Drafting contracts containing unfair terms and the risk of pecuniary penalties

For several years, an "unfair" term in a "standard form" "consumer contract" or "small business contract" has been void. The regulation of unfair terms was taken a step further on 9 November 2023 when pecuniary penalties were introduced for the use of unfair terms in standard form consumer contracts and small business contracts. The primary target of these pecuniary penalties is likely to be the entity that is a party to the contract and advanced the unfair term. But is there a risk to inhouse lawyers who draft the contract of being exposed to pecuniary penalties? Due to the accessorial liability provisions in the Australian Consumer Law (ACL), there is risk but the parameters of the risk are unclear since the application of the accessorial liability provisions is complicated and the provisions have not been applied in the context of unfair terms.

Pecuniary penalties for unfair terms

Since 9 November 2023, proposing or relying on an unfair term has amounted to a contravention of sections 23(2A) or (2C) of the ACL. A contravention is punishable by a pecuniary penalty under section 224 of the ACL, among other things. Due to section 224(1)(e), a court may order a person to pay a pecuniary penalty if that person has "been in any way, directly or indirectly, knowingly concerned in" a contravention of sections 23(2A) or (2C). There are two elements to being "directly or indirectly, knowingly concerned in" a contravention: conduct and knowledge. Let's look at each.

What do you need to do to be "directly or indirectly, knowingly concerned in" a contravention?

Whether conduct amounts to being "directly or indirectly, knowingly concerned in" a contravention of the ACL was recently considered by the Full Court of the Federal Court in Productivity Partners Pty Ltd (trading as Captain Cook College) v ACCC (2023) 297 FCR 180; [2023] FCAFC 54 (Captain Cook College).^[1] The Full Court found that a "person must have engaged in conduct (by act or omission) which can properly be said to 'implicate' them in the contravention or which shows a 'practical connection' between them and the contravention". The person does not need to "physically do anything to further the contravention" provided they "became associated with and thus involved, in the relevant sense, in the conduct constituting the contravention".

It is at least arguable that an inhouse lawyer who drafted a contract containing an unfair term engaged in conduct that made them "directly or indirectly . . . concerned in" a contravention of sections 23(2A) or (2C). The lawyer created the contract along with the unfair term. This is likely to amount to a "'practical connection' between them and the contravention" since the contravention could never have occurred without them first creating the contract. The outcome is likely to be the same if the inhouse lawyer reviewed the contract instead of drafting it from scratch. This is because a review is likely to involve a degree of drafting and also amount to the lawyer effectively approving the final drafting.

What do you need to know to be "directly or indirectly, knowingly concerned in" a contravention?

In Captain Cook College, their Honours considered in detail the knowledge requirement for being "directly or indirectly, knowingly concerned in" a contravention. To be liable, the defendant must have actual knowledge (not imputed or constructive knowledge) of "all the essential facts constituting the contravention". Actual knowledge must be present at the time of the contravention (not a later date). Actual knowledge may be inferred from "a combination of suspicious circumstances and a failure to make an inquiry" (sometimes called "wilful blindness"). Although the defendant must know "all the essential facts constituting the contravention", they do not need to know that these essential facts constituted an offence. In other words, "it is not necessary to know those facts are capable of characterisation in the language of the statute". For example, in the case of an advertisement that conveyed a misrepresentation, the defendant must know the advertisement conveyed the representation and have "knowledge of the facts that rendered the representation misleading" but they do not need to know the representation was false or misleading.

In light of this, the key question is what are the "essential facts" constituting a contravention of each of sections 23(2A) and 23(2C). It is these essential facts that an inhouse lawyer must be aware of in order to be liable under section 224(1)(e).

The "essential facts" of section 23(2A) of the ACL

The elements of section 23(2A) are that the (i) the primary contravener made a "standard form" "consumer contract" or "small business contract", (ii) the contract contained an "unfair" term and (iii) the primary contravener proposed the "unfair" term. But are these the "essential facts" of a contravention of section 23(2A)? A person accused of ancillary liability must know the "essential facts".

Let's start with element (i) of a contravention of section 23(2A): the primary contravener made a "standard form" "consumer contract" or "small business contract". The Full Court decision in Rafferty v Madgwicks [2012] FCAFC 37; 203 FCR 1 is relevant to this element. That case considered a contravention of section 51AD of the now-superseded Trade Practices Act 1974. An element of the contravention was entry into a "franchise agreement" as defined by the Franchising Code. The Full Court considered whether the lawyers, who drafted the franchise agreement, were "knowingly concerned in" the contravention of section 51AD. The Full Court concluded that the "existence of a franchise agreement ... is the sine qua non of any contravention of section 51AD" and so the lawyers "had to be aware that ... [the relevant parties] were entering into a franchise agreement" in order to be liable. It was not enough that the lawyers merely knew the facts that rendered the agreement a franchise agreement. On the basis of Rafferty v Madgwicks, it seems likely that that an inhouse lawyer will not be liable as an accessory to a contravention of section 23(2A) unless they knew the relevant contract was a "standard form" "consumer contract" or "small business contract" or were wilfully blind to that fact.

Next let's look at element (ii) of a contravention of section 23(2A): the contract contained an "unfair" term. Section 24(1) of the ACL deems a term to be "unfair" if

(a) it would cause a significant imbalance in the parties' rights and obligations under the contract,

(b) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

As already noted, it is not necessary to know that the facts constituting the contravention "are capable of characterisation in the language of the statute". On that basis, it seems likely that for an inhouse lawyer to be liable as an accessory to a contravention of section 23(2A), they do not need to have formed the view that the term (a) caused a significant imbalance in the parties' rights and obligation, (b) was not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term or (c) would cause detriment if it were to be applied or relied on. Instead, they merely need to know the facts which gave rise to these three matters.

Now let's look at the final element (iii): the primary contravener proposed the unfair term. It is likely that the inhouse lawyer will need actual knowledge that the primary contravener proposed the unfair term.

In light of the above, it seems likely that the "essential facts" of a contravention of section 23(2A) are (i) the primary contravener made a "standard form" "consumer contract" or "small business contract", (ii) the matters that meant the impugned term caused a significant imbalance in the parties rights and obligation under the contract, (iii) the matters that meant the term was not reasonably necessary to protect a legitimate interest of the primary contravener, (iv) the matters that meant the term would cause detriment to the counterparty if it were applied or relied on and (v) the primary contravener proposed the term.

An inhouse lawyer who drafted the contract may know these essential facts if they performed their role competently and diligently; for example, by informing themselves of the purpose of the contract, the identity of the counterparties, the rights and obligations of each party under the contract and the interests of their client that the contract is intended to protect. The same analysis and outcome may also apply to an inhouse lawyer who reviewed the contract instead of drafting it from scratch provided the review was conducted competently and diligently.

The "essential facts" of section 23(2C) of the ACL

The elements of section 23(2C) are that the (i) the primary contravener applies or relies on, or purports to apply or rely on, a term; (ii) the contract was a "standard form" "consumer contract" or "small business contract"; and (iii) the term is "unfair". Applying the analysis of section 23(2A) above, it seems likely that the "essential facts" of a contravention of section 23(2C) are (i) the primary contravener applies or relies on, or purports to apply or rely on, a term; (ii) the contract was a "standard form" "consumer contract" or "small business contract"; (iii) the matters that meant the impugned term caused a significant imbalance in the parties rights and obligation under the contract; (iv) the matters that meant the term was not reasonably necessary to protect a legitimate interest of the primary contravener; and (v) the matters that meant the term would cause detriment to the counterparty if applied or relied on. For the same reasons as stated for section 23(2A) above, a lawyer who drafted the contract or reviewed may know these essential facts if they performed their role competently and diligently.

^[1] The decision has been appealed to the High Court. At the time of writing, the High Court had heard the appeal but not yet delivered judgment. The High Court's decision is likely to provide useful guidance on ancillary liability, but for now the decision of the Full Court stands and this article is written on that basis.

^[2] A well-known case is Shafron v ASIC (2012) 247 CLR 465; [2012] HCA where ASIC successfully pursued a general counsel and company secretary for breach of duties owed under s 180(1) of the Corporations Act 2001 as an officer. However, ASIC did not allege ancillary liability and instead alleged primary liability for breach of section 180(1).