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 e.g. business loans (UCT Regime).
The UCT Regime is set to extend further to insurance contracts in April 2021 and many insurers are now well down the path of reviewing standard form consumer contracts and small business contracts to see whether they contain potentially unfair terms.
The recent case of ASIC v Bendigo and Adelaide Bank Limited  FCA 716 (Bendigo) served as a timely reminder for all financial services providers of the importance of ensuring compliance with the UCT Regime.
In Bendigo, the Federal Court of Australia considered the application of the unfair contract term provisions in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to the Bendigo and Adelaide Bank’s (Bendigo Bank) standard form small business contracts.
The Court found that certain clauses in Bendigo Bank’s standard form small business contracts were unfair contracts terms, in breach of the UCT Regime.
Overview of UCT Regime
Under s12BF of the ASIC Act, a contract is a ‘small business contract’ where:
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; 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.
For the UCT Regime to apply, the small business contract must also be a ‘standard form contract’ for a financial product or the provision of financial services, such as business loans, credit cards and overdraft arrangements.
Financial services providers should note that a small business contract is presumed to be a standard form contract unless the financial services provider proves otherwise (s12BK of the ASIC Act).
Section 12BF(1) of the ASIC Act provides that a term in a standard form small business contract for a financial product or service is void if the term is ‘unfair’.
What is an ‘unfair’ contract term?
Section 12BG of the ASIC Act defines the term ‘unfair’. A term in a contract is ‘unfair’ if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause financial or other detriment to a party if it were to be applied or relied on.
The court can take into account any matter it thinks relevant in determining whether a term in a contract is unfair. However, the court must take into account the transparency of the term and the contract as whole.
Pursuant to sections 12BF and 12GND of the ASIC Act, if the court determines that a term in a standard form contract is unfair, it makes a declaration to that effect and declares the term void (i.e. as if it never existed). The remainder of the contract will continue to operate between the parties if the contract can operate without the unfair term.
The Bendigo case
The Court in Bendigo declared several terms within six standard form small business contracts used by Bendigo Bank to be unfair and void from the outset. ASIC was also successful in obtaining a declaration that applies to those same terms where they appear in any other standard form small business contract used by any financial services provider.
In doing so, ASIC and the court have made it clear that financial institutions should pay particular attention to the following.
The indemnity clauses required the small business customer to compensate Bendigo Bank for any liability incurred by the bank in relation to circumstances that were not of material risk to the bank, not within the customer’s control, and could have been mitigated by the bank.
- The Court held that the indemnity clauses were unfair because the bank could hold the customer liable for loss or costs incurred by the bank that the customer did not cause, or where the loss was caused by the bank’s mistake, error or negligence, or the loss could havebeen avoided or mitigated by the bank. This satisfied the ‘detriment’ requirement in section 12BG(1)(c) of the ASIC Act.
- The Court also held the clauses created a significant imbalance in the parties’ rights and obligations, in breach of section 12BG(1)(a) of the ASIC Act as, amongst other things, the customer did not have any corresponding rights under the contract.
Event of default clauses
The impugned Bendigo Bank default clauses included terms which:
- created a default event arising from matters that did not involve any credit risk to the bank (e.g. where a customer makes an untrue or misleading statement which is not material to the contract);
- allowed the bank to take disproportionate enforcement action (e.g. the bank could cancel a loan facility even if the customer was meeting all obligations and making timely repayments);
- did not allow the customer an opportunity to remedy the default; and
- were based on the bank forming a unilateral opinion on the matter and expressed in vague and largely undefined circumstances.
The Court held that the clauses were unfair as they created a significant imbalance in the rights and obligations of the parties that would cause detriment to the customer.
Unilateral variation or termination clauses
Unilateral termination and variation clauses were held to be unfair and void. The clauses caused a significant imbalance in the parties’ rights and obligations as they entitled Bendigo Bank unilaterally to:
- vary the financial services and reduce the amount of funds available to the customer;
- vary terms of the contract at will; and
- terminate the contract if the customer did not accept any proposed new terms, or alternatively charge fees if the customer elected to terminate.
The Court was satisfied that these terms, together with the lack of any corresponding rights afforded to the customer under the contract, caused detriment to the customer and breached the UCT Regime.
Conclusive evidence clauses
The conclusive evidence clauses in Bendigo Bank’s contracts provided that the bank’s certificate would be conclusive proof of any amount owed by the customer unless the customer proved otherwise.
The clauses created a significant imbalance and caused detriment because the bank was permitted, by issuing a certificate, to impose an evidential burden on the customer to disprove matters about which the bank was best placed to provide primary evidence. As a result, the Court found that these clauses also breached the UCT Regime.
The use of the same terms in any future small business contracts by Bendigo Bank or any other financial services provider is prohibited.
Financial institutions’ contracts are critical to their proper risk management. Including and intending to rely on clauses thatdo not comply with the UCT Regime creates significant risk and unnecessary exposure for such institutions.
Financial services providers who get their UCT Regime compliance wrong will likely be required to expend considerable internal time and resources addressing UCT issues. Prevention will almost certainly be better than cure when it comes to UCT Regime compliance.
Insurers in particular can learn from the Bendigo case and consider:
- undertaking a comprehensive review of all standard form small business contracts (particularly by reference to the terms addressed above); and
- where any potentially problematic terms are detected in existing contracts with customers, seeking the customers’ written consent to vary those terms to ensure compliance.
This article was published as part of Gadens' featured publication, FSR Wrap | November 2020 edition.