Consumer Law Reforms

CONSUMER LAW REFORMS

Is your business prepared for the coming changes to Australian consumer laws?

The Trades Practices Amendment (Australian Consumer Law) Act 2010 is the first in a two part series of reforms designed to implement a single, national consumer law framework, and covers two areas: unfair contract terms and additional penalties and enforcement powers.

The reforms relating to unfair contract terms will come into force on 1 July 2010. The additional penalties and enforcement powers for the ACCC and ASIC commenced on 15 April 2010.

Unfair Contract Terms

The unfair contract terms provisions will only apply to “consumer contracts” businesses make with consumers.

The new regime will be set out in the new Australian Consumer Law (ACL) which will be added as a new schedule to the Trade Practices Act 1974 (the TPA), as well as in amendments to the Australian Securities & Investments Commission Act 2001 (the ASIC Act).

A consumer contract is defined in the ACL as:

“A contract for a supply of goods or services or a sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.”

In the ASIC Act, a consumer contract is defined as:

“A contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption.”

A term included in a consumer contract will be void if:

• the term is unfair; and
• the contract is a standard form contract; and
• in the context of the ASIC Act, the contract is a financial product or for the supply of financial services.

A term will be regarded as “unfair” if it:

• causes a significant imbalance in the parties rights and obligations under the standard form contract;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the terms; and
• it would cause detriment (financial or otherwise) to a party if it were applied or relied upon.

It is up to the party who would be advantaged by the application or reliance on the term to prove that that term is reasonably necessary to protect its legitimate interests.

When considering whether a term in a consumer contract is unfair, the Court can consider any factors that it considers relevant but must consider:

• the extent to which the term would cause detriment (financial or otherwise) to a party if the term was to be applied or relied on;
• the extent to which the term is transparent (meaning the extent to which it is expressed in a reasonably plain language, is legible, presented clearly and readily available to any party that it affects);
• the contract as a whole.

At this stage the reforms will not specifically include any examples of terms that are prohibited, although provision has been made for prohibited terms to be declared at a later date. Instead, examples of the types of terms that may be considered unfair are included. These include a term that permits one party, but not the other, to:

• avoid or limit performance of the contract;
• terminate the contract;
• penalise the other party for a breach or termination of the contract;
• vary the terms of the contract;
• renew or not renew the contract;
• vary the upfront price payable under the contract without the right of another party to terminate the contract;
• vary the characteristics of the goods or services to be supplied; or
• assign the contract to the detriment of another party without that other party’s consent.

These types of terms are not prohibited, or necessarily unfair, but some risk will arise in using them. There may be circumstances in which the use of such a term is reasonably necessary to protect a party’s reasonable business interests. Specific legislation may also expressly contemplate some of these types of clauses in specific contexts (for example, the Uniform Consumer Credit Code and new National Credit Code).

If a court finds a term to be unfair, that term is void, but the contract will continue to bind the parties to the extent that it is capable of operating without the unfair term.

Where a court declares a term in a consumer contract to be an unfair term, then it is a contravention of the ACL (or the ASIC Act if it relates to the supply of financial services) to apply or rely on that term. A court then has the power to grant orders as it deems appropriate, including an injunction, damages and/or an order to redress non-party consumers.

Certain contracts are, however, specifically excluded from the unfair contract terms provisions, being:

• some shipping contracts;
• the constitutions of companies, managed investment schemes or other similar bodies; and
• those insurance contracts that are regulated by the Insurance Contracts Act.

Do you have consumer contracts on standard terms? If so, do they contain any terms that might be regarded as unfair?

Additional Penalties and Enforcement Powers

There was also a recognition that the ACCC and ASIC needed greater powers to protect consumers, and to protect them more quickly.

Consumer protection penalties (such as those for making false representations in breach of s53 TPA) were limited to criminal sanctions which, whilst an important deterrent, required a higher standard of proof and could take some time to pursue.

The following penalties and powers have been introduced:

• civil pecuniary penalties for the breach of certain consumer protection provisions, up to a maximum of $1.1m for corporations and $220,000 for individuals;
• the ability to seek an order that a person be disqualified from managing corporations where there has been a breach of those consumer protection provisions that attract civil pecuniary penalties;
• the power to issue a substantiation notice, seeking information relevant to the substantiation of claims or representations (with fines for those that do not adequately respond);
• the ability to seek orders for the benefit of those that are not parties to court proceedings, e.g. to compensate a whole class of consumers;
• the ability to issue an infringement notice containing a financial penalty for suspected contraventions of certain consumer protection provisions (with the intention of targeting more minor contraventions that may not be pursued through the Courts); and
• the ability to issue public warning notices relating to consumer protection.

What Does This Mean For You?

It remains to be seen how the new laws will operate in practice, but it is clear that the ACCC and ASIC have greater powers to police and enforce consumer protection – including the ability to issue penalty notices without the matter being considered by a Court. The benefit for businesses is that the consumer law framework will hopefully become simpler to understand across the various jurisdictions, but that increased certainty will bring with it an even greater requirement for compliance.

It is easier for the ACCC and ASIC to take action against businesses that breach consumer protection laws, and enforcement action is likely to increase significantly.

Business owners need to do the following:

• if their business supplies goods or services to consumers on standard terms, review these terms to determine whether any of those them could be regarded as “unfair”;
• understand the consumer laws and how they apply to their business; and
• determine where there might be a risk of non-compliance (if any), and take steps to minimise that risk.

This is only a summary of some major changes. Please contact the following for further information.

Trade Practices

Financial Services