Key Points:

A company may be liable for the misleading or deceptive promotional activities by its subsidiaries.

A strong corporate group brand is usually regarded as a marketing plus. However, the recent judgment of the Federal Court in Ackers v Austcorp International Ltd [2009] FCA 432 shows that it can also create legal problems for the group parent.

Background

In 1999, Austcorp International Ltd became involved in the development of a resort on the Central Coast of New South Wales. Austcorp International was a 50 percent owner of the project (via an interposed subsidiary which held units in the unit trust that owned the site). The management and marketing of the development was contracted to Austcorp Development Management Pty Ltd, a subsidiary of Austcorp International.

In the course of the marketing and promotion of the apartments, certain representations were made to investors regarding a 7 percent "guaranteed" return and the identity of the proposed operator of the resort. These representations were made in a promotional brochure and leaflet which was distributed to investors. They were false and misleading.

When completed, the resort performed poorly, resulting in the market value of the apartments falling significantly below what many investors had paid for them. A large number of investors commenced proceedings against Austcorp International (amongst others) in 2006, alleging that Austcorp International had engaged in misleading and deceptive conduct in breach of section 52 of the Trade Practice Act.

Was Austcorp International liable?

Austcorp International argued that the development and management agreement made it clear that Austcorp Development was responsible for the marketing and promotion of apartments in the resort, and that at all times it had been Austcorp Development, not Austcorp International, that had engaged in the marketing and promotional activities, including the making of the false and misleading representations.

The Court rejected this argument, for a number of reasons, including:

  • during construction of the resort, a large sign which featured the words "Development by Austcorp" together with the Austcorp logo, was displayed on the building site;
  • the brochure and leaflet featured the Austcorp logo (without expressly identifying a particular Austcorp company);
  • letters to investors on Austcorp International letterhead included statements to the effect that Austcorp International had become involved in the development of the resort;
  • several media reports described Austcorp International as the developer of the resort; and
  • service providers to the development (including the public relations firm which prepared the brochure and leaflet) rendered invoices to Austcorp International, which Austcorp International paid (although making internal bookkeeping entries allocating the payment to the relevant subsidiary).

Austcorp International also asserted that the relevant individuals involved in the project did not represent it, but rather Austcorp Development. However, those individuals gave out Austcorp International business cards in their dealings with third party suppliers.

Important in the Court's reasoning was the impression of an association with the "Austcorp brand" that the marketing and promotion of the resort encouraged:

"The conduct of Austcorp created a situation in which people would associate it in trade or commerce as the promoter of the resort...The message which Austcorp wished to pass to the public was that it, as the ultimate owner of the brand, was responsible for the development. It cannot accept the credit and refuse to take responsibility under the Trade Practices Act for its conduct."

The Court was satisfied that Austcorp International made the misleading and deceptive representations:

"Austcorp was the hands and brains of its subsidiaries' conduct and Austcorp cannot evade responsibility for any contravention of s 52 by seeking to draw down between itself and them a corporate veil for the contraventions it perpetrated."

Comment

The outcome in the Austcorp case[1] highlights the potential for parent companies to be held liable for conduct, notwithstanding contractual arrangements which may have been put in place for the purposes of quarantining liability in relation to a particular project in a subsidiary. While such contractual arrangements may be effective to quarantine contractual liability in a subsidiary, it will not necessarily be effective to quarantine non-contractual liability, such as for misleading and deceptive conduct under section 52 of the Trade Practices Act.

Making it publicly clear that the parent has assumed no liability for the subsidiary's activities might appear to be the obvious solution. However, there is little point in having a strong group brand if it cannot be used to support the activities of subsidiaries. Balancing these two considerations is a delicate, but not necessarily insurmountable task.