Australian consumer law – unfair contract terms

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in consumer contracts for financial products and financial services.
The unfair contract terms law is part of the broader new national Australian consumer law which was fully implemented as of 1 January 2011.
The Australian consumer law was passed as the Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010 which amends the Australian Securities and Investments Commission Act 2001.
As part of these reforms ASIC also has new enforcement and consumer redress powers.
These new protections and remedies will assist ASIC to perform its role promoting the confident and informed participation of consumers and investors in the financial system.
Find out more about the Australian Consumer Law at www.consumerlaw.gov.au

What does it mean for you?

The current law already protects consumers and investors against unfairness in contractual dealings, for example, by prohibiting unconscionable or misleading and deceptive conduct.
The new provisions give additional protections to consumers and investors, by giving courts a power to find that a term is unfair. If a term is found to be 'unfair' it will be void, which means it is not binding.

Which types of contracts do the unfair contract term provisions apply to?

The unfair contract term provisions apply to 'standard form consumer contracts'. Standard form contracts are commonly used across a range of industries including telecommunications, utilities, domestic building and finance.
Consumers and investors enter into standard form contracts for financial products and financial services every day. Contracts for home loans, credit cards and client or broker agreements for example, are almost certainly standard form contracts.
Individually negotiated contracts and contracts between businesses are not covered.

What is a consumer contract?
A consumer contract is a contract for:

a financial product, or
the supply or possible supply of financial services

where at least one of the parties is an individual who is acquiring the financial product or financial service wholly or predominantly for personal, domestic or household use or consumption.

What is a standard form contract?
The unfair contract terms laws do not define ‘standard form contract’. However, in broad terms a standard form contract will typically be one that has been prepared by one party to the contract (the supplier) and is not subject to negotiation between the parties – that is, it is offered on a ‘take it or leave it’ basis.

Some examples include contracts for banking services, loan or credit card contracts.

If a consumer alleges that a contract is a standard form contract, the contract is presumed to be a standard forms contract unless the supplier proves otherwise. Things a court must take into consideration when considering if a contract is a standard form one include:

whether one of the parties has all or most of the bargaining power
whether the contract was prepared by one party before any discussion relating to the transactions occurred
whether a party was required to accept or reject the terms of the contract in the form in which they were presented
whether a party was given an effective opportunity to negotiate the terms of the contract
whether the terms of the contract take into account the specific characteristics of a party or the particular transactions.

Are all contracts for financial products and financial services covered?

No. The unfair contract terms provisions do not cover insurance contracts regulated under the Insurance Contracts Act 1984. Nor do they apply to constitutions of companies, managed investment schemes or other kinds of bodies.

Are all terms in consumer contracts for financial products and financial services covered?

No. Terms that define the main subject matter of the contract, set the upfront price payable under the contract or are required or permitted by a law of the Commonwealth, state or territory are not included in the unfair contract term provisions.

The upfront price does not include any fees/charges that are contingent on the occurrence or non-occurrence of a particular event, for example, default on a loan.

For example, the up-front price of a mortgage includes the amount borrowed and the interest payable and any fees disclosed at the time the contract is entered into, but does not include contingent fees, such as default fees. As a result, principal and interest cannot be challenged under the unfair contract terms provisions.

What if you signed a contract before 1 July 2010?

The law covering unfair contracts terms will only apply to contracts entered into or varied after 1 July 2010. Contracts entered into before that date will not be affected unless:

the contract is renewed on or after 1 July 2010 - the provisions apply to any conduct that occurs from the renewal day, or
if a term of the contract is varied on or after 1 July 2010 – the new provisions apply to the varied term only not to the whole contract.

When is a term of a consumer contract unfair?

A term in a consumer contract is unfair if:

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

In determining whether a term of a consumer contract is unfair a court must take into account the extent to which the term is transparent (that is, expressed in reasonably plain language, legible, presented clearly and readily available to all parties), and the contract as a whole.

What happens if a term in your contract is unfair?

If a court finds that a term in a standard form consumer 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.

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

You can make a complaint directly to your financial services provider and if they cannot resolve your complaint, you can take your complaint to the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Ltd (COSL).

You can also make a complaint directly to ASIC.

Although ASIC will seek the cooperation of financial services' businesses in removing terms considered unfair, it is not ASIC's role to endorse contract terms or to state that they are unfair. Only a court can decide if a term is unfair or not. ASIC, as well as a 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, the ACCC and state and territory consumer protection agencies will also work together to ensure consistency in the approach to the UCT provisions, and the consumer law more generally.

What is ASIC doing?

The new laws give ASIC an additional tool to tackle consumer detriment. Consideration of possible unfair contract terms will become part of ASIC's ongoing compliance and surveillance work.

On 10 November 2010, ASIC released guidance for mortgage lenders that sets out how provisions in the National Credit Code and unfair contract terms law apply to mortgage early termination fees (exit fees).

This follows consultation leading up to and after the 1 July 2010 start date for the new legislation.

Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms (RG 220) spells out ASIC’s guidance on points including:

what costs and types of loss can be included in exit fees
types of loss that should not be recovered through exit fees
the limited circumstances in which a lender may vary exit fees during the life of a mortgage.

Where can I get more information?

ASIC, the ACCC and state and territory consumer protection agencies have jointly published guidance on key aspects of the Australian Consumer Law including the unfair contract terms provisions.

The purpose of this guidance is to help businesses, legal practitioners and consumer advocates to understand the new laws in simple language, but it is not a substitute for the legislation. Note that not all aspects of the ACL apply to financial products and services.

A Guide to the Unfair Contract Terms Law

Avoiding unfair business practices

ASIC's Regulatory Guide 38 The Hawking provisions

Compliance and enforcement guide sets out the principles that guide the compliance and enforcement approach of the ACCC, ASIC and the state and territory consumer protection agencies in administering the ACL.

Read ASIC's advisory on expectations of lender practices on mortgage early termination fees.

ASIC's Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms

Get all the guides at www.consumerlaw.gov.au