Standard form loan contract terms found to contravene the unfair contract terms regime
On 28 May 2020, the Federal Court of Australia published its decision in ASIC v Bendigo and Adelaide Bank  FCA 716, in which it found that certain terms contained in six standard form small business contracts utilised by the Bendigo and Adelaide Bank were unfair within the meaning of the unfair contract terms regime contained in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
This decision should provide useful guidance to all in the financial products and services industry engaging with small businesses or consumers pursuant to standard form contracts. It should also be reviewed by insurers in light of the impending extension of the unfair contract terms to insurance contracts.
Terms in issue
There were 4 types of “problem” clauses in the standard form loan contracts of the Bendigo and Adelaide Bank (Bank), which deal with:
- indemnities from the customer to the Bank;
- event of default, outlining what steps the Bank could take following such an event;
- variation and termination, giving the Bank unilateral rights to do both; and
- conclusive evidence, which shifted the evidentiary onus onto the customer to prove that the Bank’s statement as to what was owed to it was incorrect.
Unfair contract terms regime
The Australian Securities and Investments Commission (ASIC) administers the law dealing with unfair contract terms in standard form consumer and small business contracts. The regimes for unfair contract terms are found in the national Australian Consumer Law, which applies to standard form consumer and small business contracts for the supply of goods or services and the sale or grant of an interest in land, and the ASIC Act, which applies to standard form, small business contracts which relate to financial products or services.
In deciding whether a term is unfair, a Court must consider the extent to which the term is transparent, as well as the contract as a whole.
A term in a standard form consumer contract will be “unfair” if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party that would benefit from its inclusion; and
- would cause financial or other detriment (e.g. delay) to a party if it were to be applied or relied upon.
A term is considered to be “transparent” if it is legible, expressed in reasonably plain language, presented clearly and readily available to any party affected by the term. In essence, terms that are hidden in fine print or phrased in legal, complex or technical language are more likely to be considered not transparent.
In making these assessments, the Court will also consider whether the particular term is fair in the context of the contract as a whole, including any other terms that may offset the unfairness of the term.
Here, ASIC sought declarations that all 4 types of clauses in the Bank’s standard form loan contracts were void ab initio.
Her Honour Justice Gleeson found that all 4 clauses were unfair for the purposes of the unfair contract terms regime in the ASIC Act as they created a significant imbalance in the parties’ rights and caused detriment to the customer.
Her Honour found that the indemnification clauses were unfair as they made the customer liable for liability, loss or costs suffered or incurred by the Bank that:
- the customer has not caused;
- have been caused by the Bank’s mistake, error or negligence; and/or
- could have been avoided or mitigated by the Bank,
where the customer did not have any corresponding rights or any control over the liability, loss or costs.
Event of default clauses
Her Honour found that the event of default clauses were unfair as they:
- enabled the Bank to take “disproportionately severe” action (including cancellation of a facility and immediate liability to the Bank for outstanding amounts and unspecified break costs), where some of the events of default were:
- entirely outside of the customer’s control, yet within the Bank’s control;
- based on the Bank’s unilateral opinion; and
- “in vague and largely undefined circumstances”,
and otherwise may not involve any credit risk to the Bank; and
- did not permit a customer to remedy the default.
Variation or termination clauses
Her Honour found that the unilateral variation or termination clauses were unfair as they generally permitted the Bank to:
- vary the financial services and reduce the amount of funds that the customer would otherwise be able to utilise with insufficient notice
- unilaterally to vary the contract at will; and
- terminate if the customer does not accept the varied terms,
where the customer did not have any corresponding rights.
Conclusive evidence clauses
Her Honour found that the conclusive evidence clauses were unfair as they:
- allowed the Bank to issue certificates as to what was owed to it by the customer, which were “conclusive evidence” of the amount claimed unless the customer was able to demonstrate “manifest error” or that the certificate is incorrect; and
- imposed the evidential burden on the customer to disprove this “conclusive evidence” in any proceedings, where the Bank was best placed to provide primary evidence on it,
where the customer did not have any corresponding rights.
Her Honour also commented on the lack of transparency in respect of the clauses, relevantly that:
- The indemnification clauses did not state in reasonably plain terms the scope of the customer’s obligation, were too broad in their scope (“without limitation”) and contained a “multiplicity of cross-references”;
- The unilateral variation or termination clauses:
- contained defined terms that related to complex matters, but the words used in the defined terms appeared misleading as to what they defined;
- were subject to headings that did not did not suggest the breadth of the terms of the clause; and
- were, in part, located in parts of the contract that “is not likely to suggest that it concerns cancellation of the facility”; and
- The conclusive evidence clauses and indemnification clauses used “legal language”.
Her Honour declared that the clauses were void ab initio and were to be replaced.
An ASIC announcement said the Bank would give an undertaking to the Court not to use or rely on any of the impugned terms in a manner that was unfair, or cause customers to suffer loss or damage. We understand that the Bank and ASIC have negotiated alternative terms that can be used instead.
ASIC Commissioner Sean Hughes stated that the “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.”
The reference to insurance firms relates to the impending extension of the unfair contracts terms regime to general insurance contracts.
This decision provides a timely reminder to banks and other financial product or services providers, and now also insurers, to check their standard form terms for anything that may be unfair and otherwise not transparent in its operation.