Key Takeaways 

The exposure draft legislation relating to enhancements to the unfair contract terms (UCT) regime has been released and contains a number of significant amendments to the UCT legislation which will have important consequences for the operation of the UCT regime in life insurance.  

The consultation period for the exposure draft legislation Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract terms reforms (the Bill) and explanatory materials closed on 20 September 2021.

The changes introduced by the Bill (many of which had been flagged in previous consultations) include giving courts the power to impose a civil liability, providing more flexible remedies to a court when it declares a contract term ‘unfair’ and clarifying the court’s power to make orders that apply to other standard form contracts that contain an unfair contract term that is the same or substantially similar to a term the court has declared to be an unfair contract term.

The Proposed Changes

The Bill proposes changes to critical components of the UCT regime including the powers of the court, the classes of contracts covered by the regime and changes to definitions and exemptions. These changes are summarised below.

Powers of the courts

The Bill augments the court’s powers under the UCT regime by:

• Providing courts with the power to impose a pecuniary penalty for a contravention of the UCT provisions in addition to the current ability to declare a term unfair.
• Providing more flexible remedies to a court when it declares a contract term unfair by giving courts the power to determine an appropriate remedy, rather than the term being automatically void (though the Bill retains the automatic voiding provisions present in the existing law).

The extra flexibility may be important in the insurance context where declaring a term unfair, may, depending on the particular term, not provide a workable solution if, for example, the term declared unfair is the term under which a customer is claiming a benefit (such as a particular definition of TPD).

• Creating a new rebuttable presumption that terms found to be unfair that are subsequently included in relevant contracts in similar circumstances, are unfair. The presumption applies where the term is proposed by the same person who proposed the original unfair term or where the term is part of a contract that is in the same industry as the contract that contained the original unfair term.

It follows that the declaration that a term is unfair in particular proceedings will have ramifications for the broader industry depending on how commonplace such a term is. Of course, the presumption that a term in a contract is unfair based on a previous court ruling can be rebutted in subsequent proceedings if there is evidence that the term is not unfair in the particular context of a different case.

• Clarifying the court’s power to issue injunctions with respect to existing or future consumer or small business standard form contracts containing a term that is the same or is substantially the same as a term the court has declared to be an unfair contract term.

Class of contracts covered by UCT regime

The Bill expands the classes of contracts covered under the UCT regime by:

• Removing the upfront contract value thresholds for the definition of small business contract. The net effect is that provided a contract meets the other criteria of small business contract (as amended by the Bill as discussed below), the contract entered into by the parties will be covered irrespective of the upfront price payable under the contract.
• Amending the definition of small business contract from less than 20 employees to less than 100 employees or a business that has an annual turnover of less than $10 million for the previous income year.

Consequently, more businesses will meet the definition of small business contract and importantly, further clarity is also provided on how employees are to be counted in determining whether a business falls within the 100 employee threshold. An exemption remains for casual employees not employed on a regular and systematic basis, but there is now also a pro rata assessment for staff employed on a part time basis.  

Other definitions and exemptions

The Bill also introduces other definitional related changes including;

• Setting out matters the court must not consider when determining whether a party was required to accept or reject terms of a contract or whether a party was giving an effective opportunity to negotiate the contract.

These new matters form part of the provisions about determining whether a contract is a standard form contract. They include that when determining whether a party was able to genuinely negotiate a contract a court is to disregard instances where a party has negotiated minor or insubstantial changes to the terms of a contract. A party’s ability to select from a pre-determined range of terms within a contract is also to be disregarded as evidence that an effective opportunity to negotiate is provided to that party.

• Changes that make it even clearer the selection by an insured of certain available features will not change the contract from being a standard form contract. In addition, even contracts which may have a number of amendments requested by an adviser will not necessarily mean the contract is not a standard form contract depending on the nature of the changes made.
• Enabling certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in relevant Commonwealth, state or territory legislation to be exempt from the protections.

Implications

The UCT regime only recently commenced in terms of insurance contracts. The further changes to the UCT regime proposed in the Bill will strengthen the remedies under and enforcement of the UCT regime.

The net effect of a term being declared ‘unfair’ will also now have significant flow on ramifications for the usage of any ‘substantially similar’ term by that insurer or within the industry (albeit, in practical terms a term declared unfair in one contract would likely cause a review of any similar term in other policies).

Overall, the proposed enhancements to the UCT regime underscore the importance of insurers continuing to monitor product terms against the ‘unfairness’ test in the UCT provisions.

Insurers will also need to identify which contracts that may have previously been exempt, will fall under the new thresholds and ensure those contracts entered into after the Bill starts comply with the UCT test.