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VOLUME 44 | NUMBER 4 | MAY 2017


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Volume 44 | Number 4 | May 2017

COVER The Meaning of Money

24

FOLLOW US lawsocietywa.asn.au LawSocietyWA @LawSocietyWA

DISCLAIMER: The views and opinions expressed in Brief and the claims made in advertisements published within it, are not to be taken as those of, or as being endorsed by the Law Society of Western Australia (Inc.) or the Brief Editorial Committee. No responsibility whatsoever is accepted by the Society, or the Editorial Committee for any opinion, information or advertisement contained in or conveyed by Brief.

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COPYRIGHT: Readers are advised that the materials that appear in Brief Journal are copyright protected. Readers wanting to cite from or reference articles in Brief Journal should reference as follows: (Month and Year) Brief Magazine (Perth: The Law Society of Western Australia) at page __). Readers wanting to reproduce a substantial part of any article in Brief Journal should obtain permission from individual authors. If an author’s name is not provided, or if readers are not able to locate an author’s contact details, readers should contact the Law Society of Western Australia (Inc.).

38 THIS MONTH

The trade mark BRIEF is the subject of registered trade mark 1253722 and is owned by the Law Society of Western Australia (Inc). Trade mark 1253722 is registered for Western Australia. Published monthly (except January) Advertising enquiries to Manager Marketing and Communications: Moira McKechnie Tel: (08) 9324 8650 | Email: mmckechnie@lawsocietywa.asn.au

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Communications and Media Officer: Andrew MacNiven Communications and Design Officer: Brett Syme RRP $15.00 incl GST. Printed by Scott Print

Editor: Jason MacLaurin Deputy Editor: Moira Taylor Editorial Committee: Gregory Boyle, Rebecca Collins, Robert French, Melissa Koo, Jason MacLaurin, Alain Musikanth, Pat Saraceni, Robert Sceales, Verginia Serdev-Patterson, Moira Taylor

REGULARS

06

Non-disclosure at one’s peril

08

Law Week 2017

10

Elder Abuse and SMSFs

12

The Meaning of Money

19

Class Actions

23

21st century justice

24

Mediation Update for Practitioners - Part 1

32

Discretionary Testamentary Trusts – Sally Bruce

38

Discretionary Testamentary Trusts – Robert Sceales

46

Amendments to Section 13 of the Sale of Land Act 1970 (WA)

49

Key Amendments to the Construction Contracts Act 2004

Proofreaders: Sonia Chee Brief is the official journal of the Law Society of Western Australia Level 4, 160 St Georges Tce Perth WA 6000 Phone: (08) 9324 8600 | Fax: (08) 9324 8699 Email: brief@lawsocietywa.asn.au | Web: lawsocietywa.asn.au ISSN 0312 5831 Submission of articles: Contributions to Brief are always welcome. For details, contact communicationsofficer@lawsocietywa.asn.au

President: Alain Musikanth Senior Vice President: Hayley Cormann Vice President: Greg McIntyre SC Treasurer: Jocelyne Boujos Immediate Past President: Elizabeth Needham Ordinary Members: Jocelyne Boujos, Brahma Dharmananda SC, Nathan Ebbs, Adam Ebell, Elisabeth Edwards, Catherine Fletcher, Rebecca Lee, Marshall McKenna, Denis McLeod, Stefan Sudweeks, Nicholas van Hattem, Paula Wilkinson

02 President's Report 03 Your voice at work 04 Editor's Opinion 51 Family Law Case Notes 52 Law Council Update 53 Pam Sawyer 54 New Members 55 Classifieds 56 Events Calendar

Junior Members: Deblina Mittra, Jodie Moffat, Noella Silby Country Member: Brooke Sojan Chief Executive Officer: David Price

01


PRESIDENT'S REPORT Alain Musikanth President, the Law Society of Western Australia

Law Week 2017 May means Law Week is just around the corner. This year’s Law Week will run from 15 to 19 May. Each year, Law Week provides an opportunity to focus on the importance of law and justice in our community. It offers a chance for the profession to engage with the community and help build a shared understanding of why the Rule of Law is fundamental to our way of life. According to the Society’s records, the first ‘Law Day’ in Western Australia was held on Monday, 18 April 1983, although the Society had been active in the community before then, for example conducting lectures for schoolchildren and community groups and running the Law Museum. The March 1983 edition of Brief notes that “Law Days and Law Weeks [had] been held in other States over the past few years”, but 1983 was “the first time that such a venture [had] been held in WA.” In his report to the Society’s 56th Annual General Meeting, the Society’s then President Ian Temby QC reported that Law Day had been “an outstanding success”. Mr Temby remarked upon the considerable work that had been undertaken by the organising committee, led by the Society’s young lawyers. At Law Day 1983, the Society conducted “law booths” in the city and at a number of suburban shopping centres, helping many people who required legal assistance, with the incidental benefit of “favourable publicity” for the profession. Maintaining access to justice for members of our community remains a key focus of Law Week, some 34 years later. This year, Law Week includes more than 30 events organised by the Society and a variety of other organisations – both for the legal profession and the wider public. Law Week 2017 commences with the Law Week Breakfast at the Argyle

02 | BRIEF MAY 2017

Ballroom, Parmelia Hilton in Perth on Monday, 15 May 2017. I hope you will join me for a keynote address by Katie Miller, 2015 President of the Law Institute of Victoria and current Executive Director, Legal Practice at Victoria Legal Aid. Katie is also the author of the report Disruption, Innovation and Change: the Future of the Legal Profession and will discuss Legal traditions in an age of disruption: How do lawyers decide what to keep and what to relinquish? The Hon Wayne Martin AC, Chief Justice of Western Australia, will chair the discussion1. The Law Week Breakfast is also the occasion for the presentation of the Attorney General's Community Service Law Awards. The Attorney General, the Hon John Quigley MLA, will present awards to an individual legal practitioner and to an organisation who have provided outstanding pro bono legal services to the Western Australian community. Also on Monday, 15 May 2017, Legal Aid Western Australia will hold a Legal Advice Outreach Service at Citiplace Community Centre. Legal Aid lawyers will be in attendance to provide legal advice to clients of Citiplace, in various areas of law, from 9.00am to 3.00pm. On Tuesday morning, 16 May 2017, the Law Access Walk for Justice will take place from 7.30am, commencing in front of the Bell Tower on the Perth foreshore. The Walk for Justice is an opportunity to celebrate the pro bono work of the legal profession, while also helping to raise funds for Law Access Limited. Members may be aware of the very important work performed by Law Access in matching individuals and community organisations in need of legal assistance with members of the profession, who generously donate their time and expertise. Participants in the Walk for Justice will take a 4.4 km return trip before being provided with a complimentary South Indian vegetarian breakfast at Annalakshmi Restaurant.

On Tuesday evening, 16 May 2017, Pragma Legal will hold a Quiz Night, with profits to the Street Law Centre WA (Inc). The event is described as a fun, anecdotal take on the more interesting and entertaining aspects of the law, all for a very worthy cause. On both Tuesday, 16 May 2017 and Thursday, 18 May 2017, Latro Lawyers in Albany will offer free simple wills for seniors card holders. On Wednesday, 17 May 2017, Fremantle Community Legal Centre will provide free legal advice on family law, traffic matters, employment law, and criminal matters among other areas. On the same day, HHG Giving Back Free Legal Clinics will be run from 4.00pm to 6.00pm in West Perth and from 4.00pm to 5.00pm in Mandurah and Albany. In the evening, the Young Lawyers Committee will host a panel discussion in Court Room 1, Supreme Court building Stirling Gardens, on Access to Justice for Refugees and Asylum Seekers. The Law Week Awards Night on Thursday, 18 May 2017, at Bankwest Place, Raine Square, will recognise those who have made an important contribution to the legal profession, including the 2017 Lawyer of the Year Award winners. Members of the profession who have achieved 50 and 60 years in practice will also be recognised. The above summary reflects merely a handful of the many events scheduled for Law Week 2017. A complete list may be found at lawsocietywa.asn.au/ law-week and is included on page 8 of this edition of Brief. I look forward to seeing you during the week. NOTES: 1.

As one of its strategic objectives, the future of the legal profession is an issue of major importance to the Society. As noted in the April edition of Brief, the Society’s Executive will meet with a range of managing partners and other key stakeholders on Friday, 19 May 2017 for a discussion on a particular aspect of artificial intelligence of significance to the profession. Look out for an upcoming edition of Brief with a focus on the future of the profession.


Your voice at work A summary of recent media statements and Society initiatives Law Society supports action of the State Attorney General to address legal assistance funding to community legal centres The Law Society of Western Australia welcomed the announcement by the State Attorney General, John Quigley to provide community legal centres with almost $1.2 million to compensate for the loss of funding from the Legal Contribution Trust. The announcement followed an earlier announcement by the Federal Attorney General that the Federal Government would not proceed with previously proposed cuts to the legal assistance sector. “The Law Society of Western Australia welcomes today’s announcement by the State Attorney General too, and will continue its work with the Law Council of Australia and other law societies across the country in campaigning for a longer term, sustainable funding model to overcome the escalating crisis in the legal assistance sector” Law Society President Alain Musikanth said.

Law Society welcomes cancellation of proposed cuts to legal assistance funding The Law Society of Western Australia welcomed the announcement by the Federal Government that it will restore funding to community legal centres in the upcoming Budget and not proceed with previously proposed cuts of approximately $35 million. “I am delighted that the Federal Government will not be proceeding with previously proposed cuts to the legal assistance sector. A reduction in funding of around 30 percent would have been extremely damaging to community legal centres generally, and to legal services for Aboriginal and Torres Strait Islander people in particular,” said Law Society President Alain Musikanth. “Practitioners in our legal assistance sector do terrific work in ensuring access to justice for some of the most vulnerable members of our community, making it vital that their organisations receive adequate funding. This announcement will be a great boost to these practitioners and, most importantly, to their clients who desperately seek legal help, and the Federal Government is to be congratulated on its decision not to proceed with the cuts,” Mr Musikanth said.

“The Law Society of Western Australia had joined with the Law Council of Australia and other law societies across the country in campaigning for the proposed cuts to be reversed and I am pleased that the Federal Government has responded appropriately. As Law Council President Fiona McLeod SC has noted, it is important that the work to maintain acceptable levels of legal assistance continues, especially in light of the Productivity Commission’s 2014 recommendation of an additional $200 million. “Prior to the State election, the Law Society had encouraged local politicians to confirm their commitment to an additional $8 million, plus long-term funding to overcome the rapidly escalating crisis in the legal assistance sector. The Law Society will continue to work at State level to ensure the Western Australian community is properly served,” Mr Musikanth said.

Law Society congratulates Amanda Forrester SC on appointment as Director of Public Prosecutions The Society warmly congratulates Amanda Forrester SC on her appointment as Director of Public Prosecutions (DPP) for Western Australia. Society President Alain Musikanth said, “Amanda Forrester SC is an experienced and highly respected member of the Western Australian legal profession and an outstanding choice as DPP. The fact that Ms Forrester is also the first female to occupy that office in Western Australia reflects a significant milestone in the history of the profession.” Ms Forrester studied at The University of Western Australia, completing her law degree in 1994. Ms Forrester is a former member of the Law Society, having first joined in May 1996. Ms Forrester has been Acting Director of Public Prosecutions since November 2016, filling the vacancy left by Joseph McGrath SC (as His Honour then was) upon his appointment as a justice of the Supreme Court of Western Australia. Before her appointment as Acting DPP, Ms Forrester held the positions of Consultant State Prosecutor and Senior State Prosecutor at the Office of the Director of Public Prosecutions in Western Australia.

Law Society celebrates Anniversaries of the Old Court House and Francis Burt Law Education Programme On Friday, 24 March 2017, the Society celebrated a significant milestone for the City of Perth’s oldest public building; it was 180 years to the day since the first church service and unofficial opening of the Old Court House was held on Good Friday 1837. “Situated in Stirling Gardens, next to the Supreme Court building, the Old Court House has been used for a number of purposes during its rich history, including as the Supreme Court, the Arbitration Court, the Law Society’s premises and currently the Law Society’s Old Court House Law Museum,” said Society President Alain Musikanth. The Museum recently unveiled a new exhibition, entitled From Past to Present: The changing face of the law in Western Australia, which examines how the law has evolved in our State. The Museum is one of only a handful of law museums in the world and promotes understanding of the law within the community. Entry is free for the public. 2017 is a year of anniversaries for the Law Society; besides marking 90 years since the association was founded, it is also the 30th anniversary of the Francis Burt Law Education Programme and Mock Trial Competition for school students. “The Francis Burt Law Education Programme, or the Centre as it was originally known, was launched by Sir Francis Burt, then Chief Justice, during Law Week 1987. It has been an integral part of the Law Society’s community engagement focus ever since, providing programmes for more than 150,000 people over the last 30 years, the majority of whom were students,” said Mr Musikanth. The Mock Trial Competition was also introduced in 1987, with the goal of raising awareness of the law and legal institutions among young people. It is a fun, dynamic way for students to become familiar with the law and helps them build useful research and advocacy skills. “To say the Competition remains popular is an understatement. There has been a significant increase in student participation numbers in recent years, with 1,295 students in 127 teams from 55 schools now taking part in 2017,” Mr Musikanth said.

03


EDITOR'S OPINION Jason MacLaurin Barrister, Francis Burt Chambers, Editor, Brief Journal

This month’s feature article “The Meaning of Money”, based upon a presentation by Professor Sarah Green1 at the Law Society’s Law Summer School 2017, contains fascinating, erudite and important observations upon a topic most lawyers probably feel they are familiar with.

Nevertheless, for all the hours poured into reading about Bitcoin on the internet, there was the lingering feeling that as much clarification about how this sort of thing works in practical terms was obtained from a back to back viewing of The Big Short and The Wolf of Wall Street.5

Or, have been told in strident but mostly unoriginal ways (lawyer jokes, a note wrapped around a brick, or a message carved into the bonnet of their car) is all they care about.

Having said that, one gem about Bitcoin came from University of Chicago Law Professor Eric Posner who delivered an exquisite backhanded compliment in explaining why it was not a Ponzi scheme, saying “a real Ponzi scheme takes fraud; Bitcoin by contrast seems more like a collective delusion”.

Professor Green’s article, however, deals with an area lawyers may not be familiar with, being cryptocurrencies, like Bitcoin. As such it touches upon a theme that will continue to be a focus of articles in Brief – being the law’s response and adaption to technological innovations. That such complexities arise in regard to a concept such as “Money” is bad news for those of us that consider the topic was authoritatively addressed by Pink Floyd in 1973 in the six neat propositions expressed on the fifth track of their classic opus, Dark Side of the Moon.2 And an attempted further exploration into the whole world of Bitcoin and cryptocurrencies results in nearCartesian doubt as to the classical understanding of the nature of money: being that you earn it by hard work, and lose it by regularly hitting on 14 when the dealer is on 9 or less.3 Further (attempted) research into Bitcoin and cryptocurrencies resulted in more confusion than enlightenment. Part of the mystique surrounding Bitcoin concerns its enigmatic (apparent) creator, Satoshi Nakamoto, who withdrew from public view several years ago. This led to the misconceived notion that watching Die Hard again would reveal something about the nature of Bitcoin. Unfortunately, it soon became evident that, in Die Hard, Alan Rickman’s character actually raided the fictional Nakatomi corporation building, attempting to steal $640 million in bearer bonds.4

04 | BRIEF MAY 2017

Editorials this year (given it is the Law Society’s 90th anniversary) customarily look back to what was in the news in Perth in 1927. In May 1927 the stories that dominated were Charles Lindbergh’s historic transatlantic flight, and the Duke and Duchess of York’s visit to Perth. The latter event harkens back to a quainter era in Australia, where a visit from a prominent foreign ally dignitary did not coincide with a threat of being nuked by North Korea. Of more significance to lawyers, Charles Lindbergh claiming the Orteig prize for his non-stop flight from New York to Paris shows that the law, and lawyers, are frequently involved in historic events. One of Lindbergh’s main rivals for the prize, Charles Levine, dumped an intended co-pilot for the attempt, Lloyd Bertaud, at late notice, in order to team up with pilot Charles Chamberlain. Bertaud successfully applied to a New York court for an injunction, preventing Levine or Chamberlain from taking off. By the time Levine had the injunction lifted, Lindburgh had already taken off in his Spirit of St Louis, on the way to fame and fortune.6 However, Levine did not sulk or instruct his lawyer to explore the possibility of claiming damages for “loss of a chance to become stupendously famous and admired worldwide”. Rather, he immediately announced that he would have his airplane fly

farther than Lindbergh’s on another transatlantic challenge. And, in the process, he also found a better use for his lawyer. In what was described as “an oftrepeated situation” Levine misled his wife by telling her he was only going out for a short “test flight”. Which is a spectacularly better line than “we’re out of milk”. It was only after Levine had taken off that his lawyer notified his wife, by letter, of Levine’s actual intentions. Levine made it to Germany, and while not making it to Berlin, falling 100 miles short, did fly longer than Lindbergh and, perhaps just as amazingly, managed to stay married until 1935. It was unclear whether any further “test flights” contributed to the 1935 divorce. This edition of Brief again contains items upon diverse areas the law including the Hon James Allsop AO upon Class Actions, Robert Sceales and Sally Bruce with articles on Discretionary Testamentary Trusts, Melissa Koo, Brendan Reilly, and Greg Steinepreis upon amendments to the Construction Contracts Act, Michael Hollingdale with an update on mediations, Simon Moen, Matthew Reid, and Raj Logarajah on amendments to the Sale of Land Act, and Professor Gino Dal Pont upon costs disclosures. NOTES: 1.

Professor Green gave a presentation at the Law Society's Law Summer School 2017 upon the topic of “Money, Banking and Crypto Currencies: A Legal Perspective” and the article in Brief is based upon that presentation and the text of Professor’s Green’s upcoming book.

2.

And, to boot, accompanied by one heck of a bass hook, and a glorious two-phase guitar solo by David Gilmour.

3.

Or by betting on the Undertaker not losing again at Wrestlemania last month, an outcome the Editor is still reeling from.

4.

In the Editor’s defence, Bitcoin has been described as a “digital bearer bond” and also, in the Editor’s view, no re-watching of Die Hard could ever be classified as a waste of time.

5.

Even if this, ultimately, was limited to the observation that Australia’s own Margot Robbie was in both films.

6.

90 years on we of course have another example of someone suing in the USA over being bumped from a flight, although it should be noted that Bertaud was not, in contrast, dragged out of the plane through the aisle, by his arms and on his back, with a concussion, a broken nose and two broken teeth.


Non-disclosure at one’s peril Gino Dal Pont Professor, Faculty of Law, University of Tasmania Ethics Column

• Statutorily prescribed costs disclosure obligations are almost unique to the legal profession. • Various consequences may flow from failing to comply with costs disclosure obligations. • That costs disclosure is prescribed by statute does not preclude potential liability at general law in this context.

Not long ago I required the services of a plumber, stemming from hot water hose that split in the early hours of the morning. The plumber duly arrived in late morning, took no more than five minutes to replace the hose, made polite chit-chat, and they went his way. At no stage, whether when requesting the service over the telephone, or indeed at any time prior to receiving the bill in the mail a week or so later, did the plumbing company supply any indication of its cost, whether by way of an estimate, an hourly rate or any minimum charge. The only communication that related in any way to cost was the individual plumber’s quip that it was a pity (for me) that the job only took a few minutes, as I would be charged for an hour. Of course, as a customer I could have asked the question. I opted against doing so not merely because I suspected the job would be minor, but as an experiment to discover whether I would be supplied with any cost estimate, or method of calculating costs, at any time. That plumbers, like other tradespersons, and indeed most professionals and other business people, have no legal obligation to make cost estimates or even to disclose their approach to charging made the outcome of my experiment perhaps no surprise. Good business may dictate openness regarding costs, but the law here does not compel this outcome. This did not, however, assuage my discomfort in being at the mercy of another for costs as to which I had no notice (and no control). It was not that long ago, in the scheme of things, that costs disclosure by lawyers to (impending) clients fell in the ‘good business’ camp, and not the subject of legal obligation. The first Australian statutory costs disclosure prescription, including costs estimates, took effect in New South Wales on 1 July 1994.1 At the time

06 | BRIEF MAY 2017

there were some costs disclosure obligations under the Western Australian professional rules of the day,2 which were intensified in 20023 before translating to statute from 1 March 2009.4 Costs disclosure, as is well known, aims to empower the client vis-à-vis the lawyer, by giving the client the opportunity to make an informed choice costs-wise whether or not to retain the lawyer or to continue with the representation. Within the lawyer-client relationship it is designed to avoid the discomfort I experienced (on what is likely to be on a much smaller scale) in waiting for my plumber’s bill. In order to ‘encourage’ lawyers to fulfil costs disclosure obligations, legislators felt it necessary to impede costs recovery in the face of incomplete disclosure, while at the same time making explicit that it could sound in disciplinary sanction. But it should not be assumed that the consequences of incomplete disclosure are confined to those prescribed by statute. In 2004 a South Australian District Court judge found a failure to disclose to a client a more meaningful estimate of the likely costs, when the lawyer could have done so, amounted to a breach of contract.5 That this decision may well have been coloured by the absence at the time of statutory costs disclosure obligations in South Australia does may not make it irrelevant under a statutory schema. In 2016 a New South Wales judge branded a law practice’s failure to provide an updated costs estimate both a breach of contract and misleading and deceptive conduct by omission (under statute).6 His Honour proceeded to find that the practice had deliberately ‘under-quoted’ in its original costs estimate as a means of securing the client. This behaviour was characterised as a breach of fiduciary duty.7 While it is perhaps unsurprising that each of these cases involved issues surrounding arguably the most challenging aspect of costs disclosure, namely costs estimates, what they do reveal is that costs disclosure is not an issue confined to the statutory arena. NOTES: 1.

Pursuant to amendments to the (then) Legal Profession Act 1987 (NSW) by the Legal Profession Reform Act 1993 (NSW).

2.

WA: Professional Conduct Rules r 10.3 (superseded).

3.

WA: Professional Conduct Rules r 16A (superseded).

4.

Under the Legal Profession Act 2008 (WA) Pt 10 Div 3.

5.

Moloney v Smith [2004] SADC 115 (although on the facts the client was unable to prove that the lawyer’s breach of duty in failing to apprise her of the likely costs had in fact caused her loss).

6.

Burrell Solicitors Pty Ltd v Reavill Farm Pty Ltd [2016] NSWSC 303 at [45] per White J.

7.

Ibid., at [180].


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LAW WEEK 2017 Monday, 15 May – Friday, 19 May 2017

In 2017, the Law Society of Western Australia showcases a series of events and information sessions focusing on law and justice in the community, including:

A FOCUS ON LAW AND JUSTICE IN THE COMMUNITY Law Week is an annual opportunity for the legal profession to engage with the Western Australian community to build a shared understanding of the vital role of the law in our society.

Law Week Breakfast and the 2017 Attorney General’s Community Service Law Awards

Law Access Walk for Justice

Quiz Night – profits to Street Law Centre WA (Inc)

Panel discussion hosted by the Law Society's Young Lawyers Committee

Free information sessions and talks

Activities hosted by law firms, community groups and other organisations across Western Australia

Community events, including activities for school students

Free legal advice – by appointment at specific locations

Law Week Awards Night

MONDAY, 15 MAY 2017 LAW WEEK BREAKFAST Time 7.15am – 9.15am Venue Argyle Ballroom, Parmelia Hilton Perth, 14 Mill Street, Perth Description Join us as we celebrate the official opening of Law Week 2017, and recognise the contributions made by members of the legal profession to the WA community. Enjoy breakfast and a keynote address from Katie Miller, Executive Director, Legal Practice, Victoria Legal Aid and 2015 Law Institute of Victoria President. Katie will present on Legal traditions in an age of disruption: How do lawyers decide what to keep and what to relinquish?

Register Cost Organiser Award organiser Sponsor For

The presentation will be chaired by the Hon Wayne Martin AC, Chief Justice of Western Australia. The Law Society is delighted to welcome the Attorney General, The Hon John Quigley MLA, to present the Attorney General’s Community Service Law Awards. lawsocietywa.asn.au/law-week-breakfast Law Society members - $60 Members | Non-members - $85 The Law Society of Western Australia Department of Attorney General

SEpARATED pARENTS pROGRAM AND WRITING A pARENTING pLAN Time 2.00pm – 4.30pm Venue Unit 7, 44a Aberdeen Street, Northbridge Description Information seminar on the Separated Parents Program and writing a parenting plan Register Call Ellie Carr on (08) 9261 4444 Cost

Free

Organiser

Lifeline WA

For

Legal profession and community

YLC: MENTAL HEALTH HYpOTHETICAL Time

5.30pm – 7.00pm

Venue

Register

The Law Society of Western Australia Level 5, 160 St Georges Terrace, Perth A panel of senior members of the profession discuss ethical dilemmas that affect young lawyers in their first few years of practice, as well as the prevalence and management of mental illness in the work place. lawsocietywa.asn.au/event/ylc-mental-health-hypothetical/

Cost

Free

Organiser

The Law Society of Western Australia

For

Legal profession

Description

HHG Legal Group Legal profession

Special thanks to Law Week supporters and sponsors

08 | BRIEF MAY 2017


TUESDAY, 16 MAY 2017 THE LAW ACCESS WALK FOR JUSTICE 2017 Time 7.30am – 9.00am Venue Commencing in front of the Bell Tower, Elizabeth Quay, Perth Description Celebrate the vital pro bono work of the profession and raise funds for the Law Access Pro Bono Referral Service. Breakfast will follow. Register mycause.com.au/events/lawaccesswalkforjustice Cost Free, registration essential Organiser Law Access For Legal profession and community

QUIz NIGHT – pROFITS TO STREET LAW CENTRE WA (INC) Time 6.30pm Venue Subiaco Sports Bar - Corporate Lounge, Gate 26, Domain Stadium, 201 Subiaco Road, Subiaco Description A fun, anecdotal take on the more interesting and entertaining aspects of the law, with plenty of games, trivia and fundraising opportunities to be had. Food and drinks available for purchase. Register eventbrite.com.au/e/law-week-quiz-night-profits-to-street-lawcentre-wa-inc-tickets-32682586496 Cost $22.00 (single tickets) or $220.00 (table of 10) Organiser Pragma Legal For Legal profession

WEDNESDAY, 17 MAY 2017 HENRY WILLEY REVELEY: WESTERN AUSTRALIA'S FIRST ENGINEER AND ARCHITECT Time 1.00pm – 2.00pm Venue Old Court House Law Museum, Stirling Gardens, Perth Description The Old Court House is one of only two surviving buildings in Western Australia attributable to Henry Reveley, the other being Fremantle's Round House. In this talk, retired Murdoch University historian Professor Bob Reece reveals Reveley's unexpectedly chequered background and the challenges he encountered at early Swan River Colony. Register SOLD OUT Organiser The Law Society's Old Court House Law Museum For Community and legal profession

ACCESS TO JUSTICE FOR REFUGEES AND ASYLUM SEEKERS – LAW WEEK pANEL pRESENTATION HOSTED BY THE YOUNG LAWYERS COMMITTEE Time 6.00pm – 7.30pm Venue Court Room 1, Supreme Court of Western Australia Stirling Gardens, Barrack Street, Perth Description This panel presentation hosted by the Young Lawyers Committee discusses Access to Justice for Refugees and Asylum Seekers, chaired by Greg McIntyre SC. Register lawsocietywa.asn.au/event/law-week-panel-presentation-ylc/ Cost Free Organiser The Law Society's Young Lawyers Committee For Legal profession and law students

RESOLUTION INSTITUTE WA CHApTER'S LAW WEEK EVENT Time 5.15pm for 5.30pm – 7.00pm Venue Jackson McDonald, Level 17, 225 St Georges Terrace, Perth Description Effective and timely resolution of tax disputes – the ATO in-house facilitation service and beyond. Presentation by Debbie Hastings, Deputy Commissioner, Review & Dispute Resolution, Australian Taxation Office Register resolution.institute/events Cost Free Organiser Resolution Institute For Legal profession

LAW WEEK DINNER FOR LEGAL pROFESSION, STAFF & pARTNERS Time 5.00pm pre-dinner drinks, 7.00pm dinner Venue Due South, 6 Toll Place, Albany Description Practitioners, staff and partners are invited to attend a dinner hosted by the Aboriginal Legal Service of WA Ltd Register lmettam@als.org.au or call (08) 9841 7833 Cost Individual order and pay on the night Organiser Aboriginal Legal Service of WA Limited For Legal profession, staff and partners

THURSDAY, 18 MAY 2017 ABORIGINAL LEGAL SERVICE OF WA INFORMATION SESSION - HUMAN RIGHTS AND LIBERTY Time 1.00pm – 3.00pm Venue 7 Aberdeen Street, East Perth Description A session for community members to come along and learn more about the significance role that the ALS plays for Aboriginal communities in Western Australia. Register Call Sabah Rind on (08) 9265 6666 or srind@als.org.au Cost Free. Refreshments included Organiser For

Aboriginal Legal Service of WA Community and legal profession

LAW WEEK AWARDS NIGHT Time 5.30pm – 8.30pm Venue Description

Register Cost Organiser

Bankwest Place, Raine Square, Level 1, 300 Murray Street, Perth As Law Week comes to a close, join us and the legal profession as we celebrate law and justice in the community for an evening of recognition, music, canapés and refreshments. The event will recognise recipients of the 2017 Lawyer of the Year Awards and practitioners who have held a practising certificate for more than 50 and 60 years. lawsocietywa.asn.au/event/law-week-awards-night Law Society members - $20 | Non-members - $45 The Law Society of Western Australia | Hosted by Bankwest

Sponsors For

Profile Legal Recruitment and Murdoch University Legal profession

For more information and other events during Law Week visit lawsocietywa.asn.au/law-week or call (08) 9324 8692 09


Elder Abuse and SMSFs Elder abuse within SMSFs is a focus of a new ALRC discussion paper Andrew Proebstl Chief Executive, legalsuper An Australian Law Reform Commission (ALRC) discussion paper has highlighted concerns about the risk of elder abuse within Self-Managed Super Funds (SMSFs) and has sought feedback about steps that could be taken to lessen its likelihood. The ALRC’s Elder Abuse discussion paper was released in December last year.1 At the time of writing this column, the ALRC was scheduled to report its findings to the Federal Attorney-General George Brandis QC in May of this year. In the discussion paper, the ALRC notes that “[f]inancial abuse is one of the most common types of elder abuse”.2 The discussion paper continues: “Superannuation funds may also be the target of elder financial abuse, particularly less regulated self-managed funds. For example, an individual trustee of a selfmanaged fund who loses decision-making ability may be vulnerable to abuse.”3 The legal framework for SMSFs was established in 1999 and, as the discussion paper notes: “The risk of vulnerability to financial abuse in relation to a SMSF arises in part because the regulatory framework for SMSFs was designed on the premise of self-protection.”4 While this independent “self-protection” may have been seen as an attractive attribute of SMSFs, an ageing population means that an increasing number of older SMSF directors are likely to be vulnerable to financial elder abuse. The ALRC concluded in the discussion paper: “A regulatory framework that relies on self-protection may be problematic, as a larger number of SMSFs come under the control of older people who may have diminishing decision-making ability. The risk associated with trustee capacity was also noted by the Financial Services Institute of Australasia (FINSIA): “the issues of population ageing and cognitive decline are a ‘silent tsunami’ for self-managed super funds (SMSFs), exposing investors in this sector to financial abuse, including fraud and inappropriate investment advice.””5

10 | BRIEF MAY 2017

Whereas SMSFs rely on “self-protection” all other (managed) super funds are subject to oversight by an independent regulator – the Australian Prudential Regulation Authority (APRA). In the words of the discussion paper, the age profile of SMSF members shows that there is an “emerging risk” of financial elder abuse in relation to SMSFs. Currently, 8.8 percent of SMSFs have members aged over 75 years of age – the most vulnerable cohort for elder abuse, according to the ALRC. 55 percent of SMSF members are aged between 55 and 74 years of age. As the ALRC notes – “in the coming decades, a greater number of older and more vulnerable individuals will have a SMSF”.6 The ALRC also notes that “Alzheimer’s Australia has submitted that approximately 20% of people over 65 years may develop dementia. Accordingly, what happens when a SMSF trustee loses decisionmaking ability is of critical concern in managing the risk of elder abuse.”7 To provide further context, Alzheimer’s Australia latest research also shows that: •

There are more than 353,800 Australians living with dementia;

This number is expected to increase to 400,000 in less than five years; and

Without a medical breakthrough, the number of people with dementia is expected to be almost 900,000 by 2050.8

In light of the concerns about the potential for financial elder abuse in relation to SMSFs, the ALRC discussion paper asked the following questions: “Should the Superannuation Industry (Supervision) Act 1993 (Cth) be amended to: a. require that all self-managed superannuation funds have a corporate trustee; b. prescribe certain arrangements for the management of self-managed superannuation funds in the event that a trustee loses capacity;

While it is the case that for some people, age may never become a barrier to their ability to competently discharge all the responsibilities involved in running a SMSF, others will, over time, lose capacity to do so and may find themselves vulnerable to financial elder abuse. It is also possible that even in instances where financial elder abuse is thankfully not an issue, older trustees may begin to struggle with the extensive legal, taxation, compliance and administrative responsibilities involved in setting up, running, paying benefits from and winding up a SMSF. While many SMSF trustees engage professionals to assist them in running their fund, the ultimate financial and legal responsibility for the fund lies with the Trustee(s) of the fund – not the professionals they may choose to engage to carry out various duties. People looking for more information on the impacts of ageing on the ability of some trustees to manage a SMSF may be interested in visiting ASIC’s MoneySmart website which has information about “Memory loss, dementia and SMSFs”. The website says that: “As trustee of your SMSF, you should plan for the possibility that some form of impairment could stop you from being able to properly manage your fund. It's better to make a contingency plan while you're capable of making good decisions than waiting until your health deteriorates. If you're not able to run your fund you could: •

Transfer your SMSF assets to a managed super fund; or

Appoint a person you trust to take over your trustee responsibilities as your legal personal representative”.10

Whichever option a trustee of a SMSF may end up considering if they fear they are losing capacity, it is advisable, as part of this process, to speak with your fellow trustee/s, your financial adviser, your legal representative, members of your family and a managed super fund before making a decision. NOTES: 1.

See https://www.alrc.gov.au/news-media/mediarelease/elder-abuse-discussion-paper.

2.

Australian Law Reform Commission Discussion Paper Elder Abuse (December 2016), page 127.

3.

Note 2 above, page 127.

4.

Note 2 above, page 138.

d. give the Superannuation Complaints Tribunal jurisdiction to resolve disputes involving self-managed superannuation funds?”

5.

Note 2 above, page 139.

6.

Note 2 above, page 138.

7.

Note 2 above, page 140.

8.

See https://www.fightdementia.org.au/statistics .

9.

Note 2 above, page 137.

It also asked: “Should there be restrictions as to who may provide advice on, and prepare documentation for, the establishment of self-managed superannuation funds?”9

10.

See https://www.moneysmart.gov.au/superannuationand-retirement/self-managed-super-fund-smsf.

c. impose additional compliance obligations on trustees and directors when they are not a member of the fund; and

ABOUT THE AUTHOR Andrew Proebstl is the chief executive of legalsuper, Australia's super fund for the legal community. He can be contacted on ph 03 9602 0101 or via aproebstl@legalsuper.com.au


Introducing a new LawCare WA service – Employee Relations Advice Line

Free help for you when you need it on serious employment issues

The Law Society is trialling a six month arrangement with the Chamber of Commerce and Industry of Western Australia whereby members can access a team of industry experts within the CCIWA Employee Relations Advice Centre, free of charge, for telephone advice on a range of human resources and employee relations issues relating to: • • • • • •

Wage rates Award and agreement interpretation Performance management and termination Equal opportunity, bullying and harassment Employee minimum entitlements Unfair dismissals

Contact (08) 9365 7660 or visit lawsocietywa.asn.au/lawcarewa The telephone advisory service is available to Law Society members from 8am to 5pm, Monday to Thursday and 8am to 4pm on Friday. The phone service is closed on weekends and public holidays. Where assistance beyond the telephone advice is required, the CCIWA Employee Relations Consultancy team can offer support and representation at your cost. This service is not included as part of the Law Society’s LawCare WA programme.

LawCare WA is available to members of

Service provided by CCIWA

11


feature

Sarah Green

By Sarah Green Associate Professor of Law, University of Oxford, United Kingdom Sarah presented at the Law Society's Law Summer School 2017 on the topic of Money, Banking and Crypto Currencies: A Legal Perspective

To be categorised as money, any medium must currently fulfil three conditions: it must be able to function as a medium of exchange, a store of value and a unit of account. The public and economic reasons for this are clear. The private law context, however, has a distinct set of concerns and would be better served by focussing solely on the criterion of a medium of exchange. The relevance to private law of units of account and stores of value is limited. What is important for private law classification and remedial purposes is the fungibility of a medium of exchange and the consequent fact that it does not depend on a double coincidence of wants.1 These qualities set such assets apart from other media, such as goods exchanged for others under a barter agreement: a fungible medium of exchange has an objectivity of value and generic availability which goods lack. Whilst virtual currencies undoubtedly constitute fungible media of exchange, they do not clearly or consistently meet the criteria of being units of account or stores of value. Once something functions as a medium of exchange, it seems artificial and disingenuous to divide mutually agreed payment obligations up into those made on the basis of state-issued (fiat) currency and those not. For private law purposes, therefore, it makes sense to treat virtual currencies as money.

What are virtual currencies and why do they present such challenges to existing categories? Given that virtual currencies need to be administered by using some form of computing device, it is tempting to align them closely with electronic bank money which, for most of us, is dealt with using similar hardware. Why, then, do virtual currencies present such a classificatory problem, when bank money (which makes up more than 95% of the money used in the UK economy, for instance)2 has long been integrated into our legal understanding? One of the reasons

12 | BRIEF MAY 2017

is that, on closer inspection, it is clear that virtual currencies have far more in common with cash than they do with bank money. And yet they are not cash. This is where the difficulties for private law might be said to begin. It is not even easy to say whether virtual currencies are closer to cash than they are to goods: Schatt has described Bitcoin, for example, as something which is “[b] ased on an elegant algorithm and possessing attributes of both currency and commodity”.3 Since Bitcoin is, at least currently, the most successful example of a virtual currency, it would seem to provide an obvious basis for explaining the technology and its legal implications. A bitcoin is a very particular string of bits that exists only on the memory of a computer, on a hard drive, a thumb drive, or even as a long string of letters and numbers printed onto a piece of paper. A bitcoin is just data, very special data. And it’s not a coin. It’s a highly divisible unit.4 The legal implication of this is that a bitcoins is not a chose in action. The string of data that constitutes a bitcoin is a unique and specific thing in its own right. It is therefore distinct from bank money, which, as a relationship of indebtedness between bank and customer, is a chose in action. It is also unlikely, however, that current common law orthodoxy would hold a bitcoin to be a chose in possession. In OBG v Allan,5 the House of Lords made it quite clear that the category of choses in possession does not include intangibles. Whilst this decision retained the established “documentary exception”, meaning that, for instance, cheques could be possessed, bitcoins would not fit this exception, since they themselves are the thing of value, rather than being a representation of an underlying asset in the way that cheques and share certificates are. There is no question that this model of currency, whilst sharing characteristics with forms of value with which the common law is familiar, does not fit comfortably into any existing classification.


13


In practical terms, what the “holder” of a bitcoin really has is exclusive access to these unique strings of data, which gives her the power to control them, whether that be for spending, saving or moving round between accounts (there is no limit to the number of Bitcoin accounts one can have). Each user has a public key, which functions like an address to which bitcoins can be sent as a means of payment, and a private key, which protects access to those bitcoins, functioning rather like a PIN or password. Strings of data are thus passed from account to account, as requested by users. Their movement, whilst physical at the level of binary data, occurs therefore within digital correspondence and is not seen or touched by users. This is what makes virtual currency “feel” like bank money. In legal terms, however, it behaves far more like cash. When bank money moves from bank account to bank account, nothing actually moves at all, and the promise of one bank to pay a customer is substituted for the promise of another bank to pay another customer for the same amount. In other words, a debt is replaced by a different debt. As alluded to above, however, bitcoins are actually valuable physical assets which move from one account (or “wallet”) to another. This has a number of implications, the first and probably most important of which is that bitcoins can be lost or stolen, and that when this occurs, they cannot be recovered except by physical recaption (that is, finding the person who now has the bitcoin in question and persuading him in some way to return it to the rightful holder). It also means that transactions in bitcoin are irreversible except, again, by persuading the transferee to return the same bitcoin. Significantly, there is no third party either to guarantee or indemnify users against the consequences of incorrect transfers. Some providers of online wallet software offer insurance against such risks, but, as ever, the direction of insurance offers serves only to indicate the default bearer of a risk. So, have we come (almost) full circle? Have we moved from cash, to bank money, to bank money represented in electronic form, to cash represented in electronic form? Maybe; at least in terms of technical potential. There are several reasons, however, why virtual currencies have not yet come close to replacing cash, at least in most developed countries. It is often said that reliance on virtual currencies is problematic and risky because such currencies are not legal tender. But then neither is bank money: Bank money lacks at least most of

14 | BRIEF MAY 2017

the legal characteristics of physical money: it is not issued under the authority of the State, it is not legal tender, it does not serve as a medium of universal exchange, and it is not negotiable.6 And yet bank money accounts for the overwhelming majority of transactions made in modern first world economies. This, therefore, cannot be the only reason why virtual currencies are not (yet) universally used. Rather, the feature of Bitcoin, and indeed virtual currencies in general, which both endear them to some and alienate them from others, is their independence from any third party intermediary. The distributed ledger technology, or blockchain, which is the really significant feature of bitcoin, obviates the need for banks, governments or any central authority. It is a truly peer-to-peer system. Every user who has a copy of the Bitcoin software on her computer thereby has a copy of the entire transactional history of Bitcoin: a record of every transaction ever made is therefore available to all users. The transactions which make up each ‘block’ in the ‘chain’ are made and verified across the network by member computers performing immensely difficult equations, in a race to be the one to come up with the correct answer. The computer that finishes first gets rewarded with bitcoins and at the same time, adds the new, verified block to the chain (once the correctness of the winning computer’s answer has been checked by its peers). The software is open source and anyone can download and modify it. Thus, the whole system is accessible to, and shared between, its users: not only is there no requirement for third party intervention, but there is no room for it. Governments across the world have had mixed reactions to this, of course, (although most have now seen their way to recognising bitcoins as taxable assets). The absence of a third party in the Bitcoin network is something of a double-edged sword. The lack of any state underwriting of a currency makes it, in the long run, potentially less stable than state-issued currency, and not as directly affected by economic policy. Within some states, this is an unappealing feature, but, in many others, it is its main attraction: Citizens of countries such as Argentina, whose governments have a near perfect track record of debasing their own currency and destroying the savings of their citizenry, have shown signs of preferring Bitcoin to their own state’s money.7

Initially, Bitcoin was less regulated than state-issued currencies, but there is no intrinsic necessity for this, and the regulation of it is increasing all the time.8 Historically, Bitcoin has been associated with criminal individuals, wanting to take advantage of its lack of unregulated status, as well as the pseudonymous nature of its transactions. (This is no reason in itself to abandon it as a promising economic medium: the advance of the internet was vastly accelerated by the commercial porn industry, as was the supremacy of VHS video over the technologically superior Betamax platform, confirming that virtue is by no means a pointer to commercial success.) The criminal underworld is not, however, the only community to have found in virtual currency something that it could not find elsewhere: Today, decentralized virtual currencies…deliver more benefits at a lower cost and with greater ease than conventional bank products… Bitcoin is helping to level the financial playing field by offering services to those individuals and businesses around the world unable to engage in financial transactions because of road blocks created by conventional bank products. Banks are excellent at keeping people away from financial services…Bitcoin has the potential to improve the quality of life for some of the world’s poorest people.9 It is this divorce between currency and state, however, which seems at the moment to be the most likely reason why virtual currencies would not fit within any existing category of “money”. As well as having to operate as a store of value, a medium of exchange and a unit of account, in order to have the legal status of money, according to Mann, that medium must also be: a. issued under the authority of the law in force within the State of issue; b. under the terms of that law, denominated by reference to a unit of account; and c. under the terms of that law, to serve as the universal means of exchange in the State of issue.10 The first of these is not only a characteristic which Bitcoin currently fails to exhibit, but is actually something which is anathemic to it. As such, Bitcoin is unlikely to adapt so as to fulfil such a criterion in future. The question arises, therefore, whether this, inter alia, should preclude its recognition as a valid means of payment in a private law context. Economists and governments are likely


to disagree with lawyers on this, since the biggest, and undoubted, difference conventional and virtual payments methods lies in the fact that the latter are privately produced and controlled and, as such, exist outside of state control.11 Nonetheless, the concerns of lawyers are specific and contextually defined, and this is certainly true of the private law in relation to payments. Charles Proctor, the current editor of Mann on the Legal Aspect of Money,12 says, in reference to such differing views: It is, of course, unsurprising that lawyers and economists should differ in their approaches to questions of this kind, for their areas of concern and objectives are also entirely different. The economist may be concerned with such ideas as monetary policy, exchange rate policy, and the supply and soundness of money within an economic area as a whole. Lawyers, on the other hand, tend to be more concerned with the protection of the purely private rights of contracting parties and the discharge of monetary obligations.13 And yet the economist’s perspective is inextricably linked with the concept of money as we know it. This is all but inevitable, and, for most purposes, unproblematic. Yet, there are areas of private law of increasingly commercial significance, for which the traditional concept of money is less than useful. This is not of course the first time that the common law’s definition of money has been challenged by social and technological change. In the past, the law has responded to the increased use of bank notes in the place of coins by expanding its definition of money to include them. When, some years later, it became apparent that there was a growing preference for bank money over both notes and coins, the law adapted once more. It is hardly likely that such technological and social developments will cease. In fact, given that the rate of such developments will probably increase,14 there is much to be said for liberating the expectations and practices of contracting parties from unnecessary definitional constraints. After all, contracting parties’ principal concern is for that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives

it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.15 This describes a medium of exchange, a feature of traditional money undisputed by either lawyers or economists. Or probably anyone else. As is well established, however, in order to fit the current technical definition of money, any medium must also exhibit two other features; it must be both a unit of account and a store of wealth. Virtual currencies fit the first criterion far more easily than they do the second two (as in fact do local UK currencies, such as the Bristol Pound and the Brixton Pound).16

... this divorce between currency and state ... seems at the moment to be the most likely reason why virtual currencies would not fit within any existing category of “money”.

Universal Means of Exchange Whilst the function of a medium of exchange is the very least that something must be in order to be considered any sort of currency, the traditional definition of money has a greater attachment to universality than the purposes of private law require.17 If both parties to a contract are willing to accept a given medium of exchange, either on a discrete or relational basis, private law has an interest in protecting their expectation of enforceability. Whilst currently, and by default, contracts made for goods to be exchanged for anything other than money are treated as barter rather than as sale, true contracts of barter differ significantly from transactions made for a means of exchange whose intrinsic quality does not immediately fulfil the needs of the parties. This distinction is important in delineating the boundaries of private law’s treatment of transactions because it imposes an objectivity that would otherwise be lacking. In other words, barter agreements are dependent on the coincidence of wants in a way that transactions using an independent medium of exchange are not. So, if A offers to give her car to B in exchange for a B’s bicycle and cycling gear, this is a transaction which depends for its worth on a particular subjective set of facts: perhaps A is moving to Oxford and B is moving to Birmingham, so that an bicycle will be more valuable to A than a car and vice versa. This is not analogous to an agreement whereby A agrees to transfer her car to B for £3000. This is because, in the former situation, the lack of fungibility of the asset offered in exchange means that there is no certain sum, independent of the parties’ particular and immediate wants, which the law can identify as forming the basis of the parties’ primary obligations. When parties incur a primary obligation to pay

15


converted; they are not perishable, nor dependent for their value either on being spent within a certain amount of time, or used in a particular way. Thus, transactions in which the property in goods passes in exchange for virtual currencies are far closer in legal terms to those made for media of exchange (sale) than they are to those of barter.

Unit of Account

a certain sum of money (or, historically, a quantity of fungibles), they thereby agree to produce something which transcends their particular and immediate requirements in both a temporal and substantive sense. Their ability to fulfil that obligation is not dependent upon the availability of specific things, which may be exhaustible, perishable and vulnerable to irreplaceable loss, but can instead be fulfilled by a measure of something of general availability. It seems fungibility is the touchstone of distinction here, which would also explain why there exists the possibility of parties agreeing to make what would otherwise be a barter into an agreement of reciprocal sales on the basis of a mutual set-off of prices, as in Alldridge v Johnson.18 The distinguishing characteristic here between a sale and a barter is the valuation of the consideration from each side;19 that is, not 5 oranges for 3 apples, but 5 oranges worth £2.50 for 3 apples worth £1.75, with, for instance, the difference to be paid in cash. By presenting the quid pro quo in this way, the parties have introduced fungibility into their obligations by giving value in currency as an alternative. Goode on Commercial Law defines fungibility as: assets of which one unit is, in terms of an obligation owed by one party to another, indistinguishable from any other unit, so that a duty to deliver one unit is considered performed by the delivery of an equivalent unit.20 Von Mises provides a further helpful explanation of why money is the ultimate fungible:

16 | BRIEF MAY 2017

A claim to money may be transferred over and over again in an indefinite number of indirect exchanges without the person by whom it is payable ever being called upon to settle it. This is obviously not true as far as other economic goods are concerned, for these are always destined for ultimate consumption.21 The presence of fungibility and the absence of consumability seem to identify what is significant and distinctive about media of exchange, as opposed to other assets used for exchange or barter. For the private law purposes of facilitating, securing and policing transactions, it is not obvious why the universality of that medium of exchange needs to form part of its definitional status. Virtual currencies such as Bitcoin are fungible for these purposes, at least as much as banknotes are. Whilst coins have no earmark at all, banknotes of course bear serial numbers, meaning that each one is strictly unique. The same goes for bitcoins, since they are all unique strings of digital code. Since, however, the serial number of a banknote or the content of a string of Bitcoin code makes no material difference to payers or payees, the former has always been treated as fungible for payment purposes. There is no obvious reason why a different approach should be taken to Bitcoin. Virtual currencies are also not consumables, but function in a way which corresponds with von Mises’ description above, since they are capable of fulfilling payment obligations amongst those willing to use them without ever needing to be settled or

It is fiendishly difficult to define precisely what a unit of account is. This may in part be due to the fact that it is an abstract concept, but one which is redundant without a quantitative value attached.22 In the UK, for example, sterling is a unit of account, providing as it does a “standard of value against which the value of commodities can be measured.”23 Since 1931, and the abandonment of the gold standard, sterling is also an independent measure of value, since it is not reducible to anything beyond itself (all the Bank of England now promises to pay the “bearer on demand” is banknotes of different denominations), but it is not clear that this independence is necessary to its status as money. What is clear is that claims to money, such as “notes issues by banks of doubtful credit or bills that are not yet mature”24 or “anything more than the simple embodiment of a unit of account”25 (such as a coin or a banknote) are not units of account in their own right in the way that the traditional definition of money requires. It is also the case that precious metals cannot function as units of account, since their value is subject to fluctuation and the vagaries of market demand,26 despite the fact that many might regard gold and silver as being at the very least intimately associated with the basic concept of money. Consequently, it would seem reasonable to conclude that virtual currencies do not function as units of account, since their value relative to sterling is subject to the same fluctuations.27 Nor are they the lowest common denominations available within the economy, since their value depends on their convertibility into national currencies. Bitcoin, for instance, is a step removed from the debt instrument referred to above; not only does the former have its own denomination, whereas the latter is denominated in sterling, but Bitcoin gives its bearer no claim right, postponed or present. At most, a holder of bitcoin has a liberty to present those assets to an exchange, and request sterling in return.28 Thus, Bitcoin represents a means of claiming (in the non-Hohfeldian sense) money, rather than being money in its own right.


Store of Value The viability of fiat money as a store of value depends entirely on the credit of the bank of issue. But virtual currencies such as Bitcoin are doubly-dependent; on their own market value, and then on the credit of banks which issue the currency for which they are exchanged. That said, there are several Bitcoin millionaires, so it is a medium which can store and accrue value, albeit with varying stability: The total value of all the bitcoin in circulation, as I write [April 2016], is £4.24 billion. That number changes, often with disconcerting rapidity, since the price of bitcoin is sharply variable. This puts outsiders off, since one of the most basic functions of money is to store value; bitcoin is a lousy store of value, as many observers have pointed out. Bitcoin, however, already does an OK job with one of money’s other main functions, as a medium of exchange. You can buy plane tickets, book hotel rooms, buy computer equipment, food and pretty much anything else with bitcoin, which is now accepted by tens of thousands of businesses. Indeed, since you can buy gift cards

with bitcoin, and use the cards at Amazon and other e-commerce sites, you can in effect buy anything you want using the cryptocurrency. There are even bitcoin cashpoint machines.29 The ability of any medium to function as a store of value, however, is ultimately relative. In Australia, Europe and the US, for example, Bitcoin is currently a relatively poor option. In Argentina, Zimbabwe or India, however, it has looked at least at times a far more appealing prospect than fiat currency.

A peculiarly private law concept of money Private law’s concern with payment rights and obligations is no better served by the conventional concept of money that it is by a more promiscuous idea of what can count as currency. That is not to suggest that the traditional institution of money has no legal relevance, but that private law should adopt its own derivative and yet independent concept; one which is more responsive to the technological and economic changes for which private commercial activity is so often responsible, and on which it always relies. As private law currently stands, there are a number of effects

which depend upon the classification of a transaction as having been made with “money”, and limited by that specific and conventional definition.30 Those effects are not, therefore, triggered by similar transactions made with virtual currencies, regardless of the expectations and intentions of the parties to any given contract. Given the swift and sustained rise in the use of these technologies, private law’s long-established approach looks dated. “Money”, as traditionally understood, has an essential economic and political function, but the time has come to question whether that function coincides with the interests of private law. Remote shopping, while entirely feasible, will flop.31 In considering virtual currencies, it is very common to encounter scepticism about the value of such a pursuit. Generally, this seems to be because such currencies are regarded as no more than a technological flash-in-the-pan. Less than a generation ago, similar sentiments were expressed about the internet. History has not been kind to those who have resisted the nearly inexorable force of Internet-connected technologies … By not moving, the banking

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industry continues to experience disintermediation, the disconnection of consumers from their banks for a variety of functions including payments.32 Vigna and Casey describe the general trajectory of thinking about virtual currencies as moving from Disdain through Scepticism, Curiosity, Crystallisation and Acceptance.33 Whilst it may well be that Bitcoin itself either fades into obscurity or crashes in a catastrophic way,34 the technology on which it is based is here to stay. Few can seriously believe that in another 20 years, people will still be passing each other pieces of paper and metal in exchange for goods and services. The financial industry certainly does not believe this, and most major banks have already committed serious funds to exploring Bitcoin’s underlying blockchain technology, with a view to integrating it into their payment protocols: The banks have looked into the possibility of better, faster, cheaper systems powered by blockchains, and have concluded that it’s possible for these to be a source of disruption and disintermediation of their business. Alternatively, they will be another profitable thing the banks own. They prefer the second option. A number of competing syndicates, funded and largely owned by the banks, are rushing to develop and patent proprietary, finance-friendly versions of blockchain technology. A consortium called R3Cev is backed by 42 financial companies and seeks to develop what would in effect be a private blockchain; Goldman Sachs, one of the firms behind R3Cev, has also filed a patent for a private blockchain-backed currency called

SETLCoin; Digital Assets Holdings, another blockchain company, is run by Blythe Masters, the English former J.P. Morgan executive who did more than anybody else to pioneer the credit default swap, the dazzlingly ingenious new financial instrument which was a huge success until it nearly destroyed the global financial system. This is just a tiny sample, and there are many other bitcoin-related initiatives.35 The same technology holds much promise for sectors with particular transactional challenges, such as corporate finance and international sales: the blockchain, which is essentially a distributed, as opposed to a central, ledger, may well provide answers to, for instance, the problems generated by the intermediation of securities36 and the negotiability of electronic documents. In any event, there is a clear need for private law theory and practice to accommodate virtual currencies. On the basis of its current categories and definitions, that will not be easy. NOTES: 1.

2.

The phenomenon which must occur in order for an exchange to be desirable when the medium of exchange is not fungible: if A wants B’s apples, she must wait until she has something B wants to exchange for those apples. This clearly detracts from the efficacy and efficiency of transactions. Fungible media dispense with the problem. D Fox, Property Rights in Money (OUP, Oxford, 2008), 1.137.

3.

D Schatt, Virtual Banking (2014, Wiley), 149.

4.

ibid., (Schatt) 153. “There were some 12.6 million bitcoins in existence in April 2014.”

5.

[2007] UKHL 21. See also Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281. Although, for a far more encouraging approach, albeit not absolutely analogous, see Dixon v. The Queen [2015] NZSC 147 at [51] for the assertion that digital files (in this case photographs) can count as property.

6.

Goode, fn 2, 489.

7.

J Lanchester, “When Bitcoin Grows Up” London Review of Books, April 2016 Vol 38, no 8, 12.

8.

P. Carl Mullan, The Digital Currency Challenge

(Palgrave, New York, 2014), 131. 9.

ibid., 88.

10.

C Proctor, Mann on the Legal Aspect of Money (7th edn, OUP, Oxford, 2012) at 1.17.

11.

Although, even here, the perceived gulf between the conventional and the novel is not as big as would first appear; bank money is technically also produced and controlled by private entities (banks), albeit entities which are to some extent regulated by the State.

12.

fn 13.

13.

ibid., 1.08.

14.

According to Moore’s law, the processing power of which newly–produced computer hardware is capable doubles every two years. Gordon Moore made his prediction in 1970, and it has turned out to be accurate, although it is generally recognised within the industry that the rate of increase in power is now faster. Inevitably, such improvements in hardware performance beget corresponding software developments. The scale of the algorithmic calculations on which Bitcoin is based, for instance, would simply not have been feasible a decade before it was created.

15.

Moss v Hancock [1899] 2 QB 111, 116.

16.

Which are issued, and only accepted by merchants within, those particular cities. The idea is to encourage people to spend their money with local businesses.

17.

Mann, fn 13, 1.52.

18.

(1857) 7 E&B 885, 119 ER 1476.

19.

Benjamin, fn 4, 1-037.

20.

Goode, fn 2, 487.

21.

L von Mises, fn 1, Chapter 3, section 1.

22.

Mann, fn 13, 2.38.

23.

ibid, 1.49.

24.

L von Mises, fn 1, Chapter 3, section 1.

25.

Mann, fn 13, 1.51.

26.

ibid, 1.51.

27.

Although this is would seem to result as much from their current status within national economies, as from any of their own intrinsic qualities.

28.

Or, of course, to present them to any party and offer them in return for goods or services.

29.

Lanchester, fn 10, 11. I have left in Lanchester’s lack of capitalisation, although, strictly, “Bitcoin” refers to the generic currency, whilst “bitcoins” are the actual tokens themselves.

30.

Such as the classification of a contract as one of sale for the purposes of Sale of Good legislation, the corresponding availability of the primary remedy of debt for the disappointed seller, and the applicability of the bona fide purchaser for value defence.

31.

Time Magazine, 1966.

32.

Schatt, fn 6, 174.

33.

P. Vigna and M. Casey, Cryptocurrency, (Bodley Head, London, 2015), 11.

34.

Although, at the time of writing, its value has been in the ascendant for a number of months.

35.

Lanchester, fn 10, text to n 7.

36.

E Micheler, “Custody chains and asset values: why crypto-securities are worth contemplating” (2015) Cambridge Law Journal 505, 532.

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Class Actions Keynote address at Law Council of Australia Forum Thursday, 13 October 2016

The Hon James Allsop AO Chief Justice, Federal Court of Australia

Few, if any, in this room need, without good reason, to be reminded of the history of class actions in Australia. Part IVA of the Federal Court of Australia Act 1976 was introduced after, and upon the recommendation of, the Australian Law Reform Commission Report No 46 on Grouped Proceedings in the Federal Court tabled in Parliament in December 1988. The history is clearly and concisely stated by the Hon Justice Bernard Murphy in a speech he gave in 2013.1 Broadly speaking, that legislation has been copied by New South Wales and Victoria, with Western Australia and Queensland likely to follow. The Commonwealth Attorney-General of the day (the Hon Michael Duffy) identified a number of advantages of the new representative procedure in his second reading speech: enhanced access to justice, reduction in the costs of proceedings and the promotion of efficiency in the use of court resources. The Attorney articulated the enhanced access to justice in two ways: first, the provision of a real remedy for people with small claims whose number may be such as to make the total amount at issue significant; and secondly, to deal efficiently with similar individual claims that are large enough to justify individual actions. The Attorney was articulating matters of considerable social utility. Part IVA built on and reformed existing representative proceeding rules dating back to 19th century procedures that had largely failed to provide the effective platform for achieving the aims identified by the Attorney. The new Part was articulated as part of the government’s equity and access policies in its social justice programme. It was not expected, the Attorney said, that the new regime would have a significant financial impact; and he said that a small number of additional cases may be brought. The legislation was not bipartisan. Its proposal had already provoked vigorous debate. The legislation was denounced

by the shadow Attorney (the Hon Peter Costello) as “bad legislation”. Four principal flaws were identified: first, it was an attack on the traditional method of exercise of legal rights; secondly, it would foster Australia as a litigious society by encouraging the proliferation of litigation; thirdly, it would change the nature of legal practice by the creation of an entrepreneurial class of lawyer promoting proceedings; and fourthly, it was a misdirected over-reaction to the problem of the cost of litigation. I do not propose to analyse who made the better predictions or better analysis; though it might now be thought atavistic to campaign for a reversion to the pre1988 position. More importantly, I think it is a false dichotomy to be seeking to choose between the two views of Duffy and Costello as if their views were the universe of available views. It is worth reflecting, at this point, on what courts do, and what litigation in court is, or should be, before commenting on class actions as we see them today. Courts are a branch of government. They execute that role in a functional way by providing a form of litigation service. But service delivery is an inadequate and incomplete description. One responsibility of the courts as a branch of government is to ensure, through their procedures and approaches to the litigation brought before them, that the scarce and valuable public resources that Parliament and the Executive devote to them are employed in a socially useful way. This is an important part of maintaining public confidence in the administration of justice. Litigation is a costly, stressful, but necessary, evil. It is necessary because it resolves disputes between parties in a civil fashion; it replaces the gun and the gang. It is an “evil” because it pits people against each other in a potentially destructive way. The strain and stress of litigation should never be underestimated. I used this expression in 2001. I sought in a small and otherwise inconsequential case (except to those who really count – the parties) to say

something about these aspects of litigation. I have had the experience in practice, as some of you probably have had as well, of seeing people in litigation, sometimes witnesses, sometimes defendants, sometimes plaintiffs, ground down, made ill and, at least in one case, killed by the strain of litigation. It caused me to say the following: Litigation is not a game. It is a costly and stressful, though necessary, evil. To paraphrase Roscoe Pound from ‘The Causes of Popular Dissatisfaction with the Administration of Justice’ (1906) 29 ABA Rep 395, 404-406, the ‘sporting theory of justice’ and any behavioural manifestation of it should be seen as a survival, or better, a relic, of the days when a lawsuit was a fight between two clans.2 I am not, and was not in 2001, a mistyeyed dreamer about litigants and their lawyers being generous and nice to each other. Some litigation is necessarily for large stakes and most litigation is productive of large strains. Though there is never call to abandon civility. And the stressful character of the undertaking is why some central characteristics of what is being done and how people should act are so important. One central requirement is the social utility of the exercise. Another is the centrality of the litigants’ interests reflected in the fiduciary responsibilities of lawyers. Recognising the need for social utility and apparent social utility in the employment of the public resources of the court, and acting conformably with such recognition, are obligations of the court, and of the profession. They are requirements of both because the administration of justice is a partnership between the courts and the profession. Neither institution (and that is how both should be viewed) can bring about the necessary change or proper state of functioning of the system without the other. The hopes (of Michael Duffy) and fears 19


(of Peter Costello) of 1988 should be reflected upon through this lens of the need for social utility of what we do as the custodians of the administration of justice, especially when examining the types of cases that are being litigated and the manner in which they are coming forward and being litigated.

GFC instrument claims, shareholder class action claims based on market disclosure or lack thereof, strata building claims, discrimination and disability claims, consumer claims against unconscionable and predatory conduct and conduct contrary to credit codes, and product liability claims.

If one recalls the vigour with which the two cases were put leading up to the legislation in 1988, it is well to reflect that the apparent social utility of the class action regime in operation must be clearly demonstrable to deny the ability of anyone to mispresent it for the advancement of his or her own interests. Public debate is often carried on without balance and fairness, and with selfish and partisan motivations. It should not be assumed that criticism of the class action regime in operation will be fair or unbiased, though that is not to say that some criticism cannot legitimately be levelled at the system in its current operation. To paraphrase Abraham Lincoln in one of his great speeches in 1854, opposing the views of Senator Douglas in Peoria, Illinois over the proposed Kansas-Nebraska Act that was to repeal the Missouri Compromise of 1820, threaten slavery in the western territories and pave the way for the bloodletting of the Civil War, the case for social utility of the class action regime in operation has to be sufficiently demonstrable so that no honest person can misunderstand it, and no dishonest one successfully misrepresent it.3

Of these active cases, 32 were filed between 2011 and 2014 (4 in each of 2011 and 2012; and 10 and 14 filed in 2013 and 2014, respectively). Two-thirds of these have been settled at mediation, are currently subject to settlement approval proceedings or are listed to be heard or mediated in late 2016 or 2017. Of the remaining third, 6 of these cases are currently subject to interlocutory proceedings or are awaiting the outcome of other court proceedings. From the 2015 and 2016 filings there are currently, respectively, 17 and 12 active matters. Over eighty-percent of these have been listed for hearing in 2017, are being case managed or are awaiting a first return date. Of the remaining 5 matters, 4 are currently subject to interlocutory proceedings or are awaiting the outcome of other court proceedings.

The valuable empirical research that has been, and continues to be, undertaken by Professor Morabito and others as to the number and nature of the class action litigation brought since 1992 does perhaps falsify the notion expressed by Michael Duffy that there would be few additional cases. There has not, however, been an avalanche. From 1992 to 2009 there were 281 in the Federal Court and the Supreme Court of Victoria. The cases that have historically been brought reflect a range of commercial and non-commercial cases: personal injury through food, water or product contamination, or through defective products; prior to legislative amendment, claims under the Migration Act; disaster tort claims; environmental claims; human rights claims; trade union claims; consumer claims for contravention of protective laws; claims by shareholders and investors; and anti-cartel claims. An examination of the current active caseload of class actions in the Federal Court reveals over 60 cases. They range from and include product liability claims, to investor class action claims, including

20 | BRIEF MAY 2017

The variety of subject matters and the number of cases are not such as to indicate an abuse of the class action vehicle into socially useless litigation. Nevertheless, it is critical to ensure that how these cases come forward and how they are being run satisfies the requirement of social utility. This is most particularly so in an environment in which commercially driven litigation funders (domestic and international) now provide significant financial support to the propounding of claims. (Something in the order of 50% of class action claims are funded in this way.) It is worth stating at this point that the introduction of a degree of central management of the Court’s workload (not just its class action workload) is facilitating a much closer scrutiny and analysis of the throughput of the cases in the Court. The digitally based information system of the Court now allows comprehensive and timely analysis of individual cases, and of the Court’s case load overall. All the present evidence in the Court is that, overall, the timeliness of disposition in the Court has improved and will continue to improve by the careful allocation of matters to judges in relevant practice areas with an informed eye to workload pressures and availability, and the continuous scrutiny of workload, individually and generally. The Court recognises that case management and efficient disposition is a two-way street. It is not only about

telling the profession what to do or what the Court expects of it; but also what the Court expects of itself and what the profession should expect of the Court. There are a number of areas where questions of good or bad practice in class actions have the capacity to affect perceptions of social utility of such cases. Some may, in due course, require legislative intervention. Broadly, they are the kinds of considerations adverted to by Michael Duffy and Peter Costello in 1988. They can be seen to include the following: a. entrepreneurial promotion of weak or speculative cases; b. the proper degree of articulation of claims in circumstances of information asymmetry, including whether discovery and s4 of the Australian Consumer Law are being used as substitutes for preliminary discovery; c. the supervision of attendant commercial considerations of fees, commissions, and legal costs in the context of the primacy of the interests of the litigants and class members; d. the fair sharing of risk amongst potential “beneficiaries” (funders, lawyers, class members) for running this kind of litigation; e. the appropriate approach to defence of such litigation and the unnecessary tactical raising of issues in “trench warfare”; f.

the proper place of procedural attack on articulated claims and the role of s31A of the Federal Court of Australia Act;

g. the proper identification of common issues and, as a related question, the place of cross-claims and how they are managed; h. offers of compromise and how they can be encouraged and made more useful; i.

the management and co-ordination of concurrent or competing claims.

I do not propose to examine these issues today. I do not say that it is an exhaustive list of the areas where the perception of social utility may be affected. Nor should their placement in an articulated list of issues be taken as a predilection of an applicant or respondent sympathetic focus. Just as there should be concern for a respondent (or respondents as a class) placed in a position of being required to discover large numbers of documents and divert hugely valuable human resources to create statements or evidence to rebut a barely articulated claim of marginal


strength, so there should be concern for the legitimate claims of members of a class which are being attacked by the implacable taking of every point, however unmeritorious, to beat away, or exhaust the resources of, the claimants. At least one answer (but, necessarily, only a partial answer) to these kinds of problems lies in strong and effective case management and the proper functioning of the profession’s and the clients’ responsibilities to the court. There is no class action exception to the binding nature of ss37M and 37N of the Federal Court of Australia Act 1976 that require parties to civil litigation to conduct themselves in a way that is consistent with facilitating the just resolution of the dispute as quickly, inexpensively and efficiently as possible; and that require lawyers to assist their parties to comply with that duty. These considerations explain why the court has brought in new practice notes, relevantly the Central Practice Note and the Class Action Practice Note. These practice notes reveal a philosophy of case management that is based on both the court and the profession recognising and fulfilling mutually important responsibilities in conducting litigation as a form of problem solving, rather than fee generation. It is crucial that this ethos pervade the conduct of litigation, including class action litigation. It does not mean that a half-baked or structurally flawed case should not be attacked, vigorously, using s31A or any other procedural application; but likewise, it does not mean that litigation will be allowed to be conducted in an implacably intransigent manner with repeated and marginally useful satellite applications. The practice notes espouse an aim of efficient and practical litigation informed by the terms of ss37M and 37N. The need for social utility of the class action system will be assessed by the fairness

and efficiency (to both sides) of the process of case management; the reality, and the perception of reality, of the primary consideration of the interests of litigants (including class members), not funders and lawyers; and the legitimacy of the consequences of the operation of the system, whether assessed through access to justice, the vindication of just claims, the encouragement of proper market behaviour by putative wrongdoers, and the elimination, without undue delay or expense, of unworthy claims. Central to the successful working of the system and the reality and perception of the social utility of class actions is the recognition of what the process is or should be: the vindication of just claims, and their resolution through a process characterised by parties (applicants and respondents) that recognise the critical features of ss37M and 37N and a profession that not only recognises its responsibility in those provisions, but also the strict fiduciary capacity in which it works, such that every decision concerning the litigation and its running can be seen as taken in the interests of the litigants. How these considerations manifest themselves in the complexities of hardfought day-to-day litigation is not always straight-forward. The new practice notes are an attempt to express and epitomise the relationship between the Court and the participants in class actions and to supervise, and provide the framework for, a practical and fair system that will be seen to be socially useful. The Court has attempted in the class action practice note to develop a framework in which the practical, specialised skills of class action registrars and judges can be deployed to help manage what are often complex and difficult claims and in which the potential for conflicts of duty and interests, and duty and duty, can be effectively and fairly managed.

Litigation funding, as an avowedly commercial endeavour, has brought challenges, and also disciplines, to the system. The disclosure and provision of those agreements and of costs agreements in parts 5 and 6 of the practice note are an attempt to ensure that the commercial and professional interests of funders and lawyers can be assessed in the fair operation of the system. Whilst I am not blind to the commercial considerations in the funding and running of mass litigation, ultimately such litigation has to be fair, practical, just and, as far as possible, cost-efficient. If it fails one or more of these tests of social utility, the Court and the profession will pay a price of the legitimate criticism of the public. The Court is seeking to ensure that, in partnership with the profession, the social utility of the class action system can be vindicated. It is important that the profession (as it no doubt does) recognises its public role in this partnership. If this provokes a wry smile in you, or provokes a response in you that such sentiments are unrealistic, then you may conclude that there is already a serious problem. If commercial interests and commercial returns (as opposed to professional responsibilities) are seen to drive a substantial section of this work then the cost of defending claims and the public cost of providing the infrastructure for them will come to be seen as an impost on Australian business and public infrastructure that will not be seen as acceptable. NOTES: 1.

Justice B Murphy “The Operation of the Australian Class Action Regime” (Speech presented to Bar Association of Queensland, 8 March 2013) http://www.fedcourt.gov. au/digital-law-library/judges-speeches/justice-murphy/ murphy-j-20130309.

2.

White v Overland [2001] FCA 1333 at [4].

3.

Abraham Lincoln Peoria Speech (October 16, 1854) (text available: www.nps.gov/liho/learn/historyculture/ peoriaspeech.htm; ME Neely The Abraham Lincoln Encyclopedia (1982, New York: Da Capo Press, Inc)).

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21st century justice The UK’s herculean efforts to modernise its court system This article first appeared in the February 2017 issue of LawTalk

By Nikki Pender “We are but a slender moment away from the time when you will never again have to go to a courthouse, but instead dressed, perhaps, in a fine silk dressing gown or your rabbit-eared onesie … you will open your laptop from your kitchen table and give your evidence via Skype or whatever.” … so Lord Justice Fulford told a gathering of expert witnesses during his keynote speech at the 2016 Bond Solon Expert Witness conference – his tongue only ever-so-slightly in cheek. In November 2015, the British Government announced that it would invest £738 million to modernise courts and tribunals and bring them into the digital age. As the senior presiding judge for England and Wales, Fulford LJ has been overseeing this transformation. Since then, judges have been connected to a bespoke cloud-based package called eJudiciary, which manages emails, calendars, judicial training, library, documents etc. They have also received new, lightweight, touchscreen laptops. In time, the entire case management system will be on a common platform in the cloud. Soon, every judge will be able to access any record at anytime from anywhere. Expert witnesses too will be able to access all relevant case materials and lodge their own reports via an online portal.

Pilot programme Last year, a pilot programme was trialled in the criminal courts. In just ten months, the Crown Court judiciary moved completely away from paper to what Fulford LJ called a “simply brilliant” digital case system. Every Judge works with an electronic bundle of documents, which is grouped into folders and equipped with user-friendly annotation capabilities. Counsel can also access the bundle and all parties are able to communicate with one another from within this system. In court, the judges operate iPads. They can record their own notes online and some send out complex orders from the bench. Fancy cloud-based algorithms even enable them to book their own sittings.

Have some learned laggards had to be dragged kicking and screaming into this new era? Apparently not. Said His Lordship, “the remarkable phenomenon is that quite elderly, technologicallychallenged judges who vowed they would never touch a keyboard in court, are now (in under a year) working entirely digitally with skill and enthusiasm”. The pilot being deemed a success, there will be an incremental roll-out of civil, family and tribunals over the next four years.

Future changes Fulford LJ sees these technological advances leading in time to more fundamental changes to court practice. While decisions affecting substantive rights will still be made by a “human” judge, there is likely to be more automation of everything else. Already, the criminal courts are managing a significant amount of pre-trial work online or via telephone; social security and child support tribunals will shortly be conducting “virtual hearings”; and the “Divorce Project” is to provide a full online application service to fast track separations or divorces. Fulford LJ himself is determined to maximise the use of video-links. He also expects that court appearances will become reserved for only those cases, or stages in a case, which require this form of interaction. The UK Crown Court already allows the evidence of children and other

vulnerable witnesses to be pre-recorded and replayed in court. This practice is now being extended into other areas. Continuously improving video quality means that the image of those speaking is not too dissimilar from seeing a witness in person.

“Virtual” hearings As the rationale for “live” evidence diminishes, the concept of “virtual” hearings will become more attractive. Lord Justice Fulford believes that it will not be long before all expert evidence will also be pre-recorded in advance. Perhaps even with the witness at a kitchen table, dressed in a rabbit-eared onesie. His Lordship acknowledged that the transformation will create its own challenges, including the risk of marginalising those who lack the ability to cope with a digital system. He reinforced that the judiciary remained “fiercely committed” to open justice, and this meant ensuring that everyone had access to telephone, video and online hearings. Two years ago, the New Zealand Ministry of Justice shelved plans for an e-Bench digital case management system. No doubt it will be watching with interest the success of the UK transformation. How soon before we see similar developments down under? Nikki Pender is a litigation lawyer and also a director of Australasian expert witness training provider, Legal Empowerment Pty Ltd. 23


Mediation Update for Practitioners Part 1

By Michael Hollingdale* Abstract The vast majority of court actions now settle without going to trial. This is due in no small measure to mediation being almost invariably a mandatory pre-trial step. While some commercial contracts contemplate mediation or some other form of ADR as a mandatory step before commencement of proceedings, many disputes escalate to litigation or arbitration without parties having attempted to resolve them through ADR. As lawyers, we more than most professional advisers, appreciate how effective and timely mediation can be for dispute resolution. Yet we as a profession are open to justified criticism that all too often we encourage or tolerate deferral of mediation of commercial disputes until well after proceedings have commenced. Some seek to defer mediation until after close of pleadings or even discovery. Having burnt costs and taken firm positions while litigation is allowed to drag on before even meeting the other party to hear the opposing views, the prospect of reaching a more satisfactory and less costly outcome is compromised. While courts actively promote early mediation through case management procedures, pre action mediation ought to be the norm in most commercial disputes. Most business people are content to have their commercial disputes resolved without a public hearing and judgment. Very few are willing to pay for the benefit of or take the risk of establishing a precedent. As a profession we owe a duty to our clients, and indirectly the community, to do more to promote early dispute resolution. This two part article provides a refresher on the practice of mediation in Western Australia, a discussion on recent developments with dispute resolution institutions and a review of recent mediation case law. Part 1 covers current mediation practice trends in: •

WA courts, including mediations presided over by judges;

the Federal Court;

ADR institutions, both domestic and

24 | BRIEF MAY 2017

Michael Hollingdale

international. Part 2 will cover recent Australian and English cases, including a number that deal with adverse costs orders arising from unreasonable conduct associated with a mediation.

Introduction In January 2010 Jackson LJ's Final Report into the Review of Civil Litigation Costs (UK) was published. Among other things, Jackson LJ sought to re-set the direction and focus of ADR. He stated: ADR, particularly mediation, has a vital role to play in reducing the costs of civil disputes, by fomenting the early settlement of cases. ADR is, however, under-used. Its potential benefits are not as widely known as they should be.1 The aim is that, in general, no case should come to trial without the parties having undertaken some form of alternative dispute resolution to settle the case.2 Similarly the Supreme Court of Western Australia seeks to foment the early settlement of cases during the course of proceedings: Active mediation is a major function of the Supreme Court. The Court is responding to the demand for mediation by registrars as a means to achieving a just and sensible result for litigants.3 In my view the legal profession in this State can do more to foment a culture of pre action settlement of disputes, including through mediation, rather than waiting for mediation to be court directed.

Conciliation-mediation distinction Nomenclature is important. Confusion can arise when moving between arbitration, conciliation and mediation in different spheres of commerce and in different legal systems. NADRAC4, a former Australian government advisory body on ADR, has provided these definitions5: Mediation is a process in which

the parties to a dispute, with the assistance of a dispute resolution practitioner (the mediator), identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted. Mediation may be undertaken voluntarily, under a court order, or subject to an existing contractual agreement. Conciliation is a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the conciliator), identify the issues in dispute, develop options, consider alternatives and endeavour to reach an agreement. The conciliator may have an advisory role on the content of the dispute or the outcome of its resolution, but not a determinative role. The conciliator may advise on or determine the process of conciliation whereby resolution is attempted, and may make suggestions for terms of settlement, give expert advice on likely settlement terms, and may actively encourage the participants to reach an agreement. In NADRAC’s view, ‘mediation’ is a purely facilitative process, while ‘conciliation’ may comprise a mixture of different processes including facilitation and advice. NADRAC considered that the term ‘mediation’ should be used where the practitioner has no advisory role on the content of the dispute and the term ‘conciliation’ where the practitioner does have such a role. NADRAC noted, however, that both ‘mediation’ and ‘conciliation’ are now used to refer to a wide range of processes and that an overlap in their usage is inevitable.6 The material difference between the two processes is that unlike a mediator (at least one who adopts the traditional facilitative role), a conciliator is expected to provide expert advice and legal information in some circumstances. As will be discussed later, evaluative


mediators often do this as well when parties request or allow them to do so. Thus, common elements of mediation and conciliation may be summarised as: •

listening to and being heard by each other;

working out what the disputed issues are;

working out what everyone agrees on (common ground);

working out what is important to each person;

aiming to reach a workable agreement;

developing options to resolve each issue;

developing options that take into account each person’s needs and desires; and

discussing what parties could do as a way of assessing options and exploring what might lead to an outcome that everyone can live with.

As one leading commentator has observed, “conciliation is essentially an applied psychological tactic aimed at correcting perceptions, reducing unreasonable fears, and improving communication to the extent that permits reasonable discussion to take place and, in fact, makes rational bargaining possible”7. Another described it as “the psychological component of mediation in which the third party attempts to create an atmosphere of trust and cooperation that is conducive to negotiation.”8 Some practitioners will be more familiar with this conciliatory role that a third party adviser plays when assisting in a dispute resolution.9

NSW Law Reform Commission CP 18 Dispute resolution: Model provisions The relevance of the distinction between the two processes comes into sharp

focus when considering the Consultation Paper 18 issued by the NSW Law Reform Commission in December 2016.10 The NSW LRC's terms of reference for this paper included11: … review the statutory provisions that provide for mediation and other forms of alternative dispute resolution with a view to updating those provisions and, where appropriate, recommending a consistent model or models for dispute resolution in statutory contexts, including court ordered mediation and alternative dispute resolution. In CP 18 the NSW LRC has proposed model mediation provisions including a model definition of Mediation: “Mediation” means a process in which the parties to a dispute, with the assistance of a third party dispute resolution practitioner (the mediator), come together in an endeavour to resolve their dispute. It includes a process that fits this description even when such a process is described as “conciliation” or “neutral evaluation”. As can be seen from this proposed definition, the LRC contemplates that the model provisions “would apply equally to the related processes known as neutral evaluation and conciliation”.12 The LRC seeks to justify this expanded definition by stating mediation is similar to neutral evaluation13. The LRC goes further and recommends all references to “conciliation” in existing legislation should be removed and replaced, where appropriate, with “mediation”. Mediation is a facilitation process that takes into consideration a range of matters, including risks, but also relationships and commercial considerations. A neutral evaluation is not a facilitation process, but an evaluative process that requires the neutral to form an opinion as to the merits. However, as a process, conciliation and mediation may be considered more alike than

neutral evaluation. The conciliator plays a relatively direct role in assisting parties to reach a satisfactory agreement. The conciliator, not the parties, will often develop and propose the terms of settlement. In this way parties seek guidance from the conciliator who is usually seen as an authority figure. Rather than guide the parties, a mediator will facilitate the process which is designed to enable them to take a more active role and to find their own suitable and mutually acceptable solution14. Expressly including neutral evaluation as part of the mediator's role in the definition of mediation would have the effect of at least endorsing the practice. It may even normalise it. Some may consider that would be a retrograde step.15 Following receipt of public submissions it will be interesting to see whether the LRC persists with the proposed merger of these distinct processes into one.

Mediation under direction of the Supreme Court in Western Australia In some Australian jurisdictions court rules make mediation a mandatory step before a matter is listed for trial, irrespective of any contractual dispute resolution regime the parties may have agreed. This is effectively the position in Western Australia under the Supreme Court Rules and Consolidated Practice Directions. In some overseas jurisdictions, such as Singapore and England, litigants are merely encouraged to mediate, however the judiciary do have limited powers to take into account a refusal to mediate when making a costs order.16 The Supreme Court of Western Australia practice First a reminder on the current practice of mediations conducted under the Supreme Court Act, the Rules and The Supreme Court Mediation Programme under the Court's Practice Directions.

25


The Court's practice and procedure has been developed to ensure that “no case is….listed for trial without the mediation process having first been exhausted.”17 The Supreme Court Act The Supreme Court Act defines mediation under direction as "mediation carried out by a mediator under a direction of the Court under and subject to the rules of court".18 Privilege and admissibility are dealt with in s71: 1. Subject to subsection (3), evidence of — a. anything said or done; or b. any communication, whether oral or in writing; or

with which a disclosure has been made under section 72(2)(c). 4. A mediator cannot be compelled to give evidence of anything referred to in subsection (1) or (2) or to produce a document or a copy of a document referred to in subsection (2) except — a. i n proceedings referred to in subsection (3)(d); or b. in proceedings relating to a costs application where there is a dispute as to a fact stated or a conclusion reached in a mediator’s report prepared under the rules of court on the failure of a party to cooperate in the mediation and the evidence or document is relevant to that issue.

c. any admission made,

Confidentiality is dealt with in s72:

i n the course of or for the purposes of an attempt to settle a proceeding by mediation under direction is to be taken to be in confidence and is not admissible in any proceedings before any court, tribunal or body.

1. Subject to subsection (2), a mediator must not disclose any information obtained in the course of or for the purpose of carrying out mediation under direction.

2. Subject to subsection (3) — a. any document prepared in the course of or for the purposes of an attempt to settle a proceeding by mediation under direction; or b. any copy of such a document; or c. evidence of any such document,

is to be taken to be subject to a duty

of confidence and is not admissible in any proceedings before any court, tribunal or body. 3. Subsections (1) and (2) do not affect the admissibility of any evidence or document in proceedings if — a. the parties to the mediation consent to the admission of the evidence or document in the proceedings; or b. there is a dispute in the proceedings as to whether or not the parties to the mediation entered into a binding agreement settling all or any of their differences and the evidence or document is relevant to that issue; or c. the proceedings relate to a costs application and, under the rules of court, the evidence or document is admissible for the purposes of determining any question of costs; or d. the proceedings relate to any act or omission in connection 26 | BRIEF MAY 2017

2. Subsection (1) does not apply if — a. the disclosure is made for the purpose of reporting under the rules of court on any failure of a party to cooperate in a mediation;… Consolidated Practice Direction PD4 The Consolidated Practice Directions include PD4 on mediation, and in particular: PD4.1.2.Case management – the Commercial and Managed Cases (CMC) List 28: Mediation by a Mediation Registrar is a holistic part of the management process, and, in general, no case is to be listed for trial without the mediation process having first been exhausted. PD4.2.1 The Supreme Court Mediation Programme Introduction 1. Mediation is an integral part of the case management process and, in general, no case will be listed for trial without the mediation process having first been exhausted. Mediation Registrars 2. The Chief Justice approves mediators to conduct mediations in civil proceedings in the Supreme Court pursuant to pt IV of the Supreme Court Act 1935 (WA) (SCA) and O 4A r

1 of the Rules of the Supreme Court 1971 (WA). The list of approved mediators is kept by the Chief Justice, and includes all registrars of the Court and a number of judges. There are no private mediators currently approved by the Chief Justice. The current practice is that mediations of cases in the Supreme Court using a private mediator are conducted outside the regime set out in SCA pt VI.19. 4. The Court may direct that a mediation be conducted by a judge of the Court if warranted by the particular aspects of the case. 5. The Court may also direct that a mediation conference be conducted by a private mediator. However pursuant to O 4A r 2(5) of the Rules, it cannot, without the consent of the parties, direct that a conference take place where a party would become liable to remunerate a mediator. The proposed mediator would need to be approved by the Chief Justice. Timing 8. Practitioners should discuss mediation with their client at the commencement of the case and consider whether it should be mediated early. Practitioners will be asked about the suitability of a case for mediation on a regular basis and must be instructed on the point. They must be able to justify a refusal to go to mediation, particularly where the matter is yet to be mediated or, in a case that has previously been mediated, the other side is willing to return to mediation. Practitioners should bear in mind that, in general, no case will be listed for trial without the mediation process having first been exhausted. Costs – failure to cooperate 35. Each party's costs of and incidental to a mediation are the party's costs in the cause. A party to a mediation may, however, apply for the costs of a mediation if they have been incurred unnecessarily by the conduct of another party – see O 4A r 8(4)(c). Such an application should be made to the case manager. The mediator, if a judicial officer, will not usually


make any costs order in a mediation. 36. The mediator may report to the Court on any failure by a party to cooperate in a mediation – see O 4A r 8(5)(b) and (6). Judicial mediation and settlement conferences Despite the debate continuing in other Australian jurisdictions over whether sitting judges ought to mediate, this practice has developed in Western Australia as it has in some overseas jurisdictions. I have found no statistics published by the Supreme Court of Western Australia concerning the number of mediations conducted by judges. Anecdotally they are directed relatively infrequently. Nicholas Hasluck, formerly a Justice of the Supreme Court, was one of a few judges who have conducted mediations under the Supreme Court Mediation Programme. For a useful discussion on this topic I commend his essay: Should Judges be Mediators? in his collection Legal Limits20. In my research I have found little guidance on how judges practise mediations in the Supreme Court of Western Australia. By way of contrast, in New Zealand its High Court rules empower judges to conduct settlement conferences. In 2012 the court published guidelines to assist those participating in a judicial settlement conference21. These conferences are an alternative to private mediation, although some misconstrue the process as a form of mediation. Both the Rules and the Guidelines make it clear that settlement conferences are not intended to be a form of mediation. Rule 7.79 (5) provides: A Judge may, with the consent of the parties, make an order at any time directing the parties to attempt to settle their dispute by the form of mediation or other alternative dispute resolution (to be specified in the order) agreed to by the parties. The Guidelines state: The rule contemplates judicial involvement in the settlement process at two stages. The first occurs in the case management conference process and in the lead up to trial. The second occurs during the trial, but is reserved for cases where the parties consent. The rule contemplates, as well, reference to mediation. Where the question of settlement is raised in the course of case management the

practice is usually to inquire of the parties as to whether they wish to attend a private mediation. If they do not, consideration will be given to allocating a judicial settlement conference.22 In a judicial settlement conference in the High Court, the judge will neither express a view in the nature of an interim judgment or ruling on the case, nor be involved in caucusing. However, because the process is designed to enable the parties to self-evaluate their position, the parties can expect that the issues will be examined and each will have the opportunity of testing the other side’s position on an issue. The Guidelines includes this description of the purpose behind Rule 7.79 that deals with judicial settlement conferences23: 2.2 No single mediation technique will be a complete answer. In the majority of cases in the High Court what the parties will require is assistance in evaluating the merits of the dispute. What is of particular importance is evaluation by the parties, not evaluation by the judge. The judge does not provide an evaluation or an opinion of the successful outcome of the litigation. The judge may, however, invite the parties to consider important aspects of the case so that their evaluation is comprehensive. It is often helpful for the judge to ask the question: “Have you considered …”. In this way the parties will identify the strength and weakness of their position on the important issues. That evaluation can then lead them to what is an appropriate conclusion to the dispute.24 The Guidelines contain the Standard Settlement Conference Directions25. These include a series of questions that the parties will be expected to answer: 1. What are the issues in this litigation? 2. Which one (or more) of these issues is most significantly affecting your inability to settle? 3. Why? 4. Have you and the other party engaged in settlement negotiations? Please describe the nature of those negotiations. 5. What offers of settlement have been exchanged? 6. Upon what criteria was your

settlement offer based (if one was made) or on what do you rely to support your present position (e.g. case law, industry standards, experts’ report or findings, etc)? 7. What else do you believe that the settlement conference Judge should know about this matter that would enable him or her to work more productively with all parties participating in the conference? The debate over the practice of judges conducting mediations will continue, though in Western Australia and in some overseas jurisdictions that ship has sailed. The New Zealand High Court Guidelines on the principles and practice of judicial settlement conferences may serve practitioners as a guide in those exceptional cases of a referral to mediation by a Supreme Court Judge.

Federal Court mediation The Civil Dispute Resolution Act 2011 prescribes that mediation should be initiated and conducted prior to the litigation process commencing. Under this Act, unless the proceedings are excluded proceedings, the parties must file a genuine steps statement, that outlines what steps have been taken to resolve the dispute or why certain steps were not taken. The steps taken to resolve the dispute include, whether the dispute can be resolved in a facilitated process, including an alternative dispute resolution process. Courts will be able to take into account whether parties have complied with the requirement to file a genuine steps statement as well as the information contained in any statements that are filed when exercising their functions and case management powers and awarding costs26. The Federal Court may refer proceedings to mediation with or without the consent of the parties27. The Chief Justice's Central Practice Note of 25 October 201628 ( CPN-1) includes Part 9 Alternative Dispute Resolution: 9.1 The Court has a broad range of options to facilitate ADR and expects that parties will always consider or seek an early resolution of matters utilising the ADR options available under s53A of the Federal Court Act and Part 28 of the Federal Court Rules, including mediation. The ADR options should be viewed by the parties not only as a means of possible resolution of the whole dispute, but also as 27


a means of limiting or resolving issues by agreement and of resolving interlocutory disputes. The above discussion of ADR developments in Australia and in New Zealand demonstrates how far mediation has come in terms of its formal recognition as being of fundamental importance to improving case management and achievement of high rates of settlement before trial. It may well be timely for the Courts and profession in Western Australia to consider requiring greater focus on pre-action protocols, whether they are called genuine steps or otherwise. If adopted, courts might indeed become the last resort for parties who have genuinely been unable to resolve their disputes.

Current mediation practice trends in ADR institutions, both domestic and international Debate continues among court administrators and the legal profession over when the matter is most likely to be ripe for mediation. The answer will depend on numerous factors and “there is no universal ripe time to mediate civil disputes”29. Some courts will encourage multiple attempts at mediation, in other words at different stages of the proceedings, including before an appeal is heard, if earlier attempts do not achieve a final resolution. Administrators of arbitration institutions and other ADR organisations are now keenly interested in this topic of ripeness as they turn their attention to introducing mediation as an intermediate step during the arbitration process30. The Resolution Institute The current Mediation Rules of the Resolution Institute31 is the 2016 Edition of the Rules that came into effect on 8 September 2016. These rules apply when parties have agreed that a dispute arising or having arisen between them shall be submitted to mediation in accordance with the 2016 Edition of the Rules32.

civil or commercial nature. The Directive described agreements resulting from mediation as being “more likely to be complied with voluntarily and more likely to preserve an amicable and sustainable relationship between the parties”33. The Directive sought to promote a voluntary process “in the sense that the parties are themselves in charge of the process and may organise it as they wish and terminate it at any time”34. New legislation has been enacted in a number of European countries to give effect to it35. New ICC Mediation Rules The International Chamber of Commerce in 2014 updated its mediation rules and guidance notes. The new Mediation Rules36 came into force as from 1 January 2014. They are short, succinct and clear. The rules provide for the fundamentals of mediation while retaining sufficient procedural flexibility for appropriate facts and proceedings. The appendix to the rules sets out the fees and costs associated with making a request for mediation under the ICC Mediation Rules and, similar to arbitration, these cover both the filing fee and the administrative expenses for the ICC. The ICC describes mediation under the ICC Mediation Rules as a flexible procedure aimed at achieving a negotiated settlement with the help of a neutral facilitator. In multi-tiered dispute resolution clauses, consideration needs to be given to the Emergency Arbitrator Provisions in the 2012 Arbitration Rules. Parties are encouraged to determine whether or not they wish to have recourse to the emergency arbitrator when providing for ICC mediation in parallel with or prior to arbitration proceedings administered by the ICC International Court of Arbitration. Practitioners should take note of three other issues when drafting dispute resolution provisions: •

The first is that article 7(4) of the Mediation Rules provides that “each party shall act in good faith throughout the mediation.” However, good faith means different things in different countries. Under Australian common law, the term is not precisely defined. The interpretation of what is required under an obligation to act in good faith has been the subject of many cases. Drafters need to consider whether their client ought to be bound by such an obligation.

Second, article 10(2) provides that unless the parties have otherwise agreed, the parties may commence

The Resolution Institute, along with the Law Society of Western Australia, is an accrediting body under the National Mediator Accreditation Scheme. Both the Resolution Institute Law and the Law Society of Western Australia maintains panels of currently accredited mediators. Removal of obstacles – a cultural shift prompted by the EU Directive The EU Mediation Directive of 2008 sets out high level principles concerning use of mediation in cross border disputes of a

28 | BRIEF MAY 2017

or continue any judicial, arbitral or similar proceeding, notwithstanding that the mediation is taking place under the ICC Mediation Rules. Express wording will therefore be required in the parties’ arbitration agreement or dispute resolution clause if mediation is to be a precursor to judicial arbitral or similar proceedings37. •

Third, when incorporating any of these clauses in their contracts, parties need to take account of any factors that may affect their enforceability under applicable law.

Model Mediation clauses The ICC has drafted four alternative model mediation clauses for parties wishing to have recourse to ICC mediation or other settlement procedures under the ICC Mediation Rules. The clauses can be amended to reflect local laws and the parties’ particular needs. The clauses can be used for mediation alone or in parallel with or prior to arbitration or other proceedings. Two of the proposed clauses combine mediation with arbitration, one simultaneously, the other successively. Another creates an obligation to consider referring disputes to the ICC Mediation Rules. The least constraining clause, clause A, merely reminds parties of their option to use the ICC Mediation Rules38. Alternative clause A, is an example of an opt-in clause. It is entitled “Option to Use the ICC Mediation Rules”. It provides: The parties may at any time, without prejudice to any other proceedings, seek to settle any dispute arising out of or in connection with the present contract in accordance with the ICC Mediation Rules. The ICC’s accompanying notes to this clause explain that: by including this clause, the parties acknowledge that proceedings under the ICC Mediation Rules are available to them at any time. This clause does not commit the parties to do anything, but the presence of the clause is designed to remind them of the possibility of using mediation or some other settlement procedure at any time. In addition, it can provide a basis for one party to propose mediation to the other party. One or more parties may also ask the ICC International Centre for ADR for its assistance in this process. For the ICC’s other suggested clauses, including an opt-out clause, refer to the ICC webpage39.


KBE Human Capital is Western Australia’s leading Legal Recruitment firm. Our Consultants have developed a reputation for providing a highly personalised service and adding value to our networks, over and above recruitment. We have long established relationships with the leading national/ international and most prominent Western Australian law firms and always aim to provide lawyers with an unrivalled level of knowledge and exceptional level of service. M&A Activity/Partnership Opportunities KBE Human Capital has been engaged to establish several new law firms who are looking to enter the WA market in 2017. We are also advising a group of top/mid-tier Partners with transportable fee bases of varying sizes who are seeking Partnership opportunities within boutique practices. We regularly assist Partners/firms looking to transition out of practice and/or join larger teams in benefiting from economies of scale and sharing fixed costs to increase overall profitability. We have ongoing mandates to secure high calibre Partners across various Practice Groups. To be considered by our clients, you will be a Salaried/ Equity Partner or Senior Associate/Special Counsel with the ability to bring across some form of transportable fee base. In the alternative, you will demonstrate a track record of rapidly developing a client base using your existing networks, across one of the following areas: • • • • • •

Construction & Projects Corporate/M&A Environment & Planning Family Insolvency Insurance

• • • • • •

Litigation Local Government Property Tax Wills & Estate Planning Workplace Relations

Market Snapshot Commercial Litigation/Commercial Lawyer for 2IC role with medium sized firm. Expanding firm with a unique and relaxed culture is seeking a Commercial Litigation Lawyer with some Commercial Law experience to work as the 2IC to the firm’s Litigation Partner. You will play an important role in BD and oversee litigation in the Supreme, District and Magistrates Courts. The role will be 80% litigation focused with scope to broaden your skill set with exposure to Property, Employment, IT and IP, general Business/ Commercial Law, and Wills and Estate Planning. Construction/Projects Lawyers for leading boutique, national and international firms. KBE Human Capital has been briefed by four Construction and Construction/ Projects teams to secure high quality Construction Lawyers with 2-6 years’ PAE. Working closely with Partners and advising tier one Principals and Contractors, these positions are career development roles offering exposure to front end advisory matters as well as extensive responsibility running high end disputes. Corporate/M&A Lawyers for multiple firms across all tiers. If you are an Associate or Senior Associate with 2 5 years’ PAE or 5-10+ years’ PAE, then you are in high demand. With the resources and commodities markets beginning to rebound, now is an excellent time for Corporate/M&A/ ECM Lawyers with quality experience to assess your career options and ensure your salary levels remain in line with current market trends. We have active roles with quality boutiques through to the largest international firms, with an overview of some urgent roles below:

• Boutique firm with unique culture and no billable targets. Following rapid growth and gaining an increased market share, you will receive extensive client contact with excellent exposure to the micro/junior market. • Rapidly growing national firm. Work closely with three highly regarded Partners. Two positions available for lawyers with 1-5 years’ PAE. The successful lawyers will be provided with primary conduct of matters across IPO’s, RTO’s, ECM and related ASX/ASIC compliance advice. The Partners are known for their relaxed approach and attracting a high profile client base across the junior and mid-cap markets. • Small national boutique completing extensive cross border work. This would suit mid-level lawyers looking to upgrade to a high quality mix of public and private deals. • Large national Corporate/M&A team, working alongside well-known Partners who are recognised internationally for their expertise. • Top-tier international firms. Career development roles for lawyers looking to step up and gain exposure to major transactions and significant deal flow across both public and private M&A, Corporate Advisory/ Compliance and ECM. Corporate/Commercial Lawyers from boutique firms seeking career advancement are encouraged to apply. Most of these positions are client facing roles where you will enjoy high levels of responsibility and extensive client contact. You must be comfortable advising senior stakeholders and dealing with boards of directors, company secretaries, in-house counsel, regulatory bodies and managing high profile transactions with supervision/guidance from the Partners. • New to market global firm. Unique opportunity to join this premier international brand at ground level and become part of a global team with plans to disrupt the Perth market. Excellent career prospects. Family Lawyers to take over existing firms/client bases. KBE Human Capital is actively assisting a number of clients on multiple exclusive briefs. We are interested in speaking with family law practitioners with 3+ years’ PAE. Our clients include leading national, full service WA firms and long established boutique firms who are looking to add high calibre lawyers to their teams. Several roles are leadership positions, mentoring junior lawyers with a lesser focus on billing and technical work, and the rare ability to take over existing practices as Senior Lawyers transition to retirement. Family Lawyers with 2-6 years’ PAE for multiple firms. KBE Human Capital has been briefed exclusively by a national, medium sized full service, and three boutique firms to secure quality junior to mid-level Family Lawyers. All of these firms advise HNW individuals with asset bases ranging from $500,000 to multi-millions, providing exposure to complex asset structures with mentoring/ training from high profile Partners. If you are a Family Lawyer with 2-6 years’ PAE, then we would be pleased to meet with you to discuss your options. Insurance/PI Lawyers for two top-tier firms. Opportunities for junior and mid-level lawyers with 1-3 years’ PAE and 3-7 years’ PAE to join two of Perth’s best regarded specialist insurance practices, within a national and international firm. The firms have very strong reputations and Partners who are recognised as experts in the insurance field, with exposure to matters across a variety of insurance areas, including professional indemnity, commercial property claims, workers’ compensation, product liability and property liability, employers’ indemnity, and medical malpractice.

Chris Bates

Maryann McKenna

Managing Director

Principal Consultant

M: 0411 645 984 E: chris@kbehumancapital.com.au

M: 0423 867 110 E: maryann@kbehumancapital.com.au

Litigation Lawyers for top-tier firm. This is a new opportunity for a junior (2-4 years’ PAE) and mid level Litigation Lawyer (3-8 years’ PAE) to join a rapidly growing top-tier firm and work alongside Partners who are regarded as among the best strategic litigators in Australia. You will act for domestic and international clients across a range of industry sectors, and complete a diverse mix of energy and resources, construction and insolvency litigation within Australia and multiple foreign jurisdictions. Litigation Senior Associate to build and lead a team. A long-term client of KBE Human Capital is seeking a Senior Associate level Litigation Lawyer to replace a retiring senior lawyer and build/lead a team. With a focus on Construction, Property, Environment and Planning, and related Commercial Litigation, you will inherit a small client base and leverage your network/BD skills to rapidly develop your own client base. This firm is located north of the river and would suit a Senior Associate who is looking to transition to Partnership within 2-5 years. Tax Lawyer to take on a 2IC role within genuine boutique firm. A highly regarded top-tier Partner seeks a quality Tax Lawyer to join their boutique team. Working closely with public, large private and significant SME clients, this role will allow the successful candidate to work closely with one of WA’s leading tax and business law minds. You will have 2-7 years’ PAE with exceptional black letter law skills, and more importantly, the ability to provide direct advice with a focus on delivering commercial outcomes rather than simply providing tax advice. If you are ambitious and interested in an opportunity to take over a firm within 2-5 years, then we would like to speak with you. Workplace Relations Lawyer to join a rapidly growing mid-tier practice. This national firm is seeking a highly ambitious Workplace Relations Lawyer with 2-3 years’ PAE to work in the team’s expanding Perth office. You will gain broad work exposure across a number of industries and direct access to the firm’s most highly valued clients, working closely with Partners and Special Counsel locally and across the National Workplace Relations team. This role will see you providing specialist advice to clients (predominantly employer) across all facets of Workplace Relations, Industrial Relations, general Employment Law, and some OH&S. Some exposure to OH&S will be beneficial but is not a prerequisite. Workplace Relations Senior Associate/Special Counsel to lead a tier one practice. The Employment practice group of this international firm has engaged KBE Human Capital to secure a Senior Associate or Special Counsel to head the Workplace Relations, Health & Safety practice for the firm’s Perth office. The role will involve working closely with Employment/OH&S Partners across Australia as well as managing existing panel and non-panel work, servicing long standing WA government, ASX listed and global company clients of the firm. You will handle a range of contentious and non-contentious matters, conduct training for clients and advise boards on a broad range of Workplace Relations matters. The successful candidate will be of at least Senior Associate standing with 5+ years’ PAE. Candidates with strong Workplace Relations/OH&S experience with backgrounds outside of private practice will be considered, as long as they have the relevant level of experience. We are currently working on numerous exclusive briefs to source high calibre lawyers from 2 years’ PAE through to Equity/Salaried Partners, in addition to the roles listed above, and it would be a pleasure to meet with you to discuss the opportunities currently available in the WA legal market. Please contact Chris Bates or Maryann McKenna for further information. KBE Human Capital is a proud supporter of Parkerville Children & Youth Care

KBE Human Capital P: 08 6467 7889 A: 1322 Hay Street, West Perth 6005 W: kbehumancapital.com.au 29


ICC Guidance Notes The ICC has published guidance notes to the Mediation Rules40. These notes are a very practical guide to both the rules and the general conduct of mediations. These guidelines include issues that can be addressed by parties preparing for the initial mediation conference and if appropriate raise them for discussion with mediators when designing the process. I mention just two issues that are covered. First, mention should be made of the recommended terms of settlement. This guidance note states: Without imposing terms of settlement on the parties, the mediator may, if requested by all parties, recommend terms of settlement for their consideration. The second note is about combining mediation with other settlement procedures. It states: The parties and the mediator may agree that in certain circumstances (e.g. where a settlement agreement has not been arrived at after a certain period of time) the parties may jointly request the mediator to provide a non-binding evaluation of the merits of the dispute in order to assist them in reaching a negotiated settlement agreement. Incorporation of the ICC Mediation Rules in a dispute resolution clause is just one means of encouraging mediation, whether it is administered fully by the ICC for a fee or an ad hoc mediation where the ICC plays no role in appointing the mediator or administering the mediation. Various national and international dispute resolution bodies have published model rules that participants may choose to incorporate into their agreement for the purposes of their dispute resolution mechanisms41. When incorporating mediation into a multi-tiered dispute resolution clause, it is important that relevant matters be provided for with sufficient certainty, and yet with flexibility to deal with the specifics of any particular dispute. The ICC Mediation Rules are an example of that purpose being achieved. Use of flexible hybrid mediation procedures Many dispute resolution clauses provide that mediation is to take place before arbitration (or litigation) proceedings are commenced. If mediation is not provided for, and the parties turn their minds to this option once arbitration has commenced, either they can agree with the arbitrator to take time out to mediate within those proceedings (and having the arbitrator 30 | BRIEF MAY 2017

also act as mediator). This process is known as “Med-Arb�. Alternatively, the parties may agree to mediate (with an appointed mediator) separately from the arbitration proceedings. In some jurisdictions, the inclusion of mediation within the course of arbitration (Med-Arb) is enacted in arbitration legislation. This hybrid process is said to offer several advantages: the potential of saving time and costs by appointing the same person as mediator and arbitrator, and the certainty that the dispute will be resolved either by agreement or award. However those advantages need to be weighed against potential risks of allowing one person to wear two hats. The risks include that disputants may be inhibited in what they say in the presence of the mediator in the knowledge that the same person may end up as the arbitrator who then has to decide the outcome. Another risk, particularly for international disputes, is that an arbitral award may be set aside or rendered unenforceable for breach of the rules of natural justice (want of procedural fairness). To date, Med-Arb has not been adopted with any enthusiasm in Australia or the United Kingdom. Despite the legislation entitling parties to arbitration in Australia to use a hybrid process, most practitioners concede it is problematic to do so as part of the arbitration process itself. A number of these concerns have been addressed in some jurisdictions, including in Australia42, Hong Kong and Singapore, by introducing gateways into what is essentially a consensual process. In Australia a party may opt out at any stage and terminate the mediation proceedings and a new arbitrator will be appointed unless agreed otherwise. Parties who consider using mediation once arbitration is under way are usually advised to treat it as a separate process. This would be the prudent course despite the additional cost involved in having to appoint a mediator if the arbitration needs to follow an unsuccessful mediation. If mediation occurs during the course of arbitration proceedings, and the parties are content to alert the arbitral body to it occurring, it is often sensible to stay the arbitration to allow time for the mediation process. This may save costs being unnecessarily spent on the arbitration. (Such a stay or pause in the proceedings is sometimes referred to as a 'mediation window'). By formally taking a time out, the parties can focus on the mediation without being distracted by the advance of the arbitration and incurring the costs of those steps when a settlement may be imminent. In other cases, such as when timing for a final award arbitration is

critical, the parties may prefer to conduct the mediation without requiring a stay or pause in the arbitral proceedings43. The option for, and timing of, mediation may be raised at the initial arbitration case management conference. ICC Mediation Guidance Notes44 also address the option of the parties agreeing in the course of arbitration that they would like a sole arbitrator or a member of a tribunal (usually the chairman) to assist the parties in negotiating a settlement of their dispute by acting as a mediator. If the mediation does not produce a settlement of all issues in dispute in the arbitration, the parties’ agreement may also permit the mediator to return to the role of arbitrator and proceed to make or participate in the making of an award in the arbitration. The Guidance Notes point to an advantage of this process being that if the parties agree terms of settlement through mediation proceedings conducted in the course of arbitration proceedings, they may be able to record the terms of settlement in a consent award pursuant to Article 32 of the ICC Arbitration Rules. Such a consent award may be of assistance where, for example, one or more parties wish to be able to enforce the settlement agreement as an arbitral award45. As our collective experience of Med-Arb evolves so too will its merits continue to be debated46. Another example of a flexible mediation process that can provide the parties with more options is when parties mediate with a view to asking the mediator to provide a written non-binding opinion after a mediation conference concludes without a resolution. (The ICC contemplates this in its second guidance note to its Mediation Rules47 as does the SMC's Mediation Procedure). Assuming the mediator has the requisite qualifications,48 the perceived benefit in doing so is that the mediator has had the advantage of reading the material provided and of hearing the parties in joint and private sessions. Accordingly, it is suggested that the mediator will be in a sufficiently informed position to assess the respective legal merits and risks being taken by the parties. Often the non-binding opinion will form the basis for further negotiations and a resolution. This option, in one form or another, is no doubt being adopted more in mediations involving large commercial disputes particularly where the appointed mediator is a senior practitioner or retired judge. Attractive as this option may appear to be, it is not without its risks, even when dealing with an evaluative style mediator.


Singapore International Arbitration Centre (SIAC) Commercial parties contracting in Western Australia often adopt SIAC as their preferred arbitral tribunal or seat. SIAC's Model clause for Arb-Med-Arb (AMA) includes: ….The parties further agree that following the commencement of arbitration, they will attempt in good faith to resolve the Dispute through mediation at the Singapore International Mediation Centre (“SIMC”), in accordance with the SIAC-SIMC Arb-Med-Arb Protocol for the time being in force. Any settlement reached in the course of the mediation shall be referred to the arbitral tribunal appointed by SIAC and may be made a consent award on agreed terms. Singapore International Mediation Centre (SIMC) SIMC has published an AMA Protocol49 that applies to all disputes submitted to the Singapore International Arbitration Centre (SIAC) for resolution under the Singapore Arb-Med-Arb Clause or other similar clause (AMA Clause) and/or any dispute which parties have agreed to submit for resolution under this AMA Protocol. Under the AMA Protocol, parties agree that any dispute settled in the course of the mediation at the Singapore International Mediation Centre shall fall within the scope of their arbitration agreement. Singapore Mediation Centre (SMC) This Centre has seen a dramatic increase in the number of mediations conducted through the Centre in 2016. The mediation process conducted by the Singapore Mediation Centre (SMC) is governed by its Mediation Procedure.

assist in negotiating for settlement.

Part 2 of this article will contain a discussion of recent case law from Australia and England.

Guidelines 2.2

25.

Appendix A to The Guidelines.

26.

Civil Dispute Resolution Act 2011 ss11 and 12.

27.

S53A Federal Court of Australia Act 1976.

28.

Central Practice Note: National Court Framework and Case Management (CPN-1)

29.

Justice PA Bergin, 'The objectives, scope and focus of mediation legislation in Australia' (2013) 2 Journal of Civil Litigation and Practice 49, 56.

30.

For example, Resolution Institute in Australia, CEDR in the UK, the International Chamber of Commerce ('ICC') in Europe and American Arbitration Association in the United States.

31.

The Resolution Institute is the membership body incorporating IAMA and LEADR. Resolution Institute performs the functions previously offered by those organisations including nominations.

32.

2016 Edition of the Mediation Rules are at: https://www. resolution.institute/documents/item/1897.

33.

EU Mediation Directive [2008] OJ L 136/3, paragraph 6.

34.

Ibid., paragraph 13.

35.

Many Member States have passed legislation specifically to implement the Directive, including France, Germany, Luxembourg, the Netherlands, Spain and Sweden. However to date, other states, including the UK before Brexit, have only specifically implemented certain aspects of the Directive. Refer to the study entitled: Giuseppe De Palo et al, 'Rebooting’ The Mediation Directive: Assessing the Limited Impact of its Implementation and Proposing Measures to Increase the Number of Mediations in the in the EU (January 2014) European Parliament: Directorate-General for Internal Policies <http://www.europarl.europa.eu/ RegData/etudes/etudes/join/2014/493042/IPOL-JURI_ ET(2014)493042_EN.pdf>.

36.

ICC Mediation Rules.

37.

Nick Rudge, Focus: Asia Pacific International Arbitration Update: New ICC Mediation Rules (9 April 2014) Allens Linklaters <http://www.allens.com.au/pubs/arb/ foarb9apr14.htm#New_I>.

38.

International Chamber of Commerce, Suggested Clauses for ICC Mediation <http://www.iccwbo.org/ products-and-services/arbitration-and-adr/mediation/ suggested-clauses/#sthash.FfsemL0f.dpuf>.

39.

Ibid.

40.

International Chamber of Commerce, Mediation Guidance Notes <http://www.iccwbo.org/Productsand-Services/Arbitration-and-ADR/Mediation/Rules/ Mediation-Guidance-Notes/> ('ICC Mediation Guidance Notes').

41.

For example, refer to Australian Centre for International Commercial Arbitration at <www.acica.org .au>, Institute of Arbitrators & Mediators Australia at <www. iama.org.au>, Australian Commercial Disputes Centre at <www.acdcltd.com.au>, Centre for Effective Dispute Resolution at <cedr.co.uk> and American Arbitration Association at <www.aaa.com>.

42.

Commercial Arbitration Act 2012 (WA) s27D. Other States in Australia have adopted similar amending legislation.

43.

For a useful discussion on the relationship between Mediation and Arbitration refer to the ICC Mediation Guidance Notes (above n 29), paragraphs 28 to 35.

44.

ICC Mediation Guidance Notes, paragraph 34. Because of the potential risks in some jurisdictions, ICC Mediation Rules, Article 10(3) allows a mediator to act as an arbitrator in the same dispute only when all of the parties have consented in writing.

45.

ICC Mediation Guidance Notes, paragraph 34.

46.

For a further explanation and valuable contribution to the Med-Arb debate refer to: Alan Limbury, Med-Arb: getting the best of both worlds (29 February 2012) International Mediation Institute <https://imimediation. org/cache/downloads/30zzdkccdig4skgw80c8sw wc0/hybrid-processes-2010---article-by-alan-limbury. pdf>. Refer also to the Australian Alternative Dispute Resolution Law Bulletin 2014 .Vol 1 No 4 that is devoted to the topic 2014 including another contribution by Alan Limbury.

47.

ICC Mediation Guidance Notes.

48.

Regulation of mediators through accreditation is still evolving. While incidents of mediators abusing their position may be rare (for example though lack of suitable training or experience or undisclosed conflicts of interest), safeguards need to be considered to uphold the integrity and competency standards of the mediation profession.

NOTES: *

Accredited Mediator, Partner HWL Ebsworth Lawyers.

1.

”Jackson Report” (“Review of Civil Litigation Costs: Final Report” by Jackson LJ, published by HMSO in 2010, Executive Summary, para 6.3, p xxii).

2.

Cumulative First Supplement to the 2013 edition of the White Book (Civil Procedure, Sweet & Maxwell).

3.

Supreme Court WA Media release: Extra Mediation Rooms Available 10 August 2012.

4.

NADRAC was an independent non-statutory body established in 1995 to provide expert policy advice to the Australian Attorney-General on the development of ADR and promoted the use of alternative dispute resolution. NADRAC concluded in late 2013.

5.

NADRAC, Dispute Resolution Terms (3 September 2003) Australian Government: Attorney-General's Department: https://www.ag.gov.au/LegalSystem/ AlternateDisputeResolution/Documents/NADRAC%20 Publications/Dispute%20Resolution%20Terms.pdf

6.

NADRAC Dispute Resolution Terms 2003.

7.

Adam Curl, Making Peace (Tavistock Publications, 1971) 177.

8.

Christopher W Moore, The Mediation Process, Practical Strategies for Resolving Conflict (Jossey –Bass, 1st ed, 1986) 124.

9.

Conciliation is rarely the preferred means of resolution of commercial disputes in Australia. It is, however in the field of industrial relations: the Conciliation and Arbitration Act 1904 (Cth). While much has changed in the industrial landscape over the last century, conciliation is an integral part of industrial relations and arguably remains an important principal means of resolving industrial disputes in Australia. The Institute of Arbitrators & Mediators Australia (IAMA), now the Resolution Institute, a professional body that has provided arbitration and conciliation services since 1975, has embraced mediation since the mid-1990s when the demand for domestic arbitrations and conciliation dropped off.

10.

CP18 at: http://www.lawreform.justice.nsw.gov.au/ Documents/Current-projects/ADR/Consulation-paper/ CP18.pdf.

11.

But excluded review of dispute resolution under the Commercial Arbitration Act 2010 or the Industrial Relations Act 1996 – see CP 18 Terms of Reference para 1.1

12.

CP18, para 1.11

13.

CP 18, para 2.5 'We propose that the model provisions also apply to the process known as “neutral evaluation”. In neutral evaluations, just as in mediations, the neutral evaluator is a third party who assists the parties in dispute to reach an agreement. The key difference is that the neutral evaluator offers non-binding advice to the parties. Any ultimate agreement remains one the parties themselves reach.'

14.

See discussion in 'Arbitration, Mediation and Conciliation: differences and similarities from an International and Italian business perspective' by Alessandra Sgubini, Mara Prieditis & Andrea Marighetto, August 2004, Mediate.com http://www.mediate.com/ articles/sgubinia2.cfm.

15.

CP18, para 2.4

16.

The Right Honourable the Lord Woolf (discussing compulsory reference to mediation), 'Mediation: The Way Forward' (Speech delivered at the 2013 Singapore Mediation Lecture, Singapore, 10 October 2013) <http:// www.mediation.com.sg/assets/downloads/address-bythe-rt-hon-the-lord-woolf/lordwoolfspeech.pdf.

17.

Practice Direction PD4.1.2.48.

The Mediation Procedure50 includes: 7.5 In the event that no settlement is reached, and at the request of all parties and if the Mediator(s) agrees, the Mediator(s) will produce a non-binding written recommendation of the terms of settlement. Such a recommendation will only be the Mediator's own assessment. Except with the consent of the Mediator(s) and of all parties, it shall not be used in any proceeding of whatever nature.

24.

18.

S69 Supreme Court Act 1935 (WA) Part VI Mediation.

19.

Practice Direction 4.2.1.2 [Approval and Accreditation of Mediators] was revoked on 9 March 2016.

20.

Sydney, The Federation Press, 2013. Note further observations in the launch speech of this book by The Hon Robert French AC, Chief Justice of the High Court of Australia, published in Brief, April 2014.

21.

https://www.courtsofnz.govt.nz/old/business/guidelines/ judicial-settlement-conference/Settlement-conferenceguidelines-April-2013.pdf

49.

http://simc.com.sg/siac-simc-arb-med-arb-protocol/

22.

Guidelines: 1.3 and 1.4

50.

23.

High Court of New Zealand Rules r 7.79 Court may

http://www.mediation.com.sg/assets/businessservices/6-Mediation-Procedure-with-Annexes-A-to-D6Nov15.pdf.

31


Discretionary Testamentary Trusts Adapted from CPD paper presented at the Law Society's Law Summer School 2017

By Sally Bruce Special Counsel, Jackson McDonald Photo: Ron D’Raine Images

Introduction This article discusses the following aspects of discretionary testamentary trusts: •

benefits and limitations in terms of asset protection

drafting issues including: 

key offices and concepts

mandatory v optional trusts

capital protected trusts

control v asset protection

single v multiple trusts

vulnerability to family provision claims

implications for social security

time of creation

What is a discretionary testamentary trust? A discretionary testamentary trust is a discretionary trust set up under a will. It may be structured in different ways but a common type of discretionary testamentary trust is one that is effectively controlled by the primary beneficiary, who may be the trustee, the appointor and hold powers similar to that of a guardian in an inter vivos trust. Like inter vivos family trusts, there is generally a broad class of discretionary beneficiaries under a discretionary testamentary trust. 32 | BRIEF MAY 2017

What are the benefits of a discretionary testamentary trust?

also from family breakdown. Protection from family breakdown is more difficult.

Asset protection and tax effectiveness are two principal benefits of a discretionary testamentary trust.

The difficulty in terms of protection from family breakdown arises from the wideranging powers of the Family Court. There is a line of family law cases which has extended s792 of the Family Law Act 1975 (Cth) to look beyond the form of the trust instrument to the substance of whether one or either of the parties to the marriage was able to control and benefit from the assets of the trust.3

Asset protection a. Protection from creditors Discretionary testamentary trusts are useful where an intended beneficiary (the primary beneficiary) is or may be exposed to claims by creditors. Rather than leaving the primary beneficiary with an outright gift (which might then fall into the hands of creditors), a willmaker may instead make the gift to the trustee of a discretionary testamentary trust, controlled by the primary beneficiary. The assets in the discretionary testamentary trust will be protected from the primary beneficiary’s creditors, although the primary beneficiary will retain underlying control of the trust. Commonly, the terms of a discretionary testamentary trust will automatically disqualify the primary beneficiary from holding a controlling position in the trust in the event of bankruptcy. An independent person or “protector” then steps in to fill such position until the bankruptcy is discharged. This confers an added protection on the primary beneficiary.1 b. Protection from family breakdown Often, willmakers are looking to protect their children not just from creditors, but

One of those cases is Ashton and Ashton (1986) FLC 91-777 where Strauss J said at p 75,653: The powers which the husband has in the Ashton Family Settlement give him control of the trust either as trustee or through a trustee which is his creature, and at the same time he is able to apply all the income and property of the trust for his own benefit. In my opinion, in a family situation such as the one here, this Court is not bound by formalities designed to obtain advantages and protection for the husband who stands in reality in the position of the owner. He has de facto legal and beneficial ownership. Aside from the issue of control, the interest of an object of a discretionary trust constitutes “property” for the purposes of the Family Law Act 1975 (Cth) 4 and under Part VIIIAA of that Act the Family Court can make an order binding a third party trustee where there is a sufficient nexus between the assets


of the trust and the property of the parties to the marriage.5

1. identify and value the matrimonial property;

This brings into question the utility of discretionary testamentary trusts as a mechanism to protect against family breakdown.

2. assess the respective contributions of the parties (both financial and non-financial);

In an article written by Robert Monahan of Monahan Estate Planning entitled “Protecting an inheritance: family law and inheritance”6 he indicates that, while the Family Court has power to include inherited assets in the marital asset pool including those in a testamentary discretionary trust, the use of a discretionary testamentary trust is still the best strategy to minimise the chances of inherited assets forming part of the matrimonial asset pool. He sets out his reasons at p84 and they include the following: •

the inherited property within the trust is not originally property of a party to the marriage. Generally, neither party to the marriage has made any actual contribution to that property.

the inherited assets can be viewed as a contribution made on behalf of the party receiving the inheritance.

the trust is not established by a party to the marriage. It is established by the willmaker.

the trust usually evidences an intention by the willmaker to benefit a broader class of beneficiaries.

use of the trust clearly separates the inherited assets from the marital assets. This, Mr Monahan writes, helps justify an argument for the application of the asset-by-asset approach and therefore either: 

the exclusion of the inheritance altogether as marital property; or

justifies separate special credit for the contribution.

There are a number of family law cases I would like to canvass as they shed light on how the Family Court might treat a discretionary testamentary trust. First, however, it is necessary to understand, in broad terms, how the Family Court approaches property settlement claims. I must emphasize that I am not a family lawyer. My comments on the Family Court process and my take on the family law cases are purely from the perspective of a succession lawyer. The four step process There is a “four step process” in the assessment of property settlement claims, as follows:

3. consider whether an adjustment is required based on present and future means and the needs of the parties; 4. in light of the above, determine what order is just and equitable in all the circumstances. Mr Monahan notes in his article “Protecting an inheritance: family law and inheritance” (supra) that, in assessing the parties’ respective contributions, the court may take a “global” approach or an “asset-by-asset” approach. At p80 of his article, Mr Monahan explains the difference between these two approaches as follows: The global approach places all the assets in one pool, with the court then determining the contributions made by each party to the one pool of assets. The asset-byasset approach allows the court to place assets in different pools, and then the court determines the contributions of each party to each pool. Mr Monahan notes that the court generally adopts a global approach but that the asset-by-asset approach may be adopted in appropriate circumstances and that such approach is often argued in cases dealing with inheritances (whether on discretionary testamentary trust or direct). With the asset-by-asset approach the court may be more likely to treat an inheritance as a separate asset pool, particularly if the inheritance is still capable of being separately identified. Of course the best case scenario for the inheriting party is for the inheritance to be excluded from the matrimonial asset pool, but even if this does not happen, with the asset-by-asset approach, credit for the inheritance is likely to be attributed in whole to the inheriting party. Even if the global approach is used, the court can still adjust the contributions as a whole to take account of a greater contribution by way of inheritance from one party over another. The potential downside, however, is that the inheriting party may receive separate credit only for the initial value of the inheritance, rather than its value at the date of the proceedings. The increase in value between the date on which the inheritance was initially received and the date of the proceedings is more likely to

be treated as a shared contribution.7 It is important to remember that these comments about the global approach v the asset-by-asset approach relate to steps 1 and 2 of the four step process. There are still two more steps after that which might result in a significant adjustment between the parties. Having briefly canvassed how the Family Court approaches property settlement claims, I now turn to look at the cases. Lovine & Connor and Anor [2011] FamCA 432 This case makes quite disturbing reading for a succession lawyer. The facts were these: •

The parties separated in 2010 after a marriage of 10 years.

A dispute arose about whether the assets of a discretionary testamentary trust of which the husband was a trustee should be regarded as an asset of the husband.

The husband’s father died in 2001. His will appointed the husband and his two sisters as executors and trustees. It established two testamentary trusts.8

Two-thirds of the husband’s father’s residuary estate was to be applied “…to or for the benefit of all or such one or more exclusively of my son [the husband], his children and remoter issue …. or such relative (as defined in section 995 of the Income Tax Assessment Act 1997) of [the husband] as he nominates in writing for this purpose … in such shares as [the husband] from time to time in his sole and absolute discretion determines from time to time …”

The court looked straight through the legal niceties of the will of the husband’s father. At para 115, the court held: The entirety of the evidence satisfies me that the intention of the testator as clearly understood by the husband was for the three children of the deceased to benefit in equal shares either by themselves or their children ... The court found that the reason the husband’s father set up two testamentary trusts of one-third and two-thirds respectively, instead of three (one for each of his three children) was because, at the time the will was made, one of his daughters was going through a relationship breakdown and he wanted to prevent the daughter’s partner from

33


benefiting under his will or estate. At para 115, the court held: That problem was overcome in the drafting of the will by the reference to section 995 of the Income Tax Assessment Act 1997 in which the definition of “relative”, in this circumstance of the husband, includes his sister [the one going through the relationship breakdown]. That is the reason why the testamentary trusts were divided into the proportions of two thirds and one third. The two thirds proportion was intended, and has actually benefited, both the husband and Ms S without referring to the latter. The husband tried to argue that he was a mere trustee of the testamentary trust. However, the court did not accept this argument. In holding that the residual assets of the testamentary trust formed part of the matrimonial property, the court examined where control of the trust in fact lay, in just the same manner as if it were an inter vivos trust. The court referred specifically to Ashton and Ashton (supra) in this regard. At para 126, the court found: … in every sense the husband is the only real decision maker and while the will appointed his sisters as trustees with him, they play no active role. The actual distributions in this matter have already benefited the husband’s two sisters and/or their children and it is entirely consistent with the facts that the residual benefit should be applied to the husband and/or his children.

The S Trust had two capital beneficiaries, namely the children of the husband and the wife. The capital of the trust was reserved to the children. The husband, the husband’s brother, W Pty Ltd and certain relatives were income beneficiaries. There was no evidence that any capital or income distributions had been made to the husband or the wife or their children at the time of the hearing. It is not absolutely clear from the judgment, but it appears the N Trust was more in the nature of a standard discretionary trust with the husband’s brother and his wife as the primary beneficiaries.

The husband’s brother gave evidence that the two trusts were set up to enable the husband’s mother to receive social security benefits after 5 years and also to protect the husband’s mother’s assets from any claim by the wife had she died and left provision for the husband in her will.10 The wife had tried to argue that the assets of the S Trust should be treated as the property of the husband. But this argument was not accepted.11 At para 152 the court referred to the High Court decision in Kennon v Spry; Spry v Kennon (2008) 251 ALR 25 but said the facts of the case before them were sufficiently different that the principles arising from Spry’s case had no relevance.12 Some of the factual differences in Essex are these:

these cases? Where a beneficiary is at risk of family breakdown, it would seem appropriate that at least the following issues be seriously considered in the set up and administration of a discretionary testamentary trust: •

direct and de facto control of the trust

separation of trust assets from matrimonial property

pattern of income and/or capital distributions

breadth of the class of primary beneficiaries

separation between income/capital beneficiaries

recital of the purpose of the trust

It is important to bear in mind that while measures may be taken to reduce the risk of trust assets being treated in property settlement proceedings as part of the matrimonial asset pool, the trust may still be regarded as a financial resource of a party to a marriage. Tax effectiveness Like inter vivos trusts, discretionary testamentary trusts are a useful tool for splitting income. However, unlike inter vivos trusts, income that is paid to or applied from a testamentary trust for the benefit of a minor is not subject to the penalty tax rates that normally apply to unearned income of minors under Division 6AA of the ITAA 1936. Rather, such income falls within the definition of “excepted trust income” under s102AG(2) of the ITAA 1936 and, subject to the anti-avoidance provisions such as those in s102AG(3) and (4), the ordinary marginal rates of tax apply.

the assets of the trust were never property of the parties to the marriage;

All was not entirely lost for the husband, however. Credit for the trust assets was attributed entirely to the husband and, overall, the court determined the contributions to be 75% by the husband and 25% by the wife.9

the husband exercised no control over the trust;

the husband had received no distributions from the trust;

the husband was a mere income beneficiary of the trust;

Drafting issues

Essex & Essex [2009] FamCAFC 236

the husband was not capable of being added as a capital beneficiary of the trust.

Key offices and concepts

The husband’s mother had two children: the husband and the husband’s brother. During her lifetime, the husband’s mother set up two discretionary trusts (the S Trust and the N Trust) and gifted substantial assets to each of them. Both trusts had the same corporate trustee (W Pty Ltd). The husband’s brother was the sole director and shareholder of the trustee company. The husband’s brother was also the appointor and effectively controlled both trusts. The two trusts were set up at around the same time, but the terms were different:

34 | BRIEF MAY 2017

The court did find, however, that the S Trust should be treated as a financial resource of the husband. It considered that the evidence admitted a compelling inference that the husband would receive income distributions from the trust at the conclusion of the property proceedings.13

A discretionary testamentary trust will generally involve these key offices and concepts:14 •

executor

primary beneficiary

potential beneficiaries

appointor

protector

Lessons to be learned

trustee

So, in terms of the utility of discretionary testamentary trusts as a protective mechanism in the event of family breakdown, what can we draw from

preservation age

automatic disqualification of ineligible office bearers


a. Executor

c. Potential beneficiaries

The choice of executor is very important where you have a discretionary testamentary trust because an important range of powers and discretions is often placed in the hands of the executor. Apart from the powers that may vest in the executor at the time the trust is created, there are some powers which will often revert back to the executor if the trustee or appointor becomes ineligible (for example through bankruptcy, legal incapacity or family breakdown).15

The potential beneficiaries are equivalent to the class of general beneficiaries under an inter vivos trust. One or more potential beneficiaries may be selected by the trustee of the discretionary testamentary trust to receive benefits from the trust. While they are entitled to due consideration by the trustee, they have no right to demand a benefit.17

It is important to ensure that there are sufficient alternative or substitute executors provided for in the will, to be available to act when called upon.16 b. Primary beneficiary

d. Appointor The person who holds the office of appointor can appoint and remove the trustee. This critical power is often held by the primary beneficiary, at least in the first instance. The power of appointment is generally made transferable to another by deed or will. e. Protector

As mentioned above, one of the most common types of discretionary testamentary trust is the beneficiary controlled testamentary trust, where a willmaker sets up a separate trust for each child as primary beneficiary. The primary beneficiary controls their own trust and may hold the offices of trustee, appointor and protector (subject to automatic disqualification if the primary beneficiary becomes ineligible).

Depending on how the discretionary testamentary trust is drawn, the protector may hold consent powers, similar to those of a guardian under an inter vivos trust, to which some of the powers (e.g. the power to distribute capital or to bring forward the vesting day) of the trustee are subject. Like the office of appointor, the office of protector is generally made transferable to another by deed or will

and it is usually held, at least in the first instance, by the primary beneficiary. f.

Trustee

Generally speaking, the first trustee of the discretionary testamentary trust will be the primary beneficiary and/or his or her nominee. However, that will not always be the case. For example, in some situations, such as where the primary beneficiary is a minor, the office of trustee may be held by the executors until the primary beneficiary comes of age. g. Preservation age This concept is used in differing senses. In some precedents, the preservation age is the age at which the primary beneficiary assumes control of his or her discretionary testamentary trust. In others, it will trigger the creation of the discretionary testamentary trust. h. Automatic disqualification from office Commonly, the terms of a discretionary testamentary trust will automatically disqualify the primary beneficiary from holding office as trustee and/or appointor (and, depending on how the trust is drafted, protector) in the event

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of their bankruptcy, legal incapacity or family breakdown. The purpose of this automatic disqualification is to protect the trust assets from the primary beneficiary, or the primary beneficiary’s creditors or ex spouse, as the case may be. As discussed above, it is important to note that protection from family breakdown is far more difficult to secure than protection from creditors as the Family Court has wide ranging powers to look through trusts. If protection against the Family Court is a priority, consideration might be given to setting up a single discretionary testamentary trust controlled by all the children. But there is a downside: the children will be bound together indefinitely, disagreements may arise and there may be problems in passing control to the next generation.18 Mandatory v optional a. Optional Commonly, a discretionary testamentary trust will be drafted in terms which empower the executor, at the request of the primary beneficiary, to give the primary beneficiary the whole or any part of their inheritance absolutely, rather than on trust. The reason the power resides with the executor, rather than the primary beneficiary, is to protect the primary beneficiary in the event they are bankrupt or in the midst of a family breakdown at the time of the deceased’s death. If it were otherwise, the court in a family property dispute, or the primary beneficiary’s trustee in bankruptcy, could direct the executor to pass the estate assets absolutely to the primary beneficiary and all asset protection would be lost.19 This optional discretionary testamentary trust can be very useful. For all the good intentions of their parents, a child may simply not want to manage a trust. Alternatively, it might not make sense from a practical perspective to take an inheritance on trust. For example, the inheritance might consist of the deceased’s principal place of residence. Having regard to capital gains tax and land tax implications, a child might prefer to take such an asset outside the trust. The optional discretionary testamentary trust gives the primary beneficiary flexibility so that they might take part of their inheritance absolutely and the rest on trust. b. Mandatory An optional discretionary testamentary trust will not be suitable in every situation. For example, it might not be

36 | BRIEF MAY 2017

suitable where the primary beneficiary is a spendthrift or has a history of substance abuse. In these situations, it might better to have a mandatory discretionary testamentary trust and for the controlling positions in the trust to be held by the executors, or other persons independent of the primary beneficiary, at least until the primary beneficiary is capable of assuming control. Capital protected It might be worth considering a capital protected trust where there are concerns about family breakdown or where the willmaker simply wants to ensure that the trust inures for the benefit of the next generation. The trust needs not be wholly capital protected. Provision may be made for a limited amount of capital to be made available to the first generation and for the balance to be retained for the benefit of the next generation. Control v asset protection The degree of control which a primary beneficiary is given over their discretionary testamentary trust affects the level of asset protection.20 A willmaker might want to protect assets from the beneficiary him or herself (for example, where the beneficiary is a spendthrift or has a problem with substance abuse) or from litigation by other parties (e.g. where the beneficiary is facing bankruptcy or family breakdown).21 In the first case (where a willmaker wants to protect a beneficiary from him or herself), it might be appropriate for the controlling positions in the trust to be held by the executors or other persons independent of the primary beneficiary, at least until the primary beneficiary is capable of assuming control. Again, a mandatory discretionary testamentary trust will often be more appropriate in this instance, rather than an optional one. What about the second instance (where the willmaker wants to protect the primary beneficiary from litigation by others, such as creditors or exspouses)? As discussed above, it is easier to achieve a satisfactory compromise between control v protection from creditors, than control v protection from family breakdown. Having regard to the far-reaching powers of the Family Court, the latter is infinitely more problematic. At para 3.11 of Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, the authors write:

Unless the testator is willing to impose controls, exclusions and fetters which will greatly limit the child’s freedom to enjoy or use her or his trust, any protection the trust appears to offer against a divorce or relationship breakdown will be illusory. Single or multiple trusts Where a willmaker’s primary concern is to protect the children’s inheritance in the event of a family breakdown, a single testamentary trust, with all of the children as primary beneficiaries, appointors and/ or trustees might be considered. As we have seen above, however, there is always a trade-off between protection and control. A single testamentary trust might not be workable from a practical perspective if the children do not get on or if they have different ideas about how the trust should be run. Further, a child’s own children might find themselves disenfranchised when the child (their parent) dies and in the event the surviving children retain control of the trust. Alternatively, if each child is permitted to pass their control powers to a successor of their choice, the surviving children might find themselves bound together with an effective stranger for the balance of the life of the trust. Vulnerability to family provision claims The less control a beneficiary has over a testamentary trust, the more vulnerable the estate is to a family provision claim.22 If a beneficiary (who has standing under the Family Provision Act 1972 (WA)) cannot be assured of receiving any benefit from the discretionary testamentary trust because control of the trust resides with another, they may have fertile ground for a claim under the Family Provision Act on the basis that the will does not make proper and adequate provision for them. Social security Nominating a child as a beneficiary of a testamentary trust may have an unintended impact on the child’s social security entitlements and so it is important that these issues be carefully considered in advance. Under social security law, assets or income held in or derived from a private company or trust can be attributed to a person who benefits from the company or trust. The question is whether a testamentary trust is found to be a “controlled private trust” in relation to the person. A testamentary trust will be a controlled private trust in relation to a person if they are found to meet either the source test or the control test. In the


context of testamentary trusts, it is the control test that is relevant. A person will meet the control test if the person or his associate has a sufficient level of control over the trust. Although the concept of control is generally intended to target the appointor or trustee of the trust, it is not limited to this and matters that will be considered relevant include both the direct and indirect control of the trust, exercised not only by that person but also by any of his or her associates.23 Time of creation There are differing views on this. It is the preference of some that the discretionary testamentary trust be created immediately upon the finalisation of the administration of the estate, regardless of the age of the primary beneficiary. For others, the discretionary testamentary trust will come into existence only upon the primary beneficiary attaining a specified age (often called the preservation age). My personal preference is generally the latter, principally because it reduces the risk of trust assets being distributed to others within the class of potential beneficiaries, in a manner inconsistent

with the willmaker’s primary objective. A secondary reason is that, once a primary beneficiary reaches 18 (or other preservation age as specified in the will) they can themselves elect whether to take the whole or any part of their inheritance absolutely, rather than on discretionary testamentary trust.

9.

A 15% adjustment was made in favour of the wife under s75(2) of the Family Law Act – an appeal on the adjustment was upheld and the matter remitted for rehearing.

10.

Essex & Essex [2009] FamCAFC 236 at para 100.

11.

Essex & Essex [2009] FamCAFC 236 at para 168.

12.

Essex & Essex [2009] FamCAFC 236 at para 152.

13.

Essex & Essex [2009] FamCAFC 236 at para 172.

14.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 6.16.

15.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 1.14.

16.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 6.17.

17.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 6.19.

18.

See generally Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, Chapter 3 “Asset Protection and Discretionary Testamentary Trusts”.

19.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 1.12.

20.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 3.3.

21.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 3.3.

22.

This is assuming the primary beneficiary is a person entitled to claim under s7 of the Family Provision Act 1972 (WA).

23.

See Discretionary Testamentary Trusts Precedents and Commentary Rowland and Bailey, LexisNexis Butterworths, Australia, 2013, at para 5.4.

NOTES: 1.

Note however that the power of the appointor is not property which vests in the trustee in bankruptcy: Re Burton; Wily v Burton (BC9405738) (8 April 1994).

2.

Which talks about “the property of the parties to the marriage or either of them”.

3.

“Spry’s Case – Exploring the limits of discretionary trusts” Justin Gleeson SC, November 2009, edited version of paper delivered to STEP, Sydney Branch, on 22 July 2009, available to members on STEP website, refer to page 9 of 17 under the heading “(b) Do existing Full Court authorities remain intact?”, refer also to the cases referred to in footnote 2 of that article.

4.

Kennon v Spry; Spry v Kennon (2008) 251 ALR 257.

5.

See Simmons and Anor v Simmons [2008] FamCA 1088 – in this case, while the trust was not controlled by the husband, he had significantly invested in the trust assets in the form of an interest free loan and there was a longstanding scheme of distributions to beneficiaries including the husband and his siblings.

6.

Retirement and Estate Planning Bulletin (Lexis Nexis) 2014 Vol 17 No. 5 at pp79-85.

7.

“Protecting an inheritance: family law and inheritance” Robert Monahan, Monahan Estate Planning, Retirement and Estate Planning Bulletin (Lexis Nexis) 2014 Vol 17 No. 5 at p81.

8.

Lovine & Connor and Anor [2011] FamCA 432 at para 105.

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Discretionary Testamentary Trusts CPD paper presented at the Law Society's Law Summer School 2017 Robert Sceales

By Robert Sceales Principal, Sceales Lawyers

Introduction I have assumed that delegates attending the presentation have a working knowledge of trust law principles and the taxation of trusts under Division 6 of Part 3 of the Income Tax Assessment Act 1936 and the provisions of Part 3-1 of Chapter 3 of the Income Tax Assessment Act 1997. Sally Bruce has covered the trust law and drafting issues in her paper. This paper focuses on the taxation issues which may arise in relation to death with regard to testamentary trusts under and by virtue of the Income Tax Assessment Acts 1936 and 1997 respectively, with particular reference to Division 128, the provisions of s102AG, the CGT provisions applicable to trust estates set out in Part 3-1, Division 104, and CGT event K3 in s104-215 of ITAA 1997.

Testamentary Trusts A testamentary trust (or will trust) is a trust created by a will (or a codicil to a will), which is not created inter vivos. A deed or other instrument executed inter vivos is executed between living persons (Butterworths Encyclopaedic Australian Legal Dictionary, LexisNexis, Australia). A testament is a will. A testamentary instrument is a will or codicil. The provisions of s102AG and s102AGA apply to inter vivos trusts which I refer to as well. A person having testamentary capacity may dispose of his or her property by will as he or she sees fit. It is, however, necessary that he or she disposes of such property personally, and does not delegate the power of disposition to another person. In Tatham v Huxtable [1950] HCA 56; (1950) 81 CLR 639 the will required the executor to distribute the residuary property “to others not otherwise provided for who, in my opinion, have 38 | BRIEF MAY 2017

rendered service meriting consideration by the Testator”. Kitto J said (at 653): It is a “cardinal rule”, to which a power of selection among charitable objects is the sole exception, that a “man may not delegate his testamentary power. To him the law gives the right to dispose of his estate in favour of ascertained or ascertainable persons. He does not exercise that right if in effect he empowers his executors to say what persons or objects are to be his beneficiaries”: Chichester Diocesan Fund v Simpson (2). It is therefore necessary in all cases (other than charity cases) that the persons or objects to benefit under the will shall be, by the will itself, ascertained or made ascertainable. They may be made ascertainable by reference to a specified future event, including an act to be done by another person provided that that act does not amount to the making by one man of another man’s will: Stubbs v Sargon (3). In Gregory v Hudson (1997) 41 NSWLR 573 (affirmed on appeal (1998) 45 NSWLR 300) the testator left a gift to an inter vivos trust, the terms of which included a power of variation. Young J considered the rule against delegation of testamentary power in the case of a gift to a typical discretionary trust. He summarised the position in New South Wales (at 586): In summary, reducing the foregoing to their simplest form, the position as to the rule against delegation of will-making powers is as follows: 1. The rule is part of the law of New South Wales. 2. A person will not exercise the power personally, where a power is given to an executor or some third person to choose the

persons who are to benefit from the testator’s bounty. 3. There are exceptions to that rule in the case of powers of appointment including powers of appointment where there is a trust to exercise the power in favour of: (a) charitable purposes; (b) powers where the appointor can appoint to himself or herself so that the interest conferred is equivalent to ownership; and (c) special powers where the class of persons who can be benefitted is defined with sufficient precision. 4. It is not a breach of the rule to give property by will [to] a preexisting trust or to constitute a trust which is sufficiently constituted according to the rules of certainty in trust law. 5. There is a further apparent exception where secret or halfsecret trusts are used. A point of possible interest to the reader of this paper are the comments of Young J (at 586-7): During argument, I remarked that the discretionary trust set up in the instant case was one which makes a judge in equity in 1997 wonder why equity courts are bothering with this sort of trust at all. Trusts, and at an earlier time, uses, were enforced by courts of equity because it was against the conscience of the holder of the legal estate not to carry out the promise that had been made to hold the property concerned on the trust expressed in the instrument. However, where the trustee can virtually designate who is to be the beneficiary, this ground has no validity at all. When one sees that discretionary trusts are used for the anti-social purpose of minimising


taxation or defeating the rights of wives (see, e.g. Re Davidson and Davidson (No 2) [1994] FLC (92469), there does not seem to be any reason in conscience why a court of equity should take any notice of them at all. Counsel were surprised that any judge should take this view and accordingly I announced during the argument that I would not seek to develop it in this case, but I believe that the message should be put abroad that the time may well have come where equity will have to reconsider its attitude to enforcing this sort of trust. The main benefit of a testamentary trust compared to an inter vivos trust is the income tax concession for minors, who are taxed as adults with the benefit of the tax-free threshold, currently $18,200. I revert to this in greater detail later.

Probate and Administration Following death, there will inevitably be some time before a legal personal representative is appointed by Grant of Probate. Consequently, there is a vesting of the deceased’s property in the Public Trustee until a grant is made, or a deemed vesting in executor. In WA upon the death of any person the deceased’s property vests in the Public Trustee and relates back to the legal personal representative on the Grant of Probate: Public Trustees Act 1941 s9. While there are provisions under Division 128 of ITAA 1997 as to the transfer of assets, there is no provision to exempt from the CGT rules a notional transfer from the Public Trustee to the legal personal representative pursuant to s9. The Commissioner’s practice is to ignore this event. This practice is supported by the timing of acquisition rule under Item 1 to the Table in s109-55, by which a CGT asset of a deceased is taken to devolve to the legal personal representative when the individual dies. The role of a legal personal representative, either as executor under a Will or as administrator under Letters of Administration, is to collect and preserve the deceased’s assets, to pay the deceased’s debts and distribute the estate according to the will or the terms of the Administration Act. The legal personal representative’s authority derives from the legislative provisions and the Grant of Probate: Administration Act. The trustee’s role is to hold the trust property, to carry out the terms of the

trusts constituted by the will, and to deal with the proprietary interests of beneficiaries. The trustee’s position is derived from the instrument of trust, namely the will or codicil. During the period of administration, no beneficiary has an equitable proprietary interest in any of the estate property. The interest of the beneficiaries at that stage is to require the legal personal representative properly to administer the estate. The estate at that time is not a trust, because no person other than the legal personal representative has a proprietary interest in the property of the estate: Commissioner of Stamp Duty (Queensland) v Livingstone (1964) 112 CLR 12 at 18, [1965] AC 694 at pp 7078; Barns v Barns (2003) 214 CLR 169; (2003) 196 ALR 65; [2003] HCA 9 at para 50. In the case of the trust, a beneficiary, other than a member of a class of beneficiaries under a discretionary trust or a taker in default of appointment, has an equitable interest in the trust property even if it is not an ownership interest. The interest of the taker in default is a vested interest, subject to the contingency of divestment. If a beneficiary is given specified property under a will, the beneficiary has an equitable interest in the property, subject to the executor’s right of indemnity; Re Neeld [1962] 2 AER 335 CA at 359. During the period of administration a beneficiary may deal with its right to the proper administration of the estate, which is a chose in action: see CSD (Qld) v Livingstone supra at CLR p 27; and AC at p 717. As to the nature of this right see further Buckley J in Re Leigh’s Will Trusts [1970] CH 277 at pp 281 – 2; [1969] 3 All ER at p434: (i) the entire ownership of the property comprised in the estate of a deceased person which remains unadministered is in the deceased’s legal personal representative for the purposes of administration without any differentiation between legal and equitable interests;

a right to require the deceased’s estate to be duly administered whereby he can protect those rights to which he hopes to become entitled in possession in the due course of the administration of the deceased’s estate; (iv) each such legatee or person so entitled has a transmissible interest in the estate, notwithstanding that it remains unadministered. Once the estate is fully administered, the role of the legal personal representative ceases. The debts will have been paid, assets and income will have been distributed, or may be held by a trustee under a testamentary trust, the trustee being either the legal personal representative or another person appointed to act in the capacity of trustee under the will. The Australian Taxation Office considers that the trust will commence at the completion of the administration of the estate or, at the earliest, when the trustee first pays income: …where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor’s discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries. IT 2662 at [14] and ATO ID 2004/458.

Division 128 - Effect of Death Division 128 creates a general exemption that on death a capital gain or capital loss from a CGT event that results for a CGT asset owned by the deceased prior to death is disregarded: s128-10.

(ii) no residuary legatee or person entitled on the intestacy of the deceased has any proprietary interest in any particular asset comprised in the unadministered estate of the deceased;

There is an exception to this rule if the CGT asset passes to a beneficiary in the estate who is:

(iii) each such legatee or person so entitled to a chose in action, viz,

3. a foreign resident: (Note 1 to s12810).

1. an exempt entity; 2. the trustee of a complying superannuation entity; or

39


The events described in Note 1 occur under CGT event K3: s104-215. Under Division 128, a CGT asset of the deceased “passes” to a beneficiary of the deceased estate if the beneficiary becomes the owner of the asset in any of the following cases: 1. under the deceased’s will, or the will as varied by a Court Order; 2. by operation of an intestacy law, or such a law as varied by Court Order; 3. if the asset is appropriated to the beneficiary by the deceased’s legal personal representative in satisfaction of a pecuniary legacy or some other CGT interest or share in the estate; or 4. under a deed of arrangement entered into by the beneficiary to settle a claim to participate in the distribution of the deceased’s estate, where any consideration given by the beneficiary for the asset consists only of the variation or waiver of a claim to one or more other assets that form part of the estate: s128-20(1); see further Taxation Ruling TR 2006/14 at para 33 – 37. A “CGT asset” is defined to include any kind of property, including a legal or equitable right that is not property. It includes a “part of, or an interest in” any kind of property and a legal or equitable right that is not property: s108-5.

Under s128-20(1), it does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by the legal personal representative. Consequently, the asset will “pass” to the beneficiary when the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate, whether or not the asset is later transmitted or transferred to the beneficiary. In Taxation Determination TD 2004/3 at para 4, the Commissioner states: While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, we consider that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. It is considered that there is nothing in section 128-20 that makes “passing” dependent upon the acquisition of legal ownership. Under s128-20(2) a CGT asset does not pass to a beneficiary if the beneficiary becomes the owner of the asset because the legal personal representative transfers it under a power of sale.

2. any consideration given by the beneficiary consists only of the variation or waiver of a claim to an asset or assets that form part of the estate.

Thus, if a beneficiary pays consideration to the legal personal representative or trustee to acquire a CGT asset of the estate, the transfer would not come within s128-20. The disposal would be within CGT event A1: s104-10(2). See ATO ID 2006/34. This is because the interest in the CGT asset did not pass to the beneficiary under the deceased’s will in the manner set out in s128-20. Furthermore, and as mentioned earlier s128-20(2) specifies that an asset does not pass to a beneficiary if it is transferred to the beneficiary under a power of sale.

It is necessary, for the purposes of s12820(1)(d) that the deed of arrangement is concluded prior to the administration of the estate being completed, unless the beneficiary can demonstrate that a court would, at the time the deed is concluded, have entertained an application for family provision, or an extension of time within which to make such an application.

An asset held by a deceased that becomes part of a testamentary trust created under the deceased’s will which is distributed by the trustee to a beneficiary will pass to the beneficiary for the purposes of Division 128: see Practice Statement PSLA 2003/12 and Taxation Ruling TR 2006/14 at para 77 – 81.

It is not necessary, however, for a taxpayer to commence legal proceedings in order to establish that he or she has a claim to participate in the distribution of the assets of the estate. A claim may be established by a potential beneficiary communicating to the trustee his or her dissatisfaction with the will: see Taxation Ruling TR 2006/14, para 37.

CGT events E5 to E8 (in ss 104-75 to 104-100) create an exemption for trusts “to which Division 128 applies”. Consequently, if the exception applies, the Commissioner takes the view that it is not necessary to consider whether any other CGT event has occurred: TR 2006/14 at para 77.

In order to be effective a deed of arrangement must be entered into: 1. to settle a claim to participate in the estate; and

40 | BRIEF MAY 2017

In TR 2006/14 the Commissioner takes

the following view: 79. In the context of CGT events E5, E6 and E7, the exception will apply if, as part of the administration of a deceased estate, an asset the deceased owned when they died passes to a beneficiary in accordance with section 128-20 (note that in certain circumstances where an asset passes to a beneficiary the Commissioner treats the trustee of a testamentary trust in the same way as he treats a legal personal representative: Law Administration Practice Statement PS LA 2003/12). 80. CGT event E8 does not involve the passing of any asset to a beneficiary – it happens if a beneficiary disposes of their interest in trust capital. The exception to CGT event E8 will therefore apply if, during the administration of the deceased individual’s estate, a beneficiary disposes of their interest in trust capital. The exception applies however only to the extent that trust assets owned by the deceased when they died might pass to the beneficiary, that is these assets are excluded when calculating the trust’s net asset amount or reduced net asset amount under subsections 10495(2) and 104-100(2). An issue which is being promoted at the present time is that relating to “optional” testamentary trusts, created at the wish of the beneficiaries. The reasons given for this is that one or other of the beneficiaries may have a burning desire to control his or her “share” of the estate. CGT event E1 occurs if a taxpayer creates a trust over a CGT asset by declaration or settlement: s104-55(1). The time of the event is when the trust over the asset is created. CGT event E2 occurs if a taxpayer transfers a CGT asset to an existing trust: s104-60(1). The time of the event is when the asset is transferred. It should be noted that the exceptions which apply to CGT events E5, E6, E7, E8 and E9 in relation to the application of Division 128 do not apply to CGT event E1 or E2. It follows that if a beneficiary under a testamentary trust creates an interest over or transfers an interest to a trustee in respect of its life or term interest in a non-arm’s length dealing, these events may apply. CGT event E8 does not apply because a life or term interest is


not a capital interest, as to which an exemption would apply. The cost base of such an interest would be its market value as at the date of death. If this were transferred for no consideration, the beneficiary is deemed to have received market value at the date of the event: Taxation Ruling TR 2006/14 paragraph 24-28 and 72. The Commissioner’s practice is: Not to recognise any taxing point in respect of assets owned by a deceased person until they cease to be owned by the beneficiaries named in the Will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT Event K3 applies).

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Thus, for example, if the Will provides that the deceased’s surviving spouse has a life interest in the deceased’s home and, on his or her death, the home vests in the son, the home would pass to the son for the purposes of s128-20 on the death of the deceased: see ATO ID 2006/34.

option to purchase, which is dutiable in the ordinary course.

Where s128-20(1)(d) applies, and the beneficiaries of the estate enter into a deed of arrangement to settle a claim to participate in the distribution of the estate, the Commissioner will treat the arrangement, made to settle a genuine dispute between beneficiaries which is completed before the estate is fully administered, as having no CGT effect because the rights of beneficiaries do not crystallise before that time. The Commissioner accepts that the assets pass under the will albeit in an altered condition: see Taxation Ruling TR 2006/14 at para 37.

Under s22 of the Land Tax Assessment Act 2002 an exemption from liability to land tax exists if private residential property is owned by the executor of a will as trustee, and an individual identified in the will is entitled to the property as a tenant for life, or has a right under the will to use the property as a place of residence for as long as he or she wishes, but is not entitled to any estate of freehold in possession of the property. The individual must use the property as his or her primary residence: s22 LTAA 2002.

Transfer Duty and Land Tax Under s139 of the Duties Act 2008 nominal duty is chargeable on a transfer or agreement for the transfer of dutiable property to the extent that the transfer gives effect to a distribution in the estate of a deceased person and there is no consideration for the agreement or transfer: s139(2)(a)(i) and (ii). This provision must be read with reference to the provisions of Commissioner’s Practice DA 29.2. This distinguishes, with examples, matters where a transfer of a specified property to a named beneficiary will be effected within the terms of the exemption. This is contrasted with cases where the transfer of property does not occur in accordance with the will, either in that it passes to other beneficiaries or in other shares, or where the beneficiary has an

income of the trust estate as is attributable to a period when the beneficiary was a resident; and

There is an exemption from liability to duty on a declaration of trust over dutiable property to the extent it gives effect to a distribution in the estate of a deceased person: s139(2)(b).

There is a more limited exemption under s23 LTAA for one year following the year in which the resident died provided there was an exemption under s21, and as long as the estate does not derive rent or other income from the property during the assessment year. Taxation of Minor Beneficiaries If a trust has trust accounting income and net income and a beneficiary who is a resident individual and under a legal disability is presently entitled to a share of trust accounting income under the ordinary concept of present entitlement or is deemed to be presently entitled to it by virtue of s95A(1) of ITAA 1936, the minor’s share of net income is taxed to the trustee under s98. S98(1)(a) specifies that the trustee is assessed and is liable to pay tax in respect of: (a) so much of that share of the net

(b) so much of the share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. The trustee is taxed at individual rates without any tax deductions. Division 6AA of Part III of ITAA 1936 and the Rating Act impose penal tax on the income of minors, including minors who receive trust income. The purpose of Division 6AA is to prevent income splitting, especially through family trusts, to take advantage of the tax free threshold for individuals and the graduated tax rate scales. The position of a minor beneficiary in receipt of income from an inter vivos discretionary trust is described in the following set of figures:

Inter Vivos Discretionary Trust

Distribution

less: Tax (at 47%)

$20,542.00 $ 9,654.74 $10,887.26

There is an exception to these rules in respect of income attributable to the assessable income of a trust estate that is “excepted trust income” under s102AG of ITAA 1936. If a trust derives both assessable income that is “excepted trust income” and any other type of income, it will be necessary to make an allocation for tax purposes between the income which qualifies as “excepted trust income” and the income 41


from the estate of a deceased person and was so transferred within three years after the date of death of the deceased person: see s102AG(2)(d)(i) and (ii). While one cannot “create” a testamentary trust once the testator has died, the provisions of s102AG(2) (d) enable the beneficiaries of the estate to achieve that purpose, subject to the limitations imposed by s102AG(2A). The fact that the minor must acquire the property so transferred and from which the income was derived when the trust ends requires the existence of an absolute right according to the terms of the trust, not dependant on the discretion of the trustee.

which does not so qualify. Under s102AG(1) where a beneficiary of a trust estate is a prescribed person, the Division applies to so much of the share of the beneficiary of the net income of the trust estate of the year of income as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, in relation to that beneficiary, “excepted trust income”. This gives the Commissioner a discretion to make an apportionment between amounts of “excepted trust income” and other trust income. Under s102AG(2)(a), an amount included in the assessable income of a trust estate will be “excepted trust income” in relation to a beneficiary of the trust estate to the extent of which the amount is assessable income of a trust estate that resulted from: 1. a will, codicil or an order of court that varied or modified the provision of a will or codicil; or 2. an intestacy or an order of court that varied or modified the application in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate. In Estate of the Late A W Furse No 5 Will Trust v FCT (1990) 21 ATR 1123; 91 ATC 4007 Hill J said that all that is necessary to fall within s102AG(2)(a): Is that the assessable income be assessable income of the trust estate, that trust estate being one of the forms of trust estate referred to in s102AG(2)(a)(i) or (ii) (that is to say not an inter vivos trust). (91 ATC at p4018; 21 ATR at 1136). The Commissioner regards a

42 | BRIEF MAY 2017

testamentary trust created under a will as a trust estate that “results from” a will, so that income distributed by the trustee of a testamentary trust is “excepted trust income”: see ATO ID 2002/947 (since withdrawn as it is regarded as a straight application of the law). The term “assessable income of a trust estate that resulted from” does not restrict the category of “excepted trust income” to income from assets already held by the deceased at the time of death. Hill J said (at 21 ATR 1136): Such a view is too narrow. Clearly the legislature must have contemplated the case where the will assets were sold and the proceeds reinvested. What happened in the present case is that the trustee borrowed funds and used the borrowed funds to invest in such a way as to derive assessable income from the investment. In my view, the consequence of such an investment was that assessable income was derived by the trust estate so that income was “assessable income of the trust estate” and clearly enough the trust estate was one that resulted from the will of the [deceased]. Under s102AG(2)(d) “excepted trust income” includes an amount derived by the trustee of a trust estate from the investment of any property: 1. that devolved for the benefit of the beneficiary from the estate of a deceased person; 2. that was transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person

It should be noted, therefore, that under s102AG(2A), it is necessary that the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as trustee) when the trust ends. If the minor beneficiary cannot acquire the property so transferred to the trust, the income will not qualify as “excepted trust income”. The position of a minor beneficiary in receipt of excepted trust income from a testamentary trust is described in the following set of figures: Testamentary Trust [Excepted Trust Income] Distribution

$20,542.00

less: Tax $0 - $18,200 $ 0.00

less:

$2,342 x 19% $ 444.98

$ 444.98

Low Income Tax Offset

$ 445.00

Net Amount

$20,542.00

At current tax rates, therefore, there would be a saving of $9,654.74 between a distribution under testamentary trust and an inter vivos trust. In order for the beneficiaries of a testamentary trust to be entitled to franking credits in relation to shares acquired after 31 December 1997, the trustee is required to make a Family Trust Election in accordance with Schedule 2F ITAA 1936. This may not give rise to a problem where dealing with relatively simple arrangements. Where, however, there is a discretion to pay income to people who are not within the “family group” as defined in s272-90 of Schedule 2F the existence of the Family Trust Election may restrict the tax effective distribution of income,


such as might happen if a life interest were given to a friend, not a member of the family group. In that case family trust distribution tax is payable on the amount of the distribution.

Schemes in Relation to “Excepted Trust Income” Under s102AG(3), if any two or more parties to: 1. the derivation of the “excepted trust income” mentioned in subsection (2); or 2. any act or transaction directly or indirectly connected with the derivation of that “excepted trust income”, were not dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction, the “excepted trust income” is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction. Similarly, under s102AG (4), where assessable income is derived by a trustee directly or indirectly under or as a result of an agreement that was entered into or carried out for the purpose or for purposes that included the purpose of securing that the assessable income would be “excepted trust income”, s102AG(2) will not apply. In AAT Case 10,321 (1995) 31 ATR 1131 the minor beneficiary received income said to be excepted trust income under a child maintenance trust, established in accordance with s102AG(2)(c)(viii) read with s102AGA as a result of family breakdown. The scheme was one by which his father used funds provided by his firm to settle a unit trust, which in turn lent the funds to the trustee of a pre-existing discretionary trust, which subsequently paid a small amount of interest on the loan, and made a distribution of income to the unit trust. It, in turn, distributed the income for the benefit of the minor beneficiary. The Tribunal held that the income derived from the unit trust was not from the investment of $22,000, since the income it derived was in consequence of a discretionary distribution. This was held to be a windfall gain unrelated to the investment. In Taxation Ruling TR 98/4 which deals with child maintenance trusts, the Commissioner gives some guidance as to what is regarded as contravening s102AG:

76. Section 102AG(3) applies where higher than arm’s length rates of income are paid in relation to the investment of property transferred beneficially to the child. In the case of a CMT [Child Maintenance Trust] holding a unit in a unit trust, for example, the relevant question determining the arm’s length return is how much return would be expected if all parties were dealing at arm’s length in relation to the return on the unit. For instance, if there was only a nominal amount of property subscribed for the unit, the arm’s length income of the unit is nominal or zero. Any greater return would attract the operation of s102AG(3). Similarly, if property were invested in an annuity to be paid by a parent, the income under the annuity should not exceed the range of income under annuities available at the same cost and on the same terms from commercial providers of annuities. Extraordinary terms in an annuity from a non-arm’s length source may suggest the income exceeds an arm’s length rate of return. 77. Sections 102AG(3) and 102AE(6) apply to any parties to any act or transaction connected even indirectly to the derivation of excepted income: they are not limited to dealings between the party deriving the excepted income and the party from whom that income is derived. Take, for example, the trustee of a CMT investing in a unit trust that acquires a company in partnership with someone else. The law requires: •

The unit trust to deal at arm’s length with its partner over the distribution of partnership income or derive no more than an arm’s length share of that income;

the partners to deal at arm’s length with the company over the dividends they take, or take no more than arm’s length dividends; and

the company to deal at arm’s length in earning its profits, or to make no more than arm’s length profits. If dividends on profits exceed arm’s length amounts, the

excepted income derived by the CMT has to be recalculated. 78. The subsections ensure that, for the purposes of s102AG(2) (c)(viii) and 102AE(2)(b)(viii) substantial property has to be transferred to ground any substantial amount of excepted income. They limit income, where parties do not deal at arm’s length in relation to the income, to what it would have been if they had dealt at arm’s length. But the tax law does not require parties to deal at arm’s length. For example, a lender at arm’s length would not allow the interest on a loan to be a matter of discretion. But if a CMT or a related entity, made loans on that basis, so much of the interest as did not exceed arm’s length interest could still be excepted income. 79. The parties to the derivation of excepted income, or to an act or transaction connected even indirectly with the derivation of excepted income, may be at arm’s length. This is not sufficient; they must deal with each other at arm’s length, that is, as arm’s length parties would normally do, so that their dealing has an outcome that is the result of normal bargaining (see The Trustee for the Estate of the Late A W Furse No 5 Will Trust v FCT (1990) 21 ATR 1123 and Granby Pty Ltd v FCT (1995) 30 ATR 400; 95 ATC 4240). It has been suggested that even if they are not at arm’s length, subsections 102AG(3) and 102AE(6) do not apply if they deal on an arm’s length basis, a view that has some support in the authorities. Another view would be that the subsections apply where parties are not at arm’s length, but where they do deal on an arm’s length basis the income is necessarily what it would have been between parties dealing on that basis. On either view, if parties are dealing only on an arm’s length basis in relation to the derivation of excepted income and any even indirectly related acts or transactions, subsections 102AG(3) and 102AE(6) do not reduce the amount of the excepted income.

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CGT Event K3

would not “pass” to the beneficiary.

The exemption created by Division 128 is subject to the provisions of s104-215, which creates CGT event K3.

Capital Events – Dealing with Beneficiary’s Interest

CGT event K3 occurs if an asset owned by the deceased passes to a beneficiary in the estate who, when the asset passes, is: 1. is an exempt entity; 2. is the trustee of a complying superannuation entity; or 3. is a foreign resident: s104-215(1)(a) to (c). If the asset passes to a beneficiary who is a foreign resident, CGT event K3 happens only if: 1. the deceased were an Australian resident before dying; and 2. the asset (in the hands of the beneficiary) is not taxable Australian property: s104-215(2). An “exempt entity” is one whose ordinary income and statutory income are exempt from income tax by reason of Division 50D ITAA 1997, or an entity whose ordinary income or statutory income is exempt from income tax because of any Commonwealth law other than ITAA 1997: s995-1. A testamentary trust that receives the assets of a deceased under a will to hold in perpetuity, with a direction to apply the income for public charitable purposes, is within the definition: ATO ID 2004/458. CGT event K3 does not happen if assets of a deceased estate are held by the trustee of a testamentary trust in perpetuity and the income is distributed to charities: see Private Ruling 20677(2000). A capital gain or capital loss which is made from a testamentary gift of property that would have been deductible under s30-15 if it had not been a testamentary gift is disregarded: s118-60(1). If the only reason the gain or loss is not disregarded under s118-60(1) is because the property has not been valued by the Commissioner at more than $5,000, then, for the purposes of that subsection, it has taken to have been so valued. It follows that the capital gains or losses are disregarded because the deceased would have been entitled to a deduction. As with Division 128, CGT event K3 requires that the CGT asset “pass” to a beneficiary who is within the three categories. Once again, it follows that if the trustee were to liquidate the asset it 44 | BRIEF MAY 2017

The scheme of the CGT provisions, as mentioned in relation to Division 128, is that when an asset of the deceased estate passes to a beneficiary, either directly or indirectly from the trustee of a testamentary trust, the beneficiary inherits the deceased’s cost base. In the case of a pre-CGT asset, the beneficiary is taken to acquire the asset at its market value as at the date of death: s128-15(4). The interests of a life tenant and a term beneficiary (if there is one) are separate assets, created at the time of death. These may be disposed of as shown in the Table to s109(5). The current practice of the Commissioner is that a life or term beneficiary under a testamentary trust who acquires its interest for no consideration is taken to have acquired it for market value: Taxation Ruling TR 2006/14 at paragraph 144 and 165. When the interest of the life and term beneficiary ceases, the legal interest is transferred to the residuary beneficiaries. Under s128-20, the interest “passes” as at the date of death. The Commissioner treats the residuary beneficiary’s interest as becoming “unencumbered” by the life interest. The termination of the life and term interest do not create a separate CGT asset, because the interest was created as at the date of death. While the cost base of the residuary interests and the market value as at the date of transfer may be different, the practice of the Commissioner is not to treat that event as a taxing point although CGT event C2 would occur. The practice is in conformity with the rule that if the beneficiary of a trust (other than a unit trust or deceased estate) surrenders its trust interest in return for a distribution by the trustee of a trust asset or to end a capital interest under the trust, any capital gain or loss from the surrender or loss of the trust interest is disregarded: s104-75(6) and s104-85(6). CGT events E5, E6, E7 and E8 have no tax effect for testamentary trusts except for assets acquired by a trustee after death. This is as long as the trust is one to which Division 128 applies and no other CGT event has a more specific application: s102-23 and 102-25. If a trustee uses trust funds to acquire a CGT asset which is later distributed to a beneficiary or disposed of to a third party, CGT events E5, E6, E7 and E8 can occur because Division 128 does not apply: Taxation Ruling TR 2006/14 at paras 77 – 80.

If a trustee purchases an asset to which the beneficiary is absolutely entitled, no CGT event occurs when the trustee transfers the asset to the beneficiary. The transfer does not give rise to CGT event A1 because there is no change of ownership within s104-10(2). CGT event E1 will not apply: s104-55(5). The beneficiary’s cost base is the purchase price paid by the trustee: Taxation Ruling TR 2006/14 at para 29 – 32. If the beneficiary is not absolutely entitled to the asset when the trustee acquires it, the transfer is within s12820 when the trustee transfers it to the beneficiary because it passes under the will. The trustee will incur a capital gain or loss that is not disregarded under s128-10 because the asset was not owned by the deceased at the date of death. If a beneficiary disclaims and surrenders a trust interest, an effective disclaimer of the gift operates by way of avoidance and not by way of disposition: it defeats the donor’s intention to give the property to the donee: FCT v Ramsden 2005 ATC 4136 at p 4146, [2005] FCAFC 39; (2005) 58 ATR 485. A disclaimer must be unequivocal. It operates retrospectively so the beneficiary does not acquire a CGT asset and the disclaimer does not give rise to CGT event C2: Taxation Ruling TR 2006/14 at paras 29 – 32. If a beneficiary under a testamentary trust has a life interest in a dwelling that is the main residence, a disclaimer of the life interest is a CGT event C2, but the capital gain, if any, is disregarded under s118-110. The Commissioner’s practice is to treat the life interest as an ownership interest in the dwelling under s118-130. If the trustee of a testamentary trust makes a payment to a beneficiary “in respect of” the beneficiary’s interest, and some or all of the payment is not included in the beneficiary’s assessable income, CGT event E4 occurs: s10470(1). The cost base of a life or term beneficiary’s interest is the market value of the interest at the time it was created. CGT event E4 is not subject to Division 128. If a beneficiary of a testamentary trust becomes absolutely entitled to an asset of the trust as against the trustee, CGT event E5 is excluded under s104-75(1) as a trust to which Division 128 applies. This applies only to assets owned by the deceased at the time of death. The trustee will not make a capital gain. If a beneficiary who is absolutely entitled to a trust asset directs the trustee to transfer it to another trust, CGT event E2 will occur for the beneficiary.


If a trustee disposes of a CGT asset of a trust to a beneficiary “in satisfaction of the beneficiary’s right or part of it, to receive ordinary income or statutory income from the trust”, CGT event E6 happens: s104-80. By reason of the exemption where Division 128 applies, CGT event E6 does not operate. If, for example, a trustee transfers a CGT asset owned by the deceased at death to a life beneficiary in consideration of it giving up its interest, CGT event E6 will occur because the asset is not transferred under the deceased’s will, but under a separate agreement. If a trustee disposes of a CGT asset of the trust to a beneficiary “in satisfaction of the beneficiary’s right or part of it, in the trust capital”, CGT event E7 will occur: s104-85. If, however, Division 128 applies, then CGT event E7 will not operate. If a beneficiary of a trust disposes of a capital interest in the trust to a person other than the trustee, CGT event E8 may apply. Where Division 128 applies, CGT event E8 will not operate, unless the interest relates to assets acquired by the trustee after the deceased’s death: s10490(1)(a). Planning Issues In my view, the use of a testamentary trust (or will trust) is useful to achieve the tax benefits applicable to income payable to minor beneficiaries, such as grandchildren, or, in the case of a parent who dies leaving minor children. It is also beneficial in terms of asset protection, subject to the issue of control and the question whether or not the beneficiary’s interest is “property” or a “financial resource” for the purposes of the Family Law Act. Sally Bruce has referred to the decisions of the Family

Court and High Court. In view of the decision of the High Court in Kennon v Spry [2008] HCA 56; [2008] 238 CLR 366 I think considerable caution is required in the choice of trustees or controllers. French CJ there held (CLR p 395 at para 81): The assets of the Trust, coupled with Dr Spry’s power to appoint them to his wife and her right to due consideration, were, until the 1998 Instrument, the property of the parties to the marriage for the purposes of s79. The fact that Dr Spry removed himself as a beneficiary by the 1983 Deed does not affect that conclusion. Because the 1998 Instrument effectively disposed of Mrs Spry’s equitable right to be considered in the application of the Trust fund, and having regard to the trial judge’s conclusions about the purpose of the instrument, the order setting it aside was an appropriate exercise of the Family Court’s power under s106B. Mrs Spry’s equitable right could then be considered as part of the property of the parties to the marriage. The setting aside of the 18 January 2002 Dispositions was also appropriate. The ancillary order that Dr Spry pay his wife the sum of $2,182,302 was appropriate for the reasons stated by Gummow and Hayne JJ in their joint judgment. See also French CJ at CLR 394, para 78: Gummow and Hayne JJ, in their joint reasons, characterise Mrs Spry’s right with respect to the due administration of the Trust as part of her property for the purposes of the Family Law Act. I respectfully agree with their Honours that prior to the 1998 Instrument the equitable right

to due administration of the Trust fund could be taken into account as part of the property of Mrs Spry as a party to the marriage. So too could her equitable entitlement to due consideration in relation to the application of the income and capital. I am less inclined to advocate so-called “optional” trusts or separate trusts. In my view, creating separate trusts where the beneficiary is both trustee and principal beneficiary named as a taker in default of appointment, practically destroys the asset protection that one seeks to achieve whether seen from a commercial or family law perspective. I also have concerns as to the question whether the “optional” nature of the arrangement contravenes the principles described by Kitto J as the “cardinal rule” in Tatham v Huxtable (supra) (at CLR 653), and there is the added complication of CGT events E1 and E2 arising on the declaration of trust. There is also the risk that the Office of State Revenue may consider the arrangement not to satisfy s139 read with DA 29.2. The overriding question is whether the testator has sufficient personally owned assets to enable the trustee of the testamentary trust to invest and generate the return required. In the case of a testamentary trust the assessable income must result from a trust estate established by will or order of court. It is in the nature of things that most successful businessmen and professional people have few or no assets in their name: the assets are held in trusts or companies, not being property of the deceased. Income distributions from a related discretionary trust could not be said to be assessable income of a trust estate that resulted from a will.

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Amendments to Section 13 of the Sale of Land Act 1970 (WA) Maintaining consumer protection while pushing for vendor flexibility

By Simon Moen, Matthew Reid, Raj Logarajah Jackson McDonald

Introduction Section 13 of the Sale of Land Act 1970 (WA) (SLA) is intended to protect purchasers of land by prohibiting a person from selling five or more lots in a land subdivision or two or more lots in a strata development where the vendor is not the owner of the land. In 2014, the Court of Appeal in Barker v Midstyle Nominees Pty Ltd,1 (Barker) found in favour of a purchaser against a vendor who was not the owner of the land and reaffirmed the key purpose of s13 of the SLA to be that of consumer protection. It is claimed that the decision in Barker has had an impact on finance and funding arrangements for the land development industry.2 In order to deal with the matters raised by the decision in Barker, Landgate undertook a review of s13 of the SLA and released its proposed changes in a consultation paper in March 2015. Substantial changes to s13 came into effect on 3 April 2017. This paper briefly looks at the history of s13 and contains a summary of the key amendments to s13. Finally, observations are made about the changes and their practical consequences.

Background The main purpose of s13 of the SLA is to protect purchasers from the risk of a vendor’s failure to obtain title to the land the vendor is offering to subdivide and sell. A vendor’s inability to obtain title will prevent settlement of the land in

46 | BRIEF MAY 2017

question and may result in losses to the purchaser, which may include loss of any deposit or monies paid to the vendor or the lost opportunity to purchase an alternative parcel of land.3 In 1968 the Minister for Justice (Minister) asked the Law Reform Committee of Western Australia (LRCWA) to look into developing legislation to protect the rights of purchasers who default under terms contracts for the sale of land. In response, the LRCWA published a report entitled, ‘Protection to Defaulting Purchasers’ In September 1969.4 The LRCWA in its report highlighted the potential problem with land developments which involved vendors who sold subdivided lots which they did not own: There is still no indication at this stage that there are any similar problems in Western Australia to those outlined above. Nevertheless we have knowledge of one large subdivisional project, where land is being developed and sold in lots, but where the vendor to the purchasers of the subdivided lots is not the registered proprietor of the land, and is in fact the last but one purchaser in a chain of dependent terms contracts from the registered proprietor. There may well be other subdivisional projects of this type, but we have not made a survey. In these circumstances the final purchaser gets little protection in the event of default by any of the intermediates, on whom he must rely for his ultimate title.5 Subsequently, the Minister requested the LRCWA to recommend legislation to protect the interests of purchasers

buying lots in a proposed subdivision from a vendor who is not the registered owner of the land. The LRCWA responded to the Minister’s request in a supplementary report, “Relief for Purchasers under Land Sales” (‘Supplementary Report’) which was published in February 1970.6 In its Supplementary Report the LRCWA considered the freedom to contract alongside the potential problems which could arise in relation to sale of subdivisional land by vendors who do not own the land.7 It recommended enacting legislation “requiring vendors of subdivisional land comprising five or more portions be the registered proprietor of that land before he sells or offers for sale any portion or enters into any contract to sell any portion”.8 The main purpose behind the LRCWA’s recommendation was to protect purchasers “by removing from the field irresponsible speculators who are at risk of not being able to finance the purchase and transfer of land into their own names” and prevent the rise of problems caused by the “practice of selling land subject to a chain of dependant terms contracts”.9 The Minister in his second reading speech on the original Bill, which upon enactment became the Act, indicated to the Legislative Council that the Bill incorporated all of the LRCWA’s recommendations.10 As to the protection to consumers offered by the newly constructed clause s13, the Minister said: In the event of default in any one of the contracts between the registered proprietor and the ultimate purchaser, losses may


be sustained by people unable to protect their transactions. The restriction will not prevent the owner of a lot or even a small group of lots from selling even though he has not got title. It will, however, exercise some control over the type of speculator who has caused some public concern recently.11

Developer obtains a planning approval and undertakes a marketing campaign to see if the development is viable. c. Step 3 Developer enters into contracts to sell lots off the plan, before the developer owns the underlying land. d. Step 4

The law prior to amendment In 2014, the Court of Appeal in Barker reaffirmed that the main policy behind s13 of the SLA was that of consumer protection. The section was intended to “protect a purchaser from the risk that a vendor/developer never obtains title and is unable to effect settlement, causing the purchaser loss” and to “constrain the business operations of land developers who were carrying out relatively large subdivisions”.12 The Court of Appeal went on to find that contracts entered into in breach of section 13 of the SLA are enforceable by the purchaser but unenforceable by the vendor and the contracts remain unenforceable by the vendor even if the vendor later becomes the registered proprietor of the sale property. The offending sale contract is akin to a call option held by the buyer. The following commonly used approach to development site acquisitions, offends the section: a. Step 1 Developer enters into an option to acquire the development site or enters into a contract to buy the development site but settlement is deferred. b. Step 2

Developer decides based upon the presales that the project is viable and exercises the option or decides to proceed to settlement. e. Step 5 Developer settles on the purchase of the land and becomes the registered proprietor. In Barker, the Court of Appeal considered section 13 and found that the sale contracts entered into at Step 3 above were unenforceable by the seller, but enforceable by the buyer – so in effect, the buyer could “get out” but the seller could not. According to Landgate, the decision in Barker was in line with Parliament’s intention of affording protection to the purchaser through s13 of the SLA, but feedback from industry sources indicated that the decision in Barker had an impact on finance and funding arrangements for the land development industry in Western Australia. Such an impact was seen as detrimental to the development and release of new lots onto the market and their affordability.13 After consultation with industry representatives, professional bodies and government agencies, Landgate released its consultation paper in March 2015 titled “Sale of Land Act: Proposals for Changes to Section 13”.14

Landgate found that vendors should be allowed to enter into sale contracts of subdivided lots prior to owning them: Landgate’s view, following consultation with Key Stakeholders, is that the advantages of Non-Owner Sale off the Plan contracts outweigh the disadvantages and that, providing the consumer protection policy objectives of section 13 can be addressed, Non-Owner Sale off the Plan contracts should be permitted.15 Landgate’s consultation paper has led to a complete revamp of s13 of the SLA and the rewrite closely reflects Landgate’s proposed changes.

Amendments to s13 of the SLA The Sale of Land Amendment Bill Act 2016 was approved by Parliament on 10 November 2016.16 The amended SLA took effect from 3 April 2017.17 Sections 13A to 13I have been inserted. The key amendments to s13 of the SLA are summarised as follows: a. The application of section 13 is to be expanded to cover the sale of one or more lots in a subdivision including strata subdivisions, rather than on sales of five or more lots in a subdivision or two or more lots in a strata subdivision. b. Section 13A allows developers the ability to sell lots where the developer is not the registered owner of the development land, provided that the sale contract complies with sections 13B to 13D of the SLA. c. Section 13B requires that a contract of sale of any lot in a subdivision

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where the vendor is not the owner of the land (‘future lot contract’) be subject to the ‘vendor’s condition’ which requires the vendor to become, or being entitled to become, the registered proprietor of the lot or lots to be sold within 6 months from the date of execution of the contract or any other period the parties specify in the contract or in a variation to the contract (‘vendor’s condition’). d. Section 13C requires that a future lot contract must include a warning that contains a statement to the effect that the vendor is not the proprietor of the lot or lots to which the contract relates. e. Section 13D requires that a future lot contract must provide that any deposit or other amount payable by the purchaser under the contract must be paid by the vendor to a deposit holder specified in the contract within 2 working days after receipt of the payment from the purchaser; and held by the deposit holder on trust for the person entitled to receive it under the contract. The contract is illegal and void if the vendor fails to comply with sections 13B to 13D of the amended SLA. Section 13E mandates that a vendor must pay to the deposit holder specified in a future lot contract any deposit or other amount paid by the purchaser under the contract within 2 working days after receipt of the payment from the purchaser or face a fine of $100,000. Section 13F enables the Registrar of Titles to require an audit of a deposit holder’s trust accounts from time to time for the purpose of determining compliance with the requirements in section 13E. Under s13G, the vendor and the purchaser are obliged to make all reasonable endeavours to ensure that the vendor’s condition is satisfied. Furthermore, the vendor must give the purchaser reasonable information about the steps taken by or on behalf of the vendor to satisfy the vendor’s condition within a reasonable time after receipt of a written request for the information from the purchaser. Under section 13H, the vendor must give the purchaser notice in writing that the vendor’s condition has been satisfied. If the vendor fails to give the notice required within 10 days, the vendor’s

48 | BRIEF MAY 2017

condition is taken not to have been satisfied. In accordance with s13I, if a vendor’s condition in a future lot contract is not satisfied the purchaser may terminate the contract by notice in writing to the vendor. The penalty for failure to place deposit monies into a trust account and for entering into a void contract is $100,000 (the current penalty for breaching s13 is $750). The $100,000 penalty is now an offence and so a breach of s13 of the amended SLA by a corporation could lead to an actual penalty of $500,000 in accordance with s40(5) of the Sentencing Act 1995 (WA).

Observations on the amendments The decision in Barker may have acted as a barrier to entry into the land development industry for middle to lower tier vendors as they may have struggled to fulfil upfront financial requirements needed to develop land. The amendments to s13 of the SLA will effectively remove this barrier and allow for competition within the industry (in theory) keeping the price of land lots competitive. As such, the amendments to s13 not only protects purchasers but may also result in cost savings to purchasers.

penalty will actually be five times that stated in the Act pursuant to section 40(5) of the Sentencing Act 1995 (WA). It is interesting to compare the amendments to section 13 with the Strata Titles Act 1985 (WA) (STA) in relation to accidental non-disclosure of information. Under the STA, if the seller does not provide the buyer with “notifiable information”, the buyer simply has a right to avoid (i.e. get out) of the sale contract and the seller is not subject to a monetary penalty. Whereas, under the proposed amendments to section 13, if the seller does not provide the buyer with the “statutory warning”, the sale contract becomes illegal and void and the seller is subject to a significant monetary penalty. The primary purpose of the SLA is to protect buyers of land and to provide clarity as to the current owner. In light of this consumer protection bias, care will need to be taken to ensure that the sale contract properly describes the “period of time” the seller has to become the proprietor of the lot. In particular, the following type of clause should be avoided: – “the period of time for the seller to become the proprietor of the lot is 12 months, but that 12 months can be extended by the period of time equal to delays which arise outside the seller’s control”.

Nonetheless, the amendments to s13 do not provide complete guidance on what constitutes “all reasonable endeavours” as required in s13(G)(1). This raises the question as to what a vendor will need to do or to have satisfied s13(G)(1).

The amendments to section 13 will not be retrospective. This means that the amendments will not “fix” existing sale contracts which currently contravene section 13 of the Act.

In addition, a vendor must give the purchaser “reasonable information” about the steps taken by the vendor to become the registered owner of the land as required in s13(G)(3) of the amended SLA. Yet again, it is not clear what the vendor has to do, provide or prove in order to satisfy this obligation.

NOTES:

The legislative changes to section 13 bring their own challenges and compliance burdens, particularly for selling agents, lawyers preparing sale contracts and conveyancers. The new penalty of $100,000 is a significant change from the previous penalty of $750. This is of particular concern in the case of an accidental or inadvertent contravention. The new penalty is also per offence. So if a developer enters into 10 contracts in breach of section 13, the potential liability will be $1,000,000. In addition, if a corporation breaches section 13 the

1.

[2014] WASCA 75.

2.

Sale of Land Amendment Bill, Explanatory Memorandum (2016).

3.

Sale of Land Amendment Bill, Second Reading Speech (2016).

4.

Barker [2014] WASCA 75, [28].

5.

Law Reform Commission of Western Australia, Project No 1 – Part I: Protection to Defaulting Purchasers, Report (1969), [25].

6.

Barker [2014] WASCA 75, [32].

7.

Ibid., [33].

8.

Law Reform Commission of Western Australia, Project 1: Relief for Purchasers Under Land Sales, Supplementary Report (1970), [5]

9.

Ibid.,[5], [6].

10.

Barker [2014] WASCA 75, [35].

11.

Western Australia, Parliamentary Debates, Legislative Council, 3 November 1970, 1742.

12.

Landgate, Sale of Land Act: Proposals for Changes to Section 13, Consultation Paper (2015), 2.

13.

Sale of Land Amendment Bill, Explanatory Memorandum, above n 2.

14.

Landgate, above n 12, 1.

15.

Ibid.

16.

Landgate, Sale of Land Act Reforms (2017) <https:// www0.landgate.wa.gov.au/for-individuals/legislationand-reform/sale-of-land-amendment-bill-2016>.

17.

Ibid.


Key Amendments to the Construction Contracts Act 2004 Melissa Koo, Senior Associate Brendan Reilly, Partner Greg Steinepreis, Partner Squire Patton Boggs

The Construction Contracts Amendment Act 2016 (WA) (Amendment Act) introduced a number of changes to the Construction Contracts Act 2004 (WA) (the Act), with the majority of amendments taking effect as of 15 December 2016. The amended Act has been complemented by a Code of Conduct for contractors, the establishment of a compliance unit within the Department of Commerce to monitor compliance with the Code and expanding the Small Business Commissioner’s power to review and mediate disputes. Furthermore, as at 30 September 2016, the government has mandated the use of project bank accounts on public projects valued between AU$1.5 million and AU$100 million to ensure payments to subcontractors if the government contractor becomes insolvent.

Key Amendments The key amendments introduced by the Amendment Act to note are as follows: 1. Business Days All time limits relating to adjudicating a payment dispute have been amended from “days” to “business days”. The definition of business days excludes weekends, public holidays and the period from 25 December to 7 January. This is a welcome amendment for both principals and contractors. 2. Time Period to Make Application for Adjudication A key amendment the Amendment Act introduces is significantly increasing the time limit for lodging an application for adjudication from 28 days to 90 business days. Arguably this goes against the purpose of the Act, which is to enable the swift resolution of

payment disputes. However, the government believes that this amendment will address a concern that the previous time limit was an impediment for some participants, particularly small subcontractors, from accessing the adjudication process. The increased time period provides a potential applicant with approximately 18 calendar weeks to lodge a claim. 3. Time Period to Respond The Amendment Act replaces the time in which a response to an adjudication application can be made from 14 days to 10 business days. 4. Permitting Recycled Claims A significant amendment to the Act is the change to the definition of “payment claim” to include matters covered by a previous payment claim, thereby permitting recycling of claims. Permitting recycled claims will allow a party whose initial payment claims were rejected or disputed to be included in a subsequent payment claim. There appears to be no limit on how many times a claim can be recycled. However, a payment dispute cannot arise in respect of matters included in a payment claim that have been the subject of an application

for adjudication that has been dismissed or determined. Permitting recycled claims provides applicants with increased flexibility to seek rapid adjudication of a payment dispute. However, it may go against the object of the Act if a claim can be made multiple times and then be the subject of adjudication well after the relevant event occurred. This is exacerbated by the increased time period in which an adjudication application can be made. Essentially, there may not be an absolute time limit placed on when an adjudication application can commence. 5. Contract Payment Terms The Amendment Act reduces the maximum contract payment term from 50 days to 42 days. The new maximum payment term will commence operation on 3 April 2017. This amendment will operate to read down contractual provisions which have payment terms which exceed the 42 day limit. Therefore, principals should take notice of the new maximum payment term and the effect it will have on existing contracts as at 3 April 2017.

49


6. Substance Not Form The Amendment Act amends the Act to focus on substantial compliance rather than the form of an adjudication application. The amendments provide that the adjudicator must dismiss an application without determining its merits if the application has not been prepared in accordance with section 26(2)(a), unless satisfied that the application complies with the section sufficiently for the adjudicator to commence adjudicating the dispute. This will ensure the substance of an application will prevail over the form, to the extent to which the adjudicator is satisfied that the application sufficiently complies with section 26(2)(a). 7. Enforcement of Adjudication Determination Previously, leave of the Court is required in order to enforce a determination as a judgment or order of the Court. The Amendment Act amends the Act’s current position by removing the

requirement of leave of the Court and only requiring that, a party that is entitled to be paid an amount pursuant to a determination, file at Court a copy of the determination (certified by the Building Commission), and an affidavit verifying that payment is due and owing.

Potential Impact of the Amendments Contractors The amendments to the Act are favourable to contractors. It is apparent that, by amending the Act, the government aims to improve payment protection for smaller contractors, therefore mitigating the issues of insolvency and security of payment faced by those contractors in the construction industry. Prior to the operation of the Amendment Act, contractors had to pay special attention to when payment claims arise, in order to comply with the deadline to make an adjudication application under the Act. Now the flexibility is two-fold,

as the applicant has an additional 14 calendar weeks or so to prepare an application as well as the ability to recycle claims. Principals The key amendments are conversely unfavourable to principals or respondents. The respondent’s disadvantage under the Act is exacerbated as there is now a large imbalance in the time allowed to prepare a response to adjudication. As the applicant now has increased time to prepare an adjudication application there is the potential that a respondent will have to reply to very detailed, voluminous claims in a similar amount of time as allowed under the Act previously. This could cause injustice, especially in complex and large matters. Further, prior to the Amendment Act, a principal would have had some level of certainty that once the 28 day timeframe for making an adjudication application had expired, they would not be subject to an adjudication application. This is no longer the case with an applicant’s ability to recycle claims.

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50 | BRIEF MAY 2017


FAMILY LAW CASE NOTES Robert Glade-Wright Former barrister and accredited family law specialist

Property – Reconciliation after final order – Wife appeals dismissal of her s79A application – Husband’s failure to disclose In Waterman [2017] FamCAFC 23 (8 February 2017) the Full Court (Bryant CJ, Murphy J and Kent JJ) allowed the wife’s appeal against Judge Newbrun’s dismissal of her s79A application for the setting aside of a final property order made before the parties – who had two children – reconciled. The order required the sale of their home and an equal division of proceeds. The wife argued miscarriage of justice due to the husband’s failure to disclose his financial circumstances and that the parties had impliedly consented to the order being set aside. Murphy J (with whom Bryant CJ and Kent J agreed) at [(34)] cited Morrison [1994] FamCA 153 in which the Full Court said that “[o]rdinarily, a failure to comply with th[e] duty [of disclosure] will amount to a miscarriage of justice”, continuing at [61]: “Taken together … the wife’s lack of literacy; the husband’s failure to disclose; … the wife’s selfrepresentation … [when] the husband’s solicitor ‘told’ the wife of the proposed orders; … that occurred at the husband’s solicitor’s office; the fact that the orders were read to her only once … ; and … that she was not advised as to entitlements, all, in my view, amount to a miscarriage of justice … ” Murphy J said ([66]) that “[r]econciliation is not, of itself, sufficient for a finding that the parties had impliedly consented to the setting aside of a s79 consent order … Rather, any such finding is made by reference to the … circumstances … [of] the parties’ relationship by which the … intention is to be inferred”; and that ([77]) “[n] otably absent … from the ultimate findings made by his Honour … is any mention of … the parties’ respective contributions”; and concluded ([88]): “I am unable to see … how it was reasonably open to his Honour to conclude in 2016 that the parties did intend to bring an end to their financial relationships by the 1998 orders.” Children – Mother “orchestrated” father’s exclusion from child’s life – Trial judge gave insufficient weight to mother’s neglect and exposure of child to violence In Bangi & Belov [2017] FamCAFC 5 (3 February 2017) the Full Court (Ainslie-

Wallace, Murphy & Cronin JJ) allowed the father’s appeal against Hannam J’s parenting order for a 10 year old child after a nine day trial. The mother only attended the first five days, telling the court that if the orders made did not accord with her wishes she would not obey them ([107]), and did not attend the appeal. The father had sought orders that the child live with him, arguing “that the child was at risk of harm in the mother’s care” ([2]). The trial judge ordered that the child live with the mother and spend five nights a fortnight and half of holidays with the father. He argued on appeal that the order was based on inconsistent findings as to the mother’s parenting capacity and that the family consultant’s findings as to the mother being the child’s primary attachment figure was in ignorance of other evidence, such as violence in the mother’s household. The Full Court said ([6]-[19]) that for two years after separation “the father had been excluded from the child’s life”; “the mother orchestrated that exclusion”; the mother did not co-operate with an order that the mother take the child to a psychologist for therapy; the trial judge rejected the mother’s claim that the father had been violent or abusive; that the mother “lacked credibility and … had been violent to both the father and the child” and had “exposed [the child] to … drunkenness … [by] the mother’s partner … and … violence between the mother and her partner”. The trial judge ([22]) said that “removal of the child from the mother would be traumatic for him” and found that the mother’s attitude had “changed”, a finding that “did not sit comfortably with other findings made by her Honour” ([104]). All “charges against the father were dismissed as were the domestic violence orders” ([41]). The Full Court referred ([102]) to “cogent evidence, accepted by her Honour, from a person unconnected with the proceedings (Mr JJ) of a significant lack of parental care … and … exposure to regular family violence … That evidence was entirely supportive of the father’s evidence”. The family consultant said ([109]) that removal of the child was “an option if her Honour found the mother had significant deficits in her … parenting”. The trial judge’s findings were “based upon the evidence of the family consultant” ([112]) who was not made aware of the evidence of Mr JJ, the Full Court saying ([114]) that “[t]he failure to have the family consultant express opinions postulated upon the trial judge’s acceptance

of Mr JJ’s evidence (and the father’s evidence seen in its light) is in our view a significant omission”. Interim costs – Wife’s application dismissed – Parties’ wealth not controlled by husband, wife’s big spending, $27,000 owed by her friend In Millhouse & Mullens [2017] FamCA 37 (27 January 2017) Hogan J dismissed the wife’s application for an order for payment of $150,000 for her legal costs. Hogan J concluded ([41]-[42]): “ … I am not persuaded that it is just and equitable … [to] mak[e] … [the] order [sought] … because: a.

I … doubt that ... ‘the wealth of the parties’ … is controlled by one of them; rather, it seems uncontroversial that it involved each party contributing their own ‘wealth’, controlling the same and making their own … decision/s about its … disposition; and

b. the Applicant’s financial circumstances following her expenditure … are such that I am not persuaded it will be possible to take into account … at trial … any sum paid to the Applicant by the Respondent; and c.

the diminution in the Applicant’s financial circumstances appears … to have arisen as a consequence of a combination of the postseparation decision to sell her H Resort property ( … where it seems its value had … halved) and her expenditure of the … proceeds … knowing of the existence of this litigation; and

d. the Applicant appears to retain some financial resources, such as the $27,000 owed to her by a friend … from which she may be able to meet at least some of her likely legal fees.”

Robert Glade-Wright is the founder, principal author and editor of The Family Law Book, a one-volume, loose-leaf and online subscription service. thefamilylawbook.com.au. He is assisted by accredited family law specialist Craig Nicol.

51


Law Council Update

Senate's powerful message on justice funding crisis should be heeded ahead of Budget On the second last sitting day prior to the Federal Budget, the Senate has passed a historic motion calling for immediate action on the funding crisis affecting Australia's legal assistance sector and the Federal Courts. The motion was co-sponsored by: Senator Kakoschke-Moore (NXT), Senator Lambie, Senator Hinch, Senator Hanson, and Senator McKim (Greens) – and supported by Labor. The motion outlines the funding crisis in the justice sector and the consequences for everyday Australians. It calls on the Government to: •

Immediately reverse the imminent cuts to Community Legal Centres (CLCs) and Aboriginal and Torres Strait Islander Legal Services – that take effect from 1 July;

Commit to adequate and sustainable longer-term funding contributions to the legal assistance sector;

Release the 2014 KPMG report on the Federal Courts; and

Review resourcing for the Federal Courts and identify what resources are required to address unacceptable delays in hearings and determinations.

Law Council of Australia President, Fiona McLeod SC – speaking from Alice Springs where she is meeting with CLCs and Aboriginal and Torres Strait Islander Legal Services – said the Senate has sent a vital and timely message to Government that cannot be ignored. "This historic motion, co-sponsored by a wide array of crossbench Senators, is a landmark Parliamentary recognition of the funding crisis in our justice sector and the consequences for all Australians," Ms McLeod said. "It is a funding crisis that affects all parts of our justice system: advice (CLCs), representation (legal aid) and judicial hearings themselves (the Federal Courts)."

52 | BRIEF MAY 2017

"Most urgently, the Government should reverse the imminent cuts to CLCs and Aboriginal and Torres Strait Islander Legal Services. "CLCs are forced to turn away 160,000 people per year. Many of those people will now carry problems that have grown far worse because they couldn't obtain legal assistance. "On legal aid, Government funding has fallen from $11.22 per capita annually in 1997 to $7.84 today. Just eight percent now qualify for legal aid, despite 14 percent living under the poverty line. Around 10,000 people per year are compelled to front the courts alone. "Meanwhile, the under funding of the Federal Courts means that families facing the most serious family law issues can wait up to three years before determination. "Cutting legal assistance and court funding generates much greater costs down the track. To the Senate's great credit, this has now been formally acknowledged. On behalf of the legal profession, I strongly urge the Government to address this crisis as a matter of urgency."

Australia's legal assistance sector facing Federal Budget disaster, and pro bono cannot plug the gap The average Australian lawyer is contributing a full week of work every year for free, but even this is insufficient to fix Australia's legal assistance funding crisis, which is set to dramatically deepen after the upcoming Federal Budget. Law Council of Australia President, Fiona McLeod SC, has told the sixth National Access to Justice and Pro Bono Conference in Adelaide today that although the crisis in legal assistance funding had been getting steadily worse over two decades, drastic cuts to take effect from 1 July this year will be particularly disastrous. "Scheduled funding cuts to Community Legal Centres (CLCs) will amount to a loss of $35 million between 2017 and 2020 – that's a 30 percent cut to

Commonwealth funding for services that are already chronically under-resourced," she said. "Last year CLCs were forced to turn away 160,000 people seeking legal assistance. These cuts will lead to 36,000 fewer clients assisted, and 46,000 fewer advices provided. "We are talking here about real people, with real problems. People who thought their situation was serious enough to seek legal assistance. People who would not have had other viable options for legal advice. "How many of those turned away now have exacerbated problems? How have those problems spread within their families, their social networks, their communities? "The Productivity Commission has called for an extra $200 million for legal assistance, because research shows these problems cost the economy long-term. Legal problems are a lot like medical problems – without prompt attention they tend to get much worse. "The Government needs to listen to the experts and reverse these catastrophic cuts." Ms McLeod noted that pro bono cannot ever be a substitute for properly funded legal aid services, remarkable though this contribution of Australian lawyers is. "The pro bono work undertaken by Australian lawyers should be a matter of enormous pride for the profession," Ms McLeod said. "Australian lawyers give away literally hundreds of thousands of pro bono work hours every year to those who have no one else to turn to. 35 hours of pro bono legal services, per lawyer, per year. "But if pro bono is to be truly effective it needs a strong legal assistance sector. Aboriginal and Torres Strait Islander Legal Services and CLCs assess cases and refer work to appropriate pro bono lawyers. Without proper funding this link is broken and many more people fall through the cracks." To learn more about the legal aid crisis visit: www.legalaidmatters.org.au.


Pam Sawyer

53


New Members New members joining the Law Society (March 2017)

Ordinary Membership

Miss Morgan Lindsay University of Notre Dame Australia

Miss Briony Whyte University of Notre Dame Australia

Ms Natsuho Akai Curtin University

Miss Monica Choi Murdoch University

Ms Emmarae Cole-Darby Murdoch University

Miss Thabisa Mbokazi Curtin University

Mrs Alison Macfarlane Murdoch University

Ms Richa Malaviya University of Notre Dame Australia

Miss Georgia Cole Curtin University

Miss Rebekah Theuissen Murdoch University

Mr James Case Curtin University

Ms Jordan Hill Curtin University

Ms Ivana Delnotaro University of Notre Dame Australia

Mr Bradley Papaluca University of Western Australia

Mr Nak Kau Edith Cowan University

Mr Dean Bao Clifford Chance (Sydney)

Mrs Amelia Pyramo Murdoch University

Mr Aidan Hawkes University of Western Australia

Ms Holly Cao Clifford Chance (Sydney)

Mr Daniel English University of Notre Dame Australia

Miss Linda Nguyen University of Western Australia

Miss Katherine Dickson Clifford Chance (Sydney)

Mr Mark Wallbridge

Mrs May Townsend

Mr Justin Koleits Edith Cowan University

Mr Chris Bailey DLA Piper Australia

Ms Kathryn Hender Clifford Chance (Sydney)

Ms Sara Winton Mining Access Legal

Mr James Kwong Clifford Chance (Sydney)

Mr Denis O'Haire Forbes Kirby Lawyers & Consultants Mrs Jana Francis Mr Daniel Velthuis Ernst & Young

Restricted Practitioner Ms Danae Aldous MacLean Legal Ms Terri Nderitu Asociatii Commercial Lawyers

Ms Catherine Lo Clifford Chance (Sydney)

Associate Membership Ms Becky Culver Ms Lisa Hurd Murdoch University Miss Courtney Jane Ashton Edith Cowan University Ms Joanne Thompson Edith Cowan University Ms Elizabeth Morris Edith Cowan University Miss Rafaela Lico Edith Cowan University Miss Shani Claassen Edith Cowan University Mr Anthony Biju Edith Cowan University Mr Aidan Glenn Edith Cowan University Ms Kathy McGrath Murdoch University

54 | BRIEF MAY 2017

Miss Munpreet Soomal Clifford Chance (Sydney) Ms Dominique Yong Clifford Chance (Sydney) Ms Penelope McCann Clifford Chance (Sydney) Ms Christie Pilkington Murdoch University Ms Lucy Morris University of Notre Dame Australia Miss Shayne Solin Curtin University Ms Lauren O'Mara Curtin University Miss Grace Lee-Tuck University of Notre Dame Australia Miss Kellie Hayman University of Notre Dame Australia Miss Kendra Turner University of Notre Dame Australia

Mr Jesse Lines Murdoch University Miss Jasmine Lim Curtin University Ms Naomi Zuvela University of Notre Dame Australia Mr Joel Speldewinde University of Notre Dame Australia Mr Byron Yeo Edith Cowan University Miss Kai Yuin Yeo Curtin University Miss Madina Eira Curtin University Ms Ellen Jury Curtin University Ms Jessica Vu University of Western Australia Ms Taila Childs Curtin University Mr James Constantine University of Notre Dame Australia

Miss Ane Espach University of Notre Dame Australia Miss Sylvia Cao University of Western Australia Miss Kathryn Simes Murdoch University Mr John Willers University of Notre Dame Australia Ms Oma Murad Curtin University Miss Stacey Price University of Notre Dame Australia Mr Kari Potier University of Notre Dame Australia Miss Vania Fung University of Western Australia Miss Fiona Le University of Western Australia Ms Amarah Ingrilli University of Notre Dame Australia

Mr Lachlan Webb University of Notre Dame Australia

Part-time Membership

Mr Dylan Hindle University of Notre Dame Australia

Mr Adam Hornsey Springdale Legal

Mr Bryan He Curtin University


Classifieds MISSING WILL

FOR SALE

FOR SALE

Would any person or firm holding or knowing the whereabouts of a will or other document purporting to embody the testamentary intentions of EDWARD ALEXANDER CONDON formerly of 6b Theba Court, Heathridge, in the state of Western Australia, latterly Wellington, New Zealand who died on 19 October 2016, please contact Debbie Smith, Public Trust via email on debbie.smith@publictrust.co.nz

PRICE SLASHED TO $3,800/m2 + GST Mint House – 326 Hay St, Perth

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Legal Practice Board Election Results The following practitioners were declared to be elected members of the Legal Practice Board for a two year term commencing Thursday, 6 April 2017.

Natalie Belinda Dimmock

Gary Norman Mack

John Gaetano Mario Fiocco

Deborah Louise Pearman

Rebecca Tenille Heath

Sabina Marie Schlink

Murdoch Jessup team makes semi-finals The Jessup Moot is the world’s largest and most prestigious moot court competition, with participants from over 500 law schools in more than 80 countries. The Australian Qualifying Rounds were held in Canberra from 7 – 11 February, with over seventy law students from fifteen Australian law schools competing in the 2017 competition. The Australian Qualifying Rounds are amongst the most competitive in the world, with Australian teams going on to win the International competition four times in the past six years.

(L-R) Troy Sauzier, Georgia Cain, Andrew Shinnick, Joshua Kain, Nicola Thomas-Evans and Poppy Efthyvoulos

The Murdoch team (consisting of Joshua Kain, Nicola Thomas-Evans, Georgia Cain, Troy Sauzier and Poppy Efthyvoulos) performed at a high standard throughout the competition, making it through to the semi-finals against some extremely tough competition.

This marks the sixth time in eight years that the Murdoch Jessup team has progressed beyond the preliminary rounds in the Jessup competition. The 2017 Murdoch Jessup team were assisted in the preparations by their team coaches, Lorraine Finlay (Director of Mooting) and Andrew Shinnick. Thank you to Lorraine and Andrew for their hard work and commitment to the team, and to our Mooting & Event Coordinator, Michelle Barron, for all of the support that she provides to our moot teams behind the scenes. The Law School would also like to thank all of the past Jessup participants, judges, lawyers and academics who helped the team prepare by judging practice moots before the competition. If you are interested in assisting with mooting at Murdoch, please contact Lorraine Finlay in the Murdoch Law School: l.finlay@murdoch.edu.au

CRICOS Provider Code 00125J SCH407_04_17

The Murdoch Law School has cemented its place amongst the top moot schools in Australia with its team reaching the semi-finals of the Australian Regional Rounds of the Philip C. Jessup International Law Moot Court Competition.

Think Murdoch. 55


Events Calendar

With thanks to our CPD partner

Stay up-to-date with the latest Law Society member events and CPD seminars

MAY 2017 CPD Seminars Monday, 15 May YLC: Mental Health Hypothetical Thursday, 25 May Quality Practice Standard Accreditation workshop one Membership Events Thursday, 4 May Sole Practitioner and Small Firm Forum Monday, 15 May Law Week Breakfast and the 2017 Attorney General’s Community Service Law Awards

Tuesday, 16 May Law Access Walk for Justice Wednesday, 17 May Access to Justice for Refugees and Asylum Seekers – Law Week Panel Presentation hosted by the Young Lawyers Committee Thursday, 18 May Law Week Awards Night Thursday, 25 May Inter-Profession Networking – Jump on Board

JUNE 2017 CPD Seminars

Membership Event

Thursday, 1 June Quality Practice Standard Accreditation workshop two

Thursday, 15 June 90th Anniversary Cocktail Party

Friday, 16 June Ethics on Friday: pointing the finger

JULY 2017 Membership Event Friday, 14 July Golden Gavel For all CPD-related enquiries please contact cpd@lawsocietywa.asn.au or (08) 9324 8614. For all membership-related enquiries please contact membership@lawsocietywa.asn.au or (08) 9324 8692. For all upcoming events and further information please visit lawsocietywa.asn.au 56 | BRIEF MAY 2017


Principal Sponsor

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The Society's 2017 Mentoring Programme Now Open

Mentoring is a brain to pick, an ear to listen, and a push in the right direction – John C Crosby Are you looking for some direction or guidance to take the next step in your career? Are you wanting to share your lessons learnt and give back to the profession? There are great career and social benefits in participating in mentoring programmes - it is a twoway street and you get out of it what you put in.  We are now accepting expressions of interest for:

For the mentees, this is an excellent opportunity to make potentially long term professional connections, seek advice and encouragement to reach your career goals and identify areas for growth and professional development. For mentors, this is a great chance to give back to the profession, share your knowledge, stay in touch with emerging issues relevant to mentees and be provided with a sense of personal and professional satisfaction.  

• Junior Practitioner mentees (less than 5 years PAE) • Practitioner mentee (more than 5 years PAE) • Aboriginal and Torres Strait Islander law student mentee • Mentors

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To participate in the Programme please complete an Expression of Interest before Friday, 19 May 2017 by visiting lawsocietywa.asn.au


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