Introduction

Section 47 (1) Trade Practices Act 1974 (TPA) prohibits the practice of exclusive dealing. Section 47 (6) TPA deals with one form of exclusive dealing known as third line forcing. Third line forcing, in general terms, involves one party supplying or offering to supply goods or services to another party on condition that they or a related party will acquire goods and service from a third party.

Conduct governed by section 47(6) TPA is illegal per se, that is, it is not subject to a competition test.

In this case, SST Consulting Services Pty Ltd (SST) experienced the severe consequences of non compliance with section 47 (6) TPA. It will lose in excess of $500,000 and, to add insult to injury, have to bear its own and the successful party’s significant court costs

Facts

The Port Botany Group carried on shipping businesses at several locations. These businesses comprised cargo packing and unpacking activities, storage, handling and repairing containers and transport generally. Australian Freight Services Ltd (AFS) was a freight forwarder and used the services of the Port Botany Group.

AFS was the local agent of a United States freight forwarder. When this company was taken over by a competitor of AFS, AFS lost an important source of business, which in turn impacted on the Port Botany Group. AFS decided to set up its own cargo consolidating business in the United States. It set up AFS Freight and Management (USA) Inc (AFS USA) for that purpose. It was to the mutual benefit of AFS and AFS USA and the Port Botany Group that they do business together.

AFS USA was in need of working capital to fund the growth of its business. The owners of the Port Botany Group were in a position and willing to lend AFS USA the funds it required for that purpose. After discussions between the parties, SST, a company associated with the Port Botany Group, progressively lent AFS USA the sum of $991,000.

The terms of the loan were documented in two documents sent respectively to AFS and AFS USA, which both companies signed. Repayment of the loan was further secured by a Guarantee given by the Directors of AFS USA, Messrs Rieson and Bell.

Key terms of the loan were that:

• AFS and AFS USA would direct all of their pack and unpack less than full container load work in Sydney, Melbourne and Brisbane and Sydney air freight to such entity as SST directed; and

• if the shareholders of AFS USA sold their shareholding or the company otherwise dealt “with the fabric of the business”, the loan, including interest, was to be paid in full.

The shares in AFS and AFS USA were subsequently sold. SST prior to settlement of the sale wrote to AFS USA and demanded repayment of the amount then owing, namely, $1,137, 519. AFS USA did not pay this amount. SST then wrote to Messrs Rieson and Bell and demanded payment of the debt. AFS paid $ 419, 523.48 but nothing more.

SST sued Messrs Rieson and Bell under the Guarantee to recover the balance of the loan owing to it.

Arguments of the Parties

Messrs Rieson and Bell argued that the arrangements between AFS USA and SST were in breach of section 47 (1) TPA because the lending of funds by SST was directly tied to AFS and AFS USA directing work to a nominee of SST. This made the arrangements unlawful and unenforceable. It followed that the Guarantee was of no effect.

SST  accepted that the arrangements were in breach of  section 47(1) TPA but argued that they were “saved” by section 4L TPA and that the unlawful aspects of the arrangements were severable from the lawful aspects with the result that AFS USA was still obliged to repay the balance of the loan.  

Section 4L TPA

Section 4L TPA provides that:

“If the making of a contract…contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 87 or 87A, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable”.

The Decision at Trial

The Trial Judge, Emmett J. of the Federal Court, found that the tying of the arrangements for the lending of money to the direction of packing and unpacking business was not such that the cutting of the tie would in any way change the character or nature of the arrangements in relation to the loan. As such, the tying provisions of the arrangements were severable from the loan provisions. This meant that AFS USA remained liable to repay the balance of the loan to SST as did the guarantors under the Guarantee.

Although unnecessary for his decision, Emmett J. said that section 4L TPA meant that where the making of a contract contravened the TPA, the contract would be valid and enforceable except to the extent that the offending provision of the contract can be severed, in which case that provision will not be valid or enforceable. Relief could also be granted to a party to the contract under section 87 TPA or section 87A TPA by reason of the contravention. This view differed from the Full Court’s decision in News case (1996) 64 FCR 410. Because of His Honour’s views on the question of severability, he was not required to decide whether any, and if so, what relief might have been granted under section 87 TPA as sought by Messrs Rieson and Bell. 

The Full Court

The Guarantors appealed. The Full Court (comprising Wilcox, Sackville and Finn JJ.) came to a different conclusion to Emmett J., finding in favour of the Guarantors.

The Full Court, while observing that the language of section 4L TPA could have been clearer, accepted that the construction of the section adopted by the Full Court in the News case was not in error. That Full Court found that section 4L TPA provided that if a provision of a contract contravened the TPA but was severable, it did not affect the validity or enforceability of the the balance of the provisions. If it was not severable, the contract was illegal and void. The Court did not deal with the operation of sections 87 and 87 TPA, in either case.

On this interpretation, the task of the Full Court was to determine whether the offending tying provision was severable from the overall arrangements between the parties.The Full Court was satisfied that the parties deliberately “…wedded the loan and the pack and unpack obligations [and it was] not for the Court to divorce the two components of their arrangement”. For the Court to do so would be to alter the nature of the contracts and business relationship between the parties even though what remained would be a loan obligation.

For the Full Court, the question was not whether cutting the tie would change the character or nature of the arrangements in relation to the advances (as per Emmett J.) but whether cutting the tie would change the character or nature of the parties’ contract. While observing that the evidence as to the background to and the reasons for structuring the arrangements between the parties left something to desire, it could not be denied that the pack and unpack obligation was an integral part of the arrangements put in place to underpin the loan that was made. As such, severance of the tying provision was not possible.

The contract between SST and AFS USA was therefore illegal, being in breach of section 47(1) TPA and, together with the Guarantee, unenforceable.

Conclusion

This result may appear harsh but is a direct consequence of the arrangements SST entered into. What at the time the parties no doubt assumed was a “normal” business arrangement turned out to be anything but.

Although too late for SST, as a result of the recommendations of the Dawson inquiry into the TPA, the Federal Government proposes to bring the third line forcing provisions of sections 47(6) and 47 (7) TPA into line with other forms of exclusive dealing by making them subject to a “substantially lessening of competition” test. These amendments to the TPA, along with many others, are contained in the Trade Practices Legislation Amendment Bill (No.1) 2005.

Despite the importance of this case being tempered by the impending amendments to the TPA, the key lesson for corporations remain; they, together with their directors and senior management, must be ever alert to the requirements of the TPA and put in place suitable trade practices compliance programs and training to ensure that such dire consequences as were produced in this case are avoided.

For further information, please contact Stephen Newman.