Unjust contracts

Contributed by Ian Macdonald and current to 1 September 2005

WHAT IS AN UNJUST CONTRACT?

The SAT can also determine whether a credit contract, mortgage, guarantee, or change to a credit contract, mortgage or guarantee is unjust (s.70).

The term “unjust” is not defined in the Code, but is stated to include “unconscionable, harsh or oppressive”. This is not an exhaustive definition of the term. Even if the contract is not “unconscionable, harsh, or oppressive”, it may still be “unjust” (s.70(7)).

Rather than providing an exhaustive definition, the Code takes the approach of setting out a non-exhaustive list of factors which can be taken into account by the Tribunal in determining whether the contract is unjust.

A contract may be unjust because its terms, consequences or effects are unjust; or the contract may be unjust because of the unfairness of the methods used to make it. Often both of these elements will be present when a contract is found to be unjust.

The Tribunal would be most likely to find that a contract is unjust if the applicant can show:

• her or she was acting under some special disadvantage such as mental illness, illiteracy, commercial inexperience or inability to speak English, and/or some unfair emotional or physical pressure;
• the credit provider was aware of the special disadvantage or unfair pressure;
• the actual terms of the contract were not beneficial to the applicant (for example a guarantor who enters into a risky obligation with no corresponding benefit); and
• independent legal or financial advice was not given or was not sufficient to remedy any unfairness in the transaction (s.70(2)).

It is clear that a contract will not be considered to be unjust simply because one of the relevant factors is established. For example, a contract will not be regarded as unjust simply because there is an “inequality in bargaining power” between the parties. An inequality in bargaining power is a feature of all consumer credit contracts. Rather, the SAT will have to consider all of the circumstances of the individual case in determining whether a contract is unjust.

The SAT is also to have regard to “the public interest and to all the circumstances of the case”.

Some of the factors that can be taken into account are as follows:

• the relative bargaining power of the parties;
• whether or not it was reasonably practicable for the applicant (the debtor, mortgagor or guarantor) to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;
• whether or not the applicant or their representative was reasonably able to protect the applicant’s interests because of their age or physical or mental condition;
• whether or not, and if so when, independent legal or other expert advice was obtained by the applicant;
• the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the applicant and whether or not the applicant understood those provisions and their effect;
• whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the applicant and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics.

The full list of factors is set out in section 70(2) of the Code, one of which is as follows:

“whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship”.

It seems unlikely that inability to meet repayments under a contract could by itself make a contract unjust. However, taken together with other factors that are relevant to the debtor’s judgment about whether or not to enter into the contract, it may be a significant factor.

Problems that arise when the credit provider is not aware of relevant circumstances

In determining whether a credit contract, mortgage or guarantee is unjust, the Court is not to have regard to any injustice arising from circumstances that were not reasonably foreseeable when the contract, mortgage or guarantee was entered into or changed (s.70 (4)).

There is still some uncertainty about how this provision should be interpreted. However, where the credit provider is not aware of circumstances giving rise to injustice, then the unjust contract provisions of the Code probably do not allow the relevant contract to be set aside. For example if a person affected by mental illness enters into an unfair contract, it is unlikely that the contract will be set aside unless the credit provider knew or should have known of that circumstance. The typical example is where a person purchasing a vehicle arranges their finance through the finance and insurance salesperson at the vehicle dealer’s premises. Here the credit provider will not know or have reason to know anything about the personal circumstances of the debtor, except for basic details from the finance application such as income, assets and date of birth. The salesperson will usually not be taken to be the agent of the credit provider. Even if the salesperson knows about the personal circumstances of the debtor, the credit provider will not be taken to have this information.

THE PROCESS FOR DETERMINING WHETHER A CONTRACT IS UNJUST

An unjust contract application must be made to the SAT. It cannot be made to a Court. Information as to how to apply to the SAT is available from its website: www.sat.justice.wa.gov.au.

If the SAT finds that the credit contract, mortgage, guarantee or change is unjust, it can “re-open the transaction” that gave rise to the credit contract, mortgage, guarantee or change.

When the SAT reopens a transaction, it can then decide to grant various kinds of relief, including setting aside contracts (s.71).

Unjust “changes”

The SAT can also consider whether a change to a credit contract, mortgage or guarantee is unjust, and re-open the transaction that gave rise to the change. This applies to unilateral changes as well as to changes made by agreement.

If the “transaction” giving rise to the change is unjust, then it can be re-opened. The effect of the change could be reversed or modified by orders made by the SAT. For example, if a new fee were to be introduced, and the amount of that fee was excessive, that change could be reversed by the SAT (s.72).

What powers does the SAT have?

Where the SAT re-opens a transaction, it has a broad discretion to make a variety of orders to adjust the relations between the parties (s.71). These include setting aside agreements made or mortgages given in connection with the transaction. The SAT may also relieve the debtor and any guarantor from payment in excess of such amount as it considers to be reasonably payable.

UNCONSCIONABLE INTEREST AND OTHER CHARGES

The Code has special provisions for making applications in relation to unjust interest and other charges. These apply to:

• a unilateral change in the annual percentage rate or rates under a credit contract;
• an establishment fee or charge;
• a fee or charge payable on early termination of a credit contract;
• a fee or charge for a pre-payment of an amount under a credit contract. (s.72(1)).

No other changes, fees or charges can be annulled or reduced under section 72.

However, the fee or charge may be attacked under the general provisions relating to unjust contracts in section 70. For example, a high interest rate is one factor that the SAT can look at in determining whether a credit contract is unjust.

The SAT may reduce or annul the change or fee or charge under section 72 if it finds that the change, fee or charge is “unconscionable”. In section 72 the term “unconscionable” has a specific meaning.

When is a change in the annual percentage rate of interest “unconscionable”?

A change to the annual percentage rate of interest is unconscionable “if and only if” it changes the annual percentage rate in a manner that is unreasonable, having regard to any advertised rates or other representations made by the credit provider before or at the time the contract was entered into, the period of time since the contract was entered into, and any other consideration the Tribunal thinks relevant. The change is also unconscionable if it is a measure that discriminates unjustifiably against the debtor when the debtor is compared to other debtors of the credit provider under similar contracts (s.72(2)).

When is an establishment fee “unconscionable”?

The SAT is to have regard to whether the amount of the fee or charge is equal to the credit provider’s reasonable costs of determining an application for credit and the initial administrative costs of providing the credit, or is equal to the credit provider’s average reasonable costs of those things in respect of that class of contract (s.72(3)).

When is an early termination or prepayment fee “unconscionable”?

These fees are unconscionable “if and only if” they exceed a reasonable estimate of the credit provider’s loss arising from the early termination or pre-payment, including the credit provider’s “average reasonable administrative costs” in respect of such a termination or pre-payment (s.72(4)).

WHAT TIME LIMITS APPLY?

An unjust contract application may not be made more than 2 years after the relevant credit contract is rescinded or discharged or the credit provider writes off the relevant debt, whichever occurs first (s.73).

An application under section 72 may not be brought more than 2 years after the relevant change takes effect or fee or charge is charged under the credit contract or the credit provider writes off the relevant debt, whichever occurs first (s.73(2)).