This is Information Sheet 210 (INFO 210). It explains how the law protects consumers from unfair terms in contracts for financial products and services. It also outlines what consumers can do if they think a contract term is unfair.
The unfair contract terms law protects consumers (including small business consumers) from unfair terms in standard form contracts for financial products and services and insurance. These unfair contract terms are illegal under the ASIC Act 2001 (see section 12BF).
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 was 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.
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).
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.
The unfair contract terms law in the ASIC Act does not cover the following:
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 (Note: 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, on or after 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.
Example 1: Upfront price payable for a loan contract
Russell enters into a personal loan contract with a lender for $50,000, repayable over five years. The interest rate on the loan is 10% per year. There is an establishment fee of $1,000, and a late fee 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, late fees and any other contingent fees are subject to the unfair contract terms law and could breach the law if they meet the definition of ‘unfair’ (as described under ‘What makes a contract term unfair?’).
Example 2: Transparency of the excess under an insurance contract
Paula buys a home building insurance policy. The amount of excess for each insured event is 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?
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.
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.
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.
The following are examples of consumer contract terms that may be unfair under the unfair contract terms law.
Example 3: Cash settlement based on cost to the insurer
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.
Example 4: Right to unilaterally vary the contract
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.
Example 5: Outdated medical definitions in an insurance policy
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.
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 insurance 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 the consumer (or beneficiary) can do:
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:
If a consumer is unhappy with how the financial services provider 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. AFCA is an alternative to going to court, which can be expensive.
AFCA is required to do what is fair in all the circumstances when determining complaints, and can provide a range of remedies to consumers who would otherwise be bound by unfair contract terms (e.g. varying, rectifying or setting aside a contract).
For most complaints, AFCA’s decisions are binding on the financial firm (if the consumer accepts the decision). If the consumer does not accept the decision, they keep their legal rights to take the complaint to court.
If a consumer is unhappy with AFCA’s decision about their complaint, they 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.
A court can decide whether or not a term is unfair. ASIC cannot endorse contract terms or declare that they are 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 act for individuals unless it is in the wider public interest, and then only 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, see these guides and releases:
Note: This guide does not reflect the extension of the unfair contract terms protections to insurance contracts, which came into effect in April 2021, or the introduction of the civil penalty regime in October 2023.
20-123MR Court declares Bendigo and Adelaide Bank contract terms unfair (29 May 2020)
18-262MRProspa removes unfair loan terms for small business borrowers and guarantors (7 September 2018)
18-073MRASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
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.
Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.
