeal against penalty was allowed and a $250 penalty was substituted.  The decision demonstrated the importance placed on the purpose under the Act, and the intention of the party sending the commercial electronic message.

If you would like further information please contact Laura Monahan on 07 958 7479.

Introduction

Honey New Zealand (International) Limited v. Director General of the Ministry for Primary Industries [2016] NZCA 141 considered the interpretation of the Food Standards Code (the “Code”) relating to a honey product exported under the “Manuka Doctor” trademark.

The New Zealand Court of Appeal (the “Court”) held that the “Manuka Doctor” trademark did not constitute a “health claim” within the scope of the Code.  This article examines the decision, and considers its implications for the food industry.

Facts

Honey New Zealand (International) Limited (“Honey NZ”) produced and exported honey under the “Manuka Doctor” trademark.  However, the Ministry for Primary Industries (“MPI”) was unwilling to issue export certificates for the product, on the basis that Honey NZ’s labels breached the Code because the wording “Manuka Doctor” constituted an impermissible “health claim” under the Code.

A “health claim” for the purposes of the Food Act 1981 (the “Act”) is a claim which states, suggests or implies that a food or a property of food has, or may have, a health effect.  The Code imposes a general prohibition on a “health claim” unless it meets nutrient profiling scoring criteria and complies with the requirements of a high level or general level health claim.

MPI argued that “Manuka Doctor” was a general level health claim, which can only be permitted if the food complies with the Code or the maker of the health claim notifies MPI of the food and health effects to be established by a process of systematic review set out in the Code.

Honey NZ sought a declaratory ruling from the High Court that it was not in breach of the Code.  The High Court Judge declined on the basis that the wording implied Manuka honey had properties making it “good for your health”, finding that unsubstantiated and insufficiently ratified claims about the health benefits of food are not permitted.  Honey NZ challenged this finding in the Court.

Ruling

The issue was whether “Manuka Doctor” was a “health claim”, which essentially requires that there be an effect on the human body.  The Court found that the Act and Code had a consumer protection purpose.  Consumers are to be properly and accurately informed so they can make appropriate choices.  Misleading statements are to be prevented.

While claims of health effects must be made in line with the Code, it did not follow that general claims of unidentified health claims were prohibited.  The Code targets claims of specific, measurable health effects.

The Final Assessment Report of Food Standards Australia New Zealand reports that while a “broad capture” of claims was intended, the Code would not cover claims that “did not explicitly or implicitly indicate the presence or absence of a property of the food or claims that do not describe or indicate the relationship between food or a specific component of food and a health effect”.  Examples include: “this food is organic”, “halal food”, and “farm fresh”.  The Court found close parallels between “farm fresh” and “Manuka Doctor”, which implied it would be “good for you”.

The Court also referred to the statutory purpose of the Code, which included the desirability of avoiding unnecessary restrictions on trade.  To interpret the Code as applying to general claims of unidentified benefits or effects would not achieve this aim.  The Court thought it very unlikely that a claim that “Manuka Doctor” was “good for you” (if established) would mislead consumers into buying the product when they would not have otherwise done so.

The High Court was wrong to conclude that the use of “Doctor” carried a connotation the product was “good for you” and therefore implied a general level health claim.  The Court Justices opposed the lower court’s findings by referencing trademarks such as “Dr Pepper”, “Doctor Kracker” and “Rug Doctor” as examples of brands that referenced “doctor” for purposes other than health claims.  While it was possible some members of the consumer public would associate “Doctor” with health, healing and medicine, it was thought unlikely that a substantial number of relevant consumers exercising reasonable care would make that association.

Furthermore, “Manuka Doctor” was intended to signify that Honey NZ was a specialist in honey purity and quality, evidenced by the back of the label, which had information relating to product testing.  The Court thought that consumers exercising reasonable care would have regard to the label as a whole, and conclude that the wording related to Honey NZ’s expertise and its assurance of purity and quality.  It was also thought unlikely that substantial numbers of the consumer public would make the connection between the health benefits of honey as a wound dressing and the wording “Manuka Doctor”, so as to conclude that honey would be “good for you”.

The Court concluded that the words “Manuka Doctor” did not constitute a health claim within the meaning of the Code, and consequently the appeal was allowed.

Conclusion

It is important to note the emphasis placed by the Court on consumer protection under the Act and Code throughout this judgment.  The regulations in question exist primarily for the benefit of the consumer public, and a fine balance must be struck between those interests and that of New Zealand businesses to trade freely.  In reaching its decision, the Court bore in mind the perspective of what a reasonable consumer would expect and assume from the “Manuka Doctor” claim.

For clients in the food industry, this case particularly demonstrates the importance of ensuring that representations to the consumer public are honest and accurate in order to enable informed decision making.

If you would like further information please contact Laura Monahan on 07 958 7479.