On 12 November 2016, protections were extended to small businesses against unfair contract terms. Soon afterwards, ASIC called into question the validity of several standard form terms which lenders rely upon in loan agreements.
On 9 March 2017, ASIC warned that “lenders need to immediately take steps to ensure their standard form loan agreements fully comply with the new legislation”. Media Release 17-056MR
On 16 May 2017, ASIC announced that the big four banks had agreed to remove ‘entire agreement clauses’, ‘financial indicator covenants’ (such as when the value of a secured property falls) and ‘material adverse event clauses’ (unspecified negative changes in circumstances) from their loan contracts. They also agreed to limit the operation of indemnification clauses and unilateral variation clauses. Media Release 17-139MR
On 24 August 217, ASIC announced that the big four banks had changed their loan contracts to eliminate unfair contract terms to remove ‘entire agreement clauses’, to significantly limit ‘indemnification clauses’, to remove ‘material adverse event clauses’ and to provide between 30 and 90 days notice of variation. Media Release 17-278MR
ASIC proceeds against Bendigo and Adelaide Bank and Bank of Queensland
It seems that Bendigo and Adelaide Bank and Bank of Queensland did not heed the warnings because on 3 September 2019, ASIC commenced Federal Court proceedings against these two Banks for their use of unfair contract terms in their standard form loan contracts in the period between 16 November 2016 and 30 June 2019. Media Release 19-238MR & Media Release 19-239MR.
ASIC seeks declarations that the unfair contract terms are void ab initio pursuant to s 12BG of the Australian Securities and Investments Commission Act 2001 (ASIC Act), which states:
s 12BG (1) A term of a contract referred to in subsection 12BF(1) is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Note: a s 12BF(1) contract is a small business contract which is defined as:
s 12BF (4) A contract is a small business contract if:
(a) 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
(b) either of the following applies:
(i) the upfront price payable under the contract does not exceed $300,000;
(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
There are four kinds of standard form terms that ASIC seeks the Court declare are void:
1. Indemnification clauses that:
- Apply to losses not caused by a customer’s default; and
- Have the effect of limiting the bank’s vicarious liability for its agents.
ASIC’s contention is that these clauses need to be significantly limited and not cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.
2. Event of default clauses that:
- Allow the bank to unilaterally determine whether a default has occurred;
- Do not permit the customer to remedy a default capable of remedy and which create defaults based on events which may or may not involve any credit risk;
- Create defaults based on events that are within the control of the bank, not the customer;
- Create defaults based on events that may or may not involve any credit risk;
ASIC’s position is that terms that provide for loan 'default' (such as non-monetary default) in a very broad range of circumstances, and for an unspecified ‘material adverse change event’ in the circumstances of the customer should be removed and ‘event of default clauses’ be limited to where the customer has materially defaulted on their obligations or the breach presents a material credit risk to the bank.
3. Unilateral variation or termination clauses which:
Permit the bank to vary the upfront price of the contract, the financial services to be supplied under the contract and other terms of the contract.
ASIC’s position is that terms that give banks a very broad discretion to unilaterally vary terms and conditions of the contract, where a variation would cause a customer to want to exit the contract, should be qualified to provide a notice period of between 30 and 90 days for the customer to do so.
4. Conclusive Evidence clauses that:
Have the effect of imposing the evidential burden on the customer in proceedings relating to the contract.
ASIC’s position is that Dobbs clauses (as they are known) should be limited, if not removed.
ASIC is seeking to void standard form terms as used in a variety of small business contracts including Term Loans, Commercial Rate Loans, Overdrafts and General Loan Conditions.
The unfair contract terms that ASIC is pursuing have until now been common standard form terms in loan contracts.
According to the Concise Statement filed in the Proceedings, the Bendigo and Adelaide Bank had at least 15,529 standard form loan contracts with businesses for under $1 million current as at 30 June 2019. The Bank of Queensland had 3,018 standard form loan contracts with businesses for under $1 million current as at 30 June 2019.
Now that small businesses are treated the same as consumers for lending purposes, the terms that ASIC is requesting the Court to declare void should not be relied upon by lenders wanting to exercise their rights under a loan contract.