News & Events

  • Misleading and deceptive conduct in a sale of business

    The Risks of Stretching the Truth: Misleading and deceptive conduct in a sale of business

    When we think of consumer law, we often think of dodgy goods. What we don’t often think of is the sale of a business.

    “The Uni Pub”, a well-known Canberra institution for many years, is currently the subject of ACT Supreme Court proceedings. In August 2016 Sapme Pty Ltd (the Seller) sold the business of The Uni Pub to Jornad Pty Ltd (the Buyer). After apparently struggling for some time, in March 2017 The Uni Pub closed its doors. The Buyer commenced proceedings against the Seller and its directors in March 2017 for misleading and deceptive conduct, a breach of section 18 of the Australian Consumer Law (ACL).

    The Buyer and its director claim that they would not have gone through with the purchase had it not been for the misleading representations by the Seller that the business was supporting itself financially, was up to date with its bills and rent, and that the fit out was serviced and working well. The Seller’s defence appears to be that the Buyer was aware the business wasn’t doing well (pointing to a sale price of $1 plus stock) and that the Buyer was obliged by the contract (and warned by the business broker) to satisfy themselves about the truth and accuracy of all information given in relation to the sale.

    This case is one worth watching—applying the ACL in a sale of business context would be a powerful tool to deter sellers and business brokers from making misleading representations when selling a business.

    We have already seen from cases concerning the sale of land that the latitude of potential misrepresentations has been cast pretty widely by the courts. Failing to disclose road widening proposals, inflated claims in advertising brochures, false answers to questions about pending litigation, and even ‘silence’ have all been held to constitute misleading and deceptive conduct entitling a buyer to rescind the sale contract.[1]  It is important to recognise section 18 of the ACL does not distinguish between fraudulent and innocent misrepresentations and there is no requirement that the conduct is intentional. This is mitigated only by whether it is “reasonable” to rely on the representations and whether there has been actual reliance on the representations.

    So, what can you do to protect yourself if you are selling your business?

    To minimise risk:

    1. Don’t say anything about the business that can’t be verified by written evidence (rent payment receipts, service records of plant and equipment);
    2. Don’t exaggerate the performance of the business – while you might be proud of the performance of your business and your statements could be “mere puffs” (which are self-evident exaggerations or expressions of opinion not likely to be taken seriously and importantly – not legally binding) but the worse case scenario is the exaggerations are false or misleading representations (and lead to a case like The Uni Pub);
    3. Do put the onus on the buyer to satisfy themselves about the status of the business; and
    4. Do tell your lawyer if any statements you have made need to be corrected before you sell.

    Contractual provisions excluding prior representations might not always be enough (as evidenced by this case); however, having the buyer sign a contract which declares that they have satisfied themselves about the state of the business can be a strong protection for claims such as these.

    If you require any legal advice about the sale of your business, please contact us.

    [1] CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31.

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  • Managing Contractual Non-Performance

    Business Breakfast Club June Summary - The Terminator: Managing Contractual Non-Performance

    This month at Business Breakfast Club, we discussed how to manage contractual non-performance. In particular, we focused on performance measures, reporting requirements, breaches, rights to damages, and rights to terminate. BAL Legal Director, Mark Love shared some of his insights on the topic. Mark touched on:

    The Information Pathway

    Contract management involves contract performance which can be determined via “performance indicators”. These indicators demonstrate that a party has satisfied the criteria to become entitled to payment. “Lead indicators” can provide information on future performance including whether the desired result will be achieved within the agreed time period. It can also provide an early warning of any potential issues that may arise in contract delivery. A well drafted contract will include the following milestones:

    • the deliverable;
    • the means by which the deliverable will come to life;
    • the matters that create barriers for the deliverable; and
    • the matters that mitigate one’s loss at each milestone point.

     Damages

    Damages for breach of contract are compensatory for the other party’s failure to perform the contract. Compensation is rooted in the notion that where a party sustains a loss by reason of a breach of contract, that party should be placed in the same position as if the contract had been performed. To address the breach, you must turn your mind to:

    • whether you will engage a new contractor to rectify the breach;
    • address the balance of performance of the contract in terms of time delays;
    • determine how to keep the contract enforceable; and
    • address the consequences of loss flowing from the works that still need to be completed to keep the contract on foot.

    Arrangements should be put in place to monitor and assess the underperformance in a contract. This may include the parties engaging in an “action plan”. The action plan may require the contract manager to be aware of the contractor’s capabilities, so that the acquiring entity is informed about the goods or services being provided and is able to determine whether the agreed performance standards and rectification path are capable of being met.

    Termination

    Termination of a contract leaves the parties free from any further obligations to perform the contract. Only certain breaches permit you to validly terminate the contract. These include:

    1. a breach of a fundamental term – which relies on the requirements of specific clauses;
    2. repudiation – which relies on the contracting party’s behaviour to demonstrate that the contracting party no longer regards themselves as “bound” by the contract terms; and
    3. a fundamental breach of the contract – whereby the contract has been breached to such a degree that the bargain under the contract cannot be delivered as intended or has been destroyed.

    Ultimately, identifying the common intention of the parties before entering into a contract will ensure that the issues of underperformance or non-performance in a contract are minimised.

    For more information, please contact Mark Love. The next Business Breakfast Club will take place on 13 July 2018. If you would like to attend, please contact us.

    A copy of the slides is available here.

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  • Make Good Disputes In Commercial Leasing

    Make Good Disputes in Commercial Leasing

    Commercial and retail leases often contain make good clauses which require the tenant to return the premises to their previous condition at the end of the lease.  Make good clauses can often be a cause of disputes when parties have different understandings of what the obligations are.  This can be a serious issue, as fitouts can be very expensive to install and remove.

    Parties may be so eager for a lease to commence that they forget to give proper consideration to what will happen when the lease ends.  However, it is important that make good obligations are carefully considered before a lease commences.

    Avoiding make good disputes

    The key to avoiding make good disputes is to clarify what the make good obligations are, so that each party understands what is required at the end of the lease.  Issues that should be considered include:

    1. What state should the premises be returned to? Depending on the situation, this might be bare shell, the condition of the premises when the tenant took occupation or simply a clean and tidy state.
    2. What was the state of the premises when taken over? This will be especially relevant  where a lease has been assigned.
    3. What fixtures and fittings does the landlord want removed, and which do they want to keep? Factors to consider include who owns the fitout and whether the tenant took over the lease with an existing fit out.

    Remedies for a failure to make good

    If a tenant fails to make good and leaves the landlord with a costly clean-up bill, the landlord’s only resort may to be take legal action. Courts will rarely make an order for specific performance of a tenant’s make good obligations.  More usually courts will award damages to the landlord, which may not cover the costs of making good the premises.

    To simplify the process of litigation, landlords should ensure that the lease clearly sets out a right to recover costs of the landlord undertaking the make good works so those costs can be recovered as a contractual debt, rather than as damages.

    In addition, landlords should ensure that the tenant’s bond or bank guarantee covers any breach of make good obligations under the lease.  Even if this does not cover the full cost of the landlord undertaking the make good works, it will ensure that at least some of the costs can be recovered immediately.

    An alternative to make good obligations

    As an alternative to the potential uncertainties around make good, a lease can provide for a cash payment by the tenant in return for a partial or complete release from their make good obligations.  However, this requires more effort on the part of the landlord and raises its own issues:

    1. What is a fair amount for any cash payment for release from make good obligations? The amount might be fixed in advance, a reimbursement of the landlord’s costs or an amount to be determined by valuation.
    2. At whose election should the option to use a cash payment be available? This will be particularly relevant if any agreed amount differs from the actual costs of making good the premises.
    3. To what extent is the tenant released from their obligations? The tenant might be completely, or only partially, released from their make good obligations.

    Conclusion

    Make good clauses are a potential minefield for disputes, but most of these problems can be avoided if parties understand the position before entering into a lease, and the lease reflects that understanding.

    Written by Penelope Coffey and Alexander Paton. If you require expert assistance with your commercial leasing, contact us.

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  • DELEGATION OF COUNCIL FUNCTIONS

    Essential Guide to Local Government: Delegation of Council Functions

    The delegation of Council functions is essential to the effective and efficient governance of a local Council. This guide will offer an overview of the fundamentals of delegating and sub-delegating Council functions under legislation and the common law.

    Council’s Ability to Delegate

    The Local Government Act 1993 (LGA) establishes the statutory framework for the delegation of Council’s authority. Further guidance is also given in the Interpretation Act 1987 (Interpretation Act).

    Principally, section 377 of the LGA provides the Council with the power to delegate certain functions to the General Manager or any other person or body (not including another employee of the council). However, the scope of the power to delegate is not without restrictions and Councils need to be aware of the legal principles governing delegations.

    To whom can a council delegate?

    As mentioned above, a Council may delegate functions to the General Manager and to other persons or bodies. However, a Council cannot delegate any of its functions directly to an employee of the Council, other than the General Manager.[1]

    The delegation must be made to either a specified person or body (by name) or to a particular officer or the holder of a particular office.[2] Where a function has been delegated to the holder of a particular office or position, the delegation does not cease to have effect merely because the person in the particular office or position ceases to hold that office or position.  In that case, the person occupying the office or position is taken to be the delegate.[3]

    A function can only be delegated to an office or position that is in existence at the time that the delegation is made.[4]

    How does a council delegate?

    There are certain practical steps which must be taken to validly delegate Council functions. Delegation by a Council to the General Manager, or any other person or body, must be done by resolution.[5] The delegation must also be in, or be evidenced in, writing.[6]

    Delegations may also be limited by being made subject to conditions.[7] Where the conditions are not met, the delegate will have no power to exercise the function and any resulting decision will be liable to be set aside.[8] This means that Councils need to be careful when drafting conditional delegations to ensure that any conditions are clearly expressed and, preferably, do not involve subjective elements which can invite legal challenge. Some examples include delegations that are conditional on whether a conflict with a Council policy is “minor”, that require a determination to be made as to whether strict compliance with a Council policy would be “unreasonable” or “unnecessary”[9] or a condition allowing exercise of the delegation where, following public notification of an application, no “well founded objection” is received.[10]

    Scope of Delegation

    A delegation can cover a wide range of Council functions both under the LGA and also under any other Act.  The General Manager may also delegate any of his or her functions, as well as sub-delegate any functions that have been delegated to the General Manager by the Council.[11] In the exercise of a function by a delegate, the delegate may also exercise any other function that is incidental to the delegated function.[12]

    A Council cannot delegate a function that comprises any of the matters listed in subsections 377(1)(a) to (u) of the LGA.  Those matters include (but are not limited to):

    • making rates, charges and fees;
    • borrowing money;
    • voting of money for expenditure on council works, services or operations;
    • the compulsory acquisition, purchase, sale, exchange or surrender of land; and
    • any function that is specifically required to be undertaken by resolution of the council.

    Neither the Council nor the General Manager can delegate their power of delegation.[13]

    A function cannot be delegated if the function is not in existence at the time that the delegation is made. For example, in the case of Australian Chemical Refiners Pty Ltd v Bradwell[14] a prosecution was commenced under a delegation that had been given before the enactment of the section creating the offence. The Court of Criminal Appeal held that the delegation was ineffective.

    Where a function of the Council depends on the Council forming an opinion, belief or state of mind and the function has been delegated, the function may be exercised by the delegate on the basis of his or her own opinion, belief or state of mind.[15]

    Where discretion is involved in the exercise of a function, a delegation of the function cannot limit or eliminate the discretion.  An example of this type of function is the determination of a development application under section 4.16(1) of the Environmental Planning and Assessment Act 1979.  That function involves the exercise of discretion as to whether or not to approve an application unconditionally, to approve it subject to conditions or to refuse it.  A Council (or General Manager) cannot delegate the power to approve a development application without also delegating the power to impose conditions or refuse it.[16]

    After the Delegation

    When a Council or General Manager delegates a function, the Council or the General Manager still retains the ability to exercise the function at any time before the delegate does so.[17] A delegation may also be wholly or partly revoked by the delegator.[18]

    Councils are also required to review all of their delegations during the first 12 months of each term of office.[19]

    More information

    If you have a specific question about how delegations work, call Alan Bradbury on (02) 6274 0940 or Alice Menyhart on (02) 6274 0911.

    The content contained in this guide is, of course, general commentary only.  It is not legal advice.  Readers should contact us and receive our specific advice on the particular situation that concerns them.

    Are your delegations up to date? – RelianSys Delegations Software an automated web-based solution

    Keeping track of delegations for Council Officers and staff, when structures, titles and personnel are constantly changing, can cause major headaches. This is exacerbated when records are kept manually, using old-fashioned documents and spreadsheets. Bradley Allen Love Lawyers (BAL) has partnered with RelianSys – Australia’s leading provider of automated governance solutions, to provide a fully-integrated web-based solution for Council Delegations.

    The BAL – RelianSys Delegations Software is easy to learn, simple to use, and streamlines your delegations by automating the process – saving time and improving efficiency. Because it is web-based, it can be accessed by anyone, from anywhere, at any time, on any device.  More importantly, the BAL – RelianSys Delegations solution is designed specifically for the Local Government sector, by people who understand governance in Local Government, making it highly intuitive – it thinks the way you think.

    The pricing model is very cost-effective – with all set up, updates, ongoing development, telephone training and support all included in one low-cost annual subscription.

    More importantly, the solution simplifies the process, so it takes the stress and headaches out of managing delegations.

    For a personal guided tour, please start a conversation with Febin Philip, Business Development Manager at RelianSys, on 1300 793 905.

    [1] LGA, s.377(1).

    [2] Interpretation Act, s.49.

    [3] Interpretation Act, s.49(8).  See also Martin v Minister for Mineral and Forest Resources [2010] NSWLEC 131 and [2011] NSWCA 286.

    [4] Australian Chemical Refiners Pty Ltd v Bradwell (1986) 10 ALN at N96.

    [5] LGA, s.377.

    [6] Interpretation Act, s.49(2)(b).

    [7] Interpretation Act, s.49(3).

    [8] Aldous v Greater Taree City Council [2009] NSWLEC 17.

    [9] See Kinloch v Newcastle City Council [2016] NSWLEC 109.

    [10] Lyons v Sutherland Shire Council [2001] NSWCA 430.

    [11] LGA, s.378.

    [12] Interpretation Act, s.49(4).

    [13] LGA, ss.377(1)(t) and 378(1).

    [14] (unreported) NSWCCA No. 236 of 1985 28/2/86.

    [15] Interpretation Act, s.49(7).

    [16] Belmorgan Property Development Pty Ltd v GPT Re Ltd & Anor [2007] NSWCA 171.

    [17] Interpretation Act, s.49(9).

    [18] Interpretation Act, s. 49(2)(c).

    [19] LGA, s.380.

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  • blockchain and cryptocurrency - bitcoin

    Business Breakfast Club May Summary: Blockchain and Cryptocurrency

    This month at Business Breakfast Club, Shaneel Parikh and Harry Hoang of Tailored Accounts, discussed blockchain and distributed ledger technology. Whilst Bitcoin and cryptocurrency has certainly created much hype and challenged the legal and financial landscape, Blockchain is much bigger than Bitcoin. It has the potential to revolutionise multiple industries as well as alter our social and economic infrastructure.

    Some of the topics covered:

    What is Blockchain Technology?

    Blockchain is a continuously growing list of records or transactions which are linked and secured in blocks using cryptography. These blocks subsequently reside within the ledger amongst all users. Important to an understanding of blockchain is a consideration of what distributed ledger technology is as whilst every blockchain is a distributed ledger, not every distributed ledger, is a blockchain.

    What is Distributed Ledger Technology

    A distributed ledger is a database of transactions (or data) that is shared across a network of participants. It is “distributed” because the record is held by each of the users of the network, and when a record is added, each user’s copy is updated with new information both instantaneously and simultaneously.

    What types of Blockchain Systems Exist and What are their Governance Structures?

    In practice, there are two key types of “Blockchain” systems that exist: permissioned or private blockchain and unpermissioned or public blockchain systems. Whilst the courts are yet to consider the legal structure of either system, it is important to consider how the courts could analyse such structures and in particular, which players in such systems the court may ultimately deem liable if something goes wrong.

    Benefits of Blockchain

    • each record is near real time and therefore provides an accurate and time-stamped record of a transaction;
    • public blockchain systems are widely accessible to any individual with a computer;
    • it uses DLT, each network node verifies the transaction and holds an updated copy therefore providing an immutable record ;
    • it is censorship resistant meaning that once it a transaction is made and paid for, it cannot be subject to third party intervention; and
    • each transaction is irreversible.

    Data Protection

    With the recent changes to the Privacy Act, there are certain considerations for Privacy with blockchains. For the owners of private blockchain systems, there are concerns regarding assumption of responsibility for an eligible mandatory data breach that occurs on the private blockchain system. If you operate private blockchains and provide ‘administrator’ access to a third-party contractor for example, and that third-party contractor unlawfully discloses information, irrespective of whether you played any part in the disclosure, there is a strong chance that you will be held jointly-liable for the privacy breach as ultimately you control the system and the information within.

    For more information, please contact Shaneel Parikh. The next Business Breakfast Club will take place on June 8 – if you would like to attend, please contact us.

    A copy of the slides is available here.

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  • The protection of Financial Agreements after death

    The protection of Financial Agreements after death

    Financial agreements are an increasingly common part of 21st century relationships. Financial Agreements may be made by those contemplating marriage (commonly referred to as a Prenuptial Agreement or “pre-nup”) or made during the marriage or made following separation to divide property.

    These agreements are a private determination of the parties’ rights and obligations. The terms of the Agreements deal with the couple’s assets during the relationship, at the end of the relationship and can even have an impact on the death of one of the parties.

    It is commonly held that a will-maker has a freedom of testation to determine how they would like their assets to be distributed upon their death. However, certain people who meet legislative requirements such as a spouse or former spouse who are not provided for to their satisfaction in a will may be entitled to make a Family Provision application for an order that they receive a greater share of an estate.

    When a Court determines a Family Provision application it will take into account a myriad of considerations. A Court will consider whether a Financial Agreement has been signed between the applicant and the deceased person.

    The general view taken by the High Court is that rights given by Family Provision are inalienable and it is contrary to public policy to hold a person disentitled to relief merely because they entered into an agreement with the deceased person.[1] Courts in most states have also held that you cannot contract out of making a Family Provision application by signing a Financial Agreement.[2]

    In some cases a Financial Agreement can be relevant to a Family Provision application as it explains the totality of a relationship and shows that a person may not expect to receive anything more from their partner’s estate than what the deceased decided to leave them.[3] However, a Family Provision application will still be available to someone even if there is a Financial Agreement but the Agreement can be used as evidence of the nature of the relationship.

    New South Wales is the only jurisdiction in Australia that gives parties the ability to “contract out” of their rights to make a Family Provision application.[4] This is usually done with a release of rights clause in a Financial Agreement. However, the release must be approved by the Court to be valid.[5] The Court may approve the release before the deceased’s death in a Family Law property settlement or after the deceased’s death as part of the settlement of a family provision claim.

    The release will not be approved by the Court merely because both parties consented to it. The Court will consider whether the release was to the releasing person’s financial advantage or otherwise, whether the provisions of the release were fair and reasonable at the time, and whether independent legal advice was taken and considered.[6]

    In Colosi v Colosi,[7] a release clause in a Financial Agreement was not approved by the Court as the judge held that a clause warranting that legal advice was sought is valueless where the other party must have known the warranty to be untrue.

    Similarly, in Neil v Jacovou,[8] the Court did not approve a release clause as it found that the independent legal advice sought by the widow was not proper and her entitlement was not fair and reasonable as the release of the rights was not for the widow’s benefit.

    Therefore, in all States and Territories, when preparing a Financial Agreement with your partner or former partner, you must also have considerations as to how the document affects your estate plan. Signing a Financial Agreement is not always enough to ensure the intended division of assets after death or prevent a claim. Making your intentions clear and ensuring that both parties have sought appropriate independent legal advice is integral to protecting your interests.

    Written by David Toole and Laura Godfrey. If you would like advice on Estate Planning, please contact us

    [1] Lieberman v Morris (1944) 69 CLR 69.

    [2] Kozak v Matthews [2007] QCA 296.

    [3] Hills v Chalk & Ors [2008] QCA 159; Kozak v Matthews [2007] QCA 296.

    [4] Succession Act 2006 (NSW) s 95.

    [5] Succession Act 2006 (NSW) s 95(1).

    [6] Succession Act 2006 (NSW) s 95(4).

    [7] Colosi v Colosi [2013] NSWSC 1892

    [8] Neil v Jacovou [2011] NSWSC 87.

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  • Estates Update - The 2018 Budget, Testamentary Trusts and Elder Abuse

    Estates Update - The 2018 Budget, Testamentary Trusts and Elder Abuse

    The 2018 Federal Budget was handed down by Treasurer Scott Morrison at 7.30pm on Tuesday 8 May 2018.

    Of particular interest to those in the Estate and Elder Law “space” was the Government’s clarification on the taxation of income derived within a Testamentary Trust and the Government’s $22 million funding to protect the ageing population from elder abuse.

    Testamentary Trusts

    The Federal Government has stated that from 1 July 2019, the concessional tax rates available for minors receiving income from Testamentary Trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

    Currently, income received by minors from Testamentary Trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors.

    This measure clarifies that minors will be taxed at adult marginal tax rates only in respect of income a Testamentary Trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).

    (Source – Budget Measures 2018-2019 – Part 1 Page 44)

    In other words, if a Testamentary Trust is “topped up” or injected with new assets that have not derived from a deceased estate, the concessional treatment will not apply.

    Does this measure change anything?

    The short answer is “no” – we believe this has always been the case.

    Section 6AA of the Income Tax Assessment Act 1936 applies penalty tax rates to unearned income of a minor except where the income is considered “Excepted Trust Income”.

    Section 102AG (2) of the Income Tax Assessment Act 1936 defines “Excepted Trust Income” to include (among other things) amounts which:

    • Is assessable income of a trust estate that resulted from:
    • a Will, codicil or an Order of a Court that varied or modified the provisions of a Will or codicil or
    • an intestacy or an Order of a 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.

    So in other words, income of a minor which derived from a deceased estate does not attract penalty tax rates but instead, is taxed at adult progressive tax rates. This is precisely one of the major reasons why Testamentary Trusts are (and continue to be) a major tax planning tool for families when drafting their Wills.

    The Budget measure simply serves to clarify and remind us that assets injected into a Testamentary Trust that have not been derived from the deceased estate will not receive the concessional tax treatment with regard to minors.

    This measure does not mean that assets which have not derived from the deceased estate cannot (or should not) be injected into a Testamentary Trust that has already been established. Assets held within a Testamentary Trust structure (provided it is drafted carefully and correctly) can be significantly safeguarded when it comes to Family Law separation or bankruptcy.

    Of course, specialist advice should always be obtained if assets are subsequently injected into a Testamentary Trust for the sole purpose of defeating a Family Law or creditors claim.

    Elder Abuse

    The 2018 Budget has also announced a $22 million commitment to protect the ageing population from elder abuse. The Government has committed to the creation of an Elder Abuse Knowledge Hub, a National Prevalence Research scoping study, and development of a National Plan.

    The Law Council of Australia has provided some comment as to the spending of these funds, but no doubt in  the weeks and months that follow, we should hear more about how the Federal Government intends to use these funds towards the combat of elder abuse.

    Written by Golnar Nekoee, Associate, Wills and Estate Planning. To create a power of attorney, or review your will and estate plan, please contact us.

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  • I fart in my colleagues general direction Intentional flatulence as workplace bullying

    I fart in my colleague's general direction: Intentional flatulence as workplace bullying

    Intentional flatulence is often cited as evidence of workplace bullying.

    Comic geniuses Monty Python were never accused of holding back from crude humour. One of their more memorable lines – “I fart in your general direction” – uttered by the Insulting Frenchman, fits this bill. Yet their scenes are often divorced from reality, skirting outside the bounds of the possible.

    However you say it – flatulence, bum sneezes, letting one rip or plain old farting – it is (usually) an involuntary act that is met with embarrassment. This is particularly true in the office, where it certainly is not met with the triumphant gloating of the Insulting Frenchman.

    So it may surprise some readers to learn that intentional farts are in fact frequently cited as sources of workplace grievances and evidence of bullying. Not only are accusations levelled that a colleague farted in their general direction, it is often the case that someone farted in their specific direction.

    Could it really be that fact, at least when it comes to flatulence in the workplace, is stranger even than Monty Python?

    The recent case of Hingst v Construction Engineering involved an allegation that the plaintiff’s immediate supervisor deliberately farted in his specific direction. This resulted in multiple altercations, where the plaintiff, David Hingst, sprayed his supervisor, Greg Short, with deodorant while calling him the imaginative name “Mr Stinky”. Among other allegations, Hingst alleged that Short’s actions amounted to a “complex conspiracy” to “marginalise him and terminate his employment”. This resulted, it was claimed, in Hingst suffering psychiatric injuries.

    The Victorian Supreme Court threw the case out, with Justice Rita Zammit ultimately concluding that no bullying had occurred.

    Aside from being the source of many jokes, the case raises questions about what constitutes bullying and unacceptable workplace behaviour. Indeed, it raises questions about the potential consequences of even an involuntary act for employees and employers. These consequences could be amplified further in the Australian Public Service, where the APS code of conduct is brought into play.

    It is established that a mental element, such as knowledge, intent or recklessness, is not (usually) required to establish a breach of the code. Even in circumstances where a public servant’s behaviour was not deliberate, intentional or even voluntary, it can still be harassment. This is because harassing behaviour is not measured against the perpetrator’s intentions; rather, it is based on whether a reasonable person would conclude the behaviour would humiliate, offend, intimidate or cause a person unnecessary hurt or distress. Had Hingst been an APS employee and made a code of conduct allegation against his supervisor, it is quite possible that the allegations would have been investigated – I have seen lesser allegations upheld.

    In Hingst, Zammit found it was the termination of Hingst’s employment that led him to return obsessively to the flatulence episode, which at the time had not created the alleged psychiatric harm. Rather, it was held that Hingst had “reacted in an extreme and unreasonable way to the termination of his employment, which led him to seek revenge against those whom he blames for his loss”. On Hingst’s own admission, had he not lost his job and if other incidents had not occurred, such as an alleged abusive phone call, the flatulence would “never have been a big issue”.

    From this, we can hypothesise that a reasonable person would not conclude in these circumstances that Short’s flatulence would humiliate, offend, intimidate or cause Hingst unnecessary hurt or distress. Therefore, it’s unlikely that Short, in an APS workplace, would be found to have breached the code of conduct, again in these specific circumstances.

    Having said this, there have been other instances where the act of targeted flatulence would most certainly breach the code. For example, in Bell v Boom Logistics, an act of targeted flatulence was found to “possibly attract dismissal, being an assault”. However, this incident was manifestly targeted: the perpetrator “had his hand on his bum cheek, pulled his cheeks apart and farted in my face”. Of course, Bell is a severe example, but it nevertheless illustrates that involuntary acts can meet the standard required to establish a bullying and harassment – or (as the case may be) a breach of the APS code of conduct.

    Should you find yourself in Hingst’s position (or in the shoes of the unfortunate victim in Bell), it is important to report the unwanted conduct to HR. Your employer owes you a duty of care, and in some instances farting, when it is part of a pattern of bullying or abuse, could give rise to a claim in negligence. In such cases, employees must establish that the harm was reasonably foreseeable and recognisable, and the employer failed to take reasonable steps to mitigate that risk. As Justice Robert Osborn provides in Brown v Maurice Blackburn Cashman:

    “[A] finding that a particular risk of injury is reasonably foreseeable involves a judgment of ‘fact and value’ and it is a matter of fact for the decision-maker to determine whether a defendant ought to have reasonably foreseen his or her conduct might cause psychiatric injury.”

    By contrast, in Hingst, the harm manifested from termination of employment. However, had Hingst suffered psychiatric injury directly from his supervisor’s conduct, the case might have been decided differently.

    Whenever conduct is alleged to have caused psychiatric injury, it should always be cause for pause in a workplace. However curious behaviour like alleged targeted flatulence is, even if it doesn’t amount to bullying, as Zammit concluded, it did paint “a picture of the working culture” at the workplace. Those prone to flatulence should take care to ensure their behaviour doesn’t result in messy, if unintended, consequences.

    John Wilson is the managing legal director at Bradley Allen Love Lawyers and an accredited specialist in industrial relations and employment law. He thanks his colleague James Connolly for his help in preparing this article.

    First published in The Canberra Times.

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