ASIC v Bendigo and Adelaide Bank – Unfair contract terms regime for financial services and beyond

The recent Federal Court decision of ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716, which found that certain types of clauses used by Bendigo and Adelaide Bank Limited (Bank) in its small business contracts were unfair, serves as a timely reminder to review your standard form contracts with small businesses and consumers to ensure they comply with the unfair contract terms regime.

In recent years, there has been significant industry and regulator focus on unfair contract terms, particularly for small business lending products, including through the 2016 Small Business Loans Inquiry and a review by ASIC of small business loan contracts offered by the big four banks, which resulted in the banks making changes to address ASIC's concerns. ASIC's Report 565 on Unfair contract terms and small business loans provides details of its review, the changes made by the banks, why certain types of terms raise concerns under the unfair contract regime and also ASIC's views on what lenders to small businesses should do to ensure compliance with the law.

While lenders have in recent years made changes to standard form contracts, in particular to small business contracts, to overcome many of the specific issues the Court identified with the particular clauses contained in the Bank's small business contracts, the decision provides guidance to all industries that utilise standard form contracts – for example, telecommunications, travel and utilities – to review any clauses, even those that are not used or relied on, that could be considered unfair by a Court.

In this article, we provide a refresher on the unfair contract terms regime, why the Court found that certain of the Bank's clauses were unfair and guidance for checking your standard form contracts.

Refresher on the unfair contract terms regime

The unfair contract terms regime under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) applies to the provision of financial services, including small business contracts, consumer contracts and contracts for credit activities. From October 2021, the unfair contract terms regime under the ASIC Act will also apply to insurance contracts.

Section 12BG(1) of the ASIC Act provides that a term of a contract is unfair if:

• it would cause significant imbalance in the parties' rights and obligations arising under the contract;
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.

In determining whether a term is unfair, the Court will have regard to the contract as a whole, and the extent to which the term is transparent.

If a term is unfair, the term is void. This means that the term is treated as if it never existed and cannot be enforced, but the contract, other than the unfair term, will continue to be binding.

The Australian Consumer Law contained in Schedule 2 to the Competition and Consumer Act 2010 (Cth) contains a similar legislative regime for unfair contract terms that apply to consumer contracts that are not for the provision of financial services, for example, standard form contracts that might be used in the telecommunications, utilities, and travel industries.

Examples of the types of terms that may be unfair are set out in section 12BH of the ASIC Act and ASIC's Report 565, including the types of clauses that were the subject of the Court's decision, as explained below.

The Court's findings in ASIC v Bendigo and Adelaide Bank

In the decision, the Bank had standard form contracts in its lending contracts with small business borrowers (which they had amended by the time of the decision). These contracts contained the following types of clauses:

• indemnity clauses – which specified where the borrower was to indemnify the Bank for certain liability, loss or costs incurred by the Bank;
• event of default clauses – which set out events or circumstances that would constitute a default by the borrower, which in turn would entitle the Bank to take certain action following the default, including applying default interest rates or enforcing security;
• unilateral variation or termination clauses – which entitled the Bank to unilaterally vary terms of the contract or terminate the contract, without the borrower's consent; and
• conclusive evidence clauses – which provided that a certificate from the Bank stating the amount owed on a facility would be conclusive evidence of the amount owing, unless the customer could demonstrate a manifest error.

We explain below why each of these types of terms were held to be unfair by the Court (and void). Much of the Court's analysis focused on the following 3 factors – which are key factors you should take into consideration in reviewing your standard terms:

• the significant imbalance created by the clause such that the contract as a whole was in favour of the Bank;
• the detriment the clause could cause to the customer; and
• the fact the Bank's contract did not include anything else to mitigate the unfairness created by the clause.

Indemnity clauses

The Court considered the indemnity clauses in this case to be unfair for the following reasons:

• the clause could cause detriment to the customer if applied or relied on by the Bank, particularly as the Bank could rely on the clause to make the customer liable for costs incurred by the Bank that the customer had not caused, had been caused by the Bank's mistake or negligence, or could have been avoided by the Bank;
• the clause created a significant imbalance in the parties' rights and obligations as the customer had no corresponding rights, the customer had no control over the costs that could be incurred by the Bank and the Bank could control at least some of the circumstances where the costs may be incurred;
• there was nothing else in the contract to mitigate the unfairness of theclause; and
• the clause lacked transparency as it did not express the breadth of the borrowers' obligation in reasonably plain terms (and instead contained numerous cross-references to other terms).

Event of default clauses

The Court considered the event of default clauses in this case to be unfair for the following reasons:

• the clause created a significant imbalance because:
• the default consequences could be significantly disproportionate to the default. For example, the consequence for a default of providing an incorrect date of both could permit the Bank to cancel all or part of the loan facility or make all outstanding sums immediately payable or on demand;
• the borrower was not permitted to remedy a default that was capable of remedy;
• the default (for example, providing an incorrect date of birth) did not necessarily involve any credit risk to the bank;
• the clause could cause detriment to the customer because of the consequences arising from a default, such as the Bank cancelling all or part of the loan facility; and
• there was nothing else in the contract to mitigate the unfairness of the event of the clause.

While there is no fine or penalty that can be imposed on an organisation where its standard form contract is found to have an unfair term, there may still be serious consequences arising from not being able to enforce or rely on the unfair term.

Unilateral variation or termination clauses

The Court considered the unilateral variation or termination clauses to be unfair for the following reasons:

• the clause created a significant imbalance because:
• the Bank was entitled to reduce the funds on loan to the customer with either 14 days' or 30 days' notice, which notice period may not provide sufficient time for the customer to refinance;
• the Bank was entitled to vary the contract at will, without providing corresponding rights to the borrower;
• the Bank was entitled to terminate the contract if the customer did not accept the new varied terms, or alternatively, the customer would need to pay certain fees if it elected to terminate;
• the clause could cause detriment to the customer because of the consequences arising from the unilateral variation or termination, including that the loan facility could be cancelled and the customer would need to pay certain termination fees if they wished to terminate; and
• there was nothing else in the contract to mitigate the unfairness of the unilateral variation or termination clauses, and in particular, certain clauses lacked transparency because they did not make clear the breadth of the clause or the extent of the changes that could be made.

Conclusive evidence clauses

The Court considered the conclusive evidence clauses to be unfair for the following reasons:

• the clause created a significant imbalance because the Bank was permitted, by issuing a certificate, to impose an evidential burden on the customer about matters that the Bank is best placed to provide evidence about, in circumstances where the customer had no corresponding right;
• the clause could cause detriment to the customer if the certificate issued was incorrect and there was no way for the customer to disprove it;
• there was nothing else in the contract to mitigate the unfairness of the conclusive evidence clauses, and in particular the language of the conclusive evidence clauses lacked transparency.

What are the consequences of a term being unfair?

While there is no fine or penalty that can be imposed on an organisation where its standard form contract is found to have an unfair term, there may still be serious consequences arising from not being able to enforce or rely on the unfair term.

The Court made declarations that these terms were unfair and, as a result, void. This means the term is treated as if it never existed and cannot be enforced, but the contract, other than the unfair term, will continue to be binding.

The Court also relied on its powers under sections 12GNB and 12GNC to make these declarations that the terms were void. These sections provide the Court with a discretion in circumstances where a class of persons is likely to suffer loss or damage, to make orders that may prevent or reduce the loss or damage suffered.

What should you be checking with your standard form contracts?

ASIC sought these declarations notwithstanding that the Bank accepted that the terms were unfair and the Bank had not relied upon any of the relevant terms in a manner that was unfair, or caused any customers to suffer loss or damage.

The Court's decision in this case is a further reminder that ASIC, in line with its stronger enforcement stance, may take enforcement action against lenders who have been warned about the risks of unfair contract terms in recent years, including through ASIC's industry review and Report 565, and even where customers have not suffered loss or damage.

The lessons are that you should consider the following in reviewing your standard form contracts for compliance against the unfair contract terms regime:

• Lender specific clauses: If your standard form contracts include indemnification clauses, event of default clauses, unilateral variation or termination clauses or conclusive evidence clauses, you should check that those clauses do not suffer from the specific issues the Court identified in the Bank's case. In particular, depending on the type of loan facility:
  • indemnification clauses should make clear that the customer will not be required to indemnify the lender for any losses or costs arising from the lender's fraud, negligence or wilful conduct, and also make clear the breadth of the customer's obligation in reasonably plain terms;
  • event of default clauses should provide the borrower with an opportunity to remedy the default (the Banking Code of Practice requires banks to provide small business borrowers with reasonable time of not less than 30 days to remedy non-monetary defaults); and
  • unilateral variation clauses should, where possible, limited in scope to particular circumstances or certain types of changes, and consideration should also be given to providing the borrower with reasonable notice or an opportunity to terminate without any adverse consequences.
• Transparency: While the fact that a term is transparent does not mean that the term cannot be unfair, it is important to ensure that terms are drafted as transparently as possible given that it is a factor that the Court must have regard to in determining whether a term is unfair. Transparency includes, but is not limited to, ensuring that the scope or breadth of a particular clause is clear to the consumer, the use of plain English language and avoiding small font.
• Specificity: Where possible, terms should be drafted with as much specificity as possible. Terms that are broader in scope may be more susceptible to being unfair, particularly if the application of a particular clause is not clear to the consumer. For example, unilateral variation clauses should be specific about what clauses can be unilaterally varied rather than providing a general right.
• Interest being protected: You should consider whether the term is reasonably necessary in order to protect your organisation's legitimate interests. If the term can be shown to be reasonably necessary, it may not be unfair.
• Mitigating the unfairness: If a term is reasonably necessary but creates a significant imbalance in the parties' rights and obligations, you should consider how that unfairness should be mitigated. For example, corresponding rights could be provided to the customer, or the term could expressly limit or carve out the potential detriment that the customer may suffer.

What's next for the unfair contract terms regime?

From October 2021, the unfair contract terms regime under the ASIC Act will also apply to insurance contracts under the Insurance Contracts Act 1984 (Cth). Further information on what these changes mean for insurance contracts and insurers can be found here.

ASIC also commenced proceedings in 2019 against the Bank of Queensland seeking declarations that certain contract terms in its small business contracts are unfair and void, and also that same terms in any other small business contract are also unfair – the outcome of those proceedings remains pending;

In late 2019, the Treasury Department released for public consultation a Regulation Impact Statement on Enhancements to Unfair Contract Terms Protections. The consultation invited parties to provide feedback on options designed to enhance the unfair contract term protections for small business, consumers and insurance contracts and address issues previously raised in the Review of Unfair Contract Term Protections for Small Business. Submissions for the consultation closed on 27 March 2020 and the Treasury is next expected to conduct a number of consultation sessions.

Given findings in the Treasury's review that unfair contract terms remain prevalent in standard contracts across all industries, potential options for reform may include:

• imposing civil pecuniary penalties on the use of unfair contract terms as a deterrence measure;
• expanding the infringement notice regime for ASIC and the ACCC to cover unfair contract terms;
• providing additional remedies beyond voiding unfair contract terms, including providing small businesses with the ability to apply to the court to vary a contract that has been declared to have an unfair contract term.