Bank's small business terms declared unfair

The Federal Court of Australia has found various provisions in standard form contracts between the Bank of Queensland (Bank) and its small business contracts to be “unfair” within the meaning of the Australian Securities and Investment Commission Act 2001 (Cth) (Act).

Background

In 2019, Australian Securities and Investment Commission (ASIC) brought proceedings against the Bank alleging that various terms in its standard form loan contracts with small business customers were unfair, and so void under the unfair contract terms regime in the Act.  That regime, which applies to contracts for financial products and services, is broadly equivalent to the unfair contract terms regime in the Australian Consumer Law.

Last week the Court made declarations that several of the terms were unfair, with the effect that they, are void¹.  The Bank accepted that the terms were unfair, and the parties filed joint submissions, proposed declarations and orders for the purpose of resolving the proceedings.

The case echoes the findings of a similar application relating to unfair terms in small business lending contracts in Australian Securities and Investment Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 (Bendigo decision).

Basis of the Court’s decision

Central to the Court’s decision, and the operation of s 12BF(1) of the Act, was that the unfair terms were contained in standard form contracts including various loan agreements, guarantee and indemnities, and general terms and conditions, used by the Bank in its dealings with multiple small businesses.

The terms declared by the Court to be unfair related to:

• Unilateral variation clauses allowing the Bank to vary the terms and conditions without giving advance notice to the customer or the opportunity for the customer to end the contract without penalty.

• Event of default clauses that allowed the Bank to unilaterally determine whether a default had occurred, and to declare defaults based on events that did not present any material risk to the Bank, and without giving customers the opportunity to remedy the default.

• Indemnities in favour of the Bank that extended to losses caused by the Bank’s own mistake, error, or negligence.

• Conclusive evidence clauses permitting the Bank to issue certificates of amounts owing by a customer that would be assumed correct unless the customer could prove otherwise.

Such terms were found to be unfair on the basis that they had the effect of causing significant imbalance in the parties’ contractual rights and obligations, were not reasonably necessary to protect the legitimate interests of the Bank and could cause detriment to a customer if relied upon by the Bank.

The Court also noted that it was not necessary to establish that the operation of such terms had caused demonstrable loss or damage to those small business with which the Bank had contracted. It was accepted that the mere inclusion of the impugned terms within the Bank’s standard form contracts was likely to cause customers loss or damage. On this basis, the Court was empowered to declare the terms unfair and void, and order the replacement of such terms, pursuant to s 12GNB of the Act.

Implication

This, and the Bendigo decision, highlights the careful consideration required when drafting standard form contracts with small businesses so as not to fall foul of the unfair contract terms regime. For those entering into consumer or small business contracts for financial products or services, it provides helpful examples of specific provisions in the banking context that ASIC is likely to regard as unfair. It is more broadly a reminder to all companies that operate under standard form contracts (whether in the banking sector or otherwise) that the regulators remain active in this area. 
 

^{[1] Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957}