Banks beware – Credit contracts under scrutiny for unfair contract terms

Bendigo Bank was the most recent victim of the regulators clamping down on unfair contract terms in ASIC v Bendigo and Adelaide Bank Ltd [2020] FCA 716 as the Court found that certain terms used by Bendigo and Adelaide Bank Ltd (Bank) in its standard form small business contracts were unfair within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The unfair contract terms regime

In recent times, the Australian Competition and Consumer Commission (ACCC) has been more aggressive in their enforcement of the unfair contract terms (UCT) regime contained in the Australian Consumer Law (ACL), which voids any contractual terms that are found to be unfair under the UCT regime.

The UCT regime applies to small business or consumer standard form contracts. While credit contracts constitute financial products/services, and thus do not fall within the scope of the ACL; subdivision BA, division 2 of part 2 of the ASIC Act reproduces the UCT regime, which allows for greater scrutiny of standard form contracts used by lenders in the context of the UCT regime.

ASIC appear to be following the example set by the ACCC and have sought to take a strong enforcement stance against lenders, especially in the case of small business contracts.

Under s 12BG(1) of the Act a term of contract is unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations;

• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

• it would cause detriment (whether financial or otherwise) if it were to be applied or relied on.

Facts in ASIC v Bendigo and Adelaide Bank

In this case, the parties agreed, and Gleeson J found, that the following types of clauses from the Banks’ lending contracts with small business borrowers were unfair:

• indemnification clauses – which would require the customer to indemnify the Bank in circumstances where the loss was not the fault of the Bank, was caused by the Bank’s mistake, error, or negligence, or could have been mitigated by the Bank;

• event of default clauses - which, among other things, did not permit a customer to remedy a default event, or caused a material breach to trigger as a result of a minor breach (e.g., providing an incorrect director’s birth date), the result of which could impose an uncapped liability on the customer (and did not provide a right of set-off for the customer while it did for the Bank);

• unilateral variation or termination clauses – entitling the Bank to unilaterally vary terms (including in respect of the facility provided) or terminate the contract without the borrower’s consent; and

• conclusive evidence clauses – providing that a certificate from the Bank stating the amount owed on a facility would be conclusive evidence of the amount owing.

Indemnification clauses, unilateral variation clause, and conclusive evidence clauses were found to lack transparency. However, notwithstanding the parties had agreed that all terms set out above would be unfair in breach of the ASIC Act, Gleeson J noted that the event of default clauses were transparent.

The Bank gave an undertaking that it would not use or rely on any of the unfair terms and Gleeson J granted consent orders that sought declarations to vary them. 

Key takeaways

The Court’s decision is a reminder that ASIC may take enforcement measures against lenders in relation to the UCT regime, even where no loss or damage has been suffered by a borrower.

It is important to review your standard form contracts with consumers and businesses to ensure they comply with the UCT regime under the ACL (and, or financial service providers, the ASIC Act). This is particularly pertinent given regulators are lobbying for a penalty regime to be introduced in order to further deter including terms that may be deemed unfair.  

ASIC’s Commissioner has also called on insurer’s to be aware of this decision ahead of the extension of the unfair contract terms protection to insurance contracts, to be implemented under the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 from April 2021.

If you would like your contracts reviewed to ensure they do not contain terms that may be deemed unfair, please contact:

Paul Gray
Principal
T: 03 5225 5231
E: pgray@ha.legal

Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal

This article was prepared with the assistance of Hugo Le Clerc, Graduate Lawyer.