Unfair contract term protections for consumers

When does the unfair contract terms law apply?

What makes a contract term unfair?

What happens if a term is unfair?

What can a consumer do if they think a contract term is unfair?

What can ASIC 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 the contract is:

• a consumer contract
• a 'standard form contract', and
• for a financial product or service.

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 was varied on or after 5 April 2021.

Consumer contract

At 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 contract

The 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 largely on a ‘take it or leave it’ basis.

However, a contract may still be a standard form contract even when:

• the consumer has the opportunity to negotiate changes to the contract, provided the changes are minor or insubstantial
• the business allows the consumer to select a term from a range of pre-prepared options, and/or
• the consumer is entering into both the first contract and another contract with the business, and has the opportunity to negotiate terms for that other contract.

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:

• the business offering the product or service has all or most of the bargaining power relating to the transaction
• the contract was prepared by the business before any discussion with the consumer about the transaction
• the business has repeatedly used the same or a substantially similar contract, and if so, how often
• the consumer was in effect required to accept or reject the contract as it was offered (i.e. on a 'take it or leave it' basis)
• the consumer was given an effective opportunity to negotiate the terms of the contract, and
• the terms of the contract take into account the specific characteristics of the consumer or the particular transaction.

Contracts and terms that are not covered

The unfair contract terms law in the ASIC Act does not cover the following contracts:

• individually negotiated contracts
• the constitutions of companies, managed investment schemes or other kinds of bodies
• medical indemnity insurance contracts
• insurance contracts that are not contracts for financial products or services under the ASIC Act, including contracts for private health insurance, compulsory third-party insurance, and workers compensation insurance
• insurance contracts entered into or renewed before 5 April 2021 (but terms in existing contracts varied on or after 5 April 2021 are covered)
• guaranteed renewable life insurance policies made or entered into before 5 April 2021 and subsequently renewed on or after 5 April 2021
• certain life insurance policies made or entered into before 5 April 2021 which, subsequent to 5 April 2021, have been replaced, linked or unlinked

Note: Linked life insurance policies bring different life insurance products together with a combined amount of cover. The premium for linked policies is typically lower than the total cost of each product. Sometimes linked policies can be unlinked to make them standalone policies.

• the operating rules of licensed financial markets or clearing and settlement facilities, or
• real time gross settlement systems approved as payment and settlement systems by the Reserve Bank of Australia.

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

Type of term	Description
Terms that define the main subject matter of the contract	The 'main subject matter' of a contract is the product or service acquired under the contract (i.e. the basis for the existence of the contract). For insurance contracts, the main subject matter is limited to what is being insured. For example, under a comprehensive car insurance policy, the main subject matter is the car that is being insured. The term that describes the car cannot be considered under the unfair contract terms law.
Terms that set the upfront price payable	The 'upfront price payable' is the amount disclosed to the consumer for supply of the product or service at or before the time the contract is entered into. It does not include fees and charges for something that may or may not happen during the contract. For example, for a home loan contract the upfront price includes the amount borrowed (principal), the interest rate, and any establishment fees disclosed when the contract is entered into, but not loan default fees as these fees are contingent on the borrower defaulting. For insurance contracts, the upfront price payable is the premium. The amount of the premium is also affected by the amount of the excess or deductible payable. While the excess or deductible does not form part of the upfront price payable, a term that sets the amount of the excess or deductible is also not covered by the unfair contracts terms law if it is a transparent term that is clearly disclosed before or when the contract is entered into.
Terms that are required or expressly permitted by a law of the Commonwealth, or a state or territory	These terms cannot be considered under the unfair contract terms law.
Terms that are taken to be included in a contract by operation of a law of the Commonwealth, or a state or territory	These terms are excluded to the extent that the relevant law mandates their inclusion. However, if the term is included in such a way that would go beyond the requirement of the law and is unfair, then the unfair contract terms protection can still be applied.
Terms that result in other contract terms being included in a contract because of the operation of another law of the Commonwealth, or a state or territory	These terms are excluded to the extent that the provisions would prevent the other terms from being included or operating as required by the law. However, if the term is included in such a way that would go beyond the requirement of the law and is unfair, then the unfair contract terms protection can still be applied.

The following are examples of terms that 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:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract
• is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term, and
• would cause detriment (financial or otherwise) to a consumer if it were to be applied or relied on.

Transparency

When 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.

Context

The court must assess the unfairness of a term in the context of the contract as a whole.

Whether a term is unfair can depend on its effect when read together with the other terms of the contract. 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 terms

The following are examples of consumer contract terms that may be unfair under the unfair contract terms law.

 

 

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.

A pecuniary penalty may be imposed if a business proposes, applies, relies on, or purports to apply or rely on, an unfair contract term. Each unfair term included in a standard form contract may attract a separate penalty.

If a court finds that a term is unfair, it can make a range of orders, including to:

• declare all or part of the contract to be void
• vary the contract
• refuse to enforce some or all of the terms of the contract
• prevent the same or a substantially similar term from being included in any future standard form small business or consumer contract
• disqualify a person from managing a corporation
• require the business to publish information specified by the court
• direct the business to refund money or return property to the consumer affected, or
• direct the business to provide services to the consumer affected, at the business's expense.

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:

• grant an injunction
• order that the business provides redress to the consumer affected, or
• make any other orders the court considers appropriate.

What can a consumer do if they think a contract term is unfair?

If 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:

• Step 1: Complain to the financial services provider 
  First, a consumer can make a complaint to the financial services provider they have the contract with to try to get the result they want. The financial services provider will deal with the complaint through its internal dispute resolution process.

  Also, consumer contracts that are covered by an industry code may have additional protections, including protections similar to those provided under the unfair contract terms law. Examples of industry codes are:

• the Code of Banking Practice administered by the Australian Banking Association
• the Customer Owned Banking Code of Practice administered by the Customer Owned Banking Association
• the General Insurance Code of Practice administered by the Insurance Council of Australia, and
• the Life Insurance Code of Practice administered by the Financial Services Council.

• Step 2: Complain to the Australian Financial Complaints Authority
  If a consumer is unhappy with how the business responds to the complaint, they can complain to the Australian Financial Complaints Authority (AFCA). AFCA provides consumers and small businesses with a free and independent dispute resolution scheme to assist with resolving financial complaints.

• Step 3: Apply for a court to declare the term unfair
  Depending on the result of the complaint to AFCA, a consumer can apply to a court for a declaration that the term is unfair. If the consumer is successful, the term will be void.

For more information, see ASIC Moneysmart’s guidance on How to complain and Information Sheet 174 Disputes with financial firms (INFO 174).

What can ASIC do about unfair contract terms?

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 taken court action to have unfair terms removed from standard form consumer contracts since this regime came into effect.

We cannot endorse contract terms or declare that they are unfair. Only a court can decide whether or not a term is unfair.

To 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.

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 information

For more information on the unfair contract terms law and what ASIC has done, see these guides and releases:

• Unfair contract terms: A guide for businesses and legal practitioners – an industry report by the ACCC, ASIC and the state and territory consumer protection agencies (as at October 2023, this guide did not reflect the extension of the law to insurance contracts, or the introduction of the civil penalty regime)
• 20-123MR Court declares Bendigo and Adelaide Bank contract terms unfair (29 May 2020)
• 18-262MR Prospa removes unfair loan terms for small business borrowers and guarantors (7 September 2018)
• 18-073MR ASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
• 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).

Consumers can also call ASIC on 1300 300 630 or ask a question online.

Important notice

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. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

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.