WA Termination clause of contract - Do "Group members" include sole trader/company?

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pb3

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7 June 2021
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In a supply/distributor agreement with a manufacturer the following termination clause is included -

The distributor represents and warrants that neither it not any of its group members (if any) is insolvent or is deemed or presumed insolvent under any applicable law....

The agreement is between supplier (company) and sole trader. The sole trader owns a pty ltd service company, which was used to provide staff for it's business. The service company was put into liquidation, with no suggestion of the sole trader or business being or presumed to be insolvent or otherwise activating this clause.

The distributor repudiated the distributor agreement for several months (refused to supply goods) after providing the liquidator of the company with all documentation and express authority over the distributor agreement, in an apparent confusion over which entity they were dealing with.

Finally the distributor terminated the agreement under the following clause

Distributor may terminate this Agreement immediately for reasons of non-payment or material breach by the Distributor.

The material breach sited was that the service company (as a group member) was put into liquidation. There were no relevant conflicts between parties during long trading history, and the distributor was aware that the service company was going to be wound up, and was supportive of distributors actions in this regard, providing confirmation that trading would continue.

From the sole traders point of view it appears that the supplier had made a privacy breach, and instead of admitting fault/liability decided to affirm this action as correct, and when pushed to provide a response on the status of agreement consequently terminated.

My questions are
  1. In this context (no definition of "group" present) can the term group members in this agreement bind a contracting sole trader, to the performance of it's service entity (whether or not a related entity) ?
  2. Whether by ipso facto regulations or otherwise, is it a legally effective termination clause where an insolvency event (liquidation) of a company that is related but a non-party to an agreement is the trigger for the termination of the contracting parties agreement?
  3. Given this is a standard form contract (take it or leave it) with the supplier being by far the dominant party, could these clauses, or the use of them in the above example be an example of unfair / deceptive or unconscionable conduct?
Thankyou..
 

Rod

Lawyer
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27 May 2014
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1. Hard to know without seeing the full contract, but is possible.
2. Depends on all the facts and circumstances. Not possible to answer in an online forum.
3. Hmm, it is possible. Again depends on all the facts and circumstances.

I am also not familiar with WA laws sealing with unfair contracts.
 

Docupedia

Well-Known Member
7 October 2020
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Aside from the issue of whether the 'group members' definition is relevant in these circumstances, there is also the question of whether termination for insolvency is valid in the first place. Under amendments made to the Corporations Act a clause which allows automatic termination on insolvency (often called an 'ipso facto' clause) may be unenforceable. This only applies to contracts entered into on and from 1 July 2018. There are quite a few exemptions, and the provisions are very technical.

While being placed into liquidation may be an allowable trigger for termination, the clause you've stated doesn't say that that is the trigger - it says 'insolvent'. That's a different thing. Just because a company is insolvent doesn't mean it goes into liquidation. There are a number of methods available to turn insolvency around and become solvent again. My understanding is that the amendments were put in place to help that possibility, as automatic termination of a supply contract (for relevant example) could make the slide into liquidation a foregone conclusion. In other words you have about zero chance of turning insolvency around if your contractual network is frozen. However - as I said, it is very technical and walking the line between trading out of insolvency and insolvent trading (which is an offence) is a very fine one that requires careful planning and execution.

The reality is, regardless of anything else, this is not a self help exercise. You need to engage a solicitor with knowledge of contracts, corporate law, and insolvency to argue the point for you.

I'd forget about the privacy question. It may have some very minor relevance, but it distracts from the main issue. If there is a confidentiality clause in the contract then that would probably be a better angle and may get more traction.

Unfair contract terms may be a valid argument to make. However, it take a contemplation of the whole contract and arrangement to be properly considered (for example, even if it is a standard form contract, you need to consider whether there was negotiation/opportunity for negotiation in setting its terms; whether legal representation/advice was available/taken; how the subject clause interacts with the rest of the contract; etc.).
 

Tim W

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28 April 2014
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This looks like a MLM contract?