Unfair Contract Terms Reforms

On 9 November 2023, amendments to the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (ASIC Act) regarding unfair contract terms came into effect in Australia. The amendments include the broadening and expansion of the contracting parties that the unfair contract terms (UCT) regime applies to, together with introducing new penalties for breaches of the regime.

The amendments form part of the ongoing wave of regulatory reform in Australia’s financial services sector since the Hayne Royal Commission, particularly in relation to financial product design and governance which has been a key focus area for the Australian Securities and Investments Commission (ASIC).

This article provides a brief snapshot of the amendments to the ASIC Act and their implications for insurance contracts.

 

Unfair contract terms reforms – insurance contracts

The ASIC Act is the relevant legislation for unfair contract terms (UCT) in insurance contracts. Insurance contracts first became subject to the UCT regime in April 2021. By way of summary, the recent changes have introduced the following amendments:

• creation of new prohibitions for UCTs in the ASIC Act;
• a broadened definition of “small business”;
• clarification on matters relevant to determining whether a contract is a “standard form contract”; and
• providing courts more flexible remedies once a term of a contract is declared unfair.

 

NEW PROHIBITIONS AND PENALTIES

Section 12BF of the ASIC Act has been amended to introduce the following new prohibitions:

• prohibition on entering into a standard form contract containing an unfair term; and
• prohibition on applying or relying on an unfair contract term.

This means that breaches of the above prohibitions will constitute the contravention of a civil penalty provision with the result that there are now financial penalties for non-compliance (previously, if a contract term was found to be unfair, it would be declared void but there were no financial penalties).

 

EXPANDED “SMALL BUSINESS” DEFINITION

Under the previous laws, the UCT regime applied if one party to the insurance contract was a business that employs fewer than 20 persons. The change to the definition means that a small business contract is where one party to the contract:

• is a business that employs fewer than 100 persons; or
• has a turnover for the last income year of less than USD10 million.

This amended definition will significantly expand the reach of the UCT regime to a broader number of policyholders. Additionally, the upfront price payable threshold for determining whether an insurance contract is a “small business” contract has been increased to USD5 million.

 

CLARIFICATION ON “STANDARD FORM CONTRACT” DEFINITION

Whilst many insurance contracts already fell within the definition of a “standard form contract”, the amendments now clarify that a contract may still be a “standard form contract” even where a party has been given the opportunity to negotiate minor changes to the contract.

 

FLEXIBLE REMEDIES

The amendments also give courts more powers to determine a remedy once a term of a contract is declared unfair. Whilst the court will still retain the power to declare the term void, the changes also give the court powers to make orders:

• to prevent or reduce loss caused by the unfair term itself or any similar terms in any existing contracts; and
• to prevent a similar term being included in any future standard contracts to which the respondent is a party.

 

IMPLICATIONS FOR THE INSURANCE SECTOR

ASIC has been increasingly active in pursuing enforcement activity related to unfair contract terms in insurance contracts. To date, they have explicitly stated that it will be reviewing terms in home insurance contracts relating to maintenance and “wear and tear” for potential unfairness. We expect this activity to continue in 2024.