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unfair contract terms – small business finance contracts

20 December 2021
chelyn murphy
Read Time 4 mins reading time

As highlighted in our recent article on the unfair contract terms (UCT) regime, amendments are currently being proposed to the UCT laws which, if passed, will have the effect of:

  • providing courts with the power to impose pecuniary penalties; and
  • expanding the scope of the small business standard form contracts that are covered, including to contracts where at least one party employs fewer than 100 persons and/or one party’s turnover in the previous income year is less than $10 million.

application of UCT laws to finance contracts

The UCT laws under the Australian Consumer Law (applying to consumer or small business contracts for the supply of goods or services) are largely mirrored under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The UCT laws under the ASIC Act apply to standard form consumer and small business contracts where the contract is a financial product or a contract for the supply of financial services.

This includes contracts for any form of financial accommodation, hire purchase agreements, contracts where credit is provided for the purchase of goods or services, and hire, lease and rental contracts.

ASIC guidance and UCT compliance

In March 2018, ASIC published Report 565 (Unfair contract terms and small business loans) detailing changes made by the ‘Big Four’ banks to their small business loan contracts for UCT compliance, with a view to also assisting other lenders to meet their UCT obligations.

The Report confirmed that the following types of provisions in small business loan contracts are likely to be unfair:

  • ‘entire agreement’ clauses;
  • broad indemnification clauses that do not exclude losses and liabilities arising from the fraud, negligence or wilful misconduct of the lender or its officers, employees, contractors, agents or receivers;
  • material adverse change default clauses and broad cross-default clauses;
  • non-monetary defaults that do not provide a reasonable remedy period or adopt a materiality threshold; and
  • broad unilateral variation clauses, including those that do not provide sufficient prior notice of the variations (particularly where the customer does not have a right to terminate without penalty).

recent cases

There have been recent Federal Court cases that have found certain banks’ small business loan/credit contracts as containing unfair terms, including:

  • Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716; and
  • Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957.

In each case, the Court subsequently made orders to vary each bank’s:

  • customer indemnification clauses (including to exclude loss caused by the mistake, fraud, negligence or wilful misconduct of the lender or its employees, officers, contractors, agents or receivers appointed by it);
  • event of default clauses (including to provide the customer a period to remedy the default (where appropriate), or to make the default actionable by the lender only if it materially impacts on the customer’s payment obligations, the lender’s security risk or the lender’s legal or reputational risk);
  • unilateral variation clauses (including to provide for minimum notice periods, depending on the type of variation (eg variations to interest rates or fees and charges), and giving the customer a right to terminate without incurring unspecified break costs or other fees); and
  • conclusive evidence clauses (including to remove provisions that provide that the lender’s certificate about an amount payable or another matter is sufficient or conclusive evidence of such amount or matter).

In addition, in October 2020, the ACCC instituted proceedings in the Federal Court against Fuijifilm (previously Fuji Xerox), alleging that its small business software/services and rental/lease contracts contained unfair terms, including terms as to unilateral variation, automatic renewal, liability limitation, termination, termination payment, end of contract period and non-reciprocal obligations. The proceedings have been referred to mediation due to take place in March 2022, with a view to a trial in July 2022.

next steps

Currently, a term in a small business contract that is found to be unfair will be void (that is, not binding and/or unenforceable and unable to be relied upon). If the proposed amendments to the UCT laws are passed, this will result in unfair contract terms as being unlawful and will give courts the power to impose penalties.

Given the significant impact this may have on businesses that supply goods, services or finance to small business customers (or that are small business suppliers themselves), we recommend that businesses review their standard form contracts to make sure that they comply with the UCT laws.

Please contact us if you would like your standard form contract reviewed.

stay up to date with our news & insights

unfair contract terms – small business finance contracts

20 December 2021
chelyn murphy

As highlighted in our recent article on the unfair contract terms (UCT) regime, amendments are currently being proposed to the UCT laws which, if passed, will have the effect of:

  • providing courts with the power to impose pecuniary penalties; and
  • expanding the scope of the small business standard form contracts that are covered, including to contracts where at least one party employs fewer than 100 persons and/or one party’s turnover in the previous income year is less than $10 million.

application of UCT laws to finance contracts

The UCT laws under the Australian Consumer Law (applying to consumer or small business contracts for the supply of goods or services) are largely mirrored under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The UCT laws under the ASIC Act apply to standard form consumer and small business contracts where the contract is a financial product or a contract for the supply of financial services.

This includes contracts for any form of financial accommodation, hire purchase agreements, contracts where credit is provided for the purchase of goods or services, and hire, lease and rental contracts.

ASIC guidance and UCT compliance

In March 2018, ASIC published Report 565 (Unfair contract terms and small business loans) detailing changes made by the ‘Big Four’ banks to their small business loan contracts for UCT compliance, with a view to also assisting other lenders to meet their UCT obligations.

The Report confirmed that the following types of provisions in small business loan contracts are likely to be unfair:

  • ‘entire agreement’ clauses;
  • broad indemnification clauses that do not exclude losses and liabilities arising from the fraud, negligence or wilful misconduct of the lender or its officers, employees, contractors, agents or receivers;
  • material adverse change default clauses and broad cross-default clauses;
  • non-monetary defaults that do not provide a reasonable remedy period or adopt a materiality threshold; and
  • broad unilateral variation clauses, including those that do not provide sufficient prior notice of the variations (particularly where the customer does not have a right to terminate without penalty).

recent cases

There have been recent Federal Court cases that have found certain banks’ small business loan/credit contracts as containing unfair terms, including:

  • Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716; and
  • Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957.

In each case, the Court subsequently made orders to vary each bank’s:

  • customer indemnification clauses (including to exclude loss caused by the mistake, fraud, negligence or wilful misconduct of the lender or its employees, officers, contractors, agents or receivers appointed by it);
  • event of default clauses (including to provide the customer a period to remedy the default (where appropriate), or to make the default actionable by the lender only if it materially impacts on the customer’s payment obligations, the lender’s security risk or the lender’s legal or reputational risk);
  • unilateral variation clauses (including to provide for minimum notice periods, depending on the type of variation (eg variations to interest rates or fees and charges), and giving the customer a right to terminate without incurring unspecified break costs or other fees); and
  • conclusive evidence clauses (including to remove provisions that provide that the lender’s certificate about an amount payable or another matter is sufficient or conclusive evidence of such amount or matter).

In addition, in October 2020, the ACCC instituted proceedings in the Federal Court against Fuijifilm (previously Fuji Xerox), alleging that its small business software/services and rental/lease contracts contained unfair terms, including terms as to unilateral variation, automatic renewal, liability limitation, termination, termination payment, end of contract period and non-reciprocal obligations. The proceedings have been referred to mediation due to take place in March 2022, with a view to a trial in July 2022.

next steps

Currently, a term in a small business contract that is found to be unfair will be void (that is, not binding and/or unenforceable and unable to be relied upon). If the proposed amendments to the UCT laws are passed, this will result in unfair contract terms as being unlawful and will give courts the power to impose penalties.

Given the significant impact this may have on businesses that supply goods, services or finance to small business customers (or that are small business suppliers themselves), we recommend that businesses review their standard form contracts to make sure that they comply with the UCT laws.

Please contact us if you would like your standard form contract reviewed.