Legal practitioners and their business clients will benefit from a good understanding of the significant and far-reaching impacts of the changes on both consumer and business transactions due to the new Australian Consumer Law,1 the first phase of which was passed in March 2010.
In particular, the Australian Competition and Consumer Commission (ACCC) is gaining a range of intrusive investigatory powers as well as the ability to seek new penalties for breaches of the Trade Practices Act (TPA).
These additional ACCC powers will greatly enhance its ability to combat breaches of unconscionable conduct and consumer protection laws. However, there is a real question whether granting these additional powers will tilt the balance of power too far in favour of the ACCC in its dealings with business.
The Australian Consumer Law changes
The Australian Consumer Law introduces four main changes to the existing consumer protection law system:
- a range of new enforcement powers and remedies for the ACCC;
- introduction of unfair contract terms legislation;
- a new product safety system; and
- a range of miscellaneous changes to standardise consumer protection laws across Australia.
- substantiation notices;
- public warning powers; and
- infringement notices.
- civil pecuniary penalties;
- disqualification orders; and
- non-party redress.
A substantiation notice is a notice which "requires a supplier to provide a consumer regulator with a basis for representations that it makes regarding its goods and services".2
The Trade Practices (Australian Consumer Law) Act (No 1) 2010 (ACL) states that the new s.87ZL of the TPA provides the ACCC with the ability to issue a substantiation notice to persons who have made a claim or representation promoting the supply of goods or services, or an interest in land or employment. The person, which includes corporations, can be required to provide information or documents to substantiate or support their claims or representations. The period for compliance with a substantiation notice is 21 days unless extended by the ACCC under s.87ZM.
The penalty for failing to comply with a substantiation notice is a pecuniary penalty of $16,500 for a corporation or $3,300 for an individual. The penalties for providing false or misleading information in a substantiation notice are $27,500 for a corporation and $5,500 for an individual.
Previously, the ACCC's practice was to request information from a business either on a voluntary basis or in accordance with a s.155 notice. Under a s.155 notice a business was compelled to produce information and/or documents to the ACCC. Prior to issuing a s.155 notice, the chairman of the ACCC had to satisfy himself that he had reason to believe that the business had information or documents which related to a matter which constituted a contravention of the TPA. While the requirement to form a "reason to believe" did not involve a very high burden for the ACCC, it did impose an evidentiary threshold.
The evidentiary threshold that the ACCC must satisfy now before issuing a substantiation notice is significantly lower. The ACCC only needs evidence of a claim or representation before exercising its powers. The ACCC does not need to have a reasonable belief or reasonable grounds for suspecting a breach of the TPA before issuing a substantiation notice.
The availability of a substantiation notice gives the ACCC the ability to move much more quickly against traders which have made, in the ACCC's opinion, outlandish claims about the uses and benefits of their goods or services.
The main concern about the ACCC's substantiation notice power is that the ACCC may seek to use this power in situations where it is inappropriate. For example, it may be very tempting for the ACCC to simply 'churn out' substantiation notices in investigations where previously it would have had to collect evidence to prove a contravention of the TPA.
Public warning powers
The ACL also provides the ACCC with the power to issue a public warning about a trader. In this regard, the ACL report states that "public warnings are issued to inform the public of potentially harmful conduct taking place in the very short term".3
It would appear that public warning powers are intended to be directed against "'fly-by-night' operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders".4 Therefore the focus appears to be on bogus traders who are simply seeking to misappropriate money from consumers and then vanish, making subsequent legal action against them all but impossible.
The following is the text of the new s.86DA:
The Commission may issue to the public a written notice containing a warning about the conduct of a corporation if:
a. the Commission has reasonable grounds to suspect that the conduct may constitute acontravention of a provision of Part IVA, V or VC; and
b. the Commission is satisfied that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct; and
c. the Commission is satisfied that it is in the public interest to issue the notice.Therefore the elements of the public warning power are:
the ACCC must have reasonable grounds to suspect that conduct being engaged in may constitute a breach of the TPA; and
one or more persons are likely to suffer detriment as a result of the conduct; and
the ACCC is satisfied that it is in the public interest to issue the notice.
The first element of the new public warning power is that the ACCC must have reasonable grounds to suspect that conduct is in breach of the TPA. It seems that the test of whether the ACCC has "reasonable grounds to suspect" a breach of the TPA is an objective test. In practice, it will not be very difficult for the ACCC to satisfy this element because of the use of the word "suspect" in the legislation.
The second element is that one or more persons are likely to suffer detriment because of the conduct. The legislation does not specify that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to prevent consumers from suffering financial detriment.
The third element of the legislation is the most onerous aspect in terms of the ACCC utilising its public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other strategies such as commencing rapid court action or seeking ex parte injunctions. In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact which issuing a public warning notice may have on a business's ability to continue trading.
Finally, the legislation provides that the ACCC can issue a notice where a business has failed to respond to a substantiation notice. In these circumstances, the ACCC must also believe it is in the public interest to issue a notice.
The main concern with the public warning power is that it may be exercised by the ACCC in inappropriate circumstances. Clearly, a public warning issued by the ACCC about a business is likely to have the effect of preventing consumers from dealing with that business. Another likely consequence is that current customers of that business (who may have been quite happy with the business before the public warning was issued), may now want their money back because they believe that the business is disreputable. This could jeopardise the financial position of the business even though a court has not found that the business has engaged in any illegal conduct.
Another concern is that there is no obligation on the ACCC to commence legal action against a business which has been the subject of a public warning. Rather, the ACCC will, at least in theory, be able to issue a public warning and then take no further legal action against the business to establish their concerns in court.
There is no doubt that the public warning power is a significant addition to the ACCC's enforcement powers. It is also a power which can be used to great effect against very blatant fly-by-night operators. In relation to such businesses, it is vitally important to warn consumers at a very early stage since the money accumulated by such businesses is often siphoned overseas to distant jurisdictions and their Australian companies liquidated.
It is not clear whether the ACCC will be seeking to use the public warning power extensively once it is introduced or whether its use will be reserved for the most blatant cases. In this regard, it would be particularly helpful for both practitioners and businesses if the ACCC issued a public statement about its attitude to the public warning power and the circumstances in which the power will be exercised.
Along with the public warning power, the most controversial new power given to the ACCC is the power to issue infringement notices. Under this power, the ACCC is able to issue on-the-spot fines to traders for particular conduct without taking a matter to court.
Under the ACL, s.4 of the TPA has been amended to include a definition of "infringement notice provision". Infringement notice provisions will include unconscionable conduct, false and misleading conduct, misleading conduct in relation to employment and business activities, misrepresentations about the full cash price misrepresentations, referral selling, harassment and coercion, unsolicited debit and credit cards, product safety matters and breaches of the substantiation notice provisions.
Significantly, the ACCC will not be able to issue infringement notices for s.52 conduct, breaches of s.54 (offering gifts and prices without being able to supply), bait advertising, breaches of s.58 (accepting payment without being able to supply goods) or blowing (unsolicited directory entries and goods).
The onus which the ACCC needs to satisfy in order to issue an infringement notice is set out in s.87ZE which states: "If the Commission has reasonable grounds to believe that a person has contravened an infringement notice provision, the Commission may issue an infringement notice to a person."
Only one infringement notice may be issued in relation to an alleged contravention. Infringement notices cannot be issued in relation to conduct which is more than 12 months old. The infringement notice penalty must be paid within 28 days of the notice being issued.
The maximum penalties which can be obtained through the use of an infringement notice are $6,600 for a corporation and $1,320 for an individual. The ACCC can also issue an infringement notice for a contravention of the substantiation notice provisions.
Once the infringement notice has been paid, no civil or criminal proceedings may be started or continued against the person by the Commonwealth or Commission in relation to the conduct the subject of the infringement notice.
As is apparent from the maximum penalties which can be obtained through an infringement notice, such notices are only to be issued for less serious contraventions of the consumer protection laws.
The new power to issue infringement notices is controversial because it raises separation of powers issues - namely, the blurring of executive and judicial functions. The power to impose a pecuniary penalty on a business for a breach of legislation would appear to be the exercise of a judicial function, which should properly reside in the courts, rather than with a federal government agency, such as the ACCC.
It is likely that a business which is the subject of an infringement notice will have the right to challenge the notice in court if it does not believe it has contravened the relevant provision of the TPA. This challenge is likely to be based on administrative law grounds, as the decision to issue an infringement notice appears to be an administrative decision. However, the cost of challenging an infringement notice is likely to be significantly greater than the amount being sought under the notice. Therefore few businesses are likely to challenge an infringement notice even if they have not contravened the TPA.
Another significant concern about the introduction of the infringement notice power is that it may result in the ACCC focusing its investigatory resources on relatively minor contraventions of the TPA by smaller businesses or on purely local issues, rather than focusing on conduct by larger businesses or conduct occurring on a national basis.
The most significant change to the remedies available to the ACCC are civil pecuniary penalties for contraventions of the consumer protection laws.5 Previously, when the ACCC took civil proceedings for breaches of consumer protection laws, the only remedies it could seek were injunctions, declarations, non-punitive orders and compensation. If the ACCC wished to obtain a fine for a breach of consumer protection laws it was only able to refer a criminal prosecution to the Commonwealth Director of Public Prosecutions.
The ACL report noted that civil penalties were not available under either federal or state consumer protection legislation. This was identified as a "significant gap in the range of enforcement options available to consumer regulators".6 Reference is also made in the report to the greater deterrent effect that access to civil penalties should have on businesses which may be tempted to breach the consumer protection law provisions.7
The new s.76E establishes civil pecuniary penalties for unconscionable conduct, consumer protection (except breaches of s.52) and product safety breaches. The penalty for contravening these provisions is $1.1 million for a corporation and $220,000 for an individual per contravention. The ACL makes it clear that corporations and individuals cannot be fined twice in separate civil and criminal cases for the same conduct. A new defence to the imposition of civil pecuniary penalties has been introduced (s. 85(7)).
Access to civil penalties for contraventions of consumer law provisions will have a very significant impact on the ACCC's enforcement activities. For example, civil penalties will give the ACCC considerably more leverage in dealing with businesses which it believes have contravened consumer protection laws. Previously the ACCC has been quite hamstrung in its settlement negotiations with businesses due to its inability to use civil penalties as leverage in unconscionable conduct and consumer protection cases However, with access to large maximum penalties the ACCC is in a strong position to offer to accept a lower pecuniary penalty in return for a business agreeing to other remedies, such as paying compensation to consumers.
Another area where the ACCC is likely to seek large civil penalties is in relation the so-called fly-by-night operator. As stated above, the problem which the ACCC faces with fly-by-night operators is that by the time legal proceedings have been commenced the assets of the company are gone, and the company itself is in liquidation. The only action which the ACCC can then take is to sue the former directors and managers of the company, seeking injunctions and declarations in the hope that such orders may prevent these individuals from engaging in similar conduct in the future.
However, once the ACCC can seek civil penalties for consumer protection breaches, it is able to seek significant penalties personally against the directors and managers of these failed fly-by-night operators. This provides the ACCC with two specific advantages. First, a successful civil penalty action against a former director or manager of such a business will have the effect of depriving such a person of some of their ill-gotten gains. Second, if these individuals fail to pay the civil pecuniary penalty, the ACCC may be able to take action to bankrupt them personally which would prevent them from being directors in the future.
The ACL also introduces disqualification orders for individuals who have engaged in conduct in breach of consumer protection laws.8 The ACL states these orders may "ban or restrict individuals from participating in specific activities for a period of time, including managing corporations or undertaking specific business conduct".9 Disqualification orders are already available for contraventions of the restrictive trade practices provisions of the TPA (Part IV).
The power to make a disqualification order is outlined in s.86E(1B). This subsection states that the court may make an order disqualifying a person from managing a corporation for a period of time that the court considers appropriate if it is satisfied that:
the person has engaged in or has attempted to engage in a contravention of the relevant provisions of the TPA; andIndividuals can be disqualified for breaches of the unconscionable conduct, consumer protection (except for s.52) and product safety provisions of the TPA.
the disqualification is justified.
The most notable feature of the new disqualification order is the width of the court's discretion to make such an order. The only guidance provided about how the discretion should be exercised is contained in s.86E(2) which states that the court can consider "the person's conduct in relation to the management, business or property of any corporation".
There is no indication in the legislation that a disqualification order should only be made in circumstances where the individual has been shown to have engaged in similar breaches of the TPA in the past and is therefore a repeat offender. Further, the length of the disqualification order is not subject to any statutory maximum period, but rather is subject to the court's opinion as to the appropriate period of disqualification.
The availability of disqualification orders also gives the ACCC much greater leverage in settlement negotiations with businesses and their directors or managers. The ACCC is able to propose that it will not pursue disqualification orders against particular directors or managers in return for their agreeing to other orders, such as a higher civil pecuniary penalty or an order to pay compensation to consumers.
The final new remedy introduced by the ACL is non-party redress. The ACL report described non-party redress as the power to seek an order from the court to "seek redress for persons who are not parties to the particular action".10 The ACL report specifically referred to the full Federal Court decision in Medibank Private Ltd v Cassidy11 where it was held that there was no power in the TPA to order a business to provide redress to non-parties to a proceeding.
In order to understand fully the significance of the new provisions concerning non-party redress, one first needs to understand the ACCC's previous powers to obtain compensation for consumers under the TPA.
Previously, there were two ways that the ACCC could get financial redress for consumers for a contravention of the consumer protection provisions of the TPA. The ACCC could either take an action under s.87(1B) of the TPA or a class action under the Federal Court Act.
In the past, the ACCC has shown a clear preference for proceedings under s.87(1B). This is because the ACCC is in control of the proceedings and, importantly, can decide when to settle and on what terms. However, in a class action, it is the class rather than the ACCC that controls the legal proceedings. Often a class is happy to settle for financial compensation, and will have no interest in obtaining injunctions or declarations which are remedies which the ACCC see as important to achieve specific and general deterrence.
The ACCC's preferred approach in seeking compensation under s.87(1B) where there are a large number of consumers who have suffered loss, has been to adopt what has been described as the two-step approach. Under the two-step approach the ACCC commenced litigation against a business alleging various breaches of the consumer protection provisions and sought injunctions, declarations, corrective orders, and the implementation of a trade practices compliance program. The ACCC did not seek compensation in these initial proceedings - rather it foreshadowed that it was going to seek compensation for consumers under s.87(1B) in a follow-up legal action.
The reason the ACCC took this approach is because under s.87(1B) the ACCC was required to have the written consent of all the consumers on whose behalf the ACCC was seeking compensation before making an application for compensation. As can be appreciated, getting written consent from potentially hundreds of consumers prior to commencing the initial legal proceedings would have been a time-consuming process which would delay the initiation of proceedings for a very long time.
Therefore, under the two-step approach, the ACCC could seek to prove liability in an initial action and then commence a follow-up action (once liability had been established) to seek compensation for affected consumers.
However, even the two-step process was not an ideal approach. The most obvious problem with the two-step approach was the delay before compensation was paid. Because the ACCC has to run and win its initial action before running a second proceeding for compensation, it could take a number of years before consumers were paid any compensation.
The second significant problem was that by the time the initial action had been completed the business sued by the ACCC might have had no money left to pay any compensation, particularly after it had paid the ACCC's costs. The ACCC has a statutory obligation under the Financial Management and Accountability Act 1997 to recover the costs of its legal action, so the ACCC couldn't simply waive or defer its legal costs to other claims.
Therefore, the ACCC could find itself in the ridiculous position of commencing litigation (with the ultimate goal of getting consumers compensation) and winning its case, only to see the pool of funds available to pay compensation to consumers being diminished or even extinguished by the its claim for legal costs.
Under the new s.87AAA the court may make an order against a person who has engaged in contravening conduct. Contravening conduct is defined as contraventions of the unconscionable conduct, civil consumer protection and criminal consumer protection provisions of the TPA.
Under s.87AAA(6), the court, in deciding whether to make an order, may have regard to the conduct of both the person who has engaged in the contravening conduct and the non-party consumer.
The new s.87AAB provides a list of the kinds of orders which the court can make to redress the loss or damage suffered by the non-party consumer, including orders:
- declaring a contract to be void;
- varying the terms of a contract; or
- directing a person to refund money or return property to the non-party consumer.
a. redress, in whole or in part, the loss or damage suffered by the non-party consumers in relation to the contravening conduct; or
b. prevent or reduce the loss or damage suffered, or likely to be suffered, by the non-party consumers in relation to the contravening conduct.
The most curious proposed provision in relation to non-part redress is s.87AAA(4) which states: "An application may be made under s.(1) (that is for an order for non-party redress) even if an enforcement proceeding in relation to the contravening conduct has not been instituted."
Therefore, it seems that the ACCC can seek an order for non-party redress even if it has not commenced legal proceedings in relation to contravening conduct.
The new provisions governing non-party redress will overcome many of the problems identified above associated with s.87(1B). The main advantage for the ACCC is that it will no longer have to obtain written consent from consumers prior to making an application for redress. In addition, the ACCC can seek redress through a one-step process rather than a two-step process - the ACCC is able to commence a single proceeding seeking all relevant remedies, including compensation.
The main concern about the new non-party redress remedy is that it appears to provide the court with a very broad discretion to order the payment of money to what is likely to be a fairly imprecise class of consumers. In addition, the ability of the ACCC to seek an order for non-party redress in circumstances where the ACCC has not even commenced legal proceedings seems quite odd. It would appear that such an order would normally be granted if the party against whom the order was being sought consented to it being made, because there would be no evidence before the court on which to base such an order.
The ACL introduces a quite remarkable suite of new enforcement powers and remedies to the TPA. With the power to issue substantiation notices, public warning notices and infringement notices, the ACCC will have unparalleled powers to take aggressive and pre-emptive enforcement action against businesses which it believes have contravened the consumer protection laws.
The ACCC's access to pecuniary penalties and disqualification orders will provide it with a great deal more leverage in settlement negotiations with businesses. The main consequence of the non-party redress provisions is that it will no doubt become standard practice for the ACCC to seek an order for non-party redress for consumers in virtually all of its consumer protection cases. Indeed, one can see a situation arising where the ACCC may offer not to seek pecuniary penalties or disqualification orders against the directors or managers of a business, on condition that they consent to an order to pay non-party redress to consumers under s.87AAA(4).
With this new legislation, it seems clear that the balance of power in terms of the investigation and prosecution of suspected breaches of consumer protection laws is tilted heavily in favour of the ACCC. Whether the ACCC will seek to fully utilise its new investigatory powers and use the new remedies aggressively as leverage in settlement negotiations, remains to be seen. However, one thing is clear - representing clients in consumer protection matters before the ACCC will never be quite the same again.
1. An Australian Consumer Law: Fair Markets, Confident Consumers, 17 February 2009 (ACL) at www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1482.
2. ACL, op. cit., p.46.
3. ACL, op. cit., p.47.
5. See ACL, op. cit., pp.43-45.
6. Ibid., pp.44-45.
7. Ibid., p.45.
10. Ibid., p.52.
11.  FCAFC 290.