Unfair contract term protections for consumers
This information sheet gives guidance on how the law deals with unfair terms in consumer contracts for financial products and services. It describes the protections that are available for consumers and ASIC's expectations of businesses.
- What is a consumer contract?
- What is a standard form contract?
- Which contracts are covered?
- Which contracts and terms are excluded?
- When is a term of a consumer contract unfair?
- What happens if a court finds a term is unfair?
- What can I do if I think a term in my contract is unfair?
- What has ASIC done since the unfair contract term protections for consumers came into effect?
A consumer contract is a contract for:
- a financial product, or
- the supply or possible supply of financial services.
At least one of the parties to the contract must be an individual who is acquiring the financial product or service wholly or predominantly for personal, domestic or household use or consumption.
The law does not define a ‘standard form contract’. However, in broad terms, a standard form contract is one that has been prepared by one party to the contract and is not subject to negotiation between the parties – that is, it is offered on a ‘take it or leave it’ basis.
If a consumer alleges that a contract is a standard form contract, the contract is presumed to be a standard form contract unless proved otherwise.
In determining whether a contract is a standard form contract, a court may take into account any relevant matter, but must take into account whether:
- one of the parties has all or most of the bargaining power relating to the transaction
- the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
- another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented
- another party was given an effective opportunity to negotiate the terms of the contract
- the terms of the contract take into account the specific characteristics of another party or the particular transaction.
The unfair contract terms law applies only to 'standard form' consumer contracts.
Consumers and investors enter into standard form contracts every day for financial products and financial services. Contracts for home loans, credit cards and client or broker agreements, for example, are almost certainly standard form contracts.
Individually negotiated contracts are not covered by the unfair contract terms law. A number of other exceptions also apply.
The unfair contract terms law does not cover:
- insurance contracts regulated under the Insurance Contracts Act 1984
- the constitutions of companies, managed investment schemes or other kinds of bodies.
The following specific contract terms are also excluded:
- terms that define the main subject of the contract (i.e. the goods or services that are acquired under the contract, or a term that is necessary for the supply of goods or services to occur)
- terms that set the upfront price payable
- terms that are required or expressly permitted by a law of the Commonwealth, or a state or territory.
What is the upfront price payable?
The 'upfront price payable' means the amount disclosed to the consumer at or before the time the contract is entered into.
Any future payments will be included in the upfront price as long as they are clearly disclosed to the consumer at or before the time the contract is entered into.
The upfront price does not include any other fees or charges that are contingent on the occurrence or non-occurrence of an event (e.g. loan default fees).
Example: Upfront price payable for a consumer contract
The upfront price payable for a mortgage includes the amount borrowed (principal), the interest payable and any fees disclosed at the time the contract is entered into. It does not include contingent fees, such as fees arising from a default on the loan.
The principal and interest cannot be challenged under the unfair contract terms law because they form part of the upfront price payable.
Only a court can determine whether a contract term is unfair. In deciding whether a term is unfair, a court must consider the extent to which the term is transparent, as well as the contract as a whole. The court may also consider other matters.
Meaning of 'unfair'
A term in a standard form consumer contract is 'unfair' if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
- the term is not reasonably necessary to protect the legitimate interests of the party that would benefit from its inclusion
- the term would cause financial or other detriment (e.g. delay) to a consumer if it were to be applied or relied on.
Transparency of the term
A term is considered to be 'transparent' if it is:
- expressed in reasonably plain language
- presented clearly
- readily available to any party affected by the term.
Terms that may not be transparent include terms that are hidden in the fine print or schedules, or terms that are phrased in legal, complex or technical language. However, a term that is transparent could still be found to be unfair.
The contract as a whole
The court must also assess the fairness of a particular term in the context of the contract as a whole, including any other terms that may offset the fairness of the term.
For example, a potentially unfair term may be counterbalanced by additional benefits being offered to the other party. This means that a term could be unfair in one contract but not unfair in another.
If a court finds that a term in a contract is unfair, it can make a range of orders, including:
- declaring all or part of a contract to be void
- varying a contract
- refusing to enforce some or all of the terms of a contract or arrangement
- directing a party to refund money or return property to the consumer affected
- directing a party to provide services to the consumer affected at the party's expense.
If a court finds that a term in a standard form contract is unfair, the term is void. This means that the term is treated as if it never existed. However, the contract will continue to bind parties if it is capable of operating without the unfair term.
If a court has declared that a term is unfair and a party subsequently seeks to apply or rely on the unfair term, it will be treated as a contravention of the Australian Securities and Investments Commission Act 2001. The remedies available include:
- an injunction
- an order to provide redress to the consumer affected
- any other orders the court considers appropriate.
You can make a complaint directly to your financial services provider. If they cannot resolve your complaint, you may be able to take your complaint to an external dispute resolution scheme (e.g. the Financial Ombudsman Service (FOS) or the Credit and Investments Ombudsman (CIO)) if the provider is a member of the scheme and the dispute falls within their jurisdiction.
You can also make a complaint directly to ASIC. Information Sheet 153 How ASIC deals with reports of misconduct (INFO 153) explains how ASIC handles complaints.
We do not generally act for individuals and can only take action if the matter is within our areas of responsibility. We are more likely to take action when it will be in the wider public interest and in line with ASIC's objectives of fair and transparent markets, and confident and informed investors and consumers.
It is not ASIC's role to endorse contract terms or to state 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, may apply to a court to have a term declared unfair if it is in the public interest to do so.
ASIC is responsible for enforcing the unfair contract terms law in relation to financial products and services. For other goods and services, enforcement of the unfair contract terms law is shared between the Australian Competition and Consumer Commission (ACCC) and the state and territory consumer protection agencies.
- For unfair terms in contracts for non-financial products and services, contact the ACCC.
Since the unfair contract term protections for consumers came into effect, ASIC has successfully negotiated to have a number of unfair terms removed from standard form consumer contracts.
Previous action by ASIC in relation to consumer contract terms that we considered could be unfair are detailed in the list of media releases below:
- 15-229MR Consumers can reclaim funds on expired travel money cards following ASIC action (25 August 2015)
- 14-262MR ASIC concerns see CBA release $2.2 million for 45,000 travel card customers (8 October 2014)
- 14-021MR Unlicensed rental companies enter into enforceable undertaking with ASIC (4 February 2014)
- 13-022MR ASIC accepts enforceable undertaking from Mr Rental (12 February 2013)
- 11-12AD ASIC obtains changes to contract terms under new consumer law (20 January 2011)
Where can I get more information?
- A guide to the unfair contract terms law, published jointly by the ACCC, ASIC and the state and territory consumer protection agencies
- ASIC Media Release (10-234MR) ASIC sets out expectations of lender practices on mortgage early termination fees (10 November 2010)
- ASIC Regulatory Guide 220 Early termination fees for residential loans: Unconscionable fees and unfair contract terms (RG 220)
Please 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.