Foez Dewan
Principal
Corporate Advisory
Impact of COVID-19 on your contract: Force Majeure
19 March, 2020
ASIC has used its successful unfair contract terms action against the Bendigo and Adelaide Bank to give a warning to insurers.
On 28 May 2020, ASIC obtained judgement in an action against the Bendigo and Adelaide Bank Limited (the Bank) to have several terms within its small business contracts declared unfair1. In commenting on the decision, ASIC Commissioner Sean Hughes used the opportunity to send a warning to insurers, stating:
Yesterday’s judgment shows that ASIC will take the necessary steps to enforce the law. Importantly, insurance firms should be preparing to extend these obligations in insurance contracts.
While the Bank’s contractual terms were quite different to those found in insurance contracts, the Federal Court’s decision is informative to insurers on several fronts. It indicates ASIC’s intent to pursue unfair contract terms in the courts and its approach to seeking orders in relation to them. It also provides some further guidance on how section 12BG of the ASIC Act 2001 (Cth), which is still set to apply to insurers from 5 April 2021, should be interpreted – particularly regarding what is involved in:
- proving that a term is reasonably necessary to protect legitimate interests; and
- making a term transparent.
Terms under review
In this case, ASIC’s concerns related to four types of clauses:
- Indemnities – clauses providing for the customer to indemnify the bank for loss which the customer did not cause, that was caused by the Bank’s mistake, error or negligence rather than that of the customer or which the Bank could have avoided or mitigated.
- Default provisions – clauses creating events of default which posed no credit risk to the Bank, which were within the Bank’s control or which could be determined in the Bank’s unilateral opinion, and in each case without giving the customer any right to remedy the default where that was possible.
- Unilateral variation – clauses allowing the Bank to unilaterally vary the upfront price of the contract, to cancel part of the loan or credit facility provided and other terms.
- Conclusive evidence – clauses providing that certain information, for instance that a Bank certificate setting out the amount owed by the customer, is conclusive evidence unless the customer can demonstrate manifest error.
The court found that each of these terms was unfair within the meaning of s.12BG.
Reasonably necessary to protect legitimate interests
A term is not unfair under s.12BG of the ASIC Act if it is “reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term”, though there is a presumption that that is not the case unless the party proves otherwise.
That provision is of particular relevance to insurers, given their need to rely on terms defining the scope and operation of cover, which might otherwise be exposed to challenge as unfair (ie. on the basis that they cause a significant imbalance between the parties and detriment to the customer, by limiting the scope of cover provided).
In this case, the Federal Court referred to existing case law on the issue and noted the following:
- What is a “legitimate interest” and what is “reasonably necessary” will depend on the business of the supplier, including its circumstances and the context of the contract.
- “Legitimate interests” may be of a business or a financial nature and are not necessarily monetary. A party may have interests in contractual performance that are intangible and unquantifiable.
- An analysis of what alternatives are available to the party protected by the impugned term and its proportionality may be relevant to the question of what is “reasonably necessary” to protect a party’s legitimate interests.
All of these points are likely to be relevant to considering insurance contract terms for unfairness.
Insurance contracts have a particular nature, requiring a range of terms to circumscribe the risk being underwritten in order to obtain certainty for both parties and enable the insurer to set an appropriate price. Regard would need, therefore, to be given to that context and purpose in testing whether any term is reasonably necessary to protect the insurer’s legitimate interests.
Insurance contracts can also include clauses that fall outside of this category, and yet serve an essential purpose, for instance regarding the efficient conduct of claims or to reduce the risk of fraud. These might also fall within this legitimate interests category.
Finally, a consideration of alternative terms and proportionality is likely to be relevant to a range of insurance contract terms. If there is a better approach available, which might reduce any imbalance between the parties and potential customer detriment, or which is more proportionate to the business need, a court may be more likely to find that the legitimate interests test has not been met.
Transparency
In determining whether a term is unfair, s.12BG allows a court to have regard, in determining whether a term is unfair, to “the extent to which the term is transparent”.
The Federal Court, in this case, noted that transparency is not determinative of whether a term is unfair – “If a term is not transparent it does not mean that it is unfair and if a term is transparent, it does not mean that it is not unfair”. It went on, though, to provide a useful summary of existing case law on what may point to a lack of transparency. It noted, for instance, that that could arise with respect to terms:
- drafted in legal language rather than in plain English;
- presented in small font size;
- presented in a way which does not draw them to the customer’s attention when clearer alternatives were available;
- which could have been presented in a way which provided a clearer explanation of their operation; and
- which interact with other terms, but which do not refer to each other so that their interaction is clear.
All of these issues could arise in relation to insurance contracts and, in many cases, they may not be easy to resolve, particularly where the terms concerned are not simple. Insurers that can show they have endeavoured to improve the transparent presentation of relevant terms to their customers, however, for instance through clear drafting, drawing connections between relevant terms and, potentially, by including easily understandable examples, will be on firmer ground in answering a complaint that their terms are unfair.
As to the Bank’s terms in this case, the court found that many of those lacked transparency. One, for instance, contained a “multiplicity of cross-references”, so that it could only be properly understood by referring to a large number of definitions, some of which then went on to refer to other definitions. While the use of clear definitions can aid understanding in any contract, there is a point beyond which they will become unhelpful, at least so far as they are used in a consumer contract.
Another of the Bank’s terms was criticised for being unclear. The term allowed the Bank to unilaterally vary contract terms based on a “periodic” review, but then explained the operation of the term through a “complex defined term with no apparent periodic aspect”. While transparency may not have saved this term, a clear and prominent statement to the customer of the circumstances in which the Bank could exercise these rights would have given it a better argument.
Headings can also be important. Terms allowing the Bank to unilaterally vary the contract were set out under a heading of “Changes”. The court observed that the heading did not “suggest the breadth” of the provisions set out beneath it. Likewise, a heading “Use of Facility” was not likely to suggest that it included provisions allowing the Bank to cancel the facility.
While these may provide useful tips to insurers that are currently reviewing their contracts, regard should always be given to the contract as a whole in considering questions of transparency, for instance whether it is structured in a way which makes it easily navigable, highlights the matters most likely to be important to the customer and explains the cover provided in a way which is easily understandable.
Orders
The scope of orders made in this case also offers some useful pointers. Instead of having the unfair contract terms simply rendered void, ASIC and the Bank sought consent orders to replace them with different terms. The court made those orders and, as also agreed between the parties, applied them with effect from the date of the contract in each case.
It may be that insurers should expect a similar approach to be applied to insurance contracts in the future. Having an unfair term in an insurance contract rendered void could have a range of outcomes, depending on whether the term is part of the insuring provisions, exclusions or conditions. ASIC may therefore seek agreement to vary the term, to achieve a more reasonable outcome and to have that applied to existing contracts of insurance from inception. In some cases, that may also be a better outcome for the insurer, for instance when compared with having an exclusion clause declared void, however it also raises the spectre of insurers having to pay claims on historic contracts for cover which is different to the risk on which they were originally priced.
For more information on insurance regulatory reforms, please contact insurance advisory principal, Mathew Kaley.
1 ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716
