Competition and consumer law penalties drastically increased plus unfair contract terms prohibited

What you need to know

• Parliament has just passed an Act which drastically increases the potential maximum penalties that may be awarded by a Court for contraventions of Australia's Competition and Consumer Act 2010 (CCA). The new Act also makes significant 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.  
• The amendments in relation to penalties will take effect the day after the Act receives Royal Assent.  The unfair contract terms 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 take stock to ensure they are complying with all aspects of the CCA, given the very high penalties will apply from the day after the Act receives Royal Assent.
• In addition, businesses should specifically review the new threshold for "small business" contracts, to assess whether their standard form contracts may need to be updated.
• Importantly, once the prohibitions on unfair contract terms take effect, both new contracts and renewals of existing contracts will be captured.  Variations to individual terms will also be caught.

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.

New maximum penalties

The Act increases the maximum civil and criminal penalties for corporations who have contravened the CCA and the ACL 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 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.

Quick recap: what is an unfair contract term?

Currently, a term in a standard form consumer contract or a standard form small business contract is unfair if it:

• causes a significant imbalance between the parties' rights and obligations under the contract;
• is not reasonably necessary to protect the legitimate interests of the party advantaged by it; and
• would cause financial or other detriment (including delay) to a consumer or small business if relied on.

A non-exhaustive list of the types of terms that are likely be regarded as unfair include (among others), terms that:

• permit one party but not another to avoid or limit performance of the contract;
• permit one party but not another to terminate;
• penalise one party but not another for a breach or termination;
• permit one party but not another to vary the terms of a contract;
• permit one party but not another to renew or not renew a contract;
• permit one party to vary the upfront price payable without the right of the other party to terminate;
• permit one party to unilaterally vary the characteristics of the goods or services to be supplied under the contract; or
• permit one party to unilaterally determine whether the contract has been breached, or to interpret its meaning.

Current trends in enforcement of unfair terms

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:

• terms which permit unilateral variation to price or goods or services provided, without a corresponding right to terminate (see for example the investigation of and undertakings given by Maxgaming Qld Pty Ltd, and funeral businesses Bowra & O'Dea Pty Ltd and Gerren Pty Ltd trading as Parkside Funerals);
• terms which permit automatic renewal (or require onerous steps to avoid automatic renewal), often without notice being given to the customer (see for example the investigation of and undertakings given by Maxgaming Qld Pty Ltd);
• terms which permit only one party, in their broad discretion, to determine events of default and to terminate the contract, often with serious consequences for the other party (see for example the proceedings against Fujifilm Business Innovation Australia Pty Ltd);
• terms which impose unjustified fees such as penalty fees for early termination, excessive late payment or interest fees or which set unreasonable payment or refund terms (see for example the proceedings against Fujifilm Business Innovation Australia Pty Ltd);
• terms which disproportionately exclude or waive certain rights.  For example, broad indemnities, or exclusion of all liability (see for example the ACCC investigation of Alex Gow Funerals Pty Ltd and the ASIC proceedings against Bank of Queensland Ltd); and
• terms which exclude reliance on extraneous materials / representations (eg entire agreement clauses), or alternatively, terms which impose obligations on the customer which are found only in extraneous materials not disclosed to the customer (see for example the proceedings against Fujifilm Business Innovation Australia Pty Ltd).

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).

Unfair contract terms prohibited and penalties to apply

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:

• 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 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.

Expansion of scope of "small business" contracts protected

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:

• 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 remedies for unfair terms

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: 

• 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 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.

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.

Commencement of unfair contract terms amendments

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.  

Next steps for businesses

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.

Want to know more?

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