The Australian Securities and Investments Commission (ASIC) announced on 4 September that it has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank, and separately against Bank of Queensland, in connection with (alleged) unfair contract terms (UCT) in small business contracts.
Context
The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where: a) the contract is for the supply of financial goods or services (which includes a loan contract); b) at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and c) the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.
ASIC's allegations
ASIC alleges that certain terms included in standard form, small business contracts (within the meaning of s12BF(4) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)) are unfair (within the meaning of s12GB and therefore void) because they:
- each would cause a significant imbalance in the parties’ rights and obligations under the contract;
- each is not reasonably necessary to protect the lenders' legitimate interests; and
- would cause detriment to the small businesses if the terms were relied on.
What sort of terms does ASIC allege are unfair?
The terms ASIC has identified include:
- 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
- event of default clauses that allow the bank to unilaterally determine whether a default has occurred
- event of default clauses that do not permit the customer to remedy a default capable of remedy
- event of default clauses that create defaults based on events that may or may not involve any credit risk
- unilateral variation or termination clauses which permit the lenders to vary the upfront price of the contract, the financial services to be supplied under the contract and other terms o the contract
- conclusive evidence clauses that have the effect of imposing the evidential burden on the customer in proceedings relating to the contract. These clauses also have the effect, ASIC alleges, of allowing the bank but not the customer to terminate the contract if the customer does not pay an amount stated in a certificate by the stated date
- event of default clauses that create defaults based on events that are within the control of the bank, not the customer [with respect to certain terms in Bendigo and Adelaide Bank contracts only]
[Note: For more detail, refer to the Concise Statements on the ASIC website ASIC announces UCT test case and ASIC v Bank of Queensland]
ASIC alleges that each of the terms is void pursuant to s12BF(1) of the ASIC Act and is seeking declarations of contraventions of the ss 12GND and 12GNB of the ASIC Act ) and s21 of the Federal Court of Australia Act 1976 (FCA) and injunctive relief under s12GD of the ASIC Act.
[Note: Similar issues appear to have been identified in Report 565: Unfair Contract terms and small business loans which was released last year. The report includes guidance from the regulator to lenders with small business borrowers to assist them in assessing whether loan contracts meet the requirements under the UCT law. For a summary, see: Governance News 10/04/2018.]
What does this mean (if the Court finds in ASIC's favour)?
If the Court agrees with ASIC, then the terms will be void. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.
ASIC is seeking that the terms are declared void from the outset, not from the time of the court’s declaration.
What does this mean for business?
ASIC's action is another example of the regulator's new 'why not litigate' approach. ASIC is once again, as it did in its recent action against Westpac, testing the limits of the law in court, rather than relying on disclosure and/or negotiation with industry as it may have done previously.
Once ASIC has secured the guidance that it is seeking from the Federal Court, institutions will need to assess their next steps having regard to that guidance.
[Sources: ASIC media release]
