Edmonds Judd

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Tenants wanting to alter the premises or their use

If you are a landlord owning commercial property, you may want to know how your tenant can make changes to the premises, or its use of the premises, without speaking to you about it first. If you are a tenant, you may want to know what you can do without being in contact with your landlord.

Tenants under commercial leases generally have fairly broad rights for the use and enjoyment of the property under the lease, but there are some limitations to what tenants can do without your consent. These include changing the business use of the property, assigning the lease or altering the premises. When considering any tenant’s request for consents under the lease, you must act reasonably.

 

Change of business use of the property

The deed of lease usually records the business use of your tenant in the first schedule. Your tenant cannot use the premises for anything other than the business use without your prior written consent. Provided the proposed use is not in substantial competition with the business of any other occupant of the property, reasonably suitable for the premises and compliant with any applicable statutory provision relating to resource management, you cannot unreasonably withhold consent to your tenant’s request to change the business use of the premises.

 

Alterations or additions

Your tenant cannot make any alterations or additions to the premises, or alter the external appearance of the premises, including affixing signs or advertising on the exterior of the building, without your prior written consent. In the case of signs, you cannot unreasonably withhold consent if the sign is to describe your tenant’s business.

If your tenant wants to make alterations or additions to the premises, or alter the premises’ external appearance, they must provide you with plans and specifications for the proposed works. They will also need to comply with all statutory requirements when completing the works, including obtaining any necessary building consents and/or compliance certificates. You cannot unreasonably withhold or delay your consent to these additions or alterations.

If you require it, your tenant (at their own cost) must reinstate the premises and repair any damage caused by the alterations or signs by the end of the lease. If the additions or alterations are not removed by the end of the lease, you may elect to retain ownership of these without any compensation payable to your tenant.

 

Assignment of the lease

Your tenant cannot assign the lease or sublet any part of the premises or carparks without your prior written consent. Again, you cannot unreasonably withhold consent. There are certain conditions which your tenant must meet, otherwise it will be considered reasonable for you to withhold consent. These include:

  • Your tenant can demonstrate to your satisfaction that the proposed assignee or subtenant is respectable, responsible and has the financial resources to meet their own commitments under the lease
  • All rent has been paid by your tenant and they are not in breach of the lease
  • Your tenant and assignee have (or will) signed and delivered to you a deed of assignment of lease
  • If the assignee is a company, you are entitled to request a deed of guarantee to be executed by the principal shareholders of that company, or a bank guarantee from a registered bank to be delivered to you as a condition of your consent, and
  • Your tenant agrees to pay your reasonable costs and disbursements in respect of the approval and the preparation of any documentation you require. These costs are generally payable whether or not the assignment or sublease ultimately proceeds.

 

Under the more recent versions of the ADLS standard lease, any change in the legal or beneficial ownership of a tenant company which results in the effective management or control of the company changing, such as the majority shareholder selling its shares, is treated as a deemed assignment and also requires landlord consent.

While landlords and tenants can generally work through issues of landlord consent at a commercial level by themselves, occasionally there can be problems, particularly if a landlord does not want to consent to the request or the request results in substantial changes to the lease.

 

It is a requirement of the lease that any landlord consent granted is recorded in writing, and we recommend for both landlords and tenants that you comply with this requirement. Any conditions to the consent, or changes to the lease which may result from the consent, should also be recorded in writing.

Whether you are a landlord or a tenant negotiating through a consent request, we recommend early contact with us. We can assist with advising what is and isn’t reasonable from each party in the circumstances, and can help to ensure that what you have agreed is correctly recorded, to reduce the chances of disputes in the future.

 

 

 

DISCLAIMER: All the information published in Property Speaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Property Speaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Business briefs

Cartel conduct: New Zealand’s first ever criminal cartel prosecution

The Commerce Commission recently filed criminal charges against two construction companies and their directors for alleged bid-rigging of publicly funded construction contracts. This is New Zealand’s first ever criminal prosecution for alleged cartel conduct under the Commerce Act 1986.

 

Bid-rigging, or collusive tendering, occurs where some or all the bidders collude to pre-determine who will win the bid or tender. This is a form of cartel conduct that is prohibited by the Act.

 

The case is currently before the court so information is limited but, if found guilty, the companies and their directors could face serious penalties. Each company could be fined up to $10 million, three times their commercial gain from the cartel conduct or 10% of their turnover per year per breach. Each director could be imprisoned for up to seven years and/or fined up to $500,000.

 

The Commission’s willingness to bring criminal proceedings for cartel conduct is a warning for all businesses to understand their obligations under the Act and have adequate processes to avoid engaging in cartel conduct.

 

New privacy rules for biometrics

The Office of the Privacy Commissioner (OPC) has announced it will release a draft policy code early this year regulating the collection and use of biometric information. The code will have direct implications for any businesses dealing with biometric information.

 

Biometric information is any information about a person’s biological or behavioural characteristics, such as fingerprints, face, voice or eyes. It is increasingly common for businesses to collect and use biometric information to verify people’s identities online, enhance retail security, control access to devices or physical spaces, or to monitor attendance at a site or a work place.

 

While the use of biometrics has significant benefits for businesses, it also increases the risks of profiling, discrimination, bias, and lack of transparency and control to individuals.

 

The OPC has proposed three categories of rules that businesses must comply with when collecting and using biometric information. These are:

  1. Proportionality assessment: Businesses must undertake a proportionality assessment to ensure that the reasons for collecting biometric information outweigh the risk of privacy intrusion
  2. Transparency and notification: Businesses must be open and transparent with individuals and the public about the collection and use of their biometric information, and
  3. Purpose limitations: The collection and use of biometric information will be restricted for certain purposes.

 

The public will have an opportunity to provide feedback on the code before it is implemented.

 

New reporting obligations for large businesses

The Business Payment Practices Act 2023 will come into effect on 25 May 2024. It will require large businesses to publicly report information on their payment practices to the Business Payment Practices Register.

 

The legislation applies to businesses with more than $33 million in annual revenue and $10 million in third party expenditure. The information that must be reported on includes:

 

  • The average time to pay supplier invoices
  • The percentage of invoices paid in full within the required timeframe, and
  • A description of the business’s standard payment terms (if any).

 

If a business fails to comply with its reporting obligations, it could be fined up to $9,000. If a business intentionally provides false or misleading information, it could be fined up to $500,000.  The Act is designed to address payment delays that can have significant impacts on the cash flow for New Zealand’s small and medium-sized businesses.

 

If you would like more information or advice on any of the above topics, please feel free to contact us.

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Health and safety lessons

The eruption of Whakaari/White Island on 9 December 2019 was a tragedy. Of the 47 people on the island when it erupted, 22 people were killed. The other 25 people were severely injured, many with life-changing injuries. The last of the prosecutions brought by WorkSafe due to the eruption concluded on 31 October 2023. We look at the lessons landowners and company directors can learn from these prosecutions.

 

After the eruption, WorkSafe brought charges against 13 parties under the Health and Safety at Work Act 2015. These included charges against tourism operators, two government agencies responsible for advising on volcanic risks and the landowners. The charges against the landowners are the most legally significant.

 

Whakaari Management Limited

Whakaari/White Island has been in the Buttle family since 1936. The family currently owns it through the Whakaari Trust; the trust leased the land to Whakaari Management Ltd (WML). The directors of WML are three members of the Buttle family. WML used to contract with tourism operators to allow them to conduct tours on the island. WML had no presence on the island and its staff did not work there.

 

Charges brought against WML and its directors

WorkSafe charged WML under sections 36 and 37 of the Act. Section 36 requires employers to ensure that, as far as is reasonably practicable, the health and safety of their employees. Section 37 requires an employer to take all reasonably practicable steps to ensure the safety of anyone who enters a workplace controlled by the employer, whether they work for the employer or not.

 

WorkSafe also charged WML’s directors under section 44. Where an employer is a company, section 44 requires directors to take reasonable steps to ensure that their company complies with its obligations under the Act.

 

The court’s decisions[1]

The charge against WML under section 36 was dismissed. The court held that section 36 only applied to the employer’s business activities, and WML did not carry out its business on the island. Section 36 will generally only apply to an employer’s premises or anywhere else its staff are working.

 

WML was convicted[2] under section 37 because Whakaari was a workplace that it controlled, and it had failed to obtain expert advice on the risk posed to visitors by a volcanic eruption. The court found that WML could exercise control over the activities of tour operators on the island and that it had been involved in managing their activities in the past as it had actively engaged with the tour operators regarding their operations. WML could also control the workplace by terminating, or threatening to terminate, its agreements with tourism operators that allowed them to access the island.

 

Implications for landowners

If you are a landowner and allow other parties access to your property for commercial purposes, you may have health and safety obligations as WML did on Whakaari. Section 37 will not usually apply if you operate solely as a landlord because a landlord will not usually have sufficient control to meet the section 37 requirements. Section 37 also contains a specific exemption to prevent the section from applying to farmers who allow people onto their farms for purely recreational purposes such as walking or hunting.

 

The charges against the directors of WML under section 44 were dismissed, despite WML being convicted under section 37. The court held that it could not conclude that any directors had breached their personal duty under section 44 based on the company’s failure to meet its obligations as it had no information about how the directors had made their decisions. For example, one director could have argued that WML should have sought expert advice on the risk of volcanic eruption but was outvoted by the remaining two directors.

 

What directors need to do

Following the Whakaari/White Island decision, WorkSafe will likely seek full disclosure of all board documents before bringing similar future prosecutions.  To avoid any potential criminal liability, any company director who is uncomfortable with their fellow directors’ stance on a health and safety matter should ensure that their dissenting view is recorded.

 

As a company director, if you are concerned about any decisions that your board proposes to make, or has made, about a health and safety matter, it would be useful to talk with us to clarify your position.

[1] WorkSafe New Zealand v. Whakaari Management Ltd [2023] NZDC 23224.

[2] Sentencing will take place in late February.

 

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Both are useful for employers

Many New Zealand business owners know they can offer a trial period (usually 90 days) when hiring a new employee. A trial period is designed to ensure a new employee is a good fit for their employer.

An alternative to a trial period is a probation period. This is designed to set expectations clearly between you and your employee including the terms of the hire and when a final decision about the suitability of their employment is decided.

We explain the differences between trial and probation periods to enable you to better understand your options.

 

Trial period

A trial period, if successfully included in an employment agreement, will allow you to terminate the agreement in the first 90 days of employment without your employee being able to raise a personal grievance for the dismissal. Trial periods can, however, only be used in limited circumstances.

Until 23 December last year, using a trial period was only available to employers who had fewer than 19 staff. Now, under the new coalition government, this limitation was removed and trial periods can be used by all employers, regardless of size, for new employees.

 

Key requirements of a valid trial period are:

  • Only for new employees, not current or prior employees
  • 90 days maximum length
  • Must be documented in the written employment agreement, signed before your employee starts work and must contain a valid notice period, and
  • Must only be included in the agreement and exercised in good faith.

 

When exercising a right to terminate under a 90-day trial clause, you are not obliged to provide any reasons for the termination. It is important to note that your employee can still raise a personal grievance against the business if there are other causes for grievance during their employment, such as (but not limited to) discrimination or bullying.

 

Probation period

Unlike a trial period, probation periods have a much wider application in employment law.  Probation periods are an ideal way for employers and employees to ‘try out’ a new or expanded role while setting clear expectations that this may only be a temporary employment change, and what to expect if it does not work out.

Some of the common reasons you may want to use a probation period include making sure a staff member is appropriately skilled for their role, or to allow an existing employee to accept a promotion or lateral move in the business and to show they can do the job.

Key characteristics of a valid probation period are:

 

  • Can be used for existing OR new employees
  • The probationary period can be for any length of time, as long as it is clearly defined in writing, is reasonable considering the role’s complexity, and has an appropriate agreed notice period
  • The written agreement includes what may occur at the end of the probation period (termination, reversion to their former role and responsibilities, etc), and
  • That you as the employer must provide adequate support and training.

 

Throughout the probationary period you must be able to show that you have taken reasonable steps to support your employee in achieving success in their role. This includes frequent performance-based conversations, providing adequate training and support on new skills and tasks, discussing any areas for improvement and setting clear expectations of what ‘success’ looks like for their role.

Unlike a trial period, if you decide at the conclusion of the period to terminate the employment agreement, you must explain how you have fairly assessed your employee’s performance, why their performance was not sufficient for the role and your intention to end the employment relationship.

Your employee must then have sufficient time to respond. Any response must be considered before making a final decision to terminate the employment agreement. Unlike a trial period, your employee can still bring a claim for unjust dismissal if they feel you have not followed due procedure and come to a fair conclusion.

It is also critical to note that probation periods cannot follow after a trial period for the same or very similar role. If your employee moves multiple times within your business, on each subsequent role change you may be able to apply a new probation period.

Regardless of whether you are considering a trial period or probation period, it is important you talk with us before incorporating it into your employment agreements. To be effective and defensible against a personal grievance, both trial periods and probation periods must be documented correctly throughout the period’s lifecycle, from the employment agreement pre-commencement all the way through to the end of the period. Please don’t hesitate to contact us if you are considering a trial or probation period for any of your employees.

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Over the fence

Family home v homestead: implications for relationship property

When a relationship breaks down, it is always difficult dividing up your joint assets.  It is important when deciding the division of relationship property under the Property (Relationships) Act 1976 (PRA) following a separation, or when forming a contracting out agreement, to accurately classify the home in which you and your partner/spouse live. The overall structure of the property will define whether your home is classified as the ‘family home’ or a ‘homestead.’

Family home: The PRA defines the family home as a property, including all land, buildings and improvements, which a couple generally, or primarily, reside in as their family residence. The property within the whole title must be used for the benefit of the relationship to be classified as the family home. In this case, all land under that title must be shared equally in a separation situation unless you as a couple have a contracting out agreement specifying the division of the property.

Homestead: Where only part of the property within the whole title is used for the benefit of the relationship, the portion attributable to the relationship may be considered the ‘homestead’ instead of the ‘family home.’ In this case, the remainder of the property may not be subject to the PRA principles of equal sharing, particularly if it is owned by a third party such as parents of one of the parties.

A family home will be considered a homestead if a portion of the property within the title is used by a couple as their general, or primary, family residence but the remainder of the title is used for the overall economic gain of another entity. This is more common in the rural context where couples reside on the farm but only a portion of the overall title contains the family home and the remainder is used for the economic gain of their rural business.

In this case, only the portion of the title considered to be the homestead would be considered in the division of relationship property, with the remaining property possibly not subject to the equal sharing principles of the PRA.

 

Road user charges and when to pay them?

The government imposes taxes on fuel through a road user charge (RUC) to collect funds for the maintenance and development of our roads. For most people, this tax is included in the petrol price.

Some vehicle owners, however, must pay the RUC and their fuel separately. If you own a vehicle weighing more than 3.5 tonnes, or a vehicle weighing less than 3.5 tonnes that runs on untaxed diesel, you must pay the RUC.

Your RUC licence is paid in advance to allow you to travel the distance purchased – usually in blocks of 1,000 kilometres.

You must always display the appropriate RUC licence on the inside of the passenger’s side of the front windscreen of your vehicle. Once your vehicle has travelled the distance covered by the RUC licence, you must renew your licence.

Owners must keep records of their vehicle use and have a hub odometer installed to accurately measure the distance it travels. Most vehicles that are subject to RUCs are sold with a hub odometer pre-installed.

Electric cars (EVs) do not currently incur RUCs. The new government, however, has indicated that EVs will pay the RUC from 1 April 2024 onwards.

 

Casual employees v seasonal workers

Seasonal workers are employed in certain sectors (particularly agricultural and horticultural areas) with the exclusive purpose of doing seasonal work, usually to assist with an increase in seasonal production requirements. Although seasonal work is temporary by nature, employers must be aware of the minimum entitlements for seasonal workers. There is a distinction between ‘casual’ workers and ‘seasonal workers’ in general. The Employment Relations Act 2000 requires specific clauses in employment agreements for these workers.

Casual employment: a casual worker is employed to work on shifts that are offered and accepted. There is no requirement for them to accept work you offer. In between periods of work, this worker is not considered to be employed by you.

Seasonal work: generally speaking, a seasonal worker is employed to work the entire season. These people are permanent employees on a fixed-term basis who are likely to be employed under a fixed-term agreement[1]. It is important that your seasonal worker’s employment agreement is drafted according to the specifics of the job.

If you need help with employing this summer’s casual and seasonal workers, please don’t hesitate to contact us. It’s vital to get these employment agreements correct – both for you and your employees.

[1] Section 66, Employment Relations Act 2000.

 

 

 

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Postscript

Mainzeal case

The implications of the Mainzeal case[1] are being felt far and wide amongst the directorship community. We summarise below the findings of the Supreme Court case.

 

In August, after the case worked its way through the High Court and Court of Appeal, the Supreme Court found that the directors should be personally liable for $39.8 million plus interest payable  at 5% pa from the date of liquidation – together more than $50 million. The chief executive of Mainzeal (who was also a director) is responsible for the full sum, and the personal liability of the three other directors was capped at $6.6 million each plus interest.

 

In 2013, Mainzeal went into receivership and liquidation. It was calculated the company owed around $110 million to unsecured creditors. The liquidators believed that the directors of the company had breached s135 (reckless trading) and s136 (trading whilst insolvent) of the Companies Act 1993 and should be held personally liable for the losses of the company’s creditors.

 

Many directors may want to take a moment to reflect on what the Supreme Court decision may mean for them now and in the future. Becoming personally liable for a company’s debts is a significant risk associated with accepting (or continuing) a director role.

 

If you are considering taking on a directorship, you should take independent legal and accounting advice to not only carefully assess whether your skills are a good match for the company and the sector in which it operates, but also to be clear on any potential personal liability.

[1] Yan v Mainzeal Property and Construction Limited (in liquidation) [2023] NZSC 113.

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


What are the differences?

It’s been a challenging time for many businesses since the pandemic hit our shores. If you find your company in financial difficulty, you may be forced to make some difficult decisions.

This may involve receivership, voluntary administration or liquidations – but what are the differences?

 

Receivership

Receivership occurs where a receiver (typically a licensed insolvency practitioner who may also be a chartered accountant) is appointed to deal with secured assets or manage the business of a company for the benefit of the secured creditors.

 

A receiver can be appointed by a court order or by a secured creditor under the terms of a deed or agreement, under which a contractual right to appoint a receiver has been granted by the company (or any other entity).

 

The specific powers of a receiver include the right to demand and recover income of the property in receivership, issue receipts, manage property and inspect any documents relating to the property. The receiver may also have additional rights in the deed or agreement under which it has been appointed.

 

The receiver’s primary duty is to try and bring about a situation in which debts are repaid, and the company’s property is managed – not for the benefit of the company, but for the secured creditors. To do so, a receiver will collect and sell one or more secured assets on behalf of a secured creditor, and manage other preferential claims against the company. The directors of a company in receivership have restricted powers. They must co-operate with the receiver so that the financial affairs of the business can be resolved fairly and equitably. Directors must provide company accounts, records and other information required by the receiver.

 

Voluntary administration

Voluntary administration is an option aimed at giving a business the opportunity to survive and avoid liquidation. An administrator can sometimes save a failing business; administrators are generally appointed by the company directors to deal with all a company’s creditors and its affairs.

 

In considering whether voluntary administration is an option for the company, directors must weigh up whether it has the support of creditors, and whether creditors are likely to gain more financial benefit from the company avoiding liquidation and continuing to trade.

 

Other considerations include the extent of the company’s debt, the attitudes of suppliers, its history with creditors and the availability of cash flow.

 

Liquidation

In receivership and administration situations, there is a chance a business can be saved and return to normal trading. Liquidation, however, is the end of the road.

 

Previously known as ‘winding up’, liquidation can be voluntary or compulsory. The main reason a company will face compulsory liquidation is if it is unable to pay its debts and it is insolvent. A voluntary liquidation can be used if the shareholders want to cease trading.

 

A liquidator’s principal duty is to preserve and protect the company’s assets to enable distribution to its creditors and, in a solvent liquidation, its shareholders.

 

Liquidators will recover what they can and distribute the proceeds to a company’s preferential, secured and unsecured creditors and, in a solvent liquidation, to its shareholders. Although the liquidator has control of the assets, the company keeps ownership of them and holds the assets on trust for the creditors. When the liquidation is complete the company is removed  from the Companies Register.

 

Ask for guidance

When your business is facing financial strife, it’s easy to feel overwhelmed. We recommend you contact us for guidance to support you through the process.

 

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Generative AI and copyright

Are you taking the right precautions?

Many businesses have been using artificial intelligence (AI) for a long time to gather insights into their data and make strategic decisions. Recent generative AI improvements, however, have brought the power of AI into the public’s hands like never before. As a certain spider[1] once said: With great power comes great responsibility.

 

Generative AI technologies can now be used to create almost any type of content you can imagine; everything from a poem about pineapples to music in the style of Mozart and even three-dimensional models of motorbikes. However, the legal and human issues these technologies create are far less inspiring.

 

At its core, generative AI models are trained on large datasets of predominantly human-generated works to generate new works, that are ‘inspired’ from works within the training dataset. This approach raises several important legal questions, including:

  • Are companies allowed to train an AI model on content which they do not own? This is particularly significant considering much of the content is not in the public domain and is, arguably, covered by copyright
  • Once a model has been trained, who owns the content the model produces, and can it be used without infringing the intellectual property (IP) of others, and
  • Can you own and protect the output from an AI model?

 

There are also the ethical and fairness issues of using the creative works of others without compensation.

 

Many of these topics are currently being litigated in courts around the world, and while it would take a lengthy article to cover each issue in detail here, we discuss three key issues below.

 

  1. IP laws vary from country to country
    While there are international agreements on copyright provided under the Berne Convention, there are still significant differences in copyright law in different countries. This is particularly important when it comes to issues such as relying on ‘fair use’ as a defence to copyright infringement.

    Copyright is also only a small piece of the puzzle. Depending on how you use AI, you may need to also consider local and international laws covering moral rights, consumer protection such as the Fair Trading Act 1986 and the tort of passing off, breach of contract, violations of the American statute Digital Millennium Copyright Act 1998 and unfair competition laws – to name just a few.

 

  1. AI-generated content can still infringe the rights of others
    Even if an AI is tasked with creating new content, this does not guarantee that content can be used without infringing the rights of others. Most AI models have been trained on datasets that include works protected by copyright, patents, trademarks and registered designs. Therefore, before being used, the generated outputs should be reviewed to assess potential infringement issues.

 

  1. The use of a generative AI may prevent you from asserting copyright in the generated works
    Most guidance from overseas markets at this stage is that to be copyright-eligible, the creative work requires a human author. Prompting an AI to generate content is unlikely to meet the human authorship standard. The extent to which you can claim copyright on an AI-generated work is likely to be limited to a detailed analysis of exactly what the human inputs were when compared with the computer-generated outputs.

 

What can you do to reduce risk?

Despite these above issues, you can take practical steps to help reduce your risk in using AI-generated content. These include:

  • Searching to determine how different your AI-generated content is from existing, potentially protected works
  • Ensuring that key issues such as privacy and confidentiality are not breached by your use of the AI
  • Fact checking the outputs of the AI
  • Ethical use of the AI, including not using the AI as a tool to copy or mimic the art style of another person or company, and
  • Keeping detailed records of what the generative AI was used for, including details of prompts, intermediate outputs, manual edits and so on.

 

Since generative AI technologies can be used in a seemingly endless number of different applications, your risk exposure will depend on exactly what you are using these technologies for and what precautions you can take to reduce your risk.

[1] Spider-Man said this, but it has also been attributed to Winston Churchill.

 

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Comes into force on 5 October

The Construction Contracts (Retention Money) Amendment Act 2023 was passed on 5 April this year with the legislation coming into effect on Thursday, 5 October 2023.

If your business retains funds as part of a construction contract, or a contractor retains funds from you, you should ensure you are familiar with these upcoming changes.

The primary intention behind the amendments is to provide greater clarity and to strengthen the rules regarding retained funds under the Construction Contracts Act 2002. The government wants these changes to provide more reassurance to subcontractors that they will be paid for work completed – even if a head contractor becomes insolvent.

 

Retention monies must be held separately

Previously, there was no obligation for the business retaining money to hold it in a separate account unless a trust relationship had been created. From 5 October, all funds retained under a construction contract must be held in a separate bank account that meets specific criteria.

This bank account must be held at a New Zealand bank, with a chartered accounting or law firm, or by a trustee company; and the account provider must be told that it is an account holding funds on trust. If you are required to retain funds, you may use that account for multiple contracts (you do not need an individual account for every contract with retained funds), but the account may not be used for any other purpose.

 

Reporting obligations

If you are retaining funds under a construction contract, you will also need to comply with reporting obligations on your retained funds account. If there is more than one party for whom you are holding funds, you must maintain a ledger that clearly indicates whose funds are coming in and out of the account, and report to each party individually.

On receiving funds to be retained, you must report as soon as practical to the party for whom you have retained funds. Your report must include:

  • The amount being retained
  • The date it was received
  • Details of the bank account in which the funds are being held, and
  • A statement that shows the funds in the account, including any deposits or withdrawals relevant to their retained funds.

You also must ensure that you regularly report to all parties; the Act specifies this means at least once every three months. These reports must also be produced promptly upon request from the party for whom you are retaining funds. As well, you may not charge for the administration of producing these reports.

Do note, however, that as the retention holder, you are entitled to the interest on the account; this presumably may help cover the account fees and maintenance.

 

Use of the funds

There must be agreement in place around when the funds are to be accessed. If there are any issues that arise during the contract that would result in the retained funds being used, before accessing the funds the holder of the retained funds must (at a minimum) provide notice of the intention to use the funds and why, and give at least 10 working days to the other party to rectify the issue.

 

Penalties

Significant penalties have been introduced to enforce the new legislation; failing to comply with the retained funds management regime is considered a criminal offence. For each breach of the Act, a company can be fined up to $200,000 and each director can be fined up to $50,000.

Given that these charges are applicable per offence, there are serious financial consequences for non-compliance. The amendment also has added a fine for failure to report, or for false or inaccurate reporting (even if the funds are being held in a compliant manner), of $50,000.

 

Alternatives

Given the new significant penalties and associated additional administration for retained funds, many construction contracts are being amended so that the retention holder obtains a security bond in lieu of a retention. The NZS 3910:2013, that is commonly used by the construction industry, does not set comprehensive criteria for how a bond should be provided or released. Therefore, any contractor who prefers to avoid running a retained funds bank account by using bonds, should carefully (and urgently) review and amend their contracts to ensure they comply with this new legislation.

If you are engaged in construction contracts and would like to discuss your obligations under the new amendments, please don’t hesitate to contact us.

 

 

DISCLAIMER: All the information published in Commerical eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Mainzeal decision

Major implications for company directors

Taking on the responsibility of a directorship is not a decision to be taken lightly. For New Zealand directors, the magnitude of the director role has been hammered home with the decision of the Mainzeal case from the Supreme Court in late August.[1]

This decision has sent a strong signal from the New Zealand justice system that directors can, and will be, held personally liable for financial losses experienced by creditors if the directors allow the company to trade recklessly and/or trade while insolvent.

 

About Mainzeal

Mainzeal Property and Construction Limited was one of the largest New Zealand construction companies in the years leading up to its financial collapse.  In 2013, the company went into receivership and liquidation owing unsecured creditors around $110 million. The Mainzeal liquidators believed that the directors of the company had breached s135 (reckless trading) and s136 (insolvent trading) of the Companies Act 1993 and should be held personally liable for the losses of the company’s creditors.

 

Supreme Court decision

While going into the nuances of each of the court hearings is too complex for the scope of this article (the Mainzeal case has been heard in the High Court, Court of Appeal and Supreme Court), it is noteworthy that each court accepted that the directors should be held personally liable to some extent for a breach of their director’s duties.

At the highest court in New Zealand, the Supreme Court, the judges found that the directors should be liable for $39.8 million plus interest payable at 5% pa from the date of liquidation (together more than $50 million). The chief executive of Mainzeal is responsible for the full sum, and the liability of the three other directors was capped at $6.6 million each plus interest.

 

Facts rather than intentions

Critically, personal liability falling on a director due to a breach of directors’ duties under s135 (reckless trading) and s136 (insolvent trading) is a matter of facts, not intentions.

The Mainzeal directors were not accused of any conflict of interest or lack of honesty, and were taken on their word that they acted with good intention while running the company. Regardless, it mattered that on the facts they permitted the company to trade in a way that was reckless and allowed the company to trade while it was insolvent.

 

Companies Act 1993 may need a refresh

Both the Court of Appeal and Supreme Court indicated that a review and update of the Companies Act will be helpful.

The Mainzeal case reinforces to directors the consequences of failing to avoid reckless or insolvent trading, however the current legislation does not provide additional guidance or safe harbour for directors and their decision-making. Adding new guidance for directors’ duties into the Companies Act could enable directors to more confidently navigate the complexities of commercial decision-making with a need for accountability to their creditors.

 

Personal liability

After the announcement of the Supreme Court decision, many directors may want to take a moment to step back and allow the lessons of Mainzeal to sink in. Becoming personally liable for a company’s debts is a significant risk associated with accepting (or continuing) a director role.

Every director of a company should ensure they feel adequately knowledgeable about all key aspects of their company and the sector in which it operates. Accepting a directorship role where there are gaps in skills, or knowledge of the company or sector, can lead to an increased risk that the director may unwittingly allow, or join their other directors in, a decision that permits the company to trade in a reckless or insolvent manner, opening up personal liability and prejudicing creditors.

If you are considering taking on a directorship, you should take independent legal and accounting advice to not only carefully assess whether your skills are a good match for the company and sector, but also to be clear on any potential personal liability.

If you would like some help in assessing whether a directorship is a good fit for you, please don’t hesitate to contact us for further guidance.

 

[1] Yan v Mainzeal Property and Construction Limited (in liquidation) [2023] NZSC 113.

 

 

DISCLAIMER: All the information published in Commerical eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650