Get up to 30% off your annual plan for a lifetime!
(Ends June 30)

Get up to 30% off your annual plan for a lifetime! (Ends June 30)

What Is The Arm’s Length Principle?

The law is full of principles that govern how parties ought to interact with one another. One of these examples is the arm’s length principle. This principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an arm’s length transaction. Its main function is to test whether an agreement will withstand legal scrutiny. This may be so even though the parties may have shared interests. Despite those shared interests, ensuring that either party to a transaction is separate enough not to bring about any conflicts of interest is crucial. This principle exists in a number of different types of law. Accordingly, we have explored these for you below.

Contract law

The arm’s length principle is quite common in contract law. Its purpose is to ensure that parties to a contract are separate enough an entity to be able to engage in such a contract without jeopardising impartiality and fairness. It is important to determine the independence of parties. For example, familial ties in commercial relationships and alike. So long as the arm’s length principle is satisfied, the contract continues. In any contractual negotiations, seeking the advice of a contract lawyer is always a good idea.

Property law

Following on from contract law, and usually running alongside it, is property law. The arm’s length principle might emerge where lawyers or a court may need to determine whether parents selling property to their children was in fact a bona fide sale and not a gift. The difference being that there are a number of tax implications and other legal consequences between the two. This is just one example, but may apply in other ways.

Employment law

The arm’s length principle would also apply to Employment Agreements in the contractual process between parties which might have familial ties. It is not uncommon for families to work together so when parents hire their children, this principle comes to the fore. It may also exist in spousal relationships. You should consult an employment lawyer if you are concerned about conflicts of interest in your work place.

Tax law

There are also functions for this principle in respect of tax law. This serves to ensure that transfer prices between companies of multinational enterprises are fair. Its aim is to guarantee these transfer prices are based on an actual market value, and not manipulated. In this context, the principle means that prices should be the same as they would have been, had the parties to the transaction not been related to each other. The Australian Taxation Office website provides guidelines on how this works.

The threshold for what constitutes an arm’s length will vary largely based on the specific situation. In any event, the main moral of the story is that this principle exists to prevent impropriety and ensure fairness across commercial transactions and alike. Maintaining independent impartiality is integral to fair transactions and good faith. A common part of commercial transactions can involve leverage, but it should never undermine fairness. If you are concerned about whether you would satisfy this principle in your own situation, it may be worthwhile seeking the advice of a lawyer.

Find the perfect lawyer to help your business today!

Get a fixed-fee quote from Australia's largest lawyer marketplace.

Most Popular Articles
You may also like
Recent Articles

Get the latest news

By clicking on 'Sign up to our newsletter' you are agreeing to the Lawpath Terms & Conditions


Register for our free live webinar today!

Funding and Legal Checklist for Your Business

12:00pm AEDT
Tuesday 25th June 2024

By clicking on 'Register for webinar' you are agreeing to the Lawpath Terms & Conditions

You may also like

Want to become a virtual assistant but now sure what steps you need to take? This article dives into the requirements, skills and equipment you need to become a virtual assistant.
The 2024 Federal Budget has unveiled a comprehensive package of measures designed to support small to medium enterprises (SMEs) in Australia, while also laying the groundwork for a "Future Made in Australia."
Default interest clauses can help protect lenders' interests, but sometimes they will not be enforceable. Find out more here.

Thank you!

Your registration is confirmed. Keep an eye on your inbox for an email with details on how to watch the webinar.