Australia: Directors & Officers: The "carbon cops" are coming: New exposures for D&Os

Insurance update
Last Updated: 20 June 2012
Article by Ben Allen and Nick McHugh

Insurance Commentary: Katherine Czoch

Like all representations made by businesses, claims regarding the impact of carbon pricing must not mislead or deceive or be capable of doing so. To avoid falling foul of the Australian Consumer Law, all claims relating to any cost pass-through once the carbon price comes into effect on 1 July 2012 must be both justifiable and capable of being substantiated. This is especially so in the case of indirect costs, where much more ambiguity arises.

In certain circumstances, the ACCC or ASIC may pursue pecuniary penalties and other personal orders against directors and officers of companies who are involved in the making of misleading claims in relation to the cost impact of the carbon price. Insurers could see a rise in claims on Directors' and Officers' Liability Policies with directors and officers seeking cover for such penalties and defence costs. This is particularly so because the Australian Consumer Law prohibits companies from indemnifying directors and officers for such liabilities.


When the carbon price is introduced on 1 July 2012, many businesses will face increased costs. As a result, businesses may choose to pass that increase onto consumers. However, under Australian Consumer Law businesses will need to be very careful how they go about doing so. While businesses are generally under no legal obligation to explain price increases to consumers, they must ensure that when they attribute price increases to the carbon price, their claims are both reasonable and substantiated. In this regard, the ACCC will play a significant role in ensuring that businesses do not mislead consumers about the effects of the carbon price.

Essentially, this will involve the examination of the basis for which a carbon claim is made and the impression which the claim creates to the consumer. Consequently, a business needs to consider carefully their circumstances and be sure that carbon price claims can be justified. A recent situation that fell foul of the ACCC involved businesses in the solar panel industry claiming that the carbon price would increase electricity costs by 40 per cent per year, when government estimates put the increase in the first year of the scheme at less than 10 per cent.

Misleading and deceptive claims

The main provisions in the Australian Consumer Law are sections 18 and 29(1)(i). Both sections prohibit a person from engaging in conduct that is misleading or deceptive or likely to mislead or deceive, with the latter section specifically dealing with representations concerning the price of goods or services. Under the legislation, the main issue is to determine what exactly is a false or a misleading representation. Ultimately the questions are whether a statement or action of a business is contrary to fact (that is, false) or something that has or could have affected the belief of a consumer.

The ACCC will play a significant role in ensuring that businesses do not make false or misleading claims about the carbon price increasing costs. The ACCC has powers under the Australian Consumer Law and has been given specific funding to carry out these powers, which includes an enforcement role against businesses who contravene the law. Central to this role will be the power to issue "substantiation notices". Though a direct comparison is not possible, by way of analogy, during the 18 months after the introduction of the GST in 2000, the ACCC carried out about 3,000 formal investigations of businesses and received over 35,000 complaints from consumers. Whether a similar situation arises here remains to be seen.

What can businesses do? - underwriting considerations

Step one for businesses will be to ensure that they have a compliance program in place, especially for sales and marketing staff. A system to capture all sources capable of substantiating any price increases to be attributed to carbon price increases (whether direct or indirect) will also be vital. This will include retaining all relevant invoices and statements by energy and gas suppliers, invoices and statements by input suppliers, invoices and statements by transport companies, information from industry associations, information from Government and projections from business advisors as to the likely price impact. The use of credible (and justifiable) business calculators can also be included in any such system. In some cases, businesses may decide to have their carbon cost pricing model audited by appropriate external advisors.

Businesses must also be mindful to ensure that they distinguish between cost increases that are a result of a pass-through of direct costs (for example, where the cost associated with the carbon price increase is clearly identified and itemised on supplier invoices and passed on to a consumer) and those which are a result of an indirect cost increase (such as those arising from increased electricity prices, higher working capital costs or bad debt amounts as a percentage of turnover). Obviously in the case of indirect costs, businesses will need to ensure that they are able to properly substantiate those costs that are passed on and attributed to the carbon price increase, which may be a difficult undertaking in some instances.

Business with a solid compliance plan will be at much lower risk of breaching the Australian Consumer Law and its directors and officers less likely of having claims brought against them.

Proceedings initiated by the ACCC against Directors and Officers

It is likely that the ACCC will take a very active role in investigating and enforcing the provisions of the Australian Consumer Law. On 14 November 2011, the ACCC released A Guide to Business about lawful and unlawful claims on the effect of the carbon price and this has been supplemented by the recent release of 5 "Business Snapshot" guidance papers which aim to provide assistance to businesses in substantiating claims made in relation to carbon price increases.

For misleading representations in breach of section 29(1)(i) of the Australian Consumer Law, the ACCC may take action against directors and officers of companies who have been directly or indirectly, knowingly concerned in a breach of the provision in any way. For individuals, pecuniary penalties may be awarded of up to $220,000 and the ACCC may also seek orders disqualifying the directors or officers concerned from managing corporations for a period the court considers appropriate.

Can directors and officers be indemnified?

There are two sources of indemnity usually available to directors and officers. The first in an indemnity from the company, usually pursuant to a deed of indemnity and the second is a directors' and officers' liability insurance policy.

Section 199A of the Corporations Act already prohibits a company from providing an indemnity (other than for legal costs) to directors and officers for a liability which is:

  • owed to the owed to the company
  • for a pecuniary penalty order or a compensation order
  • owed to someone other than the company and arising out of bad faith

Indemnity for defence costs is usually permitted providing that it is repaid if there is a finding in respect of the matters for which indemnity is prohibited by section 199A.

In addition to the above prohibitation, section 229 of the Australian Consumer Law now also makes it an offence for a company to indemnify its directors and officers for:

  • a liability to pay a pecuniary penalty under section 224 of the Australian Consumer Law
  • defence costs if the director or officer is found to have such a liability.

Presently, despite the prohibition on indemnifying the liabilities of directors and officers discussed above, it is open to companies to take out D&O liability policies with coverage for these events unless such coverage is prohibited by sections 199B and 199C of the Corporations Act.

Importantly, those provision prohibit a company from paying premium for insurance of a director or officer against a liability (other than defence costs) arising out of conduct involving a wilful breach of duty in relation to the company. Whilst the provision can arguably be circumvented by directors and officers paying their own premium, it remains to be seen if the Australian Consumer Law introduces any similar obstacles to insurance on public policy grounds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Ben Allen
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions