ASIC v HCF: Is it misleading to propose a contractual term that is partially enforceable?

In the recent decision of ASIC v HCF Insurance Company Pty Limited [2024] FCA 1240 (ASIC v HCF), Justice Jackman found that a term in a contract of insurance was “liable to mislead the public” contrary to section 12DF Australian Securities and Investments Commission Act 2001 (ASIC Act) because it was not enforceable according to its letter. Contractual terms are often not enforceable according to their letter due to the effect of implied terms, common law and equitable rules and legislation. Also, the correct legal interpretation of a term may depart from its strict letter. So, ASIC v HCF may have concerning implications for standard form contracts that are prepared by a business for use with its customers. However, the concern may be limited to cases where the contract is presented as a form of disclosure statement that consumers might expect to accurately record their rights and obligations. This was the factual scenario in ASIC v HCF.

ASIC v HCF

In ASIC v HCF, Justice Jackman considered the impact of section 47 of the Insurance Contracts Act on a term that required an insured to notify a life insurer of pre-existing medical conditions.

Section 47(2) of the Insurance Contracts Act addresses sickness and disability to which an insured was subject before the contract of insurance was entered into. Section 47(2) prevents an insurer from relying on a provision in a contract of insurance that limits the insurer’s liability by reference to such a sickness or disability if, “at the time the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability”. In ASIC v HCF, the contracts of insurance contained a term to the effect that no cover would be provided to the insured if an impairment, illness, disability or death occurred “as a result of” a “Pre-Existing Condition” where a “Pre-existing Condition” was defined as “any condition, illness or ailment where the signs or symptoms of which, in the opinion of a registered medical practitioner, existed at any time before the Cover Commencement Date, even if a diagnosis had not been made” (Pre-Existing Condition Term).

The Pre-Existing Condition Term did not align with section 47 of the Insurance Contracts Act. There was a “mismatch”, to quote Justice Jackman. Despite this “mismatch”, the Term “may well [have] operate[d] consistently with section 47 in the vast majority of circumstances”. Still, there were “realistic scenarios” in which it would not. Justice Jackman gave the example of the insured suffering from headaches in March, entering into a contract of insurance in April and then being diagnosed with cancer in May. A particular “registered medical practitioner” then forms the opinion that the headaches were a symptom of cancer but the insured was not aware of the cancer and a reasonable person could not be expected to have been aware the headaches were cancer. In that scenario, the Pre-Existing Condition Term (if enforceable according to its letter) would allow HCF to deny cover but section 47 would intervene and require HCF to provide cover.

Due to the mismatch between the Pre-Existing Condition Term and section 47, the Act rendered the Term partially unenforceable. Although the Pre-Existing Condition Term did not align with section 47, HCF administered the term consistently with section 47.

ASIC alleged that the Pre-Existing Condition Term was liable to mislead the public contrary to section 12DF of the ASIC Act. It also alleged that the term was unfair and therefore void under the unfair contract term laws found in the ASIC Act. This article will only consider section12DF. Justice Jackman did not find the term to be unfair.

Justice Jackman concluded that an “ordinary and reasonable member of the public would read and understand the Pre-Existing Condition Terms … as being an accurate and complete statement of when benefits will not be payable under a policy by reason of a pre-existing condition”. They “would be ignorant of the potential effect of section 47”. In reaching this conclusion, it was significant that the Pre-Existing Condition Term was contained in a product disclosure statements, which “were not mere recitations of contractual terms” and instead were “designed to help insureds decide whether the product is right for them”. Further, the product disclosure statements “purported to provide an accurate and complete statement of when benefits would and would not be payable under the policy”.

His Honour concluded that HCF engaged in conduct that was liable to mislead the public contrary to section 12DF of the ASIC Act by entering into contracts that contained the Pre-Existing Condition Term but failing to “advert to, or explain, the existence or effect of section 47 of the Insurance Contracts Act” or that the term was “partially unenforceable”. HCF’s conduct was misleading because it purported to provide “an accurate, complete and unqualified statement of the circumstances in which benefits will not be payable to a consumer by reason of a pre-existing condition” when this statement failed to note that section 47 rendered the Pre-Existing Condition Term “partially unenforceable”. Justice Jackman reached this conclusion despite:

• the Insurance Contracts Act not requiring HCF to notify the insured of section 47;
• HCF administering the Pre-Existing Condition Term consistently with section 47; and
• ASIC not presenting evidence of a single person being misled.

Contractual terms and misleading conduct

There are several provisions in the ASIC Act and Australian Consumer Law (ACL) prohibiting misleading conduct. The three most significant are

• the prohibition on misleading or deceptive conduct or conduct that is likely to mislead or deceive;
• the prohibition on conduct that is “liable to mislead the public”; and
• the prohibition on false or misleading representations in relation to certain matters.

The latter two prohibitions may both be punished with pecuniary penalties. ASIC v HCF addressed conduct that was liable to mislead the public, but the conclusions in the case are relevant to other forms of misleading conduct.

Whether contractual promises may constitute misleading conduct is a slightly vexed area. In an oft-quoted passage, Justice Allsop said in McGrath v Australian Naturalcare Products Pty Limited (2008) 165 FCR 230; [2008] FCAFC 2 that “the divining of representations from the making of contractual promises and the entry into contracts is a task to be approached with caution and with an eye to all the facts and not by reference to implying representations mechanistically from equivalent promises”.

It is accepted that a contractual warranty as to a particular state of affairs may constitute misleading conduct if that warranty is false. There is some support for the view that entry into a contract by a party constitutes a representation that it is able to perform the contract. ASIC v HCF addresses a different point: whether a term is misleading because it is not enforceable according to its letter.

In ASIC v HCF, ASIC proved that the use of a contractual term was liable to mislead the public contrary to section 12DF of the ASIC Act because the term was not enforceable according to its letter. Many terms may not be enforceable according to their letter. In light of ASIC v HCF, does any term that does not operate according to its letter create a risk of being misleading and potentially attracting a pecuniary penalty? If that were the case, it would be a concerning outcome. However, this might not be the case due to the way the contracts of insurance in ASIC v HCF were entered into. The terms of the contracts of insurance were recorded in a product disclosure statement and the policy schedule of each insured. As noted above, the product disclosure statements “were not mere recitations of contractual terms” and instead were “designed to help insureds decide whether the product is right for them”. So, a term in a more conventionally presented contract may not create the same risk. There is some authority on this point.

In Penrith Whitewater Stadium Ltd v Lesvos Pty Ltd (2007) 13 BPR 24,799; [2007] NSWCA 176, the Court of Appeal considered a contract whereby Penrith Whitewater Stadium agreed to rent premises at the stadium to Lesvos so that it could carry on a café business. The contract was found to be unenforceable because it was a contract for the disposition of an interest in land yet did not fulfil the writing requirements of section 54A(1) of the Conveyancing Act 1919 (NSW). The contract was not embodied in a product disclosure statement, unlike in ASIC v HCF. Lesvos alleged that Penrith Whitewater Stadium represented to Lesvos that the contract was enforceable by agreeing to it. Justice Ipp (with whom the other members of the Court agreed) rejected this argument saying at [59]:

• “There is nothing to suggest that the question of the enforceability or otherwise of the Café contract, at the time it was entered into, was in the mind of any of the contracting parties. The mere expression of an assent to the provisions of the Café contract says nothing as to whether the Café contract was enforceable at law. That assent did not constitute a representation that the Café contract was enforceable.”

That said, in ACCC v Booktopia Pty Ltd [2023] FCA 194 the court found by consent of the parties that a set of terms and conditions used by a book retailer amounted to a contravention of the prohibition on false or misleading representations because they did not accurately reflect a customer’s rights under the consumer guarantees in the ACL. It is important to note that ACCC v Booktopia was resolved by consent of the parties, thereby reducing the precedential value of that decision. If “a proposition of law is incorporated into the reasoning of a particular court, that proposition, even if it forms part of the ratio decidendi, is not binding on later courts if the particular court merely assumed its correctness without argument”. 

Neither ACCC v Booktopia or Penrith Whitewater Stadium Ltd v Lesvos Pty Ltd were addressed in ASIC v HCF.

It is worth noting that the Chapter 7 of the Corporations Act 2001 (Cth) and its accompanying regulations provide a detailed regime for regulating product disclosure statements. For example, section 1012E of the Corporations Act creates a contravention for giving a “defective” product disclosure statement. A product disclosure statement is “defective” if it contains a misleading or deceptive statement and the statement would be “materially adverse from the point of view of a reasonable person considering whether to proceed to acquire the financial product concerned”: section 1021B(1)(a). ASIC did not allege any contravention of Chapter 7 of the Corporations Act in ASIC v HCF and the judgment does not refer to the regime in that chapter.

It is important to note that in ASIC v HCF the Pre-Existing Condition Term was liable to mislead the public not only because it was “partially unenforceable” but also because it failed to “advert to, or explain, the existence or effect of section 47 of the Insurance Contracts Act”. So, it seems the term might not have been misleading, despite being partially enforceable, provided it had referred to section 47. This could mean that a partially enforceable contract is saved from being misleading by the contract stating that it may not be enforceable to its letter and giving a brief explanation why. Is this feasible? It depends how much detail is required. A draftsperson may not wish to include a comprehensive list of all the reasons why the contract they have drafted may not be entirely enforceable!

Drafting a contract where every term is enforceable precisely according to its letter is a challenging task. Based on the outcomes in ASIC v HCF and ACCC v Booktopia, a term that is not enforceable according to its letter could be misleading. This risk seems higher in the case of consumer contracts, particularly those where the terms are contained in a product disclosure statement that purports to provide an accurate and complete account of the parties’ rights and obligations. Matters may be different if the contract is entered into by commercial parties and is contained in a conventionally drafted contract.