Changes to the Legislation Concerning Unfair Contract Terms: What Insurers Need to Know

The following article was published by Lexology on 11 March 2021:

Amendments to the provisions concerning unfair contract terms contained in two pieces of Commonwealth legislation will take effect during 2021.  Those amendments will broaden the scope and reach of the relevant provisions.

One of the key reforms means that, going forward, the provisions will apply to insurance contracts.  

This article summarises the current regime and considers the potential impact upon insurers using standard form contracts.

Where do I find the legislation concerning unfair contract terms?

One set of provisions concerning unfair contract terms is contained in the Australian Consumer Law (ACL), which appears as Schedule 2 to the Competition and Consumer Act 2010 (Cth). 

Relevantly for insurers, those provisions are mirrored in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), in relation to contracts that are:

• financial products; or
  
  
• for the supply, or possible supply, of services that are financial services.

The ASIC Act provisions would apply already to insurance contracts but for section 15 of the Insurance Contracts Act 1984 (Cth) (ICA).  Under that section, however: 

• a contract of insurance is not capable of being made the subject of relief under any Commonwealth Act; and
  
  
• “relief” includes the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable (but does not include relief in the form of compensatory damages).

As explained below, that position will change, effective 5 April 2021.  From that date, the provisions concerning unfair contract terms will apply to insurance contracts.

What is the substance of the legislation concerning unfair contract terms?

A term of a consumer contract or small business contract is void if:

• the term is unfair; and
  
  
• the contract is a standard form contract,

(s.23(1) of the ACL and s.12BF(1) of the ASIC Act).

The ACL definitions of “consumer contract” and “small business contract” referred to below apply to contracts for a supply of goods or services or a sale or grant of an interest in land.  As noted above, the ASIC Act provisions apply to contracts that are financial products or for the supply, or possible supply, of financial services.

Under the legislation, the relevant contract continues to bind the parties if it is capable of operating without the unfair term (s.23(2) of the ACL and s.12BF(2) of the ASIC Act).

What is a “consumer contract”?

A “consumer contract” is a contract for supply to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption (s.23(3) of the ACL and s.12BF(3) of the ASIC Act).

What is a “small business contract”?

Under the current legislation, a contract is a “small business contract” if:

• at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  
  
• either of the following applies:
  
  
  • the upfront price payable under the contract does not exceed $300,000; or
    
    
  • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million,

(s.23(4) of the ACL and s.12BF(4) of the ASIC Act).

What is a “standard form contract”?

Importantly, if a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise (s.27(1) of the ACL and s.12BK(1) of the ASIC Act).

In determining whether a contract is a “standard form contract”, a Court may take into account such matters as it thinks relevant, but must take into account the following:

• whether one of the parties has all or most of the bargaining power relating to the transaction;
  
  
• 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 of the contract other than the terms referred to in [s.26(1) of the ACL or s.12BI(1) of the ASIC Act] in the form in which they were presented;
  
  
• whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in [s.26(1) of the ACL or s.12BI(1) of the ASIC Act];
  
  
• whether the terms of the contract other than the terms referred to in [s.26(1) of the ACL or s.12BI(1) of the ASIC Act] take into account the specific characteristics of another party or the particular transaction; and
  
  
• any other matter prescribed by the regulations, 

(s.27(2) of the ACL and s.12BK(2) of the ASIC Act).

What contractual terms are carved out from the legislation?

The relevance of the above “carve outs” relating to s.26(1) of the ACL and s.12BI(1) of the ASIC Act is that, under those sections, the provisions concerning unfair contract terms do not apply to a term of a consumer contract or small business contract to the extent (but only to the extent) that the term:

• defines the main subject matter of the contract; or
  
  
• sets the upfront price payable under the contract; or
  
  
• is a term required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.

What contract terms are “unfair” under the legislation?

A term of a consumer contract or small business contract is unfair if:

• it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and 
  
  
• it is not reasonably necessary in order to protect the legitimate interests of the party that would be advantaged by the term; and
  
  
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on,

(s.24(1) of the ACL and s.12BG(1) of the ASIC Act).

In determining whether a term of a contract is “unfair”, a Court may take into account such matters as it thinks relevant, but must take into account:

• the extent to which the term is transparent; and
  
  
• the contract as a whole,

(s.24(2) of the ACL and s.12BG(2) of the ASIC Act).

A term is “transparent” if the term is:

• expressed in reasonably plain language; and
  
  
• legible; and
  
  
• presented clearly; and
  
  
• readily available to any party affected by the term.

(s.24(3) of the ACL and s.12BG(3) of the ASIC Act).

Further, a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise (s.24(4) of the ACL and s.12BG(4) of the ASIC Act).

The legislation contains a non-exhaustive list of 14 examples of the kinds of terms of a consumer contract or small business contract that may be unfair (s.25 of the ACL and s.12BH(1) of the ASIC Act).  The examples provided are as follows:

• a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  
  
• a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  
  
• a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  
  
• a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  
  
• a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  
  
• a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  
  
• a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied or the interest in land to be sold or granted (under the ACL provisions), or to vary the financial services to be supplied (under the ASIC Act provisions) under the contract;
  
  
• a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  
  
• a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  
  
• a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  
  
• a term that limits, or has the effect of limiting, one party’s right to sue another party;
  
  
• a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
  
  
• a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; and
  
  
• a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

Case example: ACCC v Bytecard Pty Limited

The case of Australian Competition and Consumer Commission v Bytecard Pty Ltd (unreported, Federal Court Proceedings VID301/2013) provides a useful illustration of the way in which the legislative provisions concerning unfair contract terms can operate.

In that case:

• Bytecard was an Internet Service Provider that provided internet connectivity, domain registration, hosting and web design;
  
  
• the Federal Court declared that 4 terms within ByteCard’s standard form contract were unfair, in circumstances where those terms:
  
  
  • enabled ByteCard to unilaterally vary the price under an existing contract without providing the customer with a right to terminate the contract;
    
    
  • required the consumer to indemnify ByteCard in any circumstance, even where the contract had not been breached and the liability, loss or damage may have been caused by ByteCard’s breach of the contract; and
    
    
  • enabled ByteCard to unilaterally terminate the contract at any time with or without cause or reason; and
    
    
• the reasons why the terms were unfair were that they:
  
  
  • created a significant imbalance in the parties’ rights and obligations;
    
    
  • were not reasonably necessary to protect ByteCard’s legitimate interests; and
    
    
  • if applied or relied upon by ByteCard, would cause detriment to a customer.

How is the legislation changing?

A number of amendments to the legislative provisions concerning unfair contract terms are proposed to take effect during 2021. 

 As a package, the amendments are broad-ranging and significant.  Among other things, they include:

• large increases in the abovementioned thresholds for what constitutes a “small business contract” (so that there will be no limit on the upfront price payable under the contract, the maximum number of employees will increase from 20 to 100 and there will also be an alternative threshold of maximum annual turnover not exceeding $10 million;
  
  
• the introduction of civil penalties for using unfair contract terms; and
  
  
• greater flexibility for the Courts in determining appropriate remedies where unfair contract terms are used.

One of the key reforms, however, concerns insurance contracts under the ICA.  That reform has been implemented by the enactment of the Financial Sector Reform (Hayne Royal Commission Response - Protecting Consumers (2019 Measures)) Act 2020 (Cth).  A consequence of that legislation is that contracts of insurance under the ICA will no longer be excluded from relief relating to the effect of section 12BF of the ASIC Act. 

As a result:

• insurance contracts which are entered into or renewed on or after 5 April 2021; or
  
  
• terms of insurance contracts which are varied on or after 5 April 2021,

will be subject to the ASIC Act provisions concerning unfair contract terms.

Further, in relation to insurance contracts under the ICA specifically:

• for the purposes of the abovementioned “carve out” under s.12BI of the ASIC Act, a term will be regarded as “defining the main subject matter of the contract” only to the extent that it describes what is being insured; and
  
  
• the carve out will apply if the term is a “transparent” term that:
  
  
  • is disclosed at or before the time the contract is entered into; and
    
    
  • sets an amount of excess or deductible under the contract.

Potential impacts upon insurers

One may readily appreciate why the application of the legislation concerning unfair contract terms to insurance contracts under the ICA is a significant development for insurers.

In particular:

• the types of insurance contracts covered by the ICA include life insurance and general insurance (among others);
  
  
• many such contracts are:
  
  
  • “consumer contracts”; or
    
    
  • “small business contracts” (particularly in view of the upcoming amendments to that definition);

and are also “standard from contracts”, within the meaning of those expressions in the legislation; and

• many such contracts also include provisions of the kind referred to in the legislation as examples of terms that may be unfair (see above).

Practical tips

As noted above, the changes proposed to take effect during 2021 include not only the extension of the legislation concerning unfair contract terms to insurance contracts but also other amendments, including with respect to the remedies which a Court may impose for the use of unfair terms.

Together, those changes mean that insurers will soon be confronted with the need to comply with a regime that did not previously apply to them, coupled with potentially serious consequences (including civil penalties) for any failure to comply.

In those circumstances, insurers should review their standard form contracts with a view to removing or altering any terms which might be held by a Court to be ”unfair” within the meaning of the amended legislation.