Legal

Ombudsman, ACCC push for financial penalties for unfair contracts

Matthew Elmas /

Australian Small Business Ombudsman Kate Carnell has backed calls for a furthered strengthening of unfair contract protections for businesses, amid concern that SMEs continue to be ripped off by unfair contracts.

The small business and competition watchdogs are preparing to lobby government for the changes, which include the addition of financial penalties, having expressed concern that the current rules aren’t doing enough to deter larger businesses from including potentially unfair terms in their business contracts.

Carnell told SmartCompany that unfair contract terms are a “huge issue” facing the small business community, echoing calls by Australian Competition and Consumer Commission chair Rod Sims last week that tougher penalties needed to be introduced.

Carnell said under current rules unfair contract terms aren’t illegal, which the ACCC has argued limits its ability to investigate shoddy contracts and penalise unfair terms.

“Fundamentally, unfair contract terms aren’t illegal, and that’s the biggest problem,” Carnell says.

“With no penalties there’s no real pressure on companies to do the right thing.”

In a speech at the COSBOA National Small Business Summit last Friday, Sims said that Australian Consumer Law allows potentially unfair contract terms to be challenged in a court and declared void, but that including such terms in the first place is not prohibited.

“There is little the ACCC can do to hold them to account for prior conduct,” Sims said.

“The law simply isn’t strong enough. Unfair contract terms should be illegal.”

Australian Consumer Law was extended in 2016 to include protect small businesses against unfair contract terms, while loan contracts from Australia’s largest banks have also come under scrutiny. Carnell says since the introduction of the changes, her office has seen around half of lenders change their contracts.

But Sims said the ACCC is still unable to seek penalties in cases where a contract term has been found by a court to be unfair, or issue infringement notices where it believes terms are likely to be unfair. The competition watchdog is also unable to use its compulsory information gathering powers to gather evidence in cases of suspected misconduct.

This differs from other areas of ACCC enforcement, where infringement notices of up to $10,800 for corporations, and $2,160 for individuals, can be issued for unconscionable conduct, unfair practices and certain product safety issues, for example.

In his speech, Sims outlined a case from March 2018 where ATM provider Cardtronics admitted that its subsidiary, DC Payments, may have offered unfair contract terms with small businesses. DC Payments cooperated with the ACCC and agreed not to enforce unfair terms for existing merchants, some of whom had six-year-old agreements.

Carnell said the problem of unfair contract terms is widespread in the SME community, and it took 18 months after the initial changes to get the contracts of Australia’s big four banks compliant, for example.

Carnell said it was unreasonable to expect small businesses to take legal action against larger companies over unfair contract terms in many cases, which leave many vulnerable to exploitation under current rules.

“Most companies do the right thing and are willing to negotiate and remove those clauses, but that said, there are those … that will just stand on the steps of court and remove the clause and there’s no penalty,” she said.

Á two-year review of the changes is slated for November and both the Ombudsman and the ACCC are preparing to push for the rules to be strengthened.

Aside from a push to expand the penalties associated with unfair contract terms, Carnell said that the definition of what constitutes a small business contract also needed to be addressed.

Under current laws, small business contracts only extend to businesses that employ fewer than 20 people, and where the payable amount in the contract does not exceed $300,000 upfront or, if the contract is for a year or more, $1 million.

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Matthew Elmas

Matthew is the news editor at SmartCompany.

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