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  FCA 432 shows that it
can also create legal problems for the group parent.
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
The Court rejected this argument, for a number of reasons,
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
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."
The outcome in the Austcorp case1 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.
1. It should be noted that Austcorp International has
been granted leave to appeal to the Full Federal Court.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).