Higher penalties for anti-competitive conduct and expanded regulation of unfair contract terms

1. Significant reforms

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act) should receive Royal Assent this week and become law. The Act gives dual effect to the Albanese Labor Government’s policies of:

• “Better Competition”, involving significantly increased maximum penalties for anti-competitive conduct with immediate effect; and
• “Labor’s Better Deal for Small Business” involving expanded regulation of unfair contract terms in standard form consumer and small business contracts to commence in 12 months.

The reforms are significant and will materially increase the risk profile for some Australian businesses. Each of the two reforms are explained in more detail below.

2. Substantially increased maximum penalties

Penalties for competition and consumer law contraventions have increased significantly, some by five times.   This reform reflects the global trend towards significantly higher penalties for contraventions of competition laws.  The reform will continue the recent trend in Australia towards imposition of greater penalties.

In Europe, we have seen the evolution of multi-billion dollar penalties for anti-competitive conduct.  In Australia, penalties exceeding AUD 100 million have been rare and have largely arisen in recent consumer protection cases, but will now become more common.

The table below summarises the increased penalties that will apply for contraventions of the Competition and Consumer Act 2010 (Cth) (CCA) or Australian Consumer Law (ACL):

Increased maximum penalties also apply for contraventions of certain offences and civil penalty provisions in other parts of the CCA, including the regimes for international liner cargo shipping (Part X),  telecommunications industry (Part XIB), news media and digital platforms mandatory bargaining (Part IVBA), and the electricity industry (Part XICA).

Under the Act, if a Court cannot determine the value of a benefit, maximum penalties can now be calculated with reference to the ‘adjusted turnover for the breach turnover period’ rather than annual turnover.  The definition of ‘adjusted turnover’ is a definition of Australian revenue based on definitions used in Australian tax legislation.   The “breach turnover period” is essentially the period of time over which the contravention occurred with a minimum of 12 months.  This change could potentially result in maximum penalties that exceed AUD 50 million in certain circumstances.

As a consequence of the current reforms, Australian courts now have the ability to set penalties consistent with, and potentially higher in certain instances, than those in the comparable jurisdictions identified by the OECD in 2018. 

The increases in penalties arise from the date that the Act receives Royal Assent, likely this week.  As such, the penalties should be assumed to be in immediate effect and to apply to contraventions that occur going forward.

3. Expanded regulation of unfair contract terms

While the increase to penalties have immediate effect, the expansion of the regulation of unfair contract terms has a 12 month grace period.  The reforms to the unfair contract terms regime will commence in November 2023.
By way of background, the unfair contracts regime was historically introduced into the Australian Consumer Law to provide greater protection to consumers against ‘unfair’ terms that were included in standard form contracts.  The regime was later expanded to provide similar protection to small businesses that were entering into standard form contracts.

Currently, a term in a standard form contract is “unfair” 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 the term, and
• would cause detriment to a party if the term were to be applied or relied on.

The inclusion of unfair contract terms (UCT) in a contract is a contravention of the ACL. Similar UCT provisions are also contained in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and apply to financial institutions.

In August 2022, the Federal Court provided guidance as to the types of standard contract terms that may be regarded as unfair in certain circumstances, relevantly including certain formulations of automatic renewals, asymmetric termination rights, asymmetric liability limits, excessive termination payments, payments irrespective of delivery, and unilateral variation rights.  

Whilst the substantive provisions of the UCT regime remain unchanged, the scope of the regime has been expanded and pecuniary penalties will now apply for contraventions under both the ACL and ASIC Act.

The Act firstly achieves this by prohibiting outright the proposal, application or reliance on an unfair contract term in standard form consumer or small business contracts and introduces civil penalties for a contravention. This means that unfair contract terms will be subject to the new very substantial penalties discussed above (although different penalties apply under the ASIC Act).

These penalty provisions will apply to new contracts only (or existing contracts, once they are renewed or varied) made at the end of a 12-month grace period. This grace period is designed to give businesses time to review and adjust their contracts and practices, if required. Prior to this amendment, a contractual term found to be unfair was void but there were no immediate pecuniary consequences for the party trying to enforce the term.

Secondly, the Act expands the class of contracts that are covered by the UCT regime by increasing the small business definition threshold to capture more small businesses than before. The Act also removes the contract value threshold under the ACL, which also expands the scope of the regime to a greater subset of small businesses.

Finally, the Act also clarifies what constitutes a standard form contract to which the UCT regime applies. A contract can still be standard form despite there being an opportunity to negotiate changes to the contract that are minor or insubstantial.

The cumulative effect of these changes, in conjunction with the August 2022 decision of the Federal Court, is that the risk profile in relation to the UCT regime has dramatically increased.  The imposition of a potential maximum $50 million penalty for each instance of an unfair contract term in a standard form consumer or small business contract is now a sobering reality.

4. Recommendations

We have two key recommendations:

1. This may be an appropriate time to audit and upgrade competition and consumer law compliance frameworks within your organisation if you have not done so recently.
2. This may also be an appropriate time to undertake a compliance audit of standard form contracts with consumers and small business.  The Federal Court guidance from August 2022 provides a useful indication of the type of contractual terms that raise compliance risks.