The Federal Court has reinforced that obtaining legal advice can protect a party from civil penalties, even if it has been proven that the party contravened the law. While not entirely bullet proof, obtaining legal advice for the purpose of compliance can help shield you from regulatory-based, court imposed fines.

The Block Earner case

Earlier this year, in a first of its type decision regarding the crypto industry, the Federal Court determined that crypto start-up, Block Earner, had offered unlicensed financial services products to retail investors – effectively determining that financial services offerings based on crypto assets may fall within the ambit of financial services regulations (read our summary of the case for background).

Determining penalties

In ASIC v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578, despite having been found to have contravened the Corporations Act 2001 (Cth) (Act), the Court relieved Block Earner of liability for any civil penalty. This was done on the basis of section 1317S, which provides that the Court can relieve a party of liability if it acted honestly and, in the circumstances, ought fairly be excused for the contravention.

Importantly, factors which supported that Block Earner had acted with honesty, and should fairly be excused, were that:

• it obtained legal advice from a reputable legal firm, even though it subsequently misapplied various technical definitions in the Act;
• it had “no appetite for breaches in law and regulations” as recorded in its risk management policies;
• no loss or damage was suffered by investors;
• its profit resulting from the contravention was nominal ($21,309.60); and
• it had not previously been found by a court to have engaged in similar conduct.

The utility of legal advice

The law is clear that obtaining legal advice does not provide blanket protection, particularly where the advice is unqualified and the subsequent conduct is deliberately in contravention of the law. That is hardly surprising.

However, where, as in this case, a party perceives there to be legal uncertainty and seeks advice to ensure its proposed conduct is appropriate from a legal and risk perspective, that action should excuse it from any civil penalty‑based fine.

The Court’s decision is a welcome reminder of the protection that proactive legal advice can provide, particularly in areas where the law may be opaque or untested. This, coupled with a cooperative approach and a demonstrated genuine motivation to avoid contravening the law recorded in internal policy documents, will go quite a way to protecting against civil penalties should one find themselves inadvertently on the wrong side of the law.

It’s not over yet

ASIC has subsequently filed an appeal against the Federal Court’s decision, citing errors in law. The appeal will be heard by the Full Federal Court on a date to be determined.