The ACCC and ASIC get new powers to investigate "unfair contract terms"

Laws regarding unfair contract terms (UCTs) have received considerable attention in the last two years for two reasons:

• they were extended to UCTs in "small business contracts" when they previously only applied to "consumer contracts"; and
• regulators are taking a more active role in enforcing the laws.

The ACCC in particular has been advocating for some time that UCT laws are in need of reform.  In August 2018, ACCC Chairman Rod Sims stated bluntly:

“The regime has two significant flaws: first, unfair contract terms are not illegal, and second the ACCC cannot seek penalties when the court has declared an unfair contract term void, nor can we issue infringement notices for contract terms that are likely to be unfair.”

These sentiments were repeated by ACCC Deputy Chair Mick Keogh in an address to the National Franchise Convention Legal Symposium in October 2018.

While we are yet to see penalties introduced in relation to the inclusion of unfair terms in standard form consumer and small business contracts, the call for legislative reform has started to gain momentum.

Recently, legislation has been amended to give the ACCC and ASIC investigative powers in relation to potential UCTs.  This may lead to greater enforcement activity by the ACCC and ASIC and is reason to take notice of UCT laws, if you haven't already.

Unfair contract laws: a quick recap

So what are the UCT laws?  The Australian Consumer Law and Australian Securities and Investments Commission Act 2001 (ASIC Act) contain laws regarding "unfair" terms.  A term is "unfair" if it:

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

If a term is "unfair", it may be declared void by a court or tribunal.  Depending on the nature of the term and the extent of its use, this may have significant consequences.  For example, money that was paid under the now-void term may need to be refunded.

The UCT laws don't apply to all contracts.  Instead, they are limited to standard form contracts which are also "consumer contracts" or "small business contracts".  There are other exclusions from the UCT laws for specific types of contracts and terms.

The UCT laws have applied to standard form "consumer contracts" for some time but their application to "small business contracts" is a recent advent having only commenced in November 2016.

The powers of the regulators to investigate UCTs

In the last few years, the ACCC has brought several court proceedings in relation to UCTs as well as conducted investigations which didn't result in court proceedings.  This was despite the fact the ACCC's investigative powers under section 155 of the Competition and Consumer Act didn't apply to investigating potential UCTs. 

Among other things, section 155 of the Competition and Consumer Act gives the ACCC the power to require someone to produce information and documents to the ACCC or appear before the ACCC to give evidence in relation to a possible contravention of the Act.  Similarly, section 13 of the ASIC Act gives ASIC the power to 'make such investigations as it thinks expedient … where it has reason to suspect that there may be have been … a contravention of the corporations legislation'.

Sections 155 and 13 did not apply to the investigation of potential UCTs, but as of 26 October 2018, that's all changed.  As a result of the Treasury Laws Amendment (Australian Consumer Law Review) Act 2018 (Cth), these sections have been amended so that they apply for the purpose of the ACCC and ASIC determining whether to apply to a court for a declaration that a term is "unfair".  ASIC"s powers apply to investigating a term in a contract regardless of when the contract was entered into while the ACCC's powers only apply to contracts entered into on or after 26 October 2018.^[1]

So what does this mean for me?

Now that the ACCC's and ASIC's investigative powers extend to potential UCTs, we could see an increased number of investigations.  Previously, these regulators were depending on co-operation from businesses using potential UCTs or alternatively, they may have incidentally uncovered information concerning UCTs when using their powers to investigate other conduct.  The ACCC has indicated that enforcing UCTs in "small business contracts" is a priority for 2018 and its Chair, Rod Sims, recently said that there should be penalties for using UCTs.  Currently, there are no penalties for using UCTs and the ACCC cannot issue an infringement notice for using one.

So what does this mean for me?  Well, if you haven't conducted a review of your standard form "consumer contracts" and "small business contracts" for compliance with the UCT laws, you should.  If not, the ACCC or ASIC may use their new powers to review them for you!

^[1] See schedule 7, item 3 of the Treasury Laws Amendment (Australian Consumer Law Review) Act 2018 (Cth).^{Back to article}

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