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This information sheet (INFO 210) explains how the law protects consumers from unfair terms in contracts for financial products and services. It describes how a consumer can challenge a term under the unfair contract terms law in the Australian Securities and Investments Commission Act 2001 (ASIC Act), what happens if a term is unfair, and what ASIC can do. When does the unfair contract terms law apply? What makes a contract term unfair? What happens if a term is unfair? What a consumer can do if they think a contract term is unfair What ASIC can do about unfair contract terms When does the unfair contract terms law apply?The unfair contract terms law applies to a term in a contract if:
For an insurance contract, the unfair contract terms law will apply if the insurance contract is entered into or renewed on or after 5 April 2021, or a term in an existing contract is varied on or after 5 April 2021. Consumer contractAt least one party to the contract must be a consumer – that is, an individual who is acquiring a financial product or service under the contract wholly or predominantly for personal, domestic or household use or consumption. A consumer who is a beneficiary under an insurance contract, but is not a party to the contract, may be protected by the unfair contract terms law. A consumer is a beneficiary but not a party if they are not expressly stated on the certificate of insurance to be the insurance policyholder, but they otherwise stand to benefit directly from a claim under the policy. The unfair contract terms law also applies to small businesses: see Information Sheet 211 Unfair contract term protections for small businesses (INFO 211). Standard form contractThe unfair contract terms law covers standard form consumer contracts for financial products or the supply, or possible supply, of financial services. A 'standard form contract' is a contract that has been prepared by one party to the contract (the business offering the product or service) without negotiation between the parties. In other words, it is offered on a ‘take it or leave it’ basis. Consumers commonly enter into standard form contracts for financial products and services such as personal or home loans, bank accounts, credit cards, insurance cover or financial advice. If a consumer alleges that a contract is a standard form contract, the contract is presumed to be a standard form contract unless proven otherwise. In determining whether a contract is a standard form contract, a court may take into account any relevant matter, but must consider whether:
Contracts and terms that are not coveredThe unfair contract terms law in the ASIC Act does not cover the following contracts:
There are also specific types of contract terms that are excluded: see Table 1. Table 1: Terms that are not covered by the unfair contract terms law
The following are examples of terms that cannot be considered under the unfair contract terms law.
Russell enters into a personal loan contract with a lender for $50,000, repayable over five years. The interest rate on the loan is 5% per year. There is an establishment fee of $1,000, and a late fee of $50 is payable for each late payment. Terms that state the upfront price payable - including the amount borrowed, the interest rate and the establishment fee of $1,000 - and that are disclosed when Russell takes out the contract, cannot themselves be considered unfair. These terms set the upfront price payable and define the main subject matter of the contract. However, the late fee can be considered under the unfair contract terms law.
Paula buys a home building insurance policy. The annual premium of $1,000 and the amount of excess for each insured event are clearly disclosed in her contract. As the amount of the excess is clearly disclosed at the time Paula enters into the insurance contract, it cannot be considered under the unfair contract terms law. What makes a contract term unfair?Only a court can determine whether a contract term is unfair. A term in a standard form consumer contract is 'unfair' if it:
TransparencyWhen a court decides whether a term is unfair, it must consider the extent to which the term is transparent. A term is 'transparent' if it is legible, expressed in reasonably plain language, presented clearly, and readily available to any party affected by the term. A term may not be transparent if, for example, it is hidden in the fine print or written in legal or complex language. Transparency is, however, just one of a number of factors a court will consider. A term that is transparent could still be unfair. ContextThe court must assess the fairness of a term in the context of the contract as a whole. A potentially unfair term may be counterbalanced by additional benefits being offered to the consumer. This means that a term could be unfair in one contract but not unfair in another. The court may also consider any other matters it thinks relevant, and will determine whether unfairness arises in a particular contract on a case-by-case basis. Examples of unfair termsThe following are examples of consumer contract terms that may be unfair under the unfair contract terms law.
Larissa and Mehmet buy a home building insurance policy for their family home. Under a term in the policy, if their home is damaged or destroyed, the insurer can choose to pay a cash settlement, rather than rebuild or repair the home. The term allows the insurer to settle a claim by paying Larissa and Mehmet the amount it would cost the insurer to rebuild or repair the home. This term may be unfair because the insurer may calculate the cost of rebuilding or making repairs to be less than the amount it would actually cost Larissa and Mehmet themselves to rebuild or make repairs.
Allegra enters into a loan contract for $20,000 to buy a new car. The contract contains a term which allows the lender to vary any term or condition of the contract if the lender gives Allegra five days' notice in writing. The contract permits this even if the lender, for example, increases its fees significantly. The term may be unfair because it gives the lender broad discretion to unilaterally vary any term or condition in unspecified ways, without giving Allegra a real and reasonable opportunity to exit the contract without penalty rather than accept the variation. For example, if Allegra needs to refinance or sell assets to exit and repay the loan, she is likely to need more than five days.
In May 2021, Bern buys a disability insurance policy. The unfair contract terms law may apply to certain terms in his insurance policy as the policy was entered into after 5 April 2021. A term in the insurance contract states that the policy provides cover in the event of a heart attack. The contract defines ‘heart attack’ with reference to at least three specific diagnostic criteria including blood test results, electrocardiographic changes and symptoms. In December 2021, Bern has a heart attack on the train going home. In hospital his doctors run diagnostic tests and confirm he had a heart attack. However, he does not meet at least three of the required diagnostic criteria in his policy’s definition of a heart attack. Bern's insurer rejects his claim on the basis that he does not meet the policy definition. The policy definition of a heart attack is outdated compared with the universal medical definition of 'heart attack' used by the doctors in the hospital. Bern makes a complaint about the insurer’s decision, as his doctors have told him he has had a heart attack, and Bern believes he is covered for a heart attack. The definition of heart attack in Bern's policy may be unfair on the basis that it is outdated, inaccurate and restrictive. What happens if a term is unfair?If a court finds that a term in a standard form contract is unfair, the term will be void. This means that the term is treated as if it had never existed. However, the contract will continue to bind the parties if it can operate without the unfair term. If a court finds that a term is unfair, it can make a range of orders, including to:
If a court has declared that a term is unfair and a business subsequently tries to apply or rely on the unfair term, the business will contravene the ASIC Act. A court can then:
What a consumer can do if they think a contract term is unfairIf a consumer thinks that a term in their contract is unfair, they can challenge it. A consumer can do this even if they are only a beneficiary under a consumer insurance contract and are not a party to the contract (i.e. they are not expressly stated on the certificate of insurance to be the insurance policyholder but they otherwise stand to benefit directly from a claim under the policy). For example, if a consumer is a beneficiary under a life policy and the policyholder passes away, the consumer can challenge a term in that life policy if they think that the term is unfair. Here is what they can do:
For more information, see ASIC Moneysmart’s guidance on How to complain and Information Sheet 174 Disputes with financial firms (INFO 174). What ASIC can do about unfair contract termsTo make a complaint to ASIC about an unfair contract term, a consumer can lodge a report of misconduct online: see Information Sheet 153 How ASIC deals with reports of misconduct (INFO 153). We do not generally take action for individuals unless it is in the wider public interest, and can only take action if the matter is within our area of responsibility. We cannot endorse contract terms or declare that they are unfair. Only a court can decide whether or not a term is unfair. ASIC, as well as any party to the contract, or a beneficiary under an insurance contract, can apply to a court to have a term declared unfair. ASIC has successfully negotiated to have a number of unfair terms removed from standard form consumer contracts since this regime came into effect. For details, see the media releases listed at the end of this information sheet. ASIC is responsible for enforcing the unfair contract terms law only for financial products and services. For other goods and services, responsibility is shared between the Australian Competition and Consumer Commission (ACCC) and the state and territory consumer protection agencies. For more information about unfair terms in contracts for non-financial products and services, contact the ACCC. Where to get more informationFor more information on the unfair contract terms law and what ASIC has done, see these guides and releases: A consumer can also call ASIC on 1300 300 630 or ask a question online. Important noticePlease note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.
This is Information Sheet 210 (INFO 210), issued in February 2016 and updated in October 2020. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. An amendment to Table 1 was published on 23 October 2020 to clarify the upfront price payable for insurance contracts. |