Bills Digest No. 66 2002-03
Trade Practices Amendment Bill (No. 1) 2002
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Trade Practices Amendment Bill (No.
1) 2002
Date Introduced:
26 September 2002
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal Assent
Purpose
The purpose of
this Bill is to amend the Trade Practices Act 1974 (TP
Act) to include a plain English re-write of the pyramid selling
provision in the Act, to clarify the operation of the defence
provision in section 85 of the Act and to amend a minor drafting
error.
Chain letters, mailing lists, money making clubs
and multilevel compensation plans for low-value publications are
all examples of pyramid selling schemes. Pyramid selling schemes
induce people to join and make payments (financial or non
financial) to other scheme participants with the promise that they
will receive payments when new participants are recruited into the
scheme.
For some pyramid selling schemes the new
participants may receive goods or services in exchange for their
monetary contribution (or non financial payment).(1)
Other schemes will simply involve the transfer of money between
participants.(2) Either situation may be regarded as a
pyramid selling scheme if a substantial part of the inducement into
the scheme is the prospect of receiving payments or other benefits
when new parties are recruited into the scheme.
Whilst the structure and nature of pyramid
schemes varies, trade practices lawyer Russell Miller has noted
that, in essence,
The pyramid nature of these schemes comes about
because each person who introduces others receives a commission for
each person introduced by those persons, as well as a commission
for introducing those persons.(3)
The ACCC has written that
The reality of pyramid selling is that it tends
to heavily reward the very top of the pyramid at the expense of
everyone else in the scheme. The great majority who join the scheme
too late are led to believe that they will also benefit
financially.(4)
Sections 61 and 75AZO(5) of the TP
Act set out the legal position regarding pyramid selling schemes.
The legislation does not actually prohibit the schemes, rather it
is directed to conduct carried out by corporations in relation to
these schemes. For example, under the relevant sections, a
corporation is not permitted to promote a scheme that is identified
as being a pyramid selling scheme.
Section 75AZO sets out the conduct in relation
to pyramid selling schemes that is prohibited. A contravention of
section 75AZO by a corporation is a criminal offence, punishable by
a fine not exceeding $1.1 million. Section 61 duplicates section
75AZO, however a contravention of section 61 of the TP Act has
civil consequences. For example, where a person has suffered loss
as a result of the operation of the scheme, they may claim damages
(under section 82 of the TP Act) from the corporation involved with
the scheme.
In 1997 the Federal Government released a report
inquiring into the operation of Division 1 of Part V(6)
of the Trade Practices Act 1974 and equivalent state and
territory legislative provisions (including the provisions dealing
with pyramid selling).(7) Following from this inquiry
the Ministerial Council on Consumer Affairs in October 1999
recommended that the pyramid selling provisions in the TP
Act(8) and equivalent legislation in the States and
Territories be re-written.(9) This re-write was
considered necessary as the provisions were regarded as being
difficult to understand, creating enforcement problems for
regulators and compliance problems for scheme promoters.
This Bill contains a plain English re-write of
the pyramid selling provision of the TP Act. The Bill is intended
to clarify ambiguities that currently surround the interpretation
of section 61. It is not designed to make substantial changes to
the law relating to pyramid selling.
The Explanatory Memorandum contains a Readers
Guide and Examples, which sets out examples of schemes that may and
may not be regarded as pyramid selling schemes.
Section 15AB of the Acts Interpretation Act
1901 sets out the circumstances in which extrinsic material
may be used to assist in interpreting provisions of an Act. Section
15AB provides that extrinsic material may be relied upon;
-
- If the provision under consideration is clear on its face, to
confirm the ordinary meaning(10)
-
- If the provision in question is ambiguous or obscure, to assist
in the interpretation(11), or
-
- If the ordinary meaning given to the provision leads to a
result that is manifestly absurd or unreasonable to assist in the
interpretation.(12)
Section 15AB contains a non exhaustive list of
extrinsic material that may be used to aid in the interpretation of
legislation. Included in this list is the Explanatory Memorandum
relating to a Bill.
Therefore, if the circumstances in section 15AB
of the Acts Interpretation Act 1901 are satisfied, a court
may refer to the Explanatory Memorandum to assist them in the
interpretation of the provision.
Decision in Gilmore v
Poole-Blunden
Section 85 of the TP Act sets out the defence
provisions that may be invoked for breaches of the consumer
protection Parts of the Act.(13)
Section 85 of the TP Act states, in part, the
following;
(1) Subject to subsection (2), in a
prosecution for a contravention of a provision of Part VC, it
is a defence if the defendant establishes .
(a) that the contravention in respect of which
the proceeding was instituted was due to reasonable mistake,
(b) that the contravention in respect of which
the proceeding was instituted was due to reasonable reliance on
information supplied by another person.
Paragraph 85(1)(a) has been described as a
mistake of fact defence. Mistake of fact has been described in the
criminal law in the following way;
As a general rule an honest and reasonable
belief in a state of facts which, if they existed, would make the
defendant s act innocent, affords an excuse for doing what would
otherwise be an offence.(14)
Under paragraph 85(1)(b) it is a defence if the
relevant information was supplied and the defendant relied on that
information. The operation of paragraph 85(1)(b) was recently
considered in Gilmore v Poole Blunden(15)
(Poole Blunden). In Poole Blunden, the respondents promoted the
"Concorde" and "Golden Galaxy" schemes. Prior to promoting the
schemes, the respondents concluded that the schemes were both legal
operations. The respondents came to this conclusion after carrying
out their own research and reading a number of independent legal
opinions which in essence stated that the schemes would not breach
the relevant provisions of the Act, including the pyramid selling
provisions.
The case went on appeal from the Magistrates
Court to the Full Court of the South Australian Supreme Court. In
considering the facts of the case the Court held that the scheme
was a pyramid selling scheme within the provisions of the State s
fair trading legislation. The Court went on to consider whether the
respondents could rely on the equivalent of paragraph 85(1)(b) of
the TP Act [paragraph 88(1)(b) Fair Trading Act 1987 (SA)]
to argue that the scheme operated because of reasonable reliance on
information supplied by another person.
The Court held that the legal opinions that were
provided to the respondents amounted to "information supplied" for
the purposes of the defence(16) and that the
contraventions were due to reliance on that
information.(17) Accordingly the Court held that the
respondents had not breached the pyramid selling provisions of the
Act.
The decision in Poole Blunden increases the
scope of the defences under paragraph 85(1)(b) of the TP Act where
there is an alleged breach of a provision within Part VC of the TP
Act. It has been suggested that following this decision,
a defence to prosecution may now be available
where the defendant can demonstrate that she/he relied upon legal
advice provided by another person which is later shown to be
incorrect.(18)
In response to this, the Standing Committee of
Officials of Consumer Affairs met in December 1999 and agreed to a
uniform amendment to the TP Act and state and territory fair
trading laws to make it clear that the defence in paragraph
85(1)(b) (and state and territory equivalent legislation) be
restricted to mistake of fact (not law).(19)
Main
Provisions
Item 1 of the Bill repeals
section 61 of the TP Act. Item 2 of the Bill
inserts the proposed new Division 1AAA Pyramid
selling into the TP Act, which contains a series of new
provisions dealing with pyramid selling.
Clause 65AAA provides an
overview of the new Division and states that the aim of the
Division is to set out the meaning of pyramid selling and related
concepts. Clause 65AAB contains relevant
definitions for the operation of the new Division. Two noteworthy
definitions include the definition of participate and payment .
Clause 65AAC sets out the
conduct relating to pyramid selling that is prohibited by the TP
Act. The clause states that a corporation must not participate in a
pyramid selling scheme. The proposed clause also states that the
corporation must not induce or attempt to induce a person to
participate in a pyramid selling scheme.
Participate in a pyramid selling scheme is
defined in clause 65AAB to include a corporation
that establishes or promotes the scheme or takes part in the
scheme.
Sub-clause 65AAD(1) defines a
pyramid selling scheme . The definition focuses upon one key
elements of the scheme, namely that new participants are entirely
or substantially induced into making a payment to other
participants in the scheme by the prospect of receiving payments
when new participants join the scheme.
Payment is defined in clause
65AAB to include the provision of financial and
non-financial benefits. This makes it clear that payments can
include monetary payments or some other form of benefit such as the
receipt of goods.
Clause 65AAE sets out some
matters that may be considered when determining whether the payment
has been entirely or substantially induced by the prospect of an
entitlement to payments when new participants join the scheme. For
example the clause states that consideration may be given,
-
- to whether the payment bears a reasonable relationship to the
value of the goods or services that are received in exchange for
the payment [proposed paragraph 65AAE(1)(a)],
-
- to the emphasis that is placed on the supply of the goods and
services versus the emphasis placed on entitlement to recruitment
payments when the scheme is being promoted [proposed
paragraph 65AAE(1)(b)].
Proposed clause 65AAD clarifies
other aspects of the nature of a pyramid selling scheme. For
example, sub-clauses (2) and (3) provide the following points of
clarification;
-
- Either the promoter of the scheme or another scheme participant
can advertise the inducement [proposed paragraph
65AAD(2)(a)]
-
- The recruitment payments may be made by either the promoter or
another scheme participant [proposed paragraph
65AAD(2)(b)]
-
- The participant may be required to perform functions (in
addition to making a payment) as part of the scheme
[proposed paragraph 65AAD(3)(b)]
-
- Pyramid selling schemes can involve the sale of goods or
services or simply involve the transfer of money [proposed
paragraph 65AAD(3)(e)].
The offence provisions relating to the consumer
protection parts of the TP Act are contained within Part VC of the
Act. Currently section 75AZO makes it an offence to engage in
pyramid selling. Item 3 repeals and substitutes
section 75AZO to make the wording of the provision consistent with
the proposed new pyramid selling provisions in the Act.
The penalty for a contravention of the pyramid
selling provisions continues to be 10,000 penalty units. It is
interesting that the note currently contained in section 75AZO
which states that section 4B(3) of the Crimes Act 1914
does not apply has been removed from the re-drafted
provision.(20) The conclusion to be drawn from this is
that the drafter considers that the form in which the revised
provision has been drafted makes it clear that the maximum penalty
to be applied to a corporation in contravention of the provision is
10,000 penalty units rather than five times this amount, and hence
displaces section 4B(3) of the Crimes Act 1914.
For the abundance of caution however, it is
arguable that a note stating that section 4B(3) of the Crimes
Act 1914 does not apply should be included in this provision.
It would seem that the factors that encouraged the drafters to
include the note in the current section 75AZO (and all other
relevant consumer protection provisions in Part VC) are still
present and therefore the note continues to be necessary to remove
any ambiguities.
Item 4 makes it clear that the
new pyramid selling provisions apply only to conduct engaged in
after the commencement date
Amendments made in response
to the decision in Gilmore v Poole Blunden
The Explanatory Memorandum to the Bill states
that;
The amendment to section 85 of the TPA made by
the Bill restructures the defences provided by the section to
exclude information in the nature of legal opinions or advice on
the legal consequences of conduct from the type of information to
which the defence applies
The Bill in item 5 proposes to
implement this by repealing paragraphs 85(1)(a) and (b) and
compressing the contents of the two paragraphs into a new
proposed paragraph 85(1)(a). Proposed paragraph
85(1)(a) states that it is a defence if the contravention
was due to a mistake of fact including a mistake of fact caused by
reasonable reliance on information supplied by another person. The
effect of this amendment is therefore to remove the possibility of
a mistake of law being relied upon under section 85 of the TP
Act.
The amendment may not however achieve the
objective as set out in the above extract from the Explanatory
Memorandum. This is due to the fact that courts have held that in
some circumstances reliance on legal advice constitutes a mistake
of fact (rather than a mistake of law).
For example in Palmer v
Ostrowski(21), the appellant, a commercial
fisherman, requested that the Office of Fisheries WA provide him
with a copy of the current regulations for lobster fishing. The
document that he was provided with was incomplete in that it
omitted an amendment which closed an area for rock lobster fishing;
this area was described in regulation 34 but Fisheries WA did not
supply the appellant with this particular regulation. In this case
the majority of the Western Australia Supreme Court held that the
appellant was under a mistake of fact, the mistake of fact being
that Fisheries WA had provided the appellant with a complete copy
of all relevant material pertaining to where commercial operators
could fish for lobster. In his minority judgement, Styetler J held
that the mistake that the appellant made was a mistake of law,
namely that he believed that it was lawful to fish for lobster in
the place in which he was fishing when in fact it was unlawful.
Therefore, if the intent of the amendment is to
make it clear that acting in accordance with legal opinions and
advice is not a defence under section 85 of the TP Act (as opposed
to a mistake of law not being a defence under that section), the
legislation may need to be redrafted to explicitly address this
matter.
Section 155 of the TP Act confers wide powers on
the Australian Competition and Consumer Commission (ACCC) to
investigate possible breaches of the TP Act by requiring that
information and documents be provided to the ACCC.
Failure to provide information and documents to
the ACCC under section 155 has traditionally incurred a maximum
fine of 20 penalty units or 12 months imprisonment. The
Treasury Legislation Amendment (Application of Criminal Code)
Act (No. 2) 2001 inadvertently removed the 12 months
imprisonment sanction for a contravention of the section.
Item 8 amends section 155 to re-insert this
sanction.
This Bill contains a number of amendments to the
TP Act to clarify the Act s operation in relation to pyramid
selling and the use of the defence provision in section 85. It also
rectifies a drafting error within the Act. It would appear from the
Explanatory Memorandum accompanying the Bill that the Bill proposes
to make it clear that acting in reliance on legal advice or opinion
is not a defence under section 85 of the Act. Arguably, the Bill
does not achieve this result and further consideration may need to
be given to the effect of item 5 of the Bill.
-
- In ACCC v Giraffe World Australia Pty Ltd [1999] ATPR
41-718, Giraffe World sold a mattress (the Mat) that when connected
to a source of electricity, emitted negative ions which would
allegedly benefit the health of a person who slept on it. The
mattress was sold for $2,000. In association with the sale of the
mattress, the buyer of the Mat was introduced to the Giraffe Club
(membership fee $300 and membership application fee $50) and the
Grow Rich System. A member of the Grow Rich System was entitled to
be paid commission by Giraffe World for successfully introducing
newcomers. It was possible to buy the Mat without joining the
Giraffe Club however this was not emphasised and arguably never
disclosed. The Federal Court held that this was a pyramid selling
scheme in contravention of section 61 TPA.
- In ACCC v Golden Sphere International Inc [1988] ATPR
41-638, Golden Sphere promoted a scheme whereby members of the
public were required to pay $150 to join the scheme. The target was
provided with a Certificate of Authenticity which contained the
names of seven people, numbered one to seven. The bank account
details of the first named person in the list appeared opposite
their name. The target paid $50 to the person selling the scheme to
them, $50 to Golden Sphere and $50 to the person named at the top
of the Certificate of Authenticity . Following these payments,
Golden Sphere forwarded to the new member three numbered
certificates and each certificate contained the target s name in
the seventh position. The target s name would eventually progress
to the top of the list as new people were recruited into the
scheme. Golden Sphere represented to the target that he or she
would eventually receive in excess of $100,000 by participating in
the scheme.
- Russell Miller, Miller s Annotated Trade Practices Act
1974, Twenty third edition, Lawbook Company, 2002, p. 490.
- Chris Field, Consumer Dealings , Australian Business Law
Review, vol. 29, no. 4, Aug 2001, p. 348 referring to
Advertising and Selling, Australian Competition and
Consumer Commission, AGPS, Canberra, 1997.
- The Treasury Legislation Amendment (Application of Criminal
Code) Act (No 1) 2001 (TLAA) amended the TP Act to make the
consumer protection provisions in the TP Act, Criminal Code
compliant. Prior to this amendment, both civil and criminal
consequences flowed from a breach of the consumer protection
provisions contained in Divisions 1 and 1A of the TP Act. In order
to make these provisions Criminal Code compliant, yet maintain the
civil regime, the TLAA created a new part, Part VC in the TP Act.
Civil consequences continue to flow from a breach of Divisions 1
and 1A of the TP Act, however the criminal elements of the Division
were transferred to Part VC. Part VC substantially reproduces
Divisions 1 and 1A of Part V but contains the amendments necessary
to ensure that the divisions are Criminal Code compliant. Section
75AZO is the criminal equivalent of section 61 of the TP Act.
- Part V deals with Consumer Protection as does Part VC.
- Audit of Consumer Protection Laws, Final Report Identifying
Inconsistencies, Gaps and Overlaps in Consumer Protection
Legislation, February 1997, http://www.consumersonline.gov.au/resources/audit_report1.asp.
- Explanatory Memorandum, Trade Practices Amendment Bill (No 1)
2002, p. 1.
- Fair Trading Act 1999 (VIC) section 22, Fair
Trading Act 1987 (SA) section 70, Fair Trading Act 1987
(NSW) section 56, Fair Trading Act 1922 (ACT) section
27, Fair Trading Act 1989 (QLD) section 55D, Fair
Trading Act 1987 (WA) section 24, Fair Trading Act 1990
(TAS) section 26B, Consumer Affairs and Fair Trading Act
(TAS) section 56.
- Section 15AB(1)(a).
- Section 15AB(1)(b)(i).
- Section 15AB(1)(b)(ii).
- Parts V and VC.
- Australian Trade Practices Reporter, CCH Australia Limited, p.
12,442.
- [1999] SASC 186.
- ibid p. 24.
- ibid p. 25.
- Stewart Yeung, Defences under the Trade Practices Act Gilmore v
Poole-Blunden , Australian and New Zealand Trade Practices Law
Bulletin, vol. 15, no. 3, 1999.
- Explanatory Memorandum, Trade Practices Amendment Bill (No 1)
2002, p. 11.
- Section 4B(3) Crimes Act 1914 states that, where a
body corporate is convicted of an offence against a law of the
Commonwealth, the court may, if the contrary intention does not
appear and the court thinks fit, impose a pecuniary penalty not
exceeding an amount equal to 5 times the amount of the maximum
pecuniary penalty that could be imposed by the court on a natural
person convicted of the same offence. Therefore unless a contrary
intention appears the maximum penalty that may be imposed on a
corporation that breaches the provision is five times the amount
expressed in that provision. The note currently contained in
section 75AZO makes it clear that the maximum penalty that may be
imposed on a corporation that contravenes that section is the
amount expressed in that provision, ie 10,000 penalty units rather
than five times that amount.
- [2002] WASCA 3.
Susan Dudley
15 November 2002
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