Fair game: Unfair contract terms in superannuation?

Sections 12BF-12BM of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) contain provisions designed to protect consumers and certain small business in respect of unfair contract terms in relation to their application to financial services (UCT Regime). The introduction of civil penalties in the UCT Regime in late 2022 and the flow-on automatic ASIC breach reporting consequences have brought these issues into sharper focus for financial services licensees.

It is easy to see why some might form the view that the UCT Regime does not apply in the context of superannuation. This is because the relationship between a registrable superannuation entity (RSE) and a beneficiary of the RSE is governed by the Superannuation Industry (Supervision) Act 1993 (Cth) and general trust law, pursuant to the relevant governing rules.

Nevertheless, as we have commented previously, it is still possible for a superannuation product to give rise to contractual relationships that exist concurrently with the trust relationship. There have been a number of articles written on the general subject of contractual relationships in the context of superannuation funds and other trusts.[1]

Are there contractual relationships in superannuation?

Where contractual relationships exist in the superannuation context, it is possible for the UCT Regime to find application. Specifically, in this article, we focus on the situation in which a product disclosure statement (PDS) is structured as a contract, and the circumstances in which the UCT Regime could be considered to apply to it.

The current position in the case law is that a contract can exist depending on how the PDS and, more particularly, the application form is structured. For example, in Macquarie Capital Advisers Ltd & Anor v BrisConnections Management Company Ltd,[2] it was held with respect to the particular PDS in that case:

The PDS is not in the nature of a contractual document. It comprises a description of the proposed scheme, an identification of risks for investors who choose to apply for units, identification of benefits to unit holders from the scheme and provides answers to questions potential investors might wish to ask about the scheme.

The PDS is referred to as such in a number of places in the application form itself. If the reference in the acknowledgement to being bound by the terms of the offer was meant to be a reference to the PDS, it follows that it would have said so. In other words, the investor would acknowledge being bound by the PDS and the constitutions. That is not what the form says. I can see no reason to conclude that the words “PDS” and “terms of the offer” are interchangeable.

However, it stands to reason that if an application form included words that could be construed as a client’s intention to be bound by certain terms of the PDS, rather than broadly the terms of the offer, then those terms are certainly capable of having contractual force.

Often superannuation products seek to obtain various acknowledgements and agreements from the relevant client. Generally, in contract law terminology, it is the case that the issue of a PDS constitutes an “invitation to treat” emanating from the product issuer; the submission of an application by a client accordingly amounts to an “offer”, with the acceptance of the application by the trustee constituting the “acceptance”.

There are various reasons why such acknowledgement/agreement from the client is typically sought. These range from seeking approval in relation to privacy matters, through to payment method (i.e. direct debit), through to matters in which the consent or agreement of the client is required under the Corporations Act 2001 (Cth) (Corporations Act) (for example, the approval from the client for the trustee to provide ongoing disclosure electronically).[3]

Of course, there is no need to obtain specific client consent to the terms and conditions contained in the relevant superannuation fund’s trust deed, as this will be binding on the client by virtue of trust law principles (i.e. the client takes their trust interest subject to the terms of the trust).

This said, trusts do not typically impose positive obligations on beneficiaries, or at least tend to not do so in the same way that a contract imposes such positive obligations. For example, a trust deed might specify that a fee is payable to the trustee from the trust fund, but this does not involve any positive obligation on a member.

In short, the PDS is the usual depository of positive obligations sought to be imposed on clients vis-à-vis a superannuation product. In this regard, a distinction can be drawn between seeking consent from a client in respect of a particular matter on one hand, and agreement from a client to a positive obligation on the other.  For example, consent to the use of personal information for privacy law purposes is not of itself, and does not need to be, contractual in nature. Similarly, when the Corporations Act indicates that it requires the approval of a client to a mode of delivery of information, the word “approve” does not mean consent.

When then does a PDS become contractual in the sense of forming a contract between the product issuer and the client?

To some extent, as indicated in the BrisConnections case, this will depend on the intention of the parties and how such intention is conveyed through, typically, the application form. As was commented upon in that case, if the application form contains a provision in which the client agrees to be bound by the terms and conditions of the PDS, at first blush at least, this suggests that a contract is being formed.

Of course, there is a need to discuss whether consideration is present. Associate Professor Scott Donald (a member of the HSF team) has mapped (in the Journal of Equity) the complex intermingling of contract, trust, tort and statute in the superannuation context.  In that article, he writes that:

… an agreement to be bound by the terms of the trust will not be sufficient [consideration]. As the Walsh J noted at first instance in Tooheys Ltd v Commissioner of Stamp Duties (NSW):

An acceptance of a trust and an agreement to hold the trust property upon the terms of the trust, and to administer it accordingly, do not constitute the giving of consideration by the trustees for the property so accepted. If it were so, every trust would have to be regarded as created for full consideration.

This statement of the law has been endorsed by the High Court in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW).  In contrast, in [Cook v Benson] the majority [of the High Court] found that the contributions made by the member in that case were:

made contributions in return for the undertaking by the trustees of the funds of obligations to pay death, retirement or other related benefits, to him or his nominees, in accordance with the rules of the respective funds.

(footnotes omitted).[4]

Accordingly, consideration could potentially exist through the trustee’s admission of members into the fund.  As Donald states:

It is possible to interpret the words ‘to which he would have in due course become entitled’ used by the majority [of the High Court in Cook] as describing an agreement merely to enrol the individual in membership of the fund. It is certainly arguable that this places considerable weight on the precise phrasing of the majority and was not intended by them. However this was the approach taken on different but analogous facts by Austin J in respect of the transactions under scrutiny in Basis Capital Funds Management Ltd v BT Portfolio Services Ltd. In that case, one issue before the court related to the legal status of individuals who had submitted an application form and money but who had yet to be issued units in the fund. His Honour identified the scope of the contract as being limited, on the facts before him, to the offer of membership. Although not expressly articulated in Austin J’s judgment, the contract would presumably have come to an end once the individual had been admitted to membership and the relationship had moved onto a trust footing. This approach allocates the contractual and trust obligations to distinct stages in the course of dealing, reducing the complexity of the legal relations at any specific point in time considerably by removing the prospect of simultaneous application. It recognises that, at its core, Cook was, like Basis Capital, crucially about the process of acquisition of the interests in the fund by the member, not the enforcement of the rights enjoyed qua member. As such, this explanation is also capable of accommodating Kirby J’s dissent in Cook. Whether the courts will follow Austin J’s lead on this remains to be tested.

(footnotes omitted).[5]

In this regard, a trustee is not generally obliged under the terms of the superannuation trust to admit members to membership but rather, it enjoys a discretion in this regard.

So consideration can be present.

If there is a contractual framework, the client agrees to be bound by terms and conditions of the PDS. It follows from what we said earlier that terms and condition of the trust will be contained in the trust deed (or governing rules of the fund).

Nonetheless, terms and conditions could be contained in the PDS. Typically, such terms and conditions might include:

• more detail around superannuation investments, such as member investment directions;
• detail around applications and redemptions; and
• detail around specific areas such as binding death benefit nominations.

Importantly, usually a PDS will only need to embody terms and conditions if there is a need to bind the client to various matters, including some of the examples just cited.

What happens if the PDS is a contract?

If it transpires that a superannuation fund’s PDS is indeed a contract, then as indicated above, the UCT Regime is likely to have application.

The UCT Regime applies to standard-form consumer contracts and small business contracts. For the purposes of this article, we will consider the position with respect to consumer contracts. Under section 12BF of the ASIC Act, “[a] consumer contract is a contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption.”

There is some question as to whether a superannuation product could be said to be for personal use. Superannuation is, after all, compulsory and serves a public purpose. Nevertheless, the purchase of a particular superannuation product is still likely, in our view, to be an acquisition for personal use. Guidance in this regard can be found in the NSW Court of Appeal case of Tonto Home Loans Australia Pty Ltd v Tavares.[6]  The case did not involve a superannuation product, but rather on a loan product to be used for investment saving in one’s retirement – nevertheless we consider the logic to remain the same. It was held that:

Judicial notice can be taken of the wide investment in the community for the provision of retirement saving. Such borrowing for such purposes is not infrequently undertaken for the personal use of saving for one’s retirement. To a degree that is a business use; to a degree it is a personal or household use – for personal savings.

…

Looking here at the characteristics of this so-called financial product, were it necessary to decide, I would conclude that “ordinarily” such loans are used for the personal use of investment saving.

On this basis, it is highly likely that a superannuation product acquired by an individual consumer would be a product that is wholly or predominantly for their personal use. Therefore, to the extent that there exists a consumer contract between an RSE and a member, the UCT Regime is likely to apply to those terms.

If you have any questions about the formation of contract in superannuation or the UCT Regime, get in touch with one of our experts below.

[1] See, for example, Michael Vrisakis, ‘Co-habitation of contract and trust relationships in contemporary investment trusts’ (2008) 2 Journal of Equity 274; Scott Donald, ‘Parallel streams?  The roles of contract, trust, tort and statute in superannuation funds and managed investment schemes’ (2020) 14 Journal of Equity 151.

[2] Macquarie Capital Advisers Ltd & Anor v BrisConnections Management Company Ltd [2009] QCA 272 at [60]-[61]

[3] See, for example, section 1017D(6) of the Corporations Act 2001 (Cth) and regulation 7.9.75A(2) of the Corporations Regulations 2001 (Cth).

[4] Scott Donald, ‘Parallel streams?' at 164.

[5] Scott Donald, ‘Parallel streams?', 165.

[6] Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [296] and [298].