Unfair contract term protections for consumers
This information sheet (INFO 210) explains how the law protects consumers from unfair terms in contracts for financial products and services.
It describes how a consumer can challenge a term under the unfair contract terms law in the Australian Securities and Investments Commission Act 2001 (ASIC Act), what happens if a term is unfair, and what ASIC can do.
The unfair contract terms law applies to a term in a contract if:
- it is a consumer contract
- the contract is a 'standard form contract', and
- the contract is 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 is 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 on a ‘take it or leave it’ basis.
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 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 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, or
- insurance contracts entered into or renewed before 5 April 2021 (but terms in existing contracts varied on or after 5 April 2021 are covered).
There are also specific types of contract terms that are excluded: see Table 1.
Type of term
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 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, the excess or deductible is also not covered by the unfair contracts terms law if the amount is transparent and 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.
The following are examples of terms that cannot be considered under the unfair contract terms law.
Russell enters into a personal loan contract with a lender for $50,000, repayable over five years. The interest rate on the loan is 5% per year. There is an establishment fee of $1,000, and a late fee of $50 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, the late fee can be considered under the unfair contract terms law.
Paula buys a home building insurance policy. The annual premium of $1,000 and the amount of excess for each insured event are 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.
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.
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 fairness of a term in the context of the contract as a whole.
A potentially unfair term may be counterbalanced by additional benefits being offered to the consumer. 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.
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.
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.
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.
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.
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
- 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.
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.
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.
We cannot endorse contract terms or declare 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, or a beneficiary under an insurance contract, can apply to a court to have a term declared unfair. ASIC has successfully negotiated to have a number of unfair terms removed from standard form consumer contracts since this regime came into effect. For details, see the media releases listed at the end of this information sheet.
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.
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 2020, this guide did not reflect the extension of the law to insurance contracts)
- Regulatory Guide 220 Early termination fees for residential loans: Unconscionable fees and unfair contract terms (RG 220)
- Media Release (20-123MR) Court declares Bendigo and Adelaide Bank contract terms unfair (29 May 2020)
- Media Release (18-262MR) Prospa removes unfair loan terms for small business borrowers and guarantors (7 September 2018)
- Media Release (18-073MR) ASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
- Media Release (15-229MR) Consumers can reclaim funds on expired travel money cards following ASIC action (25 August 2015)
- Media Release (14-262MR) ASIC concerns see CBA release $2.2 million for 45,000 travel card customers (8 October 2014)
- Media Release (14-021MR) Unlicensed rental companies enter into enforceable undertaking with ASIC (4 February 2014)
- Media Release (13-022MR) ASIC accepts enforceable undertaking from Mr Rental (12 February 2013)
- Media Release (11-12AD) ASIC obtains changes to contract terms under new consumer law (20 January 2011)
- Media Release (10-234MR) ASIC sets out expectations of lender practices on mortgage early termination fees (10 November 2010).
A consumer can also call ASIC on 1300 300 630 or ask a question online.
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.
This is Information Sheet 210 (INFO 210), issued in February 2016 and updated in October 2020. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.
An amendment to Table 1 was published on 23 October 2020 to clarify the upfront price payable for insurance contracts.