Government gets tough on unfair contract terms: Changes to the Australian Consumer Law

The Federal Government has proposed new legislation which aims to reduce the prevalence of unfair contract terms in standard form contracts, create more stringent prohibitions against such terms and introduce new civil penalty provisions for subsequent breaches. The changes are designed to strengthen the Australian Consumer Law (ACL) and ensure the Australian Competition and Consumer Commission (ACCC) has sufficient power protect consumers from unfair contractual arrangements. This article looks at why these changes are necessary, what the proposed changes are and, if passed, what impact the new laws will have on the ACL.

Overview of the Bill

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Bill) has been proposed as part of the Government’s ‘Better Competition’ election platform policy. Under that policy the Government aims to strengthen Australia’s competition laws by increasing penalties for anti-competitive behaviour.

The Bill would meet these objectives via its two Schedules. Schedule 1 increases penalties for breaches of competition and consumer law, and Schedule 2 which prohibits the use of unfair contract terms in standard form contracts.

Increased penalties for breach of competition and consumer laws

In 2018, a report by the Organisation for Economic Co-operation and Development (OECD) found that the average penalty imposed, and maximum penalty available, for competition law breaches in Australia were substantially lower than those in comparable jurisdictions. In practice, this disparity creates the possibility of large businesses disregarding competition law and accepting any penalties imposed as a cost of doing business.

What are the changes?

The new maximum penalty for a breach by a body corporate will be the greatest of:

• $50 million (the current maximum is $10 million);
• three times the value of any benefit obtained by the breach, as determined by the courts; or
• if the courts cannot determine the value of the benefit obtained, 30% of the body corporate’s adjusted turnover during the breach turnover period (being the period beginning at the start of the month in which the infringement occurred and ending at the end of the month in which the body corporate ceased the infringement).

The above penalty regime is even more strenuous for the telecommunications industry, where body corporates face penalties exceeding $72 million for ongoing breaches of competition laws. These heightened penalties are contained in a separate part of the principal legislation which addresses the unique characteristics of the telecommunications market which increases the risk of anti-competitive conduct compared to other industries. The penalties for individuals are fines of up to $2.5 million and, if involved in criminal cartel offences, face a maximum prison term of 10 years.

In circumstances where Australia’s current penalty regime may be limiting the effective deterrence of sanctions for competition law infringements, the new regime will give would-be offenders pause for thought.

Unfair contract terms in standard form contracts

Standard form contracts are cost-effective and commonly used when conducting business, as they remove the need for parties to negotiate. Schedule 2 of the Bill will amend various legislation in an attempt to reduce the prevalence of unfair contract terms in consumer and small business standard form contracts.

The existing unfair contract terms (UCTs) protections in the ACL provide that when the courts find a term unfair, that term is void. UCTs, as a result, remain prevalent in standard form contracts, with consumers and small businesses owners often lacking the resources and bargaining power to negotiate such UCTs.

What is a UCT?

A term is considered unfair in a standard form contract if it:

• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term; and
• would cause detriment (financial or otherwise) to a party if the term were to be applied or relied on.

In determining whether a contract term falls within this definition, a court can consider such matters as it thinks relevant, but must take into account the contract as a whole and the extent to which a term is transparent.

What are the changes?

The Bill expands the class of contracts that are protected by UCT provisions by:

• increasing the ‘small business’ definition threshold (to a business that employs fewer than 100 persons or has a turnover of less than $10,000,000);
• raising the value threshold for contracts regulated by ASIC (a contract is covered if the upfront price payable does not exceed $5,000,000); and
• removing the contract value threshold for contracts under ACL.

In addition, the Bill strengthens the remedies and enforcements available, including by:

• prohibiting the proposal of, use of, application of, or reliance on, unfair contract terms in a standard form consumer or small business contract;
• creating new civil penalty provisions for breaches of the prohibition; and
• clarifying the powers of a court to:
• make orders for a whole contract, including the ability to void, vary or refuse all or part of a contract, if this is appropriate to prevent loss or damage likely to be caused;
• make orders to prevent a term that is the same or substantially similar to the UCT being included in future standard form small business or consumer contracts; and
• make an injunction restraining a party from entering into future contracts which contains the same or substantially similar UCT clause, and applying or relying on any existing contract that contains that same or similar UCT clause.

What is the impact of the Bill?

The Bill attempts to even the playing field for small business and consumers in Australia in the consumer law space, by shifting the onus to body corporates and large companies to ensure they are compliant.

Companies should review their standard form contracts and any terms and conditions that are provided to their customers, and seek legal advice if any uncertainty arises. The price of misconduct is significant and could result in a substantial penalty or fine.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial Group.