Substantial increase to maximum penalties and unfair contract terms to become illegal in Australia

What you need to know

• On 28 September 2022, the Government introduced a Bill combining reforms which will significantly increase maximum penalties under the Competition and Consumer Act 2010 (CCA) with important amendments to Australia's laws on unfair contract terms.
• The proposed increases in maximum penalties will have widespread application across the most significant competition and consumer law prohibitions.
• The unfair contract terms amendments introduce new prohibitions against (1) entering into a standard form consumer or small business contract which contains an unfair term, and (2) applying or relying (or purporting to apply or rely) on an unfair contract term in a standard form consumer or small business contract.  The amendments also expand the scope of "small business" contracts to which the regime will apply.  
• Once passed, the amendments in relation to penalties will take effect the day after the Bill receives Royal Assent.  The unfair contract term amendments will take effect 12 months after the date of Royal Assent, allowing time for businesses to adjust.

What you need to do

• Businesses should review their standard form contracts with consumers and small businesses, to identify and address any shortcomings.
• Although the Bill is not yet passed and contains a 12 month grace period before penalties take effect in relation to unfair contract terms, this should not be seen as a free pass in the interim.  The ACCC and ASIC will continue to take action against unfair contract terms under the existing provisions of the CCA and Australian Securities and Investments Commission Act 2001 in the meantime.  
• Finally, businesses should take stock to ensure they are complying with all aspects of the CCA, given the potential for drastic penalties to apply as soon as the Bill is passed and receives Royal Assent.

Competition and Consumer Law Reform

On 28 September 2022 the Government introduced Treasury Laws Amendment (More Competition, Better Prices) Bill 2022.  The Bill proposes substantial increases to the maximum penalties that may be imposed by courts in relation to contraventions of the CCA, and fundamental changes to Australia's laws on unfair contract terms.

New maximum penalties

The Bill proposes to increase the maximum civil and criminal penalties for corporations to the greatest of:

• $50 million (increased from $10 million);
• if the court can determine the value of the benefit obtained – three times the value of that benefit (no change); and
• if the court cannot determine the value of the benefit obtained – 30% of the corporation's "adjusted turnover" during the "breach turnover period" for the act or omission (increased from 10% of body corporate's annual turnover in the 12 months prior to the act or omission). 

For individuals, the Bill proposes to increase the maximum civil penalties from $500,000 to $2.5 million.  The Bill also proposes to increase individual criminal penalties for ACL offences to the same amount.  This increase does not, however, appear to apply to individuals who have engaged in cartel conduct, to whom the penalties in section 79 (expressed in penalty units) will continue to apply.  It is unclear if this is an oversight.

The Bill also proposes to increase 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 Bill proposes that the increased maximum civil and criminal penalties would have widespread, but not blanket application.  They would 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, and for further detail on the concept of "breach turnover period" and "adjusted turnover" please see our earlier publication on the exposure draft of the Bill here.

The proposed 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).

Once the Bill is passed, the increased penalties will commence the day after the Bill receives Royal Assent.  However, updated penalties will only apply in relation to acts, omissions or offences that occur on or after this time.

Unfair contract terms prohibited and penalties to apply

Currently, penalties do not apply to corporations and individuals who include or rely on an unfair term in a standard form contract with consumers or small businesses (the term is merely voidable in those circumstances). 

The Bill proposes to amend Schedule 2 of the CCA by introducing new prohibitions against:

• entering into a standard form consumer or small business contract which contains an unfair term, where the person proposed the unfair term; and
• applying or relying (or purporting to apply or rely) on an unfair contract term contained in a standard form consumer or small business contract.

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 Bill proposes to amend the ACL so that the maximum civil penalties for corporations and individuals who contravene the new unfair contract terms prohibitions will be consistent with the increased civil penalties outlined above.  

Under the ASIC Act, the Bill proposes the maximum penalty for a corporation that contravenes the prohibitions would 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; or 3 times the benefit derived and detriment avoided (if the court can determine the value of that amount).

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.

Expansion of scope of "small business" contracts protected

In addition to the new prohibitions, the new draft unfair contract laws expand the class of small business contracts to which the regime will apply, with the new protections applying to:

• under the ACL: a small business contract where one party has < 100 employees (up from 20); or < A$10 million turnover in the last income year (there will no longer be an upfront price payable threshold); and
• under the ASIC Act: a small business contract where the upfront price payable is A$5 million or less; and one party has < 100 employees or < A$10 million turnover in the last income year.

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.

Additional court-sanctioned remedies for unfair terms

The Bill proposes to introduce 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: 

• make orders to void, vary or refuse to enforce part or all of a contract in order to redress loss or damage that has been caused or to prevent or reduce loss or damage "likely" to be caused by a term declared unfair;
• extend orders to apply to similar terms in a respondent's other existing standard form contracts;
• issue injunctions restraining a party from including a term that is the same or substantially similar in effect to a declared unfair contract term in any future standard form contracts; and
• make adverse publicity orders and orders disqualifying a person from managing a corporation on the basis of a contravention of the unfair contracts terms provisions.

In addition, the Bill 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 substantially, and somewhat unusually, increase the potential reach of any single unfair contract term proceedings into other contracts not before the court.

Unfair terms - other clarifications and exemptions

Finally, the new laws: 

• clarify that a contract may still be standard form despite there being an opportunity for a party to negotiate minor or insubstantial changes, or to select a term from a range of options, or where a party to another contract (or proposed contract) has been given an opportunity to negotiate terms of that other contract; and
• exempt certain terms from the unfair contract terms laws where such terms are included in compliance with relevant Commonwealth, state or territory legislation and exclude a small number of categories of financial and insurance contracts.

Timing of unfair contract terms amendments

The Bill proposes that the amendments in relation to unfair contract terms would not take effect until 12 months after the Act has received Royal Assent.  In this way, companies would have a period of time to review and amend any contracts that might raise concerns regarding unfair terms.  For some companies, it would be wise to start this review sooner rather than later, as the size of this task may be significant.  In the meantime until the Bill becomes law, the ACCC and ASIC will still continue to investigate and take action against unfair terms based on their existing powers, as they have been to date.

Next steps

The Bill must pass both Houses before it becomes law.  Parliament next sits on 25-27 October 2022.

Notwithstanding the acknowledgement that potential maximum penalties should only be applied by courts in the most egregious of cases, companies should expect that the ACCC will nonetheless be agitating for courts to apply significant penalties, in circumstances where the previous consequences available for unfair contract terms were not sufficient to eliminate such terms from standard form contracts.  Accordingly 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.  

Want to know more?

If you would like to know more, please register your interest here for our upcoming webinar on these developments, to be held once the Bill is passed.