Law Reporter

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine

Professor Bob Baxt provides an overview of recent court decisions affecting the role and responsibility of directors.

Price fixing – no longer a game

The largest fine ever imposed for breaches of the Trade Practices Act (TPA) was handed down by Justice Peter Heerey in November as a result of the prosecution by the Australian Competition and Consumer Commission (ACCC) of Visy Industries Holdings and some of its major officers. In many ways, the inevitability of the fines became evident when an agreement was reached between the ACCC, Visy and its advisers some weeks ago regarding the alleged price fixing/market sharing arrangements - in effect, cartel behaviour - that had been entered into between Visy and Amcor. The ACCC learnt of the relevant arrangements as a result of an immunity application made by Amcor – it first approached the ACCC in late 2004.

It is unnecessary to delve into the nature of the arrangements. This is also not the end of the matter as both companies, and their officers, face civil actions for potential damages from other companies alleging that they were ‘victims’ of the arrangements. It is, however, important to highlight some points made in Justice Heerey’s judgment related to the need for a culture of compliance, and to provide directors with guidance on how they and their companies need to respond in the context of this decision.

Culture of compliance

One of the critical elements in evaluating whether a company has breached the TPA, or indeed other Commonwealth legislation which carries criminal or quasi-criminal penalties, is whether the company has an appropriate culture of compliance. Indeed, the existence of this culture is central to the operation of one of the most cherished principles in our law – client legal privilege (see p54). Critical in the ability of companies to escape liability for breaches is whether they have a culture of compliance in place by having created a system of proper corporate management, governance and delegation as set out by the Commonwealth Criminal Code. That code was ‘enacted’ in 1995, but only came into effect in 2001. It was expected to be replicated by all state and Territory governments. To date, they have been slow in doing so, although Victoria has replicated it in part. Perhaps the Visy case and the message that has been delivered by Justice Heerey will give them a ‘kick along’ to implement legislation which, in effect, makes it compulsory for companies to put in place proper and effective compliance strategies.

Justice Heerey made it clear that Visy did not have a culture of compliance. Indeed, its compliance policies in relation to the TPA were, in his view, almost ‘non-existent’. He noted that in assessing the penalty one had to refer to other examples. He added: “Ultimately each case turns on its own facts. Suffice it to say that the penalty proposed is more than twice the highest previous penalty imposed by this court. That is reflective of the fact that this must be, by far, the most serious cartel case to come before the court in the 30 plus years in which price fixing has been prohibited by statute.”

Cartels should be punished by the criminal laws

Justice Heerey had earlier discussed the seriousness of cartel behaviour in the context of the law. His judgement is illustrative in providing further reminders of the significance of the regulation of cartel behaviour:

“Cartel behaviour of the kind with which this case is concerned is extremely destructive of the competition on which the prosperity of a free market economy depends. Often the profits can be immense, and the risk of detection slight. Of its nature, cartel behaviour is likely to occur in secret and between parties who seek mutual benefit. In the present case, detection occurred purely by chance when Amcor’s solicitors, in the course of quite unrelated litigation, stumbled across incriminating material. Even then the present resolution may not have been reached were it not for two additional factors. First, the Commission’s immunity policy and secondly, the fact that there were not only witnesses prepared to give evidence, but also tape recordings of damning conversations.

“The progressive increase in the maximum penalties mentioned above shows how gravely the legislature regards this kind of conduct. Price fixing and market sharing are not offences committed by accident or in a fit of passion. The law, and the way it is enforced, should convey to those disposed to engage in cartel behaviour that the consequences of discovery are likely to outweigh the benefits, and by a large margin.

“Critical to any anti-cartel regime is the level of penalty for individual contravenors. We tend to overlook the fact that corporations are constructs of the law; they only exist and possess rights and liabilities as a consequence of the law. Heavy penalties are indeed appropriate for corporations, but it is only individuals who can engage in the conduct which enables corporations to fix prices and share markets.”

Perhaps all companies should ensure that their senior executive officers are made aware of these quotes and that their content is incorporated in the manuals and other policy documents issued by their risk management compliance committees and the board.

The case also illustrates the need for Australia to ensure that its competition laws are as effective in regulating cartels as that of other countries. In his judgment, Justice Heerey reminds us that many countries already have criminal sanctions in place and that the Federal Treasurer promised in February 2005 to introduce such legislation. He noted that although the TPA was amended last year to raise corporate penalties, the Government had not yet got around to introducing criminalisation. In this context, it is interesting to remind ourselves of the fact that Australia actually had criminal sanctions in place in the first competition law it had in place – the Australian Industries Preservation Act of 1906. This legislation was found to be ineffective for constitutional reasons.

Individual penalties and reimbursement of individual penalties

Justice Heerey agreed with the ‘settlement’ reached between the ACCC and Visy and that it was not necessary nor appropriate perhaps to penalise chairman Richard Pratt himself in relation to the breaches of the TPA. He had no doubt that Pratt was knowingly concerned in giving effect to the relevant understandings that underpinned the litigation. He also noted that the ACCC “does not seek the imposition of a pecuniary penalty on Pratt because he and his family are the owners of Visy and thus the burden of the penalty on the company (not to mention legal costs) will fall upon him personally”. He accepted that this was in line with authorities in earlier Australian cases that a penalty should not be doubly imposed in such circumstances.

The seriousness of compliance

The judge noted that the senior executives of their company through their counsel accepted responsibility for the conduct. “They accepted that they stepped ‘well over the line of the boundaries prescribed by the [TPA]. However, contrition here probably has a substantial element of regret at being found out.” Justice Heerey went on to note that perhaps the apology and contrition offered by the various individuals may not have been as ‘genuine’ as perhaps it should have been.

Indemnifying the officers

Often, in the past, companies paid the fines imposed on individuals who were held to have breached the TPA. Justice Heerey noted that counsel for both former CEO Harry Debney and former general manager Rod Carroll advised the court that their penalties would be paid by a Visy entity or a related entity. He added that while such indemnities are now clearly unlawful by virtue of an amendment made to the TPA in 2007, they may also be unlawful under the previous law.

His comments were a gentle reminder, if ever one needs one, about the dangers of seeking indemnities at a time when the law is becoming tougher and being interpreted more stringently by courts in dealing with these arrangements.

Client legal privilege – new concessions and concerns

The Australian Law Reform Commission will meet shortly to finalise its recommendations on Client Legal Privilege (CLP) in the context of Federal investigatory bodies. This reference was given to the Commission by the Attorney General in November 2006 as a result of a number of concerns highlighted during the Australian Wheat Board inquiry, among other developments.

In the Commissions’ Issues Paper, published in April 2007, a number of queries were raised concerning the operation of CLP. The most important of these was the suggestion that CLP be withdrawn for corporations. That suggestion was criticised by many of the responses received by the Commission. In its Discussion Paper, published in September, the Commission agreed that it was not appropriate to differentiate between corporations and individuals in the application of CLP. But there is a sting in the Discussion Paper. Certain recent developments need to be carefully considered by corporations, their boards and their respective advisers.

A matter that has become critical in a number of court cases in recent weeks - a matter raised in a different context in the European Commission as well as in Australia - is the importance of the independence of legal advisers used by corporations seeking to rely on the doctrine of privilege. In particular, as a result of recent cases in Australia (especially the decision of Graham J in Telstra Corporation Ltd v Minister for Communications, Information Technology and the Arts (No 2) [2007] FCA 1445), where advice is given to a corporation (or an organisation such as a legal partnership) by its internal lawyer or legal adviser, the courts are insisting that the particular ‘in-house’ counsel (or lawyer employed by the relevant corporation or by the organisation) is truly independent. It will be necessary for the lawyer to show that he or she has reached his or her view about the claim for privilege from an independent standpoint. This now appears to be an additional layer that is imposed on in-house counsel – that is, external lawyers (barristers or solicitors) are assumed more generally to be independent in the general context of the way in which these matters are evaluated.

The Commission’s Discussion Paper also makes it clear that one of the basic rationales for relying on privilege is that companies wish to protect certain sensitive or confidential information from disclosure to various regulators in the Federal context (and the same reasoning would apply to state or Territory regulators). This is based on the assumption that the concept of privilege is necessary to enable companies to comply with the law. As the High Court noted in the case of Baker v Campbell in 1983, the doctrine is not there simply to protect the client, but the freedom to consult a legal adviser “and the knowledge that confidential communications will be safeguarded will often make its own contribution to the general level of respect for and observance of the law within the community” (153 CLR 52 at 95).

The importance of compliance with the law is a matter that of course has now been given greater emphasis as a result of the Commonwealth Criminal Code coming into operation in 2001 (see p52). It is vital that the notion of compliance with the law is given greater emphasis and attention than perhaps has been the case in recent times. This importance is also highlighted in the decision of French J in Australian Securities and Investments Commission: Re Chemeq Limited v Chemeq Limited ([2006] SCA 936).

Most commentators agree that the Discussion Paper is balanced. It has a number of recommendations that will clearly be regarded as non-reactionary (the Attorney-General did not want knee-jerk reactions to the difficulties thrown up by the Australian Wheat Board inquiry, so in that sense it is uncontroversial).

The Paper, however, also contains an important recommendation for extension of privilege, or something equivalent to it, to those providing tax advice in appropriate circumstances. This recommendation has not been met with enthusiasm by the legal profession and by others. They suggest that privilege is a concept which arises out of the position of the lawyer (the barrister or the solicitor) being an officer of the court and owing a duty not only to the client but also to the court. That argument, however, is unlikely to win the day, not because it is unsound or inappropriate. Rather, it is because of developments in some of our major trading partners (New Zealand, the UK and the US) where corporations in particular, but individuals as well, are able to rely on the advice that is given to them by their accountants who practice in the tax area, as well as tax advice given by lawyers. It will be interesting to see how this particular issue ‘pans out’.