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Joint venturers at risk of jail terms

Joint venturers at risk of jail terms

The business community has been thrown into uncertainty as a result of key provisions in legislation passed recently imposing criminal sanctions for serious cartel conduct. Australia has lagged…

The business community has been thrown into uncertainty as a result of key provisions in legislation passed recently imposing criminal sanctions for serious cartel conduct.

Australia has lagged far behind the rest of the developed world in introducing criminal sanctions, and, for the most part, the passing of the legislation has been welcomed. However, criticism has been levelled at specific provisions relating to joint venture agreements which leave many businesses exposed to heavy financial penalties, and executives, to jail terms.

Under the final legislation passed last week, joint venture agreements will be exempted from criminal sanctions only if they fall into the narrow category of being contracts, or "understandings or arrangements that are intended, or reasonably believed to be, a contract". However, as Middletons partner Murray Deakin points out, the reality of modern business is that many joint ventures are undertaken through less stringent agreements, such as memorandums of understanding. Under the new legislation, all such existing joint ventures will now be exposed to the full force of the criminal sanctions.

Deakin believes this aspect of the new legislation will create uncertainty and inefficiencies for businesses. "In modern commerce there is a whole spectrum of dealings between businesses that never reach the heights of a formal contract. Now these arrangements in the new environment are going to be highly risky because they don't appear to be 'intended, or reasonably believed to be, a contract' and they're going to be exposed to criminal sanctions," he said.

Deakin said that businesses will now have to go back and review all existing joint venture arrangements, and, in many cases, make changes to ensure they're not at risk. "All current joint venture activities which are currently the subject of any arrangement or understanding which falls short of a contract should be reviewed, and any continuation of that joint venture - assuming the joint venture is between competitors - may be at risk of the new sanctions, and there would be a number of joint ventures that would fall into that category," he said.

Allens Arthur Robinson partner Wendy Peter believes the biggest grey area will be with oral arrangements, where there may be greater uncertainty as to whether or not a contract exists. "I think the issue of having an unwritten arrangement is probably the biggest [issue]," she said. "There's been some press in the last week that suggests that [a contract] has to be in writing. That's not correct. But, clearly, if it's an oral contract then you face the normal issues of establishing that there was an oral contract, as opposed to an arrangement, which gives rise to a legally enforceable obligation."

Deakin believes that the new legislation will have a far-reaching and dampening affect on the whole system of joint venture formation throughout the business community.

"The whole process of joint venture needs to be reviewed in light of this legislation and I think it introduces a rigidity into joint venture formation arrangements which will create practical difficulties for traditional joint ventures to be formed and financed," he said.

"It's just not the way business operates. So ... it's very disappointing to have so much uncertainty in a criminal environment which stems into the heart of joint venture formation which is an important feature of a modern economy and a future engine for economic growth."

Peter agrees that joint ventures are an important aspect of Australian business that should be promoted by Government.

"The policy should be to encourage joint ventures. Joint ventures have allowed, for example, many resources projects to get off the ground. They're a very common aspect of Australian corporate life and they should be encouraged.

However, she's less convinced than Deakin that the new legislation will dampen business enthusiasm for joint ventures in the future.

"I hope [it doesn't]. I don't think that there is any suggestion that joint ventures of themselves are inherently anti-competitive and cartel-like," she said. Really, the difficulty is in getting an exception that truly protects proper joint ventures but doesn't cover up hard-core cartel conduct, so it's a balance. And I think I would be surprised if there was a view that this really impacted on joint ventures going forward."

Peter also pointed out that a mechanism exists for parties to seek authorisation from the ACCC for a joint venture if it doesn't fit within the narrow exception. She conceded, however, that this could be very a time-consuming exercise.

"That's not an easy process ... but if you are concerned about an exposure because you're not really comfortable with the rules in the exception - and, obviously, we're now talking about criminal liability and parties may wish to get more certainty that before - there is this mechanism to obtain authorisation to give you immunity.

Despite suggestions in the media that narrow drafting of the exception may have been an oversight by the Government, Peter emphasised that it had been a deliberate policy decision. "It's not an oversight - it was deliberate policy to really limit [the exception] to contracts. It was the ACCC in particular which said that if you want to take advantage of this exception then it should be in a contract," she said.

Deakin, however, believes the Government's decision is "difficult to justify in light of modern commercial practice". "It's very disappointing where it's ended up and I do really think there is an occasion to do some further work in the joint venture exception area," he said.

- Zoe Lyon

LexisNexis is running a half day intensive session on cartel conduct on 16 July in Sydney and 1 July in Melbourne. Click here for details.

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