Contractual conundrums of investors

It is often a nightmare of many investors that just as they become comfortable navigating around complex property and share transactions they are confronted by a monstrous morass of legal documentation so lengthy, wordy and complex that it brings to mind the Joseph Joubert quote: When you go in search of honey you must expect to be stung by bees. It’s enough to make anyone throw up their hands in frustration and head for the hills. 
Here are a few tips to help determine whether to flee or stay the course of the contractual investment journey. 

Tip 1: Remember the first contract

The first contract known to mankind was probably that between G-d and Adam and Eve which in legal terms dealt with rights of use. The terms of the contract were fairly simple. G-d would give Adam and Eve the right to use the Garden of Eden on condition that they did not partake from the tree of knowledge. In practical terms the agreement was easy to understand and easily enforceable. Adam and Eve understood their obligations and the consequences of not complying with those obligations, i.e. on eating the forbidden fruit the rights of use would be extinguished or to put it in biblical terms would result in expulsion from Paradise. 

In today’s precedent-fuelled legal world, simple financial contracts are well and truly historic. Added to this in the current fast-paced Internet environment when confronted with modern contracts obscured by legalese it is very tempting and certainly understandable to hit the ‘I Agree’ button without reading through these tortuous documents. Even lawyers find the exercise not only to be a painstaking, but also, painful experience. 

However, when these contracts relate to matters such as your superannuation funds as opposed to the latest mobile phone App it is best to read the terms and conditions to ensure that your assets are well protected. Even in the face of the most complex legalese it is possible to stay the course and wade your way through. Just keep in mind the first contract, ignore the legalese and much like a treasure hunter search the contract to find the basic tenets of the transaction, i.e. does the contract contain terms which accurately and adequately describe the transaction, the cost of the transaction, each party’s material rights and obligations and the ability of both parties to enforce the transaction. 

Tip 2: Discard the Obsolete

It is very common for financial institutions to include every possible issue, probability and risk in their contracts. The problem this poses for the client is that even when seeking a fairly simple service you find yourself bound by terms and conditions which have nothing whatsoever to do with that service. 

A few months ago I was negotiating a custodial contract on behalf of a client with a well-known international bank. My client had been handed a contract consisting of over 80 pages in tiny print. The prospect of reading through the morass of legalese was not very enticing and would have required a stiff drink to face the barrage of harsh and unreasonable terms and conditions flying off the pages. However, much to my relief I discovered that of the 80 pages, only 15 pages related to custodial services. Indeed the majority of the harsh terms and conditions were relevant only to loan products and therefore were irrelevant to my client and the service to be provided. Accordingly we negotiated away the obsolete terms, and ended up with a simple, easily understandably, reasonable and relevant contract. 

Tip 3: Know When to Walk Away

Sometimes, no matter how much you want enter into a transaction it is best to walk away if despite attempts at negotiation the contractual terms remain unreasonable and/or don’t adequately reflect the important aspects of the deal. 

Usually unreasonable terms will be contained in the termination and liability and indemnity clauses, the most common examples being where financial institutions sometimes give themselves the right to: 

• terminate the contract whenever they please without penalty while restricting the rights of the client to terminate the agreement; 
• claim damages for the slightest breach of contract while restricting the client’s right to claim damages under any circumstances; 
• avoid all liability regardless of their actions or omissions while holding the client liable for any act or omission. 

The way in which companies approach their contracts is a good indication of whether they value their clients and stand by their products/services. When companies require clients to sign up to onerous terms and conditions while at the same time avoiding any or most obligations themselves walking away from the transaction is often the best choice especially if this could prove costly both from a price and risk perspective. 

Tip 4: Manage the bees and you won’t get stung when collecting the honey

Remember to always read contracts carefully, ensure that transactions are accurately and adequately recorded, ensure that the terms and conditions are reasonable as they apply to you and most importantly if there is any doubt consult your legal adviser.

The Directors’ Dilemma


A safe environment for an independent director?

There was a time in the not too distant past when it was generally accepted that directors of corporate boards constituted a closed network. As a consequence, the role of directors and their accountabilities seemed shrouded in mystery – a mystery that few people outside of the directors’ circle were interested in solving.

However, after the profligate corporate excesses of the 1980s both regulators and shareholders globally and in Australia began to demand changes to the traditional composition of corporate boards, including a requirement that the directors’ club include independent directors outside of the traditional closed networks. Corporate excesses and collapses in Australia also resulted in the introduction over time of a more stringent regulatory environment replete with personal penalties for directors.

We therefore have a corporate environment today where more diverse directors are invited onto boards as independent directors, while at the same time the personal risk associated with being a director has increased exponentially. This leaves a budding independent director with a dilemma. The coast which has been cleared to enable directorship opportunities for those previously denied them is also filled with sharkinfested regulatory waters.

The risk of personal liability Today there are hundreds of federal and state laws governing directors’ duties and creating potential personal penalties both civil and criminal for breach. Directors’ duties have been expanded from the traditional obligations for a corporation’s high level strategy and financial health to include responsibility for some of the day to day operations and policies including occupational health & safety and workplace harassment. As a result, it has become easier for shareholders and regulators to pursue directors and officers in their personal capacities for the failures of a corporation and this in turn can deter talented candidates from accepting directorships.

Can nightmare scenarios be transformed into sweet dreams?

There have been a number of high profile cases involving directors over the past five years, some of which have caused great consternation amongst current and wannabe directors. Two such cases are:

  • • The David Jones Limited case (DJs case) which included a claim against directors in their personal capacity on the basis of vicarious liability; and

  • • ASIC v Healy & Ors [2011] FCA 717 (Centro case) which dealt with the personal responsibility of each director when approving the financial accounts of a corporation.

David Jones: Vicarious Liability and Sexual Harassment

Up until about July 2010, most wannabe non-executive directors would have envied the directors of David Jones Limited (DJs). DJs was enjoying profits and had a well-established reputable brand. However, there was nothing to be envied in August 2010 when a former DJs employee sued the company, certain members of the senior management team and each director in their personal capacity alleging sexual misconduct on the part of the Chief Executive.

The main foundation of the claim against individual directors was based on an allegation that the Board had been aware of the chief executives’ propensity for sexual misconduct but chose to ignore it. If these allegations were proved, the directors in their personal capacity could have been vicariously liable for a breach of section 28B(6) of the Sex Discrimination Act 1984 (C’th) for the sexual misconduct of the chief executive. The only defence available to directors in these circumstances would be to prove that they had taken all reasonable steps to prevent employees engaging in sexual harassment.

The matter was never considered by a court as the parties agreed to settle the claim on a confidential basis. Accordingly, we do not know whether the DJs board at the time would have been held vicariously liable for the alleged misconduct of the Chief Executive.

There has been some disquiet around holding directors vicariously liable for the conduct of employees. Some say that it is one thing to hold management vicariously liable for the behaviour of employees given that management is responsible for the day to day management and operations of the company but it is unreasonable to hold accountable a Board tasked with high level strategic oversight of the company. This feeling of frustration is understandable but appropriate conduct in the workplace is a high level strategic matter. The Board should be taking reasonable steps to ensure that the company has a policy and culture to deter bad behaviour including sexual harassment in the work place. In this regard, a Board can and should:

  • • Ensure that the organisation has adopted an appropriate system to prevent sexual harassment;

  • • Monitor the operation of that system by insisting on sufficient reporting around complaints made, complaint management and outcomes;

  • • Act on any information that demonstrates that the system is insufficient.

1 Recommendation 2.4 of the ASX Corporate Governance Principles and Recommendations states that the majority of the board of a listed entity should be independent directors.

ASIC v Healey2 (‘Centro Case’): Approval of Financial Statements

The Centro case caused a great degree of consternation amongst directors and potential directors who are not specialists in finance and/or accounting matters. Centro3 constituted a group of high growth property companies with operations across Australia and the United States of America governed by the same board of directors.

This case involved Centro Board’s approval of financial statements by way of declaration required under section 295 of the Corporations Act 2001 (C’th). Subsequently, it transpired that there had been errors in the approved financial statements which the Board had failed to detect. On this basis, seven non-executive directors were held not to have taken reasonable steps required of them to approve the financial statements of the company based on the degree of care and diligence the law required of them.

The non-executive directors in this case conceded that there had been an error in the accounts but felt that as they had acted honestly and having regard to all the circumstances ought fairly to be excused4 from the civil penalty provision for having breached section 295. In particular, directors who were not experts in accounting or finance stated that they had reasonably relied on the advice provided by the Board’s audit committee and consultants who had signed off on the financial statements.

Many would sympathise with the directors in this case. After all, if an audit committee plus consultants who are experts advise that all is in order, how could non-experts have detected that there was an issue with the accounts? The issue though was not whether the directors would have detected the issue with the accounts but rather that each director had not stood back, armed with his own knowledge, and looked at and considered for himself the financial statements.5 It was not good enough for the directors to rely on a process involving an audit committee or advisors no matter how trustworthy.

Given the fundamental importance of financial statements and each individual director’s duty pertaining to approving these statements, it is important that each director:

  • Have the financial competency to understand the financial statements of a company in light of basic accounting concepts and to bring an enquiring mind to a review of these statements;

  • Question and test information provided no matter how reliable and trustworthy the source.

2 ASIC v Healey [2011] FCA 717 3 Centro Properties Limited, Centro Property Trust and Centro Retail Trust (collectively Centro) 4 Section 1317S of Corporations Act 2001 (C’th) 5 ASIC v Healey [2011] FCA 717 at [569]

Is it really worth the risk?

The DJ’s Case and the Centro Case certainly demonstrate the potential personal risks facing directors. However, these cases should not deter budding directors from joining boards as there are ways and means of avoiding personal liability.

Many books and research papers have been written on the numerous risks facing directors suggesting risk mitigation techniques. It is not possible in this paper to consider every risk or provide extensive suggestions about how to minimise these risks. However, here are a few handy practical risk mitigation tips gleaned from my personal experience and from various discussions I have had with experienced directors and corporate risk specialists.

Tips and traps

Although you will not be able to determine the full extent of a company’s health until you are on the Board, it is very important to conduct a thorough due diligence of a company before agreeing to join the board. This includes where possible talking to people who have had dealings with the company including clients or previous employees.

Just because management is charming, impressive and articulate does not mean that they are doing a good job and telling you everything.

Tension between board and management is not necessarily a bad thing – it keeps both parties on their toes and ensures a vigilance that might otherwise be lacking.

Boards and management that spend an inordinate amount of times playing political games are hazardous to a company’s health as too much time is spent on personal fiefdoms and not enough time is spent dealing with company business

Read financial statements very carefully. If you do not understand certain aspects of the statements, ask questions. Do not rely completely on the Audit Committee, Finance and Risk Committee’s opinion neither the advice of the independent auditor. Always ask questions and think carefully about the answer.

Ensure that the organisation has adopted appropriate policies and procedures including workplace procedures and policies. Monitor the operation of policies and procedures by insisting on sufficient reporting around complaints made, complaint management and outcomes

Ensure that the flow of information to the board is adequate and timely so that you have the information needed to do your job, time to assess the information and time for your enquiries to be considered.

Where appropriate, spend time understanding the day to day operations of the company whether this be by way of visiting the business from time to time or asking for presentations from various parts of the company

Act on any information that demonstrates that there may be a substantive problem. If you suspect there is a problem, raise this as a formal issue with management and the other directors by ensuring that your concerns and response to those concerns are expressly recorded in minutes. If despite your best efforts substantive problems are not resolved appropriately to your satisfaction, then as a last resort you should resign from the board as quickly as possible in order to avoid personal liability.

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Law Graduates Extortion Risk

According to a mainstream newspaper, an entrepreneurial South Australian law firm has developed what they believe to be a market worthy business model under which law graduates would be charged $22,000 for the privilege of working for the firm as articled clerks. The inventiveness of the law firm does not end there. Not only would articled clerks pay for their employment but in order to receive any remuneration at all, they would have to bring fee-earning clients into the firm and hopefully earn commission on fees paid by said clients. In summary, the firm would in essence compete with accredited practical legal training providers, such as the Leo Cussen Institute and The College of Law, while at the same time gaining free labour and new clients too.

Gobsmacked at the sheer chutzpah of this proposition, I pondered how the legal profession had regressed to a point where prospective lawyers might be required to pay a substantial sum to clerk at a law firm without a realistic chance of being remunerated.

Legal Warriors no longer conquering

Many lawyers when asked about their articled clerk experiences will begin by regaling the listener with tales about the horrors of searching for articles and how as legal warriors they fought all obstacles to articles put in their way by the profession.

When law students complain about their difficulties in finding articles, these self-proclaimed legal warriors smile condescendingly and say plus ca change, plus c’est la meme chose or if not feeling too pretentious will say nothing much has changed since I was a young flapper. Work hard, be determined and fight through the interminable application processes like us and you too will win those articles and become a certified practitioner one day, they exclaim.

However, it would seem that these days determination and hard work no matter how warrior-like will not necessarily assist budding lawyers in gaining their clerkship/traineeship. The number of graduates seeking articles has increased to such an extent that even accredited practical legal training centres such as the College of Law or Leo Cussen Institute are filled to capacity, leaving many wannabe lawyers stranded. Enter the enterprising South Australian law firm that has gauged such desperation within the articled clerk market that they believe graduates will pay a substantial sum to be articled at a law firm and work for free. Perhaps they are right. From my observations even law students with academic scores through the stratosphere and resumes that would be the pride of Mother Theresa, Cathy Freeman, Zubin Mehta and Warren Buffet combined are battling to find articles within law firms. What hope the average law student?

Paying for the privilege of working for a law firm

I am all in favour of entrepreneurship in the law. In general we are a ‘fuddy-duddy’ profession bent on procedural rules and regulations. It is therefore refreshing to discover lawyers creating business models outside the legal square. Yet somehow law firms charging law graduates for the privilege of articles makes me feel quite bilious. Here are some of the reasons why:

  1. Although during the nineteenth and early twentieth centuries legal apprentices paid for the privilege of clerking in a law firm, an apprenticeship was a substitute for studying at a law school. Fast forward one hundred years and prospective lawyers are required to obtain at least one university degree replete with legal subjects. In this environment, the concept of a law firm charging university graduates for clerkships is either an indictment on the type of education students are getting at law schools and/or potentially could be regarded as a method of extorting money from vulnerable students who form part of a saturated market.
  2. Salaries paid to articled clerks tend to be pretty low and after two months, a well performing articled clerk will generally pay their way if not by billable fees then at least by freeing up more experienced lawyer to bill clients.
  3. Don’t we as a profession have some sort of responsibility to train and mentor fledgling lawyers without being remunerated for our time?
  4. Finally, imagine the furore if hospitals charged medical graduates for internships and insisted that these graduates had to find their own patients in order to be paid some form of remuneration? In this context people would say that this is worse than slave labour as the slave actually has to pay to provide labour. Why are law graduates less worthy of outrage?

Is there something really rotten in the state of legal training?

In some respects, we should be thanking the South Australian law firm for their innovative if somewhat cringe-worthy ideas about the future of article clerkships. These innovators have highlighted the need for a long awaited serious discussion about the state of play in legal training and the grim future for law graduates.

As more and more law schools open up across Australia, law firms are hiring less and less articled clerks. As the profession closes the door on the majority of graduates, accredited training institutions cannot meet the overflowing demand. This in turn opens the door for what could be considered the potential extortion of graduates desperate to become lawyers.

Those of us who were graduates when the majority who wanted articles procured articles have a duty to stand with graduates being churned out of law schools. We who have had the benefit of experience should be asking probing questions and requiring substantive answers from those responsible for law schools and accreditation of solicitors/barristers. From my perspective these questions include:

  • What is the purpose of a law school if the majority of its graduates will not in the future have the opportunity to become qualified lawyers should they wish to do so even with the advent of supervised workplace training institutions such as The College of Law and Leo Cussen Institute?
  • What is the future of our profession if mainly those who obtain stratospheric marks at university or who are lucky enough to be born into excessive money or powerful connections will have the opportunity to gain articles experience at a law firm?
  • Where are we heading as a profession when certain law firms honestly believe that it is appropriate for graduates who have no legal experience to be tendering for legal work in order to earn a commission?
  • How do we as a profession become more innovative in providing experience and training to law graduates in a manner that will not be seen by some as endeavouring to extort money from them or taking unfair advantage of their desperation for practical training and accreditation?

Articled clerks safe from having to pay a fee for the time being

The Law Society of South Australia were quite speechless when confronted by the media about the articled clerk charging model put forward by one of their more innovative law firms. Finally it is reported that after investigation the Law Society determined that a two-year paid training and employment programme instituted by a law firm may not allow an employee to demonstrate a “continuous period of two years full time employment as an employed practitioner.” (No kidding.) Therefore the model proposed is currently not approved as an accredited manner of obtaining articles.

Pound of flesh, soul and your bank account as well

It is a truth universally acknowledged that law firms are allowed to obtain their ‘pound of flesh’ from law graduates desperate for articled clerkships (traineeships). That pound of flesh in the past consisted of working crazy hours for a measly salary in order to gain experience and the opportunity to be admitted as a solicitor. If we as a profession do not do something very soon about the saturation of law graduates on the market going forward, law graduates might well have to provide their pound of working flesh, their souls and their earthly savings to law firms as well. How did we come to this?

Becoming a strategic counsel

Introduction Benjamin Brewster said: A lawyer starts life giving $500 worth of law for $5 and ends up giving $5 worth for $500. It is a sad indictment on certain elements of the legal profession that although Benjamin Brewster died in the 1880s, many clients in 2015 would still agree with his sentiments.

Too many times I have heard people bemoan lawyers’ fees while at the same time complaining that there is no correlation between those fees and the value of the services received. This is also a perennial complaint of in-house counsel who brief out work to external solicitors. I recall one colleague stating that when she first received an invoice from an external legal firm she felt that she had been kicked hard in the solar plexus.

It would be all too easy to blame this impression of overreaching fees on greedy lawyers who try to ‘milk’ their clients and care little about providing valuable legal services. However, even though there are definitely some greedy lawyers in our fraternity, the concept of valuable legal services is multi-faceted and in many instances, fees charged by lawyers may indeed objectively reflect the value of the service given. The problem in these circumstances is that the value proposition is not clearly understood by the client.

In-house counsel therefore have an important role in assisting businesses to obtain valuable legal advice and services at a reasonable cost which at the same time is understood by the business to be relevant and appropriately costed.

When it comes to briefing out work to external services providers, what kind of in-house counsel are you?

In-house counsel sometimes feel as though they play the role of double agent within a business. On the one hand they are loyal to the interests of their client, i.e. the business, and ensuring that their client obtains valuable legal advice. On the other hand there is a loyalty to one’s colleagues and the legal profession as a whole. Navigating your way through these relationships can often prove tricky, especially when your colleagues expect you to have their back at the expense of your client, or your client expects you to forget that you are an officer of the court.

Generally, when managing the relationship between external service providers and the client, in-house counsel fall into two categories:

  • Strategic Counsel, who engage external legal services as a resource to complement legal services being provided in-house; and

  • Mail-box Counsel, who receive instructions from the client, automatically outsource the provision of the advice to external solicitors and then forward the advice without review or comment to the client.

Mail Box Counsel merely waste time shuffling papers between client and external providers and thus add little value to the client. Better to get rid of the ‘middle man/woman’ in this instance. Strategic Counsel tend to provide exceptional value to the client by outsourcingwork appropriately, managing the legal costs effectively and ensuring that the services provided by external providers are appropriate to the client’s needs

How to be a Strategic Counsel

In order to be effective and a valuable resource to the client, it is essential that in-house counsel understands the general culture and philosophy of the business including its outlook towards the market place and its risk appetite. This will dictate the manner in which legal services should be provided in order to exact value for the client.

Much has been written about howto create a legal budget and obtain ‘buy in’ from executives for that budget. My focus has rarely been on the budget but rather on prioritising the legal issues and risks of the business and thereafter effectively managing the legal team and external service providers to deal with those issues and risks. I find that if legal services are managed closely to obtain the best value from both in-house and external legal providers, the legal budget is generally well accepted and appreciated by executives.

When to engage external legal service providers

In-house counsel specialise in immediate advice. This means that to be effective, in-house counsel should be able to address issues on the run, quickly absorb the requirements of the law and apply these requirements practically and strategically to the client’s needs. This does not mean that the advice dispensed can be haphazard and lacking in thorough consideration, rather if the advice sought is not readily known or accessible, a barrister or external solicitor can be utilised to research and consider appropriate legal solutions.

One of the most complex skills to acquire as in-house counsel is the ability to appropriately outsource legal services in a manner that is efficient and cost effective. This requires an understanding of the type of services sought, the most suitable service provider who can provide those services, the reasonable cost for those services and effectively communicating the needs of both in-house counsel and the client to the chosen service provider.

It is up to the individual in-house counsel to determine the most appropriate external service provider. Importantly, whoever is chosen should be able to provide relevant services efficiently, effectively and timeously without the need for in-house counsel to argue fees charged for services rendered.

Tips for Strategic Counsel

Books could be written about how to effectively manage external service providers, but in order to save time here are a few crucial tips to assist Strategic Counsel:

  • Too many cooks actually do spoil the broth.

  • Just because you engage a law firm with a prestigious reputation does not mean that you will receive services commensurate with that reputation – the quality of services provided depends on the lawyer providing them, not the law firm engaged.

  • When engaging firms at the high end of town,try to minimise the number of solicitors to be engaged in any transaction. Generally those firms propose a minimum of three lawyers per transaction. In truth most transactions only require one senior and one junior lawyer at any given time and in most cases one lawyer will suffice.

  • Sometimes the best and most cost effective advice can be sought by going straight to the bar.

  • Never continue to use a lawyer who is alarmist and continues to provide poor services regardless of their reputation in the market place. While consumers generally would not accept and pay for poor retail products or services, why do so many people accept poor service from solicitors, moan about the cost and still pay for the service?

  • Always remember the general rule of thumb – the more extreme the methods of entertainment provided by external service providers, the more likely the service provided will be below standard. Those who provide good services tend to use their services as a marketing tool.