Are concepts such as default and termination fees in a consumer contract considered unfair?

by The FindLaw Team

Many of us will be part of some sort of consumer contract on an almost daily basis and for the most part, we wouldn’t give too much of a thought in regards to most of the contracts because they’re usually for benign goods or services, and they don’t involve great financial expenditure. However, when a consumer contract involves larger sums of money, or  is part of a financial product or service, or perhaps the length of the contract is longer than usual, then terms such as ‘default fees’, ‘concession rates’, and ‘termination fees’, may begin to appear within the consumer contract. Concepts such as termination fees are a standard feature of mobile contracts for instance and because they are prevalent, most of us wouldn’t stop to consider whether such terms are ‘unfair’. However, with that being said,  legislation does exist in regards to unfairness within a consumer contract, however, what is deemed unfair needs to be considered – especially in regards to concepts such as default fees, concession rates and termination fees.

Before going into a more in-depth exploration of unfair consumer contract terms, it would be useful to establish what a consumer contract is.

Consumer contracts and unfairness can in either fall under the auspices of the Australian Consumer Law (the ACL), or the ASIC Act and under both pieces of legislation, a consumer contract is as follows:

Under s 23(3) of the ACL, a consumer contract is for:

• a supply of goods or services; or
• a sale or grant of an interest in land to an individual whose acquisition for goods, services or interest, is wholly or predominately for personal, domestic or household use or consumption.

A consumer contract under the ASIC Act is a contract for:

• a financial product, or
• the supply or possible supply of financial services on the condition that one of the parties is an individual who acquires a financial service or product wholly or predominately for personal, domestic or household use or consumption. 

Are default fees in consumer contracts unfair?

Default fees are reliant on a consumer defaulting, therefore, triggering some sort of fees payable mechanism.

Although the ACL does include exemptions of terms which may not be considered as unfair, default fees are not included in the exemptions, and will be subject to review of unfairness either in s 25(1)(c) of the ACL or s 12BH(1)(c) of the ASIC Act. We should point out that the concepts in both pieces of legislation are similar, therefore, for the purposes of efficacy we can use the s 25(1)(c) provisions of the ACL as our basis, which states; “a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;” is an example of unfairness in a consumer contract.

Concession rates and consumer contracts

An alternative to default fees is the inclusion of concession rates within a standard form consumer contract that sets a base price, and also includes a provision of a lower “concession” price, on the basis that the person meets certain conditions, such as adhering to any financial obligations in a timely manner, or earlier than the specified period of payment for example. In instances where a base and concession provision is included – and whether such terms are to be construed as unfair – the approach that may be taken is to identify the terms of the main subject matter of the contractual agreement, and the issue at hand, which would require the courts to make a determination in regards to how the term was presented, and how it was perceived by the consumer.

Termination fees

Many people who have mobile phone contracts  may have terms included within the contract allowing for termination of the agreement before the expiry date on the condition that a termination fee is paid. Terms that require a person to pay a fee upon early termination of the contract, may be subject to review under unfair contract term provisions in certain circumstances, and may also fall under the s 25(1)(c) provisions of the ACL, and s 12BH(1)(c) example of “a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;” as outlined in s 25(1)(c) of the ACL and 12BH(1)(c) of the ASIC Act.

This piece is a broad overview of unfairness within a consumer contract. If you have any issues or concerns in regards to consumer contracts, please seek the assistance of a lawyer who will be able to assist in relation to your matter.


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