What is Operation of Law?
At its most basic level, "operation of law" refers to an automatic legal process or result, as opposed to something that is obtained through a specific action or decision. In this context, it frequently describes the way in which certain rights, privileges or property interests are acquired, transferred or resolved without the input or specific intent of those directly involved. These event typically occur in response to a specific triggering event or timeframe. For example, in an estate plan , the creation of a trust occurs by way of operation of law when property is transferred to a trustee. So long as the transferor has the capacity to make the gift, the law will consider the transfer complete on the date it was signed, regardless of when or whether the named beneficiary takes any action to accept or exercise his or her rights under the transfer. On the same hand, when a beneficiary under a will is legally competent, he or she may disclaim the bequest on day one, day 365 or even a few years after the decedent has died, and the disclaimed bequest will nevertheless be deemed to have never existed under relevant state law.
Various Contexts of Operation of Law
The most common scenarios of operation of law:
Death: When a person dies, his or her assets, debts, obligations to third parties and beneficiaries for after-death distributions, pass to his or her estate and are deemed to have operated by virtue of his or her death. (Taxation Act 1953 (Cth)) For income tax purposes the relevant event operated on the taxpayer in accordance with his or her death. Separation or Divorce: When a couple separates or is divorced under family law, unless the respective parties obtain a court order in relation to their assets or enter into a binding financial agreement in relation to their respective assets, all of their joint assets, liabilities and obligations will operate as a result of separation or divorce between the parties. These include property, bank accounts, credit cards, superannuation funds, debts, loans, credit facilities and other obligations. Contract: When parties enter into a contract for the sale of property, goods or services, the parties are deemed to legally bind themselves to fulfil their respective obligations by signing the contract and agreeing on the terms, thereby making a binding agreement at the time of signing of the contract. Nominees and/or Guarantors: When someone is appointed as a nominee to receive a payment or distribution, the nominee must account for that payment or distribution as if the payment or distribution had been made directly to the beneficiary himself (as nominee). In certain circumstances, a nominee will obtain a right of indemnity so that should he be called to make payment to or perform an obligation or liability of the beneficiary, he may be able to obtain reimbursement from the beneficiary himself. Unless it is specifically stated otherwise, the payment or distribution to the nominee will be deemed to have operated by virtue of a nomination by, appointment by or election made by the beneficiary himself (or themselves in the case of joint beneficiaries). Restructures: In the case of a corporate restructure, an asset may be transferred to an entity by virtue of its ownership of shares in another entity, entitling it to receive dividends, the subject of which dividends are deemed to have been declared by the relevant companies in accordance with their respective constitutions without the need to obtain a specific resolution or consent of the relevant board and/or committee of directors; or the vesting of property which will occur when a person becomes VCAT-referable, operates by operation of law (s104A(1) of the Securities & Investments Commission Act 1987 (Cth)).
Legal Ramifications of Operation of Law
Operation of law is not merely a concept created by law – it has concrete legal consequences. If something happens or is given legal effect by the operation of law, it can have significant impacts upon the parties involved. Similar to the first mover advantage implicit in optional extra-legal agreements, the parties may be placed in an unusual, unintended, unfair or vulnerable position.
Consequences for Parties
For the party that benefits from the operation of law, the consequences are often purely advantageous. A step-parent may have acquired a step-child relationship with children of a new spouse by the operation of law – creating a new family unit under the Family Law Act 1975 (Cth) (Family Law Act) – without there being any need for a change of name or legal adoption. Alternatively, the second spouse may have become a step-parent, becoming responsible for children of the new spouse. In both cases, the parties must be determined to have acted in all respects as if the relationship had come into existence through the operation of law.
This can have stark and ongoing implications.
Conversely, for the party who suffers because the operation of law, the consequences can be stark. Those impacted may be suffering a loss of rights that were previously available to the party or may be at a significant financial disadvantage, or, as outlined below in relation to diplomatic immunity, may suffer a loss of immunity for their actions. For example, successful parties in court proceedings in Australia may have their costs orders jeopardised because they were required to litigate an issue against a partner who was legally recognised as not being in a de facto relationship with their spouse at the time of the incident, but later became in a de facto relationship thus defeating their right to claim costs. Further, an otherwise settling character who becomes embroiled in litigation by operation of law, may find that he or she is now exposed to a recovery claim by a third party.
What does it mean?
If there is doubt or contest between parties as to the consequences of the operation of law, such consequences will be determined in the courts. Courts are able to look beyond the formal structure to determine the impacts of the operation of law of the parties. Care should be taken in the drafting of legal documents to ensure that there are no unintended consequences of the operation of law.
Operation of Law vs. Action of the Parties
Typically, an outcome arising from the operation of law does not require any affirmative action by a party in order to realize the benefit of the outcome. In addition, a party generally does not need to take specific action to avoid having the outcome occur. The following example highlights these differences:
A company enters into a credit agreement with a bank for a $1 million revolving line of credit under which, at the company’s request, the bank can make advances to third parties on behalf of the company, up to the full $1 million. Neither the bank nor the company requires the third parties to sign liability guarantees or other documents to finalize the credit line. In this example, the successful invocation of the contract, i.e., the bank’s making decisions regarding lending at its discretion over the course of the next year to various third parties, is an outcome that occurs solely by operation of law. While of course the company has to decide whether or not to use any of its credit line and therefore "invoke" the contract, this is a distinct scenario where the company is not the party invoking any specific term of the contract when it requests that the bank advance money . Rather, the bank is at all times the one determining whether or not a specific decision about making an advance is in the best interest of the bank and therefore, whether the company’s request should be honored. As an aside, in this example, the bank could still later determine at each time a request was made whether to conduct a monitoring review to determine the company’s ability to repay the requested advances and/or a credit analysis on the third party requesting the advance.
If, however, the same credit line went into effect once the company provided a fully executed line of credit agreement signed by both the company’s then-current designated signatories, the invocation of the contract would not be characterized as occurring solely by operation of law, because at the time the contract was invoked, the bank was not the named counterparty. Since the named counterparty was the company, the company needed to take affirmative steps to ensure that the individuals who bound the company for credit purposes were properly authorized to do so.
Court Cases Involving Operation of Law
In P v P [2009] EWCA Civ 548, the operation of the new section 31F was in issue. This provides: "A final order under section 31A (orders restricting the exercise of parental responsibilities) or 29A (orders prohibiting removal of children from the UK) or 34 were dismissed or set aside by a court on the ground that it had been made without jurisdiction under the 1989 Act shall not be subject to be set aside or discharged as provided for by paragraph 1 above if-(a) it is proved to the satisfaction of the High Court either—(i) that the court did not, in fact, have jurisdiction under the 1989 Act; or(ii) that an appeal against the making of that order would lay but no appeal was brought …"
This is a commonly misunderstood provision. It does not merely apply where a trial has taken place, either at first instance or on appeal, and the issue of jurisdiction has been expressly decided, but rather where there has been a "valid decision" as to jurisdiction in any way. The example given in the case law is the dismissal of an application in the first instance on the basis of "insufficient information having been provided". There is obviously a very low threshold for "insufficient information" which, in the example given in P, may have been measured only on the basis of a lack of a transcript.
The Court of Appeal provided guidance on how "insufficient information" may be interpreted in M v M [2010] EWCA Civ 334 and provided a non-exhaustive list of possible factors. Firstly, they observed that the nature of the application is important, and suggested that a failure to file an application form would not constitute "insufficient information". Secondly, they noted that applications out of time, or with the wrong date applied, could well fall into the category. Thirdly, a failure to provide the correct number of copies is unlikely to be sufficient, nor a failure to pay the correct fee, for reasons which are self-evident. Fourthly, the Court determined that where a litigant has failed to file a witness statement, this is unlikely to amount to "insufficient information" where the case has already reached the High Court having passed through a number of interlocutory stages in which the applicant has failed to file the necessary material. The "state of the papers" is therefore important.
A further case which explores the operation of section 31F is Y v G [2013] EWFC 205 (a copy of the judgment can be found here). This case concerned the dismissal of an application concerning the residence of a child, which was heard by a District Judge at a First Hearing Dispute Resolution Appointment. He refused the case on the basis that "on the basis that he was not satisfied that it was in the interests of the child to transfer the proceedings to the High Court …" The mother sought to appeal that decision, but the Court concluded that the judgment was clearly wrong. The final submission that Y was going to make was "Your honour, I sat there, and I hung on every word, and I waited for the stamp of the hammer, and I am not going to apply for leave to the High Court."
The Court held that the refusal to grant leave was a final order which could not be set aside or discharged, pursuant to section 31F(2)(a)(ii), and that there could be no appeal from the First Hearing Dispute Resolution which, by definition, is a first instance decision. The Court did not reach this conclusion lightly or quickly. They decided that the wording of subsection 2(b)(i) was "distributive, so that it governs situations where the judge to whom an application to vary disposes of the application on the ground that the court had no jurisdiction to make a final order … perhaps because of the lack of evidence as to the child’s welfare or because of the failure to provide a proper application form. It does not govern situations where an application to vary is dismissed because a judge to whom it was made considered that he did not have a sufficient evidential basis to conclude that the order which he made should be varied…"
Because the judge had held that the application was not based "on a proper evidential basis", the appeal was allowed, the First Hearing Dispute Resolution Appointment was set aside, and a one day fact finding hearing was ordered.
Pitfalls and Fallacies
A common misconception is that the operation of law occurs only where a statute imposes an obligation on a party. It is important to understand that even where a statute does not expressly provide for a deeming provision, the operation of law may still apply to alter the legal position of a party. Parties wrongly relying upon this misconception may find themselves in an undesirable position where the parties do not agree on the application of a deeming provision, or the deeming provision is not clear. In such cases, it may be necessary to consider the interpretation of the operation of law, and whether any argument is available as to why it does not apply. There are also some challenges in interpreting the application of the operation of law. In order to advance an argument that the operation of law does not apply , legal advisers should first ensure they have properly established whether a statutory deeming provision is either intended to operate retrospectively or prospectively. If a statutory deeming provision is silent as to whether it operates retrospectively or prospectively (which is often the case), when determining how the provision operates, the starting point is that the provision is intended to operate prospectively. However, if the words of the deeming provision are expressly intended to operate retrospectively, the issue of retrospectivity will be satisfied. In this case, the grounds for the argument that the operation of law does not apply are less clear and success on this type of argument may depend on the nature and intent of the deeming provision.