The decision in Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 was handed down on 28 May. The case concerned the question of whether certain terms in some standard form small business loan contracts (used by two divisions of the bank), were unfair within the meaning of s 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (Act).
The Court held that the terms were unfair and declared them void ab initio on that that basis. The terms will be replaced with new terms (to be negotiated between ASIC and the Bank).
ASIC's case
Broadly, ASIC alleged (and the bank accepted), that certain terms falling into four categories - indemnification clauses; event of default clauses; unilateral variation or termination clauses; and conclusive evidence clauses - included in certain standard form, small business contracts (within the meaning of s12BF(4) of the Act) were unfair (within the meaning of s12GB) and therefore void pursuant to s12BF(1)) because they:
- each would cause a significant imbalance in the parties’ rights and obligations under the contract;
- are not reasonably necessary to protect the lenders' legitimate interests; and
- would cause detriment to the small businesses if the terms were relied on.
ASIC did not allege that the bank relied on any of the terms 'in a manner that is unfair or that has caused any customer to suffer loss or damage'. The bank gave ASIC an undertaking (and an undertaking to the court) that it would not use or rely on any of the impugned terms, and on this basis, ASIC withdrew its claim for injunctive relief.
Why the terms were unfair
Indemnification clauses
Justice Gleeson held that the indemnification clauses were unfair because they could be relied on by the bank to make the customer liable for loss or costs incurred by the bank that the customer had not caused, or had been caused by the bank's mistake/error/negligence, or that could have been avoided/mitigated by the bank.
As such, the Court held that the terms,
'create a significant imbalance in the parties’ rights and obligations in that:
- the customer has no corresponding rights;
- the circumstances in which the liability, loss or costs may be incurred are not within the customer’s control; and
- the Bank controls at least some of the circumstances in which the liability, loss or costs may be incurred and can avoid or mitigate that liability, loss or costs'.
In addition, Justice Gleeson observed that the terms fall within the list of examples of terms in s 12BH(1) that may be unfair and that there 'there is nothing otherwise within the terms…which mitigates the unfairness of these terms'.
Justice Gleeson also accepted ASIC's argument that the terms lacked transparency.
Event of default clauses
Justice Gleeson accepted that the event of default clauses were unfair because: a) of the 'disproportionately severe default consequences' that would apply; and b) because none of the event of default clauses permitted the customer to remedy a default which could be capable of remedy.
The clauses in question could:
- create a default based on events that may not involve any credit risk to the bank (eg by providing misleading or untrue information such as a director’s date of birth)
- create an event of default (in some instances) in circumstances where:
- an untrue or misleading statement was made/repeated by the customer or its guarantors which in the context of the contract is 'insignificant' eg an error in a director's date of birth
- the bank 'unilaterally forms an opinion that something has happened' where the opinion 'may be wrong or it may also be reasonable to hold the opposite opinion and the customer has no entitlement to rectify any matter on which the Bank’s opinion is based'
- any part of a relevant document being capable of becoming void or voidable, eg due to litigation which is within the control of the bank rather than the customers
- in 'vague and largely undefined circumstances'.
Justice Gleeson observed that the terms are included in the list of examples of terms set out in s 12BH(1) that may be unfair and, having regard to the contracts as a whole, 'there is nothing otherwise within the terms of the Delphi Conditions and the Rural Conditions which mitigates the unfairness of these terms'.
Unilateral variation or termination clauses
Justice Gleeson found that the terms were unfair because they create a 'significant imbalance in the parties' rights and obligations'. More particularly, the terms were found to operate to:
- allow the bank to 'unilaterally' vary the contact 'permit one party, but not the other, to vary the obligations at will';
- allow the bank to terminate the contract if the customer fails to accept the new terms;
- not to give the customer any corresponding rights.
Again, Justice Gleeson observed that the terms fall within the list of examples of terms set out in s12BH(1) that may be unfair and that having regard to the contracts as a whole, 'there is nothing otherwise within the terms of the Delphi Conditions and the Rural Conditions which mitigates the unfairness of these terms'. In addition, Justice Gleeson found that the terms lacked transparency.
Conclusive evidence clauses
Justice Gleeson held that the terms were unfair because they created a significant imbalance in the parties' rights and obligations. More particularly, Justice Gleeson found that:
- the term allows the Bank to impose, by the issuing of a certificate, an evidential burden on the customer about matters upon which the Bank is best placed to provide primary evidence;
- the Bank has no additional duty;
- the customer has no corresponding right; and
- in the case of the Delphi Conditions, the customer can only contest the amount stated in the certificate if the customer can demonstrate "manifest error".'
As such, Justice Gleeson comments that,
'Each of the terms would cause detriment if relied upon because it requires the customer to disprove matters about which the Bank is best placed to provide primary evidence. Further, it would cause detriment if relied upon in circumstances where the certificate was wrong but the customer could not or did not seek to disprove it'.
Justice Gleeson goes on to observe that each of the terms fall within the list of examples of terms set out in s12BH(1) that may be unfair, and that having regard to the contracts as a whole 'there is nothing otherwise within the terms of the Delphi Conditions and the Rural Conditions which mitigates the unfairness of these terms'.
Impact? ASIC has called on insurers to take note of the decision
Commenting on the outcome, ASIC Commissioner Sean Hughes said that it demonstrates ASIC's commitment to enforce the unfair contract terms provisions.
Mr Hughes said,
'ASIC is committed to protect small business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms. Yesterday’s judgement shows that ASIC will take the necessary steps to enforce the law'.
Mr Hughes also called on insurer's to take note of the decision ahead of extension of the unfair contracts terms protections to insurance contracts.
'Importantly, insurance firms should be preparing to extend these obligations in insurance contracts’ Mr Hughes said.
[Note: Schedule 1 of the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 implements the government's response to Hayne recommendation 4.7 to extend the existing protections of the unfair contract terms regime under the ASIC Act to insurance contracts governed by the Insurance Contracts Act 1984 from 5 April 2021. The changes will apply to insurance contracts that are new or renewed after 5 April 2021, and also to terms of a contract varied after that date.]