A Fair Hearing – The Full Federal Court’s decision in the ASIC v Auto & General Appeal

On 5 June 2025, the Full Court of the Federal Court of Australia handed down its judgment in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2025] FCAFC 76.

The Full Court has weighed in on how the unfair contract terms (UCT) regime set out in the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) should apply to insurance contracts under the Insurance Contracts Act 1984 (Cth) (the ICA).

Background

In Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272, the primary judge held that a clause included in standard form contracts of home and contents insurance which required the consumer to tell Auto & General Insurance Company Limited (the Insurer) if ‘anything changes about [his/her] home or contents‘ (the Notification Clause) was not ‘unfair’ under the UCT regime.

ASIC appealed, submitting that:

1. The primary judge erred in the construction of the Notification Clause;
2. The primary judge erred in holding that the Notification Clause did not ‘cause a significant imbalance in the parties’ rights and obligations arising under the contract‘; and
3. The primary judge erred in holding that the Notification Clause was ‘reasonably necessary to protect [the Insurer’s] legitimate interests‘.

The Decision of the Full Court

The Full Court unanimously dismissed ASIC’s appeal.

However, the Full Court was split on the basis on which the appeal should be dismissed:

1. The majority, O’Bryan and Cheeseman JJ, held that the primary judge erred in the construction of the Notification Clause. However, the majority concluded that the Notification Clause, on the case advanced by ASIC, did not cause a significant imbalance in the parties’ rights and obligations and was reasonably necessary to protect the Insurer’s legitimate interests; and
2. Derrington J upheld the primary judge’s construction of the Notification Clause. Otherwise, his Honour concurred with the majority.

Legal Issues

Construction of the Notification Clause

At [103] to [107] inclusive, the majority held that the primary judge’s approach in construing the Notification Clause was in error because:

1. An insurance policy subject to the UCT regime is a consumer contract. The proper approach to construing a consumer contract should be to consider what the term would mean:

‘… to a reasonable individual … in the position of a consumer … , as a matter of ordinary language, reading the contractual documentation as a whole‘: at [104] and [143];

2. While the Court may seek to resolve ambiguity in a contract by adopting a commonsense approach, the Court must not seek to rewrite unambiguous terms which are harsh or unreasonable; and
3. Similarly, the majority held that while the Court may seek to resolve absurdity in a contract by adding, omitting, or correcting words, the fact that a term is unreasonable or contrary to common sense does not make that term absurd.

The majority held that the Notification Clause was not ambiguous. The majority also queried whether the Notification Clause was absurd, but accepted that ASIC advanced its case on the basis that the Notification Clause would be absurd if read literally.

The majority proceeded to consider the constructions put forward by ASIC and the Insurer to avoid an absurd reading of the Notification Clause. The majority considered that ASIC’s construction, which qualified the Notification Clause with the criterion of materiality, should be preferred because it ‘… is supported by textual, contextual and purposive considerations‘.

The ‘Parties’ Rights and Obligations Arising under the Contract’ under the UCT Regime

The majority recorded that the primary judge approached section 12BG of the ASIC Act as requiring ‘… an assessment of the relevant contractual term in the context of the legal environment in which the term operates, comprising both statutory and non-statutory law‘: at [127].

The majority maintained that the assessment of a term under section 12BG required consideration of the meaning which would be conveyed to a reasonable person in the position of a consumer acquiring insurance on the terms of the contract. The majority therefore rejected the primary judge’s approach.

Despite setting aside the primary judge’s approach, the majority still held that ASIC had not established the Notification Clause caused a significant imbalance in the parties’ rights and obligations. At [158], the majority considered the Notification Clause (- on ASIC’s construction) only obliged a consumer to notify the Insurer of changes material to the insured risk (- which the majority considered balancing the parties’ rights and obligations).

In reaching the above conclusion, the majority recorded that the parties assumed the phrase ‘the parties’ rights and obligations arising under the contract‘ should be interpreted as meaning the parties’ rights and obligations arising under the contract as modified or impacted by the ICA. The majority expressed reservations about the correctness of that assumption, distinguishing between rights and obligations under the contract as opposed to those same rights and obligations as modified under statute.

Legitimate Interests and Transparency

The majority again held that, on the construction advanced by ASIC, the Notification Clause would have been understood as only requiring notification of changes that materially impact the insured risk. The majority held that, irrespective of whether it was transparent, the Notification Clause, as understood by a reasonable consumer, was reasonably necessary to protect the Insurer’s legitimate interest of understanding whether there was a material change to the insured risk.

In considering the relevance of transparency in assessing the Notification Clause, the majority held:

1. ‘… It should be accepted that a lack of transparency of a contractual term may, on its own, support a finding that the term is not reasonably necessary to protect a party’s legitimate interests. That conclusion follows from the accepted principle that the phrase “reasonably necessary” requires consideration of the proportionality of the term against the interest being protected and alternatives that were available to the party imposing the term. It would rarely, if ever, be reasonably necessary to protect a party’s legitimate interests by a contractual term that was strongly lacking in transparency…‘: at [175]; and
2. While transparency must be considered in assessing whether a term is unfair, there is no prescribed order in which to consider transparency and the three elements of unfairness under the ASIC Act.

Key Takeaways

The Full Court has clarified how parties should construe policy terms for the purpose of the UCT regime. The Full Court has also clarified the role of transparency in assessing a policy term for unfairness.

However, the Full Court has raised and left unanswered questions about the impact of the ICA in assessing a policy term under the UCT regime. The Courts will need to consider further whether the phrase ‘the parties’ rights and obligations arising under the contract‘ should be interpreted as meaning the parties’ rights and obligations arising under the contract as modified or impacted by the ICA.

This article was written by Nicholas Matkovich, Partner, Vignesh Iyer, Senior Associate, and Isabela Lawira-Fernandez, Solicitor.