The Federal Court of Australia has declared several terms within six small business contracts used by Bendigo and Adelaide Bank to be unfair. The relevant contracts are standard form ‘small business’ loan contracts which the bank entered into with its customers after 12 November 2016. ASIC was also successful in having the Federal Court declare the same terms appearing in other standard form small business contracts, entered into by the Bank with its customers in the same time period, to be unfair.
The Bendigo and Adelaide Bank will give an undertaking to the Court not to use, or rely upon, any of the impugned terms in a manner that is unfair, or causes any customers to suffer loss or damage.
Justice Gleeson found that the unfair terms:
- caused a significant imbalance in the parties’ rights and obligations under the contract;
- were not reasonably necessary to protect the legitimate interests of Bendigo and Adelaide Bank; and
- would cause detriment to the small businesses if the terms were relied on.
ASIC’s investigation revealed that some of the unfair terms gave the bank broad discretion to unilaterally vary the terms and conditions of the contract without giving the borrower advance notice, or an opportunity to exit the contract without penalty. Other terms allowed the bank to take disproportionate actions in response to a breach by the borrower, for example, by calling a default without giving the borrower an opportunity to remedy a breach, or by calling a default based on events that do not present any material risk to the bank.
In handing down the judgment on 28 May 2020, Justice Gleeson noted that ASIC, as the statutory authority responsible for enforcing the ASIC Act, has a public interest in seeking these declarations.
The Court declared that the terms were void from the outset, not from the time of the court’s declaration, with the remainder of the contract continuing to bind the parties. The Court also ordered that the contracts be varied by replacing the unfair clauses with new fair clauses by the parties following successful negotiations between ASIC and Bendigo and Adelaide Bank.
ASIC Commissioner Sean Hughes said, ‘ASIC is committed to protect small business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms.’
‘Yesterday’s judgment shows that ASIC will take the necessary steps to enforce the law. Importantly, insurance firms should be preparing to extend these obligations in insurance contracts’ he added.
‘We are pleased the Government backed us with additional funding that was ear-marked to enforce this area of the law.’
Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.
From 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.
Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.
The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:
- the contract is for the supply of financial goods or services (including loan contracts);
- at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people); and
- the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.
In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:
- identifies the types of terms in small business loan contracts that raise concerns under the law;
- provides details about the specific changes that have been made by the ‘big four’ banks to their small business loan contracts ensure compliance with the law; and
- provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the Unfair Contract Terms law.
For more information about ASIC’s previous work relating to unfair contract terms in small business contracts, refer to:
- ASIC and ASBFEO join forces to ensure bank lenders meet unfair contract laws ();
- ASIC and ASBFEO hold banks to account on unfair contract terms ();
- Big four banks change loan contracts to eliminate unfair terms ().