It is not uncommon for parties to enter into arrangements where a person rewards another for referral of business.
The essential elements of such arrangements are relatively straight forward – Party A (Supplier) pays a sum of money or gives some other benefit to Party B (Referrer) in return for the Referrer referring or otherwise influencing or encouraging Party C (Customer) to acquire goods and/or services from the Supplier.
While these arrangements are legal if Customers are informed that the Referrer is receiving a benefit for the referral, serious legal issues may arise if the Customer is not made aware of the benefit.
Where there has been no disclosure of the Referrer’s benefit, the arrangements could fall foul of criminal laws (which apply in all six states). It is also important to understand that in New South Wales1, Queensland2, Tasmania3 and Victoria4 an offence can apply not only to the party receiving the gift or benefit (i.e. the Referrer) but also to the party providing the benefit (i.e. the Supplier). It is therefore important for the Referrer and the Supplier to ensure that proper disclosure is made to Customers.
1. Secret Commissions Legislation
Under section 179 of the Crimes Act 1958 (Vic):
- Whenever any advice is given by one person to another and such advice is in any way intended to induce or influence the person advised:
- to enter into a contract with any third person;…
and any valuable consideration is given by such third person to the person giving the advice without the assent of the person advised the gift or receipt of the valuable consideration shall be an indictable offence5.
For the purposes of this provision the term “advice given” is defined as including any “suggestion intended to influence the person to whom the same may be made or given and every influence exercised by one person over another”.6
Similar provisions apply in New South Wales, Queensland, South Australia, Western Australia and Tasmania with the definition of “advice given” varying from state to state.
In Victoria, the legal position with regard to commissions, gifts or benefits remains the same whether a corporation or an individual is the wrongdoer. It is an offence for a corporation or individual to aid or abet the contravention of laws against secret commissions7 and the penalty for doing so is a fine of up to $193,428 for a corporation and a fine of up to $193,428 for an individual and/or up to 10 years imprisonment. The penalty in New South Wales and South Australia is up to 7 years imprisonment with no monetary fine imposed while the remainder of the states are consistent with New South Wales and South Australia but attract additional monetary penalties for corporations.8
If gifts or incentives are made known to Customers, the offences under secret commissions legislation do not arise.
While the secret commissions legislation does not stipulate when or in what form such disclosure should be made, at the very least the disclosure should be in writing and made to the Customer before the Customer acquires any goods or services from the Supplier. A possible vehicle for such disclosure could be the Supplier’s Terms and Conditions of Sale, provided those terms were drawn to the Customer’s attention ahead of the relevant purchase.
It could also be some other document which is provided to the Customer by the Supplier provided that it is clear that the Customer has had an opportunity to read the documentation and the disclosure is sufficiently clear.
Best practice disclosure would be to require the Customer to sign a document outlining that they acknowledge that a commission, reward or gift may be paid to the Referrer by the Supplier before the Customer enters into the relevant transaction. That way there can be no debate as to whether the commission was disclosed to the Customer and ensures that both the Supplier and the Referrer avoid the potential criminal penalties that could flow from such arrangements.
It should also be considered that parties operating in certain industries may also be subject to specific disclosure requirements, for example, real estate agents in NSW must comply with disclosure requirements set out in the Property, Stock and Business Agents Act 2002 (NSW).
This article was written by Teresa Torcasio, Partner, Marian Ngo, Senior Associate and Alasdair Fairbairn, Associate.
P:+61 3 8644 3623
1Section 249D(1) and (2) Crimes Act 1900 (NSW).
2Section 442E Criminal Code Act 1899 (Qld).
3Section 266(1) Criminal Code Act 1924 (Tas).
4Section 181 Crimes Act 1958 (Vic).
5Section 179(1) Crimes Act 1958 (Vic).
6Section 175(1) Crimes Act 1958 (Vic).
7Section 181 Crimes Act 1958 (Vic).
8The position in the other states is:
NSW – Imprisonment for 7 years – Section 249D(1) Crimes Act 1900 (NSW).
Queensland – If a corporation, 3400 penalty units (i.e. $443,870), and if an individual, 7 years imprisonment – Section 442I Criminal Code Act 1899 (Qld).
South Australia – Imprisonment for 7 years – Section 149 Criminal Law Consolidation (Offences of Dishonesty) Amendment Act 2002 (SA).
Western Australia – If a corporation, to a fine of $250,000, and in any other case to imprisonment for 7 years – Section 538 Criminal Code Act Compilation Act 1913 (WA).
Tasmania – Penalties not expressly provided for in legislation.