News & Insights

Many businesses will be aware of the upcoming changes to the laws surrounding Unfair Contract Terms which will apply from November 2023.

In short, the changes broaden the current definitions to capture more businesses, and more transactions. Accompanying these changes are increased remedies and reporting consequences which may cost your business significantly. Evidently, most Australian businesses will be affected by these changes, including private lenders whose loan transactions may also captured under the Australian Securities and Investments Commission Act 2001.

How the changes specifically impact non-bank lenders

The new unfair contract term laws will apply to most private lenders who utilise template loan documentation. If a term is found to be unfair under the legislation, Courts will have broad powers, including power to declare the offending provision void and impose compensation and penalties. These powers extend to any third party who has a contract with the lender containing the same term.

Unfair contract terms do not include terms that define the main subject matter of a contract or upfront price payable. Clauses regarding duration, interest rates and facility limits will not need to be reviewed. Clauses that are at risk of being unfair include those which relate to the rights and obligations of parties, such as the right of the lender to vary terms such as interest rates. A majority of the terms that may be considered unfair will likely appear in private lending documents, as many of these types of terms are considered standard in the industry. Depending on the circumstances of individual loans, these terms may be justifiable and need not be removed if it can be shown that the term was reasonably necessary in order to protect a lender’s legitimate interests.

What types of clauses might be unfair

ASIC’s Unfair Contract Terms and Small Business Loans report discusses changes made by the ‘big four’ banks to their small business loan contracts in order to comply with the unfair contract terms legislation. This report provides guidance to private lenders on what changes they should consider making to their contracts. The following clauses may be considered unfair when used in loan contracts:

Unilateral Variation Clauses

• Clauses providing lenders a broad ability to vary contracts without agreement from the borrower.

Default Event Clauses

• Clauses allowing the lender to treat a loan as being in default because of an unspecified material adverse change. Such clauses give the lender a broad discretion to declare a default without providing clarity to the borrower about changes that may result in such default.
• Clauses relating to specific events of non-monetary default. Specific events may be broad enough to trigger disproportionate enforcement action by the lender. For example, minor “misrepresentations” such as a spelling error, may be captured by misrepresentation events.

Entire Agreement Clauses

• Clauses preventing lenders from being contractually responsible for conduct, statements and/or representations made to small borrowers, outside the written contract.

Financial Indicator Covenants

• Utilising breaches of some financial indicator covenants (such as loan-to-valuation ratio) in loans to trigger default and enforcement of the loan – particularly when such breach does not present a material credit risk to the lender.

Broad Indemnity Clauses

• Clauses requiring borrowers to cover losses and expenses incurred due to fraudulent, negligent, or wilful misconduct of the bank, its employees or agents or a receiver appointed by the bank.

It is important to note that terms must also be clearly drafted and transparent. In ASIC v Bendigo and Adelaide Bank [2020] FCA 716, the Court noted the following concerns when it comes to transparency:

1. Utilising technical legal language – terms which have specific legal meanings may be unfamiliar to customers and they may not understand what they are agreeing to.
2. Incorrect cross-referencing – terms that interact with other terms but do not refer to the relevant terms.
3. Utilising small font sizes or illegible writing – these terms may not be clearly drawn to the customer’s attention.
4. Improperly defined terms – terms that may incur costs yet are unclear as to what the costs are or how they are to be calculated.
5. Inefficient use of headings – terms located in sections that do not reflect the breadth of the terms. For example, a heading “use of facility” is not likely to indicate that it concerns the cancellation of the facility.

Steps that private lenders should take

The following changes may assist in improving your position in case of an unfair contract term claim:

1. Make it clear to the borrower, verbally and in writing, that they have the opportunity to negotiate the loan agreement. Your letter of offer should provide borrowers with the chance to propose any changes they may wish to put forward, and appropriate acknowledgements should be included.
2. Review your contract layout – make sure headings are clear and informative and ensure that all contractual terms are drafted in plain English, with definitions where required.
3. Ensure clauses relating to rights and obligations contain appropriate levels of detail– these clauses should not be too broad, should have appropriate parameters and detail specific timeframes in which they can be used.
4. Where potentially unfair terms are included in your loan documents, review those terms or record the reasoning and justification for those terms in internal application forms.
5. Provide mutual termination rights – if your (lender’s) rights could have significant impacts on the borrower, ensure these are accompanied by termination rights (or negotiation rights) for the borrower to reduce any significant imbalance where appropriate.

Need more information?

Deciding how to amend template contracts may be a difficult task without obtaining legal advice. If you require a comprehensive review of your loan contracts, contact our expert Commercial Team.