Monthly Archives: December 2011

Business Partners: Are they holding up their end of the bargain?

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It is not uncommon when starting or purchasing a business to want to share responsibilities and the risks of the venture. Different structures can achieve this, eg. incorporated companies, trusts and partnerships.

Each structure carries its own list of pros and cons.

One common structure is where several individuals elect to buy or take over a business together, and govern their conduct by way of a partnership agreement. Partnerships do not carry the same tax benefits as incorporated companies, but they can avoid the rigid organisation and rules provided by a company constitution and/or contained within the Corporations Act.

It is therefore important, if going into business with a partner, that the partnership deed is as comprehensive as possible – taking into account as many contingencies as can be foreseen – and that it fully addresses both the rights and obligations of all partners. An exit strategy, if the worst should happen, is also important.

It is all too common, however, for parties to dive in to a venture with gusto and enthusiasm without fully considering what may happen down the track. Often, partnership deeds are rushed or simply do not cover all the possible (likely or unlikely) scenarios that might affect the partnership venture.

When things go wrong with partnerships, and it is sad that it happens all too frequently, there is still hope even in circumstances where partnership deeds simply do not measure up.

The safety net lies in the nature of the partnership relationship. Justice Dixon in Birtchnell v Equity Trustees, Executors and Agency Co Limited (1929) 42 CLR 384, explained that the relationship between partners is a fiduciary one. The mutual confidence of partners, he said, was the lifeblood of the concern and it is only through trust between the partners that the business may go on.

Dixon J outlined a number of fiduciary duties that partners owe to each other. Firstly and primarily is that the parties must act in ‘good faith’ and honesty. This is a broad duty, and often encompasses a range of ill deeds perpetrated by less than scrupulous partners.

Next is the duty to provide full accounts of all information and assets in a partner’s possession or control that are material to the partnership business. No one partner can seize control of all the books and records of a business and seek to exclude the other partners from gaining access. To allow this, invites all manner of underhanded deeds.

Partners must also avoid conflicts of interest. By this, the Courts mean that a partner cannot set up a business under a partnership agreement and then simply turn around and set up a business in conflict or assist a business in conflict with that partnership business. When partners enter a business venture, it has been determined that they must, in furtherance of the trust between the parties, pour all reasonable focus and effort into that business.

Partners must avoid making personal profit from partnership opportunities and information, and must account for personal benefits obtained from the partnership business. A partnership venture is one of mutual gain or mutual loss, not necessarily in equal proportions but certainly to the same ends. For one partner to derive a benefit, without disclosing it to his fellow partners, is a direct breach of the implied duty of full disclosure within the partnership.

In cases where breaches of these duties occur, one partner may look to the Courts to determine the future of the partnership. If dispute in the partnership venture cannot be resolved between the parties, then a receiver can be appointed to wind up the business and send the parties, possibly sadder and wiser, on their way.

In short, while implied business obligations cover a wide range of behaviour, it is simply more practical, cost efficient and safe to take the time and legal fees at the start of the venture to ensure you have a proper, comprehensive and fully structured partnership agreement in place before rushing head first into the ‘next big thing’.

For further information contact business@whd.com.au or call 07 3232 5700.

Is your insurance cover as good as it should be?

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Insurance is seen by most as a necessary evil. Most businesses probably discuss the scope of their insurance cover with their broker, let the broker decide on (and arrange) the required policies, pay the premiums annually, and then forget about it. But if someone makes a claim against you, and you call upon an insurance policy for protection, things could get complicated.

Our insurance law expertise has been sought by clients to deal with a variety of issues when a claim is made against a business. Sometimes it is as simple as asking the insurer to indemnify the client against that claim, and stalling the claimant’s lawyers while the insurer considers its position. At the other extreme, what do you do in response to an outright refusal by the insurer to indemnify against a claim?

In this blog, we consider a recent case of ours involving a refusal of indemnity by two workers’ compensation insurers in two different states.

A family business in the Granite Belt region of Queensland operated farms on both sides of the border, but the owners’ principal farm, where they lived, was in Queensland. The business hired a worker (also resident in Queensland), but his employment was performed principally on a farm in NSW. He later alleged a back injury at work, lodged a WorkCover Queensland application for compensation (which was accepted) and WorkCover paid him statutory benefits. When benefits were ceased, the worker engaged solicitors to pursue a common law claim for damages against his employer.

In the pre-litigation phase, the worker’s solicitors served the claim on both the employer and WorkCover Queensland. WorkCover then informed the employer and the worker’s solicitors that because the worker was injured in NSW, it was not liable to indemnify the employer; the worker’s claim should be dealt with by the employer’s NSW insurer (the employer held workers’ compensation insurance policies in both states). The employer gave notice to the NSW insurer but, since the worker was still insisting that WorkCover Queensland was the relevant insurer (after all, WorkCover had paid him statutory benefits for his injury), it was not surprising that the NSW insurer equally refused an indemnity to the employer.

The employer was then served by the worker’s solicitors with a District Court Claim for damages well in excess of $100,000. Their attitude seemed to be that it was irrelevant whether the employer’s pockets were deep enough to pay the damages sought; the worker would take what he could get from the business if an insurer did not step in.

That was where things stood when we were instructed to act for the defendant employer. Informal approaches were quickly made to both insurers (to try and persuade one of them to indemnify), but were unsuccessful – each maintained its initial position. However, the employer could not be uninsured against the claim; one of the two would eventually have to indemnify the employer, but how to achieve that result before the employer had incurred significant legal costs (possibly all the way to a trial) in defending the plaintiff’s claim and also fighting the two insurers?

We recommended that the employer issue third party proceedings against both insurers, at the same time as the employer filed a defence to the worker’s claim – the two insurers were forced into formal litigation (with its accompanying legal costs) from the very beginning.  Both insurers then knew that the District Court, after a trial, would order that one of them was required to indemnify the employer – which would involve the losing insurer paying the plaintiff’s damages (and possibly also his legal costs), the legal costs of the employer and the other insurer, and also its own legal costs. Commercial commonsense from insurers means that, if they know the fight will be far more expensive than granting an indemnity – especially if, at the end of the day, the insured must succeed – then they will grant indemnity rather than engage in litigation. Within four months of the commencement of litigation, the NSW insurer agreed to indemnify the defendant employer and take over its defence of the worker’s claim – and also agreed to pay the employer’s legal costs of having to litigate against the insurer to get that result.

The moral of the story is that, if two potential insurers each refuse to indemnify a policy holder against a claim, mere talk will almost certainly get you nowhere. If commercial commonsense prevails, the prospect of litigation at the earliest opportunity should see insurers re-evaluate their positions – and usually sooner rather than later – to avoid even higher legal costs. In our client’s case, it did incur its own legal expenses up front, but only over a short period, and most of those costs were then recovered from its insurer.

A far more serious question is what would happen if the employer only held one workers’ compensation insurance policy (perhaps the broker was not fully aware of the cross-border nature of the employer’s business, or the business originally operated only in one state but slowly expanded into the other state, and no one thought about the changing implications for its insurance cover)? In that event, Murphy’s Law would probably apply – the policy you needed was the one you didn’t have, and the damages claimed might be large enough to force the business into liquidation or bankruptcy.

This tale does not apply just to farmers on the Granite Belt. Interstate transport and courier delivery businesses, and any business on the Gold Coast that uses its own staff to collect/deliver goods and services across the border, are just two examples of employers who could find themselves in the same predicament we have just discussed. Proper risk management says the employer must investigate the need for workers’ compensation policies in all states where its employees might find themselves working.

For further information contact insurance@whd.com.au or call 07 3232 5700.

Nominal Defendant’s right to recover costs is strengthened

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The Queensland Supreme Court has again reaffirmed the test of “reasonableness” in settling a personal injury claim (rather than litigating it to trial) when the Nominal Defendant later seeks to recover the damages it has paid out under section 60 of the Motor Accident Insurance Act.

In his judgment of 30 November 2011 in Nominal Defendant v Buchan [2011] QSC 364, the Chief Justice re-affirmed the 1998 decision in Nominal Defendant v Langman [1988] 2 Qd R 569 that the court “…should [not] be too astute to make microscopic examinations of compromise arrangements which save costs and which avoid the perils of litigation and which prima facie seem sensible”.

That meant, in deciding whether the Nominal Defendant acted reasonably in settling the personal injury claim, the court had to ask itself whether it was reasonable for the Nominal Defendant to rely on its legal advice, which anticipated a finding, on the balance of probabilities, that the defendant Buchan was the driver of an unregistered motorcycle and that he was carrying (as a pillion passenger) a person who died when an accident occurred.

In Buchan, the issue of whether the Nominal Defendant acted reasonably was not clear cut. There was no independent witness to the accident, Buchan had no memory of it because of his own injuries, it occurred on a remote stretch of road, the investigating police officers had not named a driver and the Coroner was unable to make a finding on the identity of driver.

However, even though the evidence in the case was mainly circumstantial, the Chief Justice concluded it was sufficient to exclude Buchan from only being the passenger, and not the driver of the motorcycle.  He then asked himself whether, if the initial claim had been taken to trial, the trial judge would, on the balance of probabilities, have concluded that Buchan was the driver.  The answer to that question was yes, and the judgment against Buchan was the original payout ($769,863), interest on that amount ($257,904) and costs.

This case highlights one of the lesser known aspects of Insurance Law in Queensland. If a claim for personal injuries arises out of a motor vehicle accident and the vehicle at fault is not insured for CTP, the Nominal Defendant (i.e. Queensland Government) acts as the insurer to investigate and settle (or defend) the claim.  If the Nominal Defendant incurs costs (which it always does), under section 60 of the Act, it has a right to recover “as a debt” those costs that are reasonably incurred. The Nominal Defendant can recover against the owner of the car, or its driver, or both.

For claims officers and their lawyers it is another reminder that, in contested Section 60 recovery claims, the legal advice in the CTP claim file (and the instructions given to the lawyers) will come under scrutiny.  Proper documentation on the file is essential.

We have been undertaking section 60 recovery actions for the Nominal Defendant for over 20 years, and it never ceases to amaze that, for the sake of avoiding payment of registration fees measured in hundreds of dollars, people like Mr Buchan accept the risk of driving accidents that could cost them more than a million dollars in a judgment against them.

Click here to read the full decision.

For further information contact us at litigation@whd.com.au or call 07 3232 5700.