Monday, 30 October 2017

Recognising and Rectifying Regulatory Risks in the Retirement Village Industry

The retirement village industry has been in spotlight over the last few months following the joint Four Corners - Fairfax investigation into Aveco Retirement Villages (Aveco). This investigation has led to calls for greater scrutiny of the entire retirement village industry. It was also the catalyst for the Australian Competition and Consumer Commission’s (ACCC) decision to launch an in-depth investigation into Aveco’s business practices. 

In this paper, I will be outlining the main compliance risks which the ACCC will be investigating in relation to Aveco – namely, misleading and deceptive conduct, unconscionable conduct and unfair contract terms.  I will also be outlining the steps which the retirement village industry can take to better manage these various compliance risks.

Retirement village industry
The retirement village industry is subject to a complex system of regulation.  Each state and territory has its own legislation which is administered by fair trading and consumer protection agencies.  For example, in NSW the industry is regulated by the Retirement Villages Act 1999 and the Retirement Villages Regulation 2009.[1] 

Even though the retirement village industry is subject to specific retirement village legislation in each state and territory, it is also subject to the provisions of the Australian Consumer Law 2010.  In other words, retirement village operators are subject to two different and largely distinct legislative regimes and as such must ensure that they fully comply with both regimes.

Australian Consumer Law 2010 (ACL)
The ACL is a single, national consumer protection law which is administered by multiple regulators. The ACCC and state and territory fair trading agencies enforce the ACL. The Australian Securities & Investment Commission (ASIC) has a role in relation to financial services.

The ACCC has primary responsibility for matters that have a national dimension, which explains its recent interest in Aveco. 

Having said this, in recent times there has been a greater degree of interagency cooperation between the ACCC and state and territory agencies. A recent notable example has been the joint investigations between the ACCC and state regulators into the VET sector which has resulted in numerous investigations and court cases. It is likely that investigations into the retirement village industry will also be conducted jointly by the ACCC and the relevant state or territory regulator.

ACCC Priorities
Each year the ACCC releases its Compliance and Enforcement Priorities which sets out the main areas that it will be focusing on in its investigations and litigation.    Therefore, it is vitally important for all retirement village operators to have a thorough understanding of the way in which the ACCC prioritises its enforcement activities, particularly given the highly interventionist and aggressive approach which the ACCC takes to consumer protection matters. 

The ACCC’s 2017 Priorities[2] identified two areas of particular relevance to the retirement village industry - namely:

  • conduct detrimentally affecting disadvantaged or vulnerable consumer groups
  • conduct involving essential goods and services

It is likely that the ACCC considers most elderly residents living in retirement villages as constituting a vulnerable consumer group.  The ACCC is also likely to see retirement villages as providing an essential service to residents.

The ACCC has also stated that it will focus its enforcement activities on conduct which is of significant public interest and concern, which explains its interests in the retirement village industry following the joint Fairfax – Four Corners investigation.

The ACCC has also adopted a practice of identifying a number of enduring priorities which it defines as conduct which is so detrimental to consumer welfare and to the competitive process that the ACCC will always regard them as a priority.  Included in the category of enduring priorities are matters which involve vulnerable and disadvantages consumers.

Finally, the ACCC lists the specific areas where the ACCC will be focusing its resources in the coming year, or the ACCC’s “Hit-List”. Notably, the ACCC 2017 “Hit List” did not include any areas of specific relevance to the retirement village industry. However, it is probably that the ACCC has already identified the retirement village industry as an addition to its 2018 “Hit List”.

Risk areas

The ACCC’s investigation of Aveo will be focusing on three areas:

  1. Misleading and deceptive conduct;
  2. Unconscionable conduct; and
  3. Unfair contract terms.

Misleading and deceptive conduct

Section 18 of the ACL prohibits misleading and deceptive conduct:

(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

As is apparent section 18 is a very broad prohibition which governs all misleading and deceptive representations whether made in writing or orally, such as statements made by sales staff to prospective consumers.

The section also applies to failures by a party to draw a consumer’s attention to an unusual term in the contract. In other words, the section catches misrepresentations by silence or omission. An example of such a term may be terms in a retirement village contract governing exit fees and associated refurbishment fees.

False and misleading representations are also prohibited under section 29 of the ACL, as follows:

(1)  A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services.

Section 29 then lists a number of specific types of prohibited misrepresentations, including the following which may be relevant to the retirement village industry:

(b)  make a false or misleading representation that services are of a particular standard, quality, value or grade; or
(g)  make a false or misleading representation that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits; 
(i)   make a false or misleading representation with respect to  the price of goods or services; or 
(m)  make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy (including a guarantee under Division 1 of Part 3-2)

Section 29 prohibits misrepresentations about the standard or quality of services which are to be provided, the uses or benefits of such services and the price of services. Each of these issues may be relevant to the retirement village sector, to the extent that such representations are routinely made to prospective residents.

Subsection 29 (1) (m) also prohibits misrepresentations about the effect or existence of a particular contractual term. Accordingly, a misrepresentation about the effect or existence of a contractual term, including the failure to draw the resident’s attention to an unusual term, may be actionable under section 29 of the ACL.

The main difference between section 18 and 29, is the availability of pecuniary penalties for a breach of section 29. While there are no pecuniary penalties currently available for a breach of section 18, section 29 is subject to a maximum pecuniary penalty of $1.1 million per contravention for a corporation and $220,000 per contravention for an individual.

Unconscionable conduct

The ACL also prohibits unconscionable conduct which is defined as behaviour which is so harsh that it goes against good conscience. As stated by the ACCC “to be considered unconscionable, conduct it must be more than simply unfair—it must be against conscience as judged against the norms of society.”[3]

The relevant prohibition is Section 21 of the ACL which provides:

Unconscionable conduct in connection with goods or services

 (1)  A person must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to a person (other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

Section 22 of the ACL sets out a range of factors which a court may have regard to when determining whether conduct is unconscionable.  A number of these factors are relevant to contractual arrangements in the retirement village industry - namely:

(a)   the relative strengths of the bargaining positions of the supplier and the customer; and

(b)   whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c)   whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d)   whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e)   the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(i)    the extent to which the supplier unreasonably failed to disclose to the customer:

 (i)    any intended conduct of the supplier that might affect the interests of the customer; and

 (ii)   any risks to the customer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer); and

 (j)   if there is a contract between the supplier and the customer for the supply of the goods or services:

(i)     the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and

(ii)    the terms and conditions of the contract; and

(iii)   the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and

(iv)   any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and

(k)  without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and

 (l)   the extent to which the supplier and the customer acted in good faith.

While all of the above factors are unlikely to be relevant in each particular situation, the presence of some of these factors in a given situation would be sufficient to establish a case of unconscionable conduct.

The ACCC is likely to assume that in most cases there will be a significant disparity in the relative strengths of the bargaining positions of the retirement village operator and the resident.  Other important considerations are whether the contract is offered to the resident on a take or leave it basis and whether the resident was able to understand the terms of the relevance contract.  This last issue is of particular importance give the apparent complexity of retirement village contracts.

Significant pecuniary penalties apply to contraventions of the unconscionable conduct provisions – namely maximum pecuniary penalties or $1.1 million per contravention for a corporation and $220,000 per contravention for an individual.

Unfair contract terms

The ACL also prohibits unfair contract terms in standard form contracts.  These laws apply to contracts used in the retirement village industry to the extent that they meet the definition of a standard form contract.

Is it standard form contract?
Section 27(2) of the ACL sets out a range of factors which a court may take into account to determine whether a contract is a standard form contract:

  • Whether one of the parties has all or most of the bargaining power;
  • Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • Whether another party was, in effect, required either to accept or reject the terms in the contract in the form they were presented;
  • Whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • Whether the terms take into account the specific characteristics of another party to the particular transaction.

Importantly, section 27 of the ACL creates a reverse onus of proof in relation to whether a contract is a standard form contract.  This section states that if one party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless the other party proves otherwise.  

Accordingly, the retirement village will have to prove that the contract is not a standard form contract, which they may be able to do by disproving the factors listed above.

Does an exclusion apply?
If the contract is determined to be a standard form contract, the next step is to determine whether any of the various exclusions apply.

The most significant exclusion relates to the upfront price payable.  The legislation makes it clear that a term which “sets the upfront price payable under the contract” is not an UCT. In other words, the new UCT laws cannot be used by a resident to effectively argue that the price payable under the contract is unfair and as such that they have no obligation to pay for the services. 

Section 26 of the ACL also excludes terms from the scope of the UCT laws if they define the subject matter of the contract. Accordingly, a resident cannot claim that a term giving effect to the supply of the primary service is an unfair term. 

Other exclusions include any terms which are required or expressly permitted by a law of the Commonwealth, a State or a Territory.  This could include terms required under state or territory retirement village legislation.

Is the term unfair?
The next step is to consider the substantive effect of the term and to determine whether that term is unfair.  The legislation sets out three factors which, if established, would mean that a term is unfair. 

A term of a consumer contract is unfair if:

a.  it would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

b.  it is not reasonably necessary in order 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.

Two important issues need to be stressed about these three factors. First, these three factors are the exclusive factors which must be proven to establish that a term is a UCT. In other words, they are not three non-exhaustive factors meant as guidance for the court but rather constitute the statutory test which the court must apply. Second, the factors are cumulative in the sense that each factor must be proven in turn in order to establish that a term is a UCT.

As is apparent, the first step in the process in determining whether a term is unfair is to assess whether the term itself would cause a significant imbalance in the parties
rights and obligations.  This criterion is not linked to the size of the respective parties, which is only relevant to determining whether the contract is a standard form contract.

The legislation also states that the term “would” cause significant imbalance. This suggests that courts will only strike down terms will have a “material” and “meaningful” impact on the rights and obligations of one of the parties. Lesser impacts are unlikely to render the term a UCT.

The court will also have to determine whether the term is reasonably necessary to protect the interests of the party advantaged by the term. The use of the term “reasonably” makes it clear that the court will be applying an objective test to determine whether the term protects the retirement village’s legitimate interests. 

Finally, the court must be satisfied that the term will cause determine to a party if it were to be applied or relied on. There are three issues to note about this factor:

(a)  a resident will have to satisfy the court that the term will cause practical detriment to a resident if it is relied on by the retirement village.  In other words, a mere theoretical detriment is unlikely to be sufficient to satisfy this factor;

(b)  a resident must show either financial detriment or other detriment. Therefore, non-financial detriments, such as time or inconvenience, or even reputational damage, may be sufficient to enliven the UCT jurisdiction; and

(c)  the test is prospective, in the sense that the court will be required to speculate on the effect of the term if it was applied or relied on.   Therefore, a resident seeking to invoke the UCT laws will not need to show that the term was enforced or even that the retirement village threatened to enforcement the term.  The mere existence of the term in the contract will be sufficient.  Additionally, a claim by a res retirement village that they would never enforce a particular term will not save that term from being characterised as a UCT.

The fact that a party does not have to prove that the other party has sought to enforce, or threatened to enforce, the alleged UCT expands the reach of the UCT legislation considerably.

Is the term transparent?
A further consideration in determining whether a term is a UCT is whether the term is transparent.  A term is considered to be transparent if it is

  • expressed in reasonably plain language;
  • legible; and
  • presented clearly; and
  • readily available to any party affected by the term.
The suggestion in the legislation is that terms which are not transparent are more likely to be characterised as unfair. In practical terms, this means that highly legalistic language, small fonts and tightly packed and largely illegible text in standard form contracts may tip the balance in favour of the term being characterised as an UCT.

Looking at the whole contract
A final step in the process will be an obligation on the court to consider the whole contract. While not expressed in the legislation as a final step, in practice it is likely that the court will undertake a final overview of the entire contract before determining whether a particular contract term is a UCT.

The importance of this step is to ensure that a particular term is not being assessed by the court in isolation from the rest of the contract.  It is likely that in many standard form contracts a number of terms will work to advantage of one party, whilst other terms will work to the advantage of the other party.  Accordingly, it is important to ensure that the court looks at the overall balance of terms in the standard form contract to make sure that one party is not challenging a particularly disadvantageous term, whilst the same time gaining the benefit of a number of other advantageous terms.

Examples of unfair contract terms
The legislation also helpfully sets out some examples of the types of terms that may be unfair.  The following is a summary of the examples of potential UCTs listed in the legislation - namely terms which:

(a)   permit one party to unilaterally avoid or limit performance under a contract;

(b)   permit one party to unilaterally, terminate, vary, assign, or renew the contract or to unilaterally determine whether the contract has been breached or to interpret its meaning;

(c)   penalise one party for a breach or termination of the contract;

(d)   permit one party to vary the upfront price payable under the contract without giving the other the right to terminate the contract;

(g)   permit one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

 (i)   limit one party's vicarious liability for its agents or its right to sue another party; and

 (l)   limit the evidence one party can adduce in proceedings or imposes an evidential burden on one party in proceedings relating to the contract.

The main distinguishing feature in the above examples is that they provide one party with unilateral rights and powers under the contract.  For example, unilateral rights to terminate the contract without cause or the exclusive right to interpret the meaning of the terms of the contract.

Another important feature of the above examples is whether they may be seen as apportioning contractual risks between the parties in an uneven way.  Implicit in these examples is a concern about a business forcing a resident to assume most, if not all, of the contractual risk arising under the standard form contract. 

The ACCC will no doubt be carefully reviewing Aveo’s retirement village contracts to ensure that none of the terms fall foul of the unfair contract terms legislation.  It is also likely that the ACCC will be broaden its investigation to encompass other retirement village’s contracts, given the claims that Aveo’s contractual terms are common across the industry.

Rectifying Risks
In order to minimise risks and avoid problems with the ACCC (and other State and territories regulators) it is important for retirement village operators to conduct a detailed Competition and Consumer Law Risk Assessment of every aspect of their business operations.

This would start with an identification of all risks in the business both from a:

  1. consumer law perspective – for example, the representations made to residents in marketing and promotional materials, the fairness of standard form contract terms and how complaints handling procedures are managed; and
  2. competition law perspective – for example, the nature of all agreements with competitors, suppliers and service providers, and other third parties.
It is important for retirement village operators to review their operations from both a consumer law and competition law perspective.  Whilst the ACCC’s initial focus will be on consumer law issues arising in the retirement village industry, it is inevitable that it will also be on the lookout for any potential competition law problems.

Once the retirement village has conducted detailed Competition and Consumer Law Risk Assessment, it should take steps to implement a comprehensive and up-to-date Compliance Program, consisting of the following elements:

  1. Compliance Policy
  1. The appointment of a Compliance Officer
  1. Other relevant policies such as a Complaints Handling Policy and a Whistle-blower Policy
  1. The establishment of an effective Complaints Handling procedure and
  1. Regular Competition and Consumer Law Compliance Training.

Taking steps to conduct a Risk Assessment and implement a Compliance Program will benefit the business by helping them to better identify and manage all competition and consumer law risks in the business.

It is apparent the retirement village industry will be the focus of government and regulatory scrutiny for some time to come. Accordingly, it is important for retirement village operators to be proactive in terms of identifying all the significant risks in their businesses and taking swift and appropriate action to remove or manage these risks.  Failure by the retirement village industry to immediately act on these risks in a timely and effective manner may force a political response which would invariably lead to the introduction of further intrusive and costly regulation.

[1] The NSW Retirement Villages Regulation is currently under review.