Overview
The Federal Court recently delivered its judgment in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2024] FCA 272. The case deals with ASIC’s claims that Auto and General had included in its’ insurance contracts, terms that were in breach of the unfair contract terms (UCT) regime.
In rejecting ASIC’s contentions, the Federal Court judgment provides guidance as to the approach that courts adopt in assessing whether a clause is unfair under the UCT regime. ASIC is appealing the decision.
‘Unfair´ in s12BG of the ASIC Act
A term of a consumer or small business contract relating to the provision of financial services will be unfair under s12BG(1) if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In order to appropriately apply the limbs of s12BG(1) to a term of a contract, Jackman J in his decision considered that the term must be construed ‘on its proper construction, that is the meaning-content of the term’. Of note, his Honour’s decision made clear that determining the proper construction of a term requires that a court consider not just the meaning content of the words used in the specific clause, but also the agreement as a whole and that an assessment of the relevant term can only be made in the context of the legal environment in which it operates, comprising both statutory and non-statutory law.
Tell us if anything changes…
The relevant term at the centre of ASIC’s claim was a ‘Notification Clause’ in Auto & General Product Disclosure Statements (PDSs) which required an insured to ‘tell us (the insurer) if anything changes about your home or contents’. The clause then went on to list the potential consequences of failing to notify the insurer, and examples where notification would be required. The examples included all related to questions that an insured would be ask at policy inception about the home or contents. ASIC alleged that the term imposed an unclear obligation on the insured as to what was required to be disclosed, created a broader right to refuse claims if an insured failed to meet the notification requirement, and could mislead or confuse a consumer as to their true obligations and rights under the contract.
In considering ASIC’s contentions, the Federal Court expressly rejected ASIC’s initial reliance on the literal meaning of the word ‘anything’ being extremely broad. As ASIC ultimately conceded, and as Jackman J pointedly noted, such a literal interpretation would lead to ‘absurdity’. With the court considering that the proper construction of the clause being that it would require the insured to notify the insurer if, during the term of the policy, there was any change to the information about the insured’s home or contents that the insured had disclosed to the defendant prior to entering into the contract. This interpretation was supported by other references to the words ‘changes’ and ‘information’ within the PDS and wider contractual documentation.
Jackman J determined that although the obligation to notify was a unilateral obligation of the insured, it was merely a reflection of the nature of the contract, and whether a term causes an ‘imbalance’ will depend on the inherent subject matter of the contract, and not the subject matter of the clause alone. His Honour considered that an insurer has a legitimate business interest in choosing which risks it will insure against, and this includes the granting of contractual powers which allow the insurer to put itself in the position it otherwise would have been had the insured disclosed information revealing any risk.
The Court also looked to the overall legal environment in which the terms of the PDS operates, namely by reference to ss13 and 54 of the Insurance Contracts Act (1984) (Cth) (ICA). s13 of the ICA implies a duty of utmost good faith for both parties to an insurance contract, while s54 limits an insurer’s ability to reduce their liability (from an adverse act of the insured) to an amount that fairly represents the actual prejudice suffered. Accordingly, the insurer would have been unable to rely on the Notification Clause in a way that caused a significant imbalance in the parties’ rights (under s12 BG(1)(a)) or in a way that was not reasonably necessary to protect its legitimate interests (s12 BG(1)(b)) because of the operation of these provisions within the ICA. The Court accepted that the terms of the Notification clause would cause a detriment to the insured if it were applied or relied upon and met the limb in s12BG(1)(c) of the test by virtue of the obligation imposed by the Notification Clause and the potential consequences of non-compliance.
Transparency
ASIC contended that the ‘fundamental vice’ in the Notification Clause was that the term was expressed in a non-transparent manner which did not allow consumers to readily know or understand their rights or obligations. The Federal Court ultimately rejected ASIC’s assertion that the lack of transparency enlivened all of the provisions of s12BG although Jackman J did note that it was disadvantageous to consumers to not be able to readily understand their rights and obligations. Consequently, although the criteria in s12BG(1)(c) were satisfied, the limbs of s12BG(1)(a) and (b) were not, and the clause could not be deemed unfair within the meaning of ss12BF and 12BG. ASIC were ordered to pay costs.
Next steps
ASIC has appealed the decision to the Full Federal Court.
In a regulatory financial services context, it will be interesting to see how courts continue to interpret these provisions going forward. We will be closely watching.
If you have questions, or require assistance, in relation to how the Unfair Contract Terms regime may impact your business, please contact the Financial Services Advisory team at HWL Ebsworth.
This article was written by Michael Anastas, Partner and Will Gallett, Law Graduate.
