12 November 2020

Unfair Contract Terms and Insurance Contracts: Further Reforms and ASIC Guidance

This article was written by Mandy Tsang and Astrid Sugden.

Further reforms to legislation concerning unfair contract terms

Proposed Reforms

On 9 November 2020, Treasury released its Regulation Impact Statement for Decision titled ‘Enhancements to Unfair Contract Term Protections’ (Impact Statement).  The Impact Statement outlined problems with the existing regulatory regime for unfair contract terms (UCT).

Concerns raised in the Impact Statement included that:

  • standard form contracts can be one-sided and are often offered on a ‘take it or leave it’ basis, with consumers and small businesses often lacking the required resources and bargaining power to review and negotiate the terms of such contracts or challenge their enforcement; and
  • UCTs continue to be prevalent in standard form contracts, despite the UCT protections which have been put in place for consumers and small businesses to date.

In order to strengthen the existing UCT protections, Treasury proposed to introduce a number of key reforms, including:

  • making UCTs unlawful and giving courts the power to impose a civil pecuniary penalty;
  • increasing eligibility for the UCT protections by expanding the definition of small business and removing the requirement for a contract to be below a certain threshold; and
  • improving clarity on when the UCT protections apply, including with regard to the definition of a ‘standard form contract’.

Making UCTs unlawful and giving courts the power to impose a civil pecuniary penalty

As the insurance industry grapples with the extension of the UCT regime to insurance contracts, Treasury’s proposal to make UCTs unlawful, and the potential for a civil pecuniary penalty to be imposed, is especially significant.

Under this option, a term of a standard form small business or consumer contract could still be challenged in a court or tribunal and found to be unfair (and in turn, void). 

However, the courts would also have the ability to apply an appropriate civil pecuniary penalty in respect of the contravention.  Any such pecuniary penalty would be subject to a maximum amount to be specified at law.  In determining whether or not to impose a civil pecuniary penalty, the court would need to be satisfied that the imposition of a civil pecuniary penalty is necessary, and the amount of any such penalty appropriate, taking into account the circumstances of the particular case.

The ACCC, ASIC and small business commissioners submitted that the UCT protections would be far more effective if there was a penalty.  They also submitted that larger businesses would be more motivated to ensure that they remove such terms from their standard form contracts.  On the other hand, concerns were raised by other stakeholders with the uncertainty around what may be considered “unfair” and whether this option would result in additional compliance costs.  This issue is especially acute for insurance contracts given the recent expansion of the UCT regime to insurance and the lack of case law and guidance in this area.

Other options noted by Treasury in the Impact Statement included amending the law to:

  • provide courts and tribunals with the discretion to determine an appropriate remedy for any term in a small business or consumer contract which is unfair (for example, to provide courts and tribunals with the ability to vary the relevant term, rather than to declare the term to be void); and/or
  • establish a rebuttable presumption that a contract term is unfair if, in a separate case, the same or a substantially similar term has been used by the same entity or in the same industry sector and declared by a court to be unfair (with the contract-issuing party then being required to produce evidence to demonstrate why the term is not unfair in the particular circumstances of the case).

The Impact Statement included 22 options in total for decisions across the following four categories: legality and penalties, flexible remedies, definition of small business contract and minimum standards.

Next Steps

It has been announced that the actions outlined by Treasury in the Impact Statement were approved on 6 November 2020 by consumer affairs ministers at the Commonwealth, State and Territory levels.

Treasury has advised that it will develop exposure draft legislation, which will provide a further opportunity for stakeholders to comment on the detail of the reforms.

ASIC information sheets and supervisory work

ASIC information sheets

ASIC has also recently released updated information sheet 210 Unfair contract term protections for consumers (INFO 210) and information sheet 211 Unfair contract term protections for small businesses (INFO 211), each of which provide updated information about how the UCT regime will apply to insurance contracts from 5 April 2021.  The information sheets can be accessed here.

The information sheets set out:

  • when the UCT laws apply;
  • what makes a contract term unfair;
  • what happens if a term is unfair;
  • what a consumer or small business can do if they think a contract term is unfair; and
  • what ASIC can do about UCTs.

For insurance contracts, some clarifications set out in the information sheets include that:

  • a third-party beneficiary under an insurance contract may be protected by the UCT laws; and
  • the 'main subject matter' of an insurance contract 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 UCT laws.  This is consistent with the example provided in the explanatory memorandum for the expansion of the UCT laws to insurance contracts).

Examples of terms that cannot be considered under the UCT laws are included in the information sheets.  Relevantly for insurance, one example provided is an excess which is clearly disclosed to the insured at the time of entry into the insurance contract.

The information sheet also provides examples of UCTs, including:

  • terms which allow an insurer to cash settle a claim based on the cost of repair to the insurer, on the basis that this 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 the insured themselves to rebuild or make repairs; and
  • a definition of “heart attack” (or other medical definitions) in a customer’s insurance policy may be unfair if it is outdated, inaccurate or restrictive.

Supervisory work

ASIC also stated that it has been engaging in supervisory work with the insurance industry on the new UCT laws.  This work has focused on:

  • terms that allow an insurer to cash settle a claim based on the cost of repair to the insurer;
  • terms that are an unnecessary barrier to a consumer lodging a claim;
  • terms that reduce the cover offered where compliance with the preconditions is unfeasible; and
  • terms that use an outdated, and therefore inaccurate or restrictive, medical definition.

 

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