Are you at risk of being penalised for “vague” and “onerous” contractual terms?

Key Takeaway Points:

• There has been increasing scrutiny over the use of standard form contracts containing unfair contract terms.

• Unfair contract terms are those that (a) cause a significant imbalance in the parties' rights and obligations; (b) are no reasonably necessary to protect a party’s legitimate interests; and (c) would cause detriment to the other party if given effect.

• New and increased penalties (which could be up to $50 million) will start applying from 10 November 2023. 

On 4 April 2023, the Australian Securities and Investments Commission (ASIC), filed a case in the Federal Court against Auto & General Insurance Company Limited (Auto & General) over a contractual term which is alleged to have aided in Auto & General being able to unfairly reject consumer claims. Under the contract in question, customers were required to notify Auto & General “if anything changes about [the customers] home or contents”. ASIC came to the view that the clause: 

• imposes an obligation on customers to notify Auto & General if ‘anything’ changes about their home or contents, which would have been too onerous, vague and/or impractical;

• suggests that Auto & General has a broader right to refuse claims or reduce the amount payable under claims if the customer does not meet the notification obligation, than is available under the Insurance Contracts Act 1984; and

• could mislead or confuse the customer as to their true obligations and rights under the contract.

Accordingly, ASIC alleges that the contract term is unfair under the Australian Securities and Investments Commission Act 2001 (ASIC Act).

What are ‘unfair contract terms’?

An ‘unfair contract term’ is unenforceable in an Australian court. Whether a term is “unfair” is determined by applying a 3-limbed test set out in the ASIC Act or the Australian Consumer Law (contained in Competition and Consumer Act 2010) (ACL) as follows:

1. The term will cause a significant imbalance in the parties’ rights and obligations under the contract; and

2. The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

3. The term would cause detriment (whether this be financial or otherwise) to a party if the term was applied or relied on.

The ACL specifically protects consumers and small businesses from unfair contract terms contained in ‘standard form contracts’. ‘Standard form contracts’ refer to those where there is an imbalance in parties’ bargaining powers, the contract is based on a template with little scope for negotiations or amendments, and/or are presented on a “take it or leave it” basis. There is a presumption that a contract is a standard form contract, in that the person who prepared the contract has the onus of proving that it is not.

Recent amendments to the unfair contract term provisions

The Auto & General case follows recent amendments which significantly expand the ambit of the unfair contract terms provisions contained in the ACL and the ASIC Act, both of which demonstrate the government’s focus on enforcement (and in turn the need for businesses to review their legal documentation). 

A key change is the introduction of civil penalties under the ACL and ASIC Act for breaches of the unfair contract term prohibition, reinforced by significant increases in maximum penalties for breaches under the ACL. These penalties will take effect from 10 November 2023, and addresses the issue of the unfair contract terms provisions having largely been “toothless” until now.

A brief summary of the key changes to the law can be seen below:

How does this affect you and how can we assist?

Sarah Court, the Deputy Chair of ASIC, stated that:

‘Contract terms need to be proportionate, transparent and clear, so any obligations are easily understood and able to be realistically adhered to by customers. They must accurately describe the actual rights and responsibilities of the parties under the contract.’

It is not long until the amendments kick in. As such, we strongly recommend that you review your standard form contracts to ensure no issues arise regarding any unfair contract terms. 

Please contact us if you are unsure whether your contracts are standard form contracts containing unfair contract terms.