Section 106 of the Industrial Relations Act is a provision that permits an applicant to avoid or vary terms of a contract whereby work is performed in an industry where its terms (or its absence of terms) are deemed unfair. It is a provision hated by black letter lawyers but loved by those who believe the merits are on their side but just can’t find a cause of action.
Until fairly recently section 106 seemed capable of extension to almost any form of commercial transaction which entailed the performance of work in an industry. In Booth v Kriticos it was found for example that the lease of a hotel required the lessee to perform work in an industry.
The good news for landlords is that in Mitchforce v Starkey & Anor (2003) NSWCA151 the New South Wales Court of Appeal has placed limits on this approach. In that case the court noted:
[the lease] is not part of a broader arrangement involving the supply of goods as may arise in the case of an hotel owned by a brewery. A case of that character may prove to be more closely analogous to the arrangements considered in Caltex Oil –v- Feenan and Magik Markets. In those cases, like Stevenson –v- Barham, the ongoing relationship between the parties was multidimensional covering a number of different aspects of the conduct of the business. In contrast, the court found that the relationship in Mitchforce was “one dimensional”. This was the case notwithstanding that the lease “contemplated” the performance of work, such as maintenance, by the lessee.
According to the Court of Appeal, the additional necessary element to bring the transaction within the scope of section 106 was a finding that the peformance of the work was for the “purpose” of the agreement being attacked. In Mitchforce the Court of Appeal found that the purpose of the agreement in question was to provide a means for conducting the business of the lessee. It could not however be said that the lessee was in any sense working for or even with the lessor. If, for example, the lessee had sold the business, the lessor would receive no part of the consideration.
The bad news for landlords is that the reasoning in Mitchforce is closely based on the particular terms of its lease. The Court of Appeal put particular emphasis on the fact that there was no express term obliging the lessee to conduct its business. The obligation to maintain the premises was found to be insufficient to constitute the lease a contract whereby work was performed in an industry because in its terms maintenance was contingent on future events (eg deterioration beyond fair wear and tear).
On the other hand, many shopping centre leases do require the lessee to conduct its business in specified working hours and sometimes to particular standards. The question of whether a turnover based rent would give the landlord a sufficient interest to change the nature of the purpose of the agreement remains open. In particular, if the lease is associated with a franchise or supply arrangement whereby the lessor effectively maintains an interest in the leased business, an argument under section 106 remains available. If the landlord has a “real interest” in the performance of the work then it can be said that the purpose of the agreement is to perform that work. At least this was the reasoning of the Court of Appeal in the Magik Markets v Break and Service Centre Drummoyne Pty Ltd (1992)28NSWLR443. The law on section 106 seems to have evolved such that commercial transactions which can be viewed as achieving a result analogous to direct operation by the landlord will still be considered contracts whereby work is performed in an industry.
Landlords who wish to minimise the uncertainty of their relationship need to scrutinise their leases to be sure that they may not be considered contracts of this kind. Similarly, lessees wishing to exploit the existence of section 106 should review their lease document and identify prescriptive covenants relating to the conduct of their business, in particular provisions which could be said to give the landlord an interest in the conduct of that business.
For further information, please contact Grant Hansen.