1. Unfair contract terms
September 2017
Theresa Zakaria
Tim Gough

2. © Australian Securities & Investments Commission.
Reproduced with permission.
© Australian Securities & Investments Commission.
Reproduced with permission.

4. Session outline
When is a contract term unfair?
What terms are open to challenge?
What does CIO think?
What next?
Questions?

5. When is a contract term unfair?
UCT laws:
Protection for consumers and small businesses (s 12BF, ASIC Act)
Standard form contracts (s 12 BK)
Three questions (s 12BG(1))
Does the term cause significant imbalance?
Is the term reasonably necessary to protect legitimate interests?
Would the term cause detriment?

6. When is a contract term unfair?
Need to consider the contract as a whole
How transparent is the term?
What are the overall rights and obligations?
(s 12BF(2))
Case-by-case consideration
Transparent terms can be unfair.
Potentially unfair terms can be counterbalanced.

7. What terms are open to challenge?
Examples in legislation (s 12BH)
Avoiding/limiting obligations
Penalties for breach/termination
Unilateral termination
Unilateral variation
Examples in the industry (ASIC release MR)
Entire agreement clauses.
Wide indemnification clauses.
Non-monetary default clauses.

8. What terms are open to challenge?
Examples in the legislation (s 12BH)
Enables only one party to avoid/limit obligations
Penalises only one party for breach/termination
Enables only one party to terminate
Enables only one party to vary terms
 Legislation says may be unfair.
 Grey listed. Not black listed.

9. What terms are open to challenge?
Examples in the industry (ASIC release MR)
Entire agreement clauses
Wide indemnification clauses
Non-monetary default clauses

10. What terms are exempt? Excluded from UCT laws Upfront price payable
Define the main subject matter of the contract.
Set the upfront price payable under the contract.
Required or expressly permitted by law.
Upfront price payable
Cost for the supply of services.
Does not include contingency fees.
(s 12BI)

11. What does CIO think? Case study: cancellation fee
The consumers contracted with the FSP to provide:
credit assistance for refinance, and
budget monitoring program.
The budget monitoring program cost $10,000.
Contract provided that if the consumers terminated:
No refund of $10,000.
Payment of a further $3,000.
The FSP did not contact the consumers for seven months.

12. What does CIO think? Case study: cancellation fee
Standard form
Personal purposes
UCT laws applied
Penalised one party for termination
Example in the legislation
$10,000 = upfront price?
Exempt
What does CIO think? Case study: cancellation fee
$3,000 = contingency fee
Could still consider under UCT law.

13. What does CIO think? Case study: cancellation fee
Was the fee reasonably necessary to protect the FSP’s legitimate interests?
Statutory presumption that must be rebutted by the FSP.
CIO needed information to show why the cancellation fee was necessary:
Was the FSP recouping costs?
Did the fee mitigate any real commercial risks?
No information given – presumption stood.

14. What does CIO think? Case study: cancellation fee
Did the fee cause significant imbalance?
No other terms to counterbalance the cancellation fee.
Did the fee cause detriment?
Financial detriment.
 Onus rests with the FSP to show that the term is reasonably necessary.
 May involve providing commercially sensitive information.

15. What does CIO think? Case study: broker commission
The consumer engaged the FSP’s brokerage services to apply for a loan. Agreement provided that if the loan did not settle for any reason, the consumer would pay the FSP the commission it would have received (0.6% of the loan amount submitted). The FSP obtained conditional approval, after which the consumer elected to terminate the FSP’s services.

16. What does CIO think? Case study: broker commission
Standard form
Personal purposes
UCT laws applied
Penalised one party for termination
Example in the legislation
Was a contingency fee
Not exempt

17. What does CIO think? Case study: broker commission
Did the fee cause significant imbalance?
Operation of the term was very broad.
Included circumstances where the consumer was not at fault.
Term was significantly weighted in the FSP’s favour.

18. What does CIO think? Case study: broker commission
Was the fee reasonably necessary?
No information given – presumption stood.
Did the fee cause detriment?
Financial detriment.
 Terms with a wide application may raise concerns.

19. Proactive: revising contracts
What next?
Proactive: revising contracts
Are they in plain English?
Do any terms raise concerns?
If so: Can they be counterbalanced? Can the application be restricted?
Reactive: provide information / responses
What risks are being mitigated? What costs are being recouped?
Is the term counterbalanced?

20. Questions?