Competition and consumer law penalties drastically increased plus unfair contract terms prohibited
27 October 2022
27 October 2022
Australia's Parliament has just passed Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act). The Act significantly increases the maximum penalties that may be imposed by courts in relation to contraventions of the CCA, and makes fundamental changes to Australia's laws on unfair contract terms.
In this article we outline the changes to penalties and unfair terms, recap what constitutes an unfair term and summarise the common themes in recent unfair terms enforcement activity. We also explain what businesses need to do in order to ensure their compliance.
The Act increases the maximum civil and criminal penalties for corporations who have contravened the CCA and the ACL to the greatest of:
For individuals, the Act increases the maximum civil penalties from $500,000 to $2.5 million. The Act also proposes to increase individual criminal penalties for ACL offences to the same amount. This increase does not, however, apply to individuals who have engaged in cartel conduct, to whom the penalties in section 79 (expressed in penalty units) will continue to apply.
The Act also increases the civil penalties for contravention of the "competition rule" in Part XIB of the CCA, which applies to corporations and individuals in the telecommunications industry.
The increased maximum civil and criminal penalties will have widespread, but not blanket application. They will nonetheless apply to arguably the most significant parts of the CCA and Australian Consumer Law including cartels, misuse of market power, exclusive dealing, contracts, arrangements or understandings and concerted practices that restrict dealings or affect competition, acquisitions that substantially lessen competition, false or misleading representations, unconscionable conduct and more. For a full list of the provisions to which the new penalties will apply, please see our earlier publication on the exposure draft of the Bill here.
Importantly, the new concept of a "breach turnover period" (replacing annual turnover) has the potential to significantly increase the maximum penalty for a corporation, particularly where a contravention has continued for a lengthy period. For example, where a contravention has continued for 10 years (and the court cannot determine the value of the benefit obtained), the maximum penalty would be the greater of $50 million or 30% the corporation's adjusted turnover (including related bodies corporate) during the 10 year period. Where a contravention is instantaneous or continues for less than a year, a 12 month period will be adopted as the breach turnover period. The concept of "adjusted turnover" ensures that in calculating the corporation's turnover, the supplies were made by the corporation in connection with Australia's indirect tax zone.
The increased penalties will not apply to the civil penalty provisions of Industry Codes, along with a number of other carve-outs. As the general prohibition on misleading or deceptive conduct is not a civil or criminal penalty provision, the proposed new penalties will also not apply to it (although such conduct is often alleged with other Australian Consumer Law prohibitions which attract penalties and to which the proposed increased penalties will apply).
Interestingly, the Act does not amend the maximum penalties in the ASIC Act, despite the ASIC Act replicating various CCA prohibitions. It is possible that this discrepancy will be resolved in the future by similarly increasing the penalties for the relevant prohibitions in the ASIC Act.
The increased penalties will commence the day after the Act receives Royal Assent. However, they will only apply in relation to acts, omissions or offences that occur on or after this time.
In light of these significant penalties, companies should be taking stock to ensure their compliance with all aspects of the CCA and ACL.
Currently, a term in a standard form consumer contract or a standard form small business contract is unfair if it:
A non-exhaustive list of the types of terms that are likely be regarded as unfair include (among others), terms that:
Although not currently able to seek penalties, the ACCC and ASIC have brought a number of recent cases in relation to unfair terms. These have included proceedings against companies seeking declarations that the terms were void, injunctions, remedial orders and compliance programs. In addition, the ACCC and ASIC may accept undertakings in relation to unfair contract terms.
By reviewing the recent investigations and proceedings brought by the ACCC and ASIC, we can identify in greater detail the types of clauses with which regulators are likely to be concerned. These include:
Despite the introduction of new prohibitions and penalties (outlined below), the fundamentals of what constitutes an unfair contract term are not amended by the new Act. As such, we expect that the ACCC and ASIC will continue to pursue cases which raise issues similar to these (albeit also seeking penalties once they become available).
Currently, where a court finds that a term is unfair, that term is void and unenforceable, but no penalty applies. The Government was concerned that this approach was insufficient to deter businesses from using unfair contract terms in their standard form contracts. To address this, the Act introduces two new prohibitions and penalties for contraventions of those prohibitions.
The Act amends Schedule 2 of the CCA by introducing new prohibitions against:
Applying or relying on means giving effect to, or seeking to enforce an unfair term.
Equivalent amendments are also proposed to the ASIC Act, with the additional requirement that the contract is either a financial product or a contract for the supply, or possible supply, of financial services.
Each of these prohibitions can be contravened multiple times in relation to the same contract (if it contains multiple unfair terms) and/or in relation to the same unfair term, if relied on more than once. Each contravention would attract a pecuniary penalty.
In terms of penalty amounts, the maximum civil penalties for corporations and individuals who contravene the new unfair contract terms prohibitions in the ACL will be consistent with the increased civil penalties outlined above. However, penalties for unfair contract terms will not commence until 12 months after the Act receives Royal Assent.
Under the ASIC Act, the maximum penalty for a corporation that contravenes the prohibitions will be the greater of (i) 50,000 penalty units (A$11.1 million); (ii) 3 times the benefit derived and detriment avoided (if the court can determine the value of that amount); or (iii) 10% of the annual turnover of the body corporate for the previous 12 months (up to a maximum of 2.5 million penalty units, or A$555 million). For an individual, the maximum penalty under the ASIC Act would be the greater of 5,000 penalty units ($1.11 million); or 3 times the benefit derived and detriment avoided (if the court can determine the value of that amount). Again, these will only commence 12 months after the Act receives Royal Assent.
The legislature has acknowledged that while potential maximum penalties are large, particularly where a prohibition is contravened more than once in relation to the same contract or the same term, courts are experienced in making civil penalty orders at appropriate levels. The maximum penalties are intended to apply in the most egregious instances of non-compliance with the new unfair contract terms prohibitions.
In addition to the new prohibitions, the new unfair contract laws expand the class of small business contracts to which the regime will apply, with the protections applying to:
While these revised criteria are intended to make it easier for a contract-issuing party to determine if it is dealing with a "small business", they also result in a significant expansion of the class of small businesses to which the regime applies.
In relation to employee head count, employee numbers are to be counted at the time a contract is entered into and later changes in employee numbers will not affect whether the "small business" definition continues to be met. Employees engaged on a part-time basis are included on a pro-rata basis and, unless engaged on a regular systemic basis, casual employees can be excluded from the head count.
The Act introduces additional remedies that courts may impose in unfair terms proceedings. Beyond declaring an unfair term of a standard form consumer or small business contract void and unenforceable, courts will be equipped with powers to:
In addition, the Act extends ASIC's power under the ASIC Act to issue a public warning notice where ASIC has reasonable grounds to suspect that a business has breached the unfair contract terms provisions (among other requirements).
These additional remedies are unusual in that they substantially increase the potential impact of any single proceedings alleging an unfair contract term. Where a respondent has, for example, included equivalent terms into other standard form contracts not before the court, a court may now make orders in relation to those other contracts. While there is clear benefit for consumers and small businesses in such "flow-on" orders being made, it is possible to imagine that there may be instances where such orders would be open to challenge. As such, it will be interesting to see how the courts approach these new powers.
Finally, the new laws:
The amendments in relation to unfair contract terms will only take effect 12 months after the Act has received Royal Assent. As a result, companies will have a period of time to review and amend any contracts that might raise concerns regarding unfair terms.
Companies doing business in Australia should take note of these proposed changes and review their standard form contracts with small businesses and consumers as a priority. Once the unfair contract term amendments commence, we expect that the ACCC will be advocating for courts to apply significant penalties to such conduct, especially in circumstances where the previous consequences were perceived as insufficient to deter companies.
If you would like to know more, please register your interest here for our upcoming webinar on these developments.
Authors: Alyssa Phillips, Partner; Melissa Fraser, Partner; Amanda Tesvic, Senior Expertise Lawyer