Unfair contract terms and ‘transparency’ in small business loans

Written by James Rigby

Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716, Federal Court of Australia, Gleeson J (28 May 2020)

The full text of this judgment is available at: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2020/2020fca0716.

(a) Summary

Following joint submissions by the parties, Gleeson J accepted that certain terms in the defendant bank’s loan facility standard form contracts were ‘unfair terms’ for the purposes of Pt 2 Div 2 Subdiv BA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The unfair terms were:

• broad indemnities in favour of the bank;
• event of default clauses with very limited opportunity to remedy defaults;
• unilateral variation and termination clauses; and
• conclusive evidence clauses.

The litigation was brought by ASIC following lengthy engagement with various banks over 2017 and 2018, culminating in its publicly-stated position in ASIC Report REP 565, which identified clauses of concern and set out (at [89]) ASIC’s intention to ‘examine small business loan contracts from other lenders to ensure that these contracts do not contain unfair terms.’ This case is one result of that examination.

(b) Facts  

The defendant, Bendigo and Adelaide Bank, offered loan facilities through two of its divisions, Delphi Bank and Rural Bank. These were on terms set out in standard form contracts, described as the Delphi Conditions and Rural Conditions, respectively.

On 12 November 2016, amendments to the ASIC Act commenced, expanding the unfair contract terms regime to protect ‘small businesses’ in addition to individual consumers: Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth).

Between 12 November 2016 and 30 June 2019, the bank entered into at least 600 facilities covered by the Delphi Conditions and 3,000 facilities covered by the Rural Conditions which were below the monetary thresholds in the second limb of the ‘small business contract’ test in s. 12BF(4) of the ASIC Act:

• not exceeding $300,000; or
• for longer than 12 months and not exceeding $1 million.

It was also found to be likely that a significant number of those contracts were with borrowers that employed fewer than 20 persons, the other limb of the test.

(c) Decision 

(i) Standard form contracts for financial products or services

ASIC alleged – giving rise to a rebuttable presumption under s. 12BK(1) – and the bank accepted that the facilities were ‘standard form contracts’.

The bank also accepted that each facility was a financial product or contract for financial services, as required for the terms to fall within the ASIC Act regime (as opposed to the general equivalent unfair contract terms regime in Pt 2-3 of the Australian Consumer Law in Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the ACL regime)).

(ii) Terms

Four categories of terms were impugned. (These terms, and the entire contracts, are in a schedule to the published judgment.)

First, indemnities in clause 14 of the Delphi Conditions and clause 12.1 of the Rural Conditions required customers to indemnify the bank, including for losses not caused by the customer, losses caused by the bank’s own errors or negligence, and losses which could have been avoided or mitigated by the bank.

Second, some listed events of default in sub-clauses 10.1(c), (j), (k) and (n) of the Delphi Conditions and sub-clauses 8.1(c), (p), (q) and (v) of the Rural Conditions were triggered by:

• events which did not involve any credit risk to the bank (for example, non-material errors in information given to the bank);
• unilateral opinions formed by the bank, including in ‘vague and largely undefined circumstances’; and
• defaults which were capable of remedy but without an opportunity to do so.

Upon default, the bank was entitled to cancel the facilities and claim break costs and an indemnity for enforcement costs, with no right of set-off for the customer and a very limited right for the customer to prevent those actions by remedying the default.

Third, unilateral variation clauses 11.1 and 22.1 of the Delphi Conditions and 2.3, 2.4, 4.2 and 4.4 of the Rural Conditions permitted the bank to unilaterally vary the price, services and other terms of the contract, with less than a month’s notice.

Fourth, conclusive evidence clauses 17.6 of the Delphi Conditions and 13.1 of the Rural Conditions provided that certificates by the bank of amounts stated to be owing would be conclusive evidence of the debt unless the customer could disprove them.

(iii) Unfairness

Section 12BG of the ASIC Act (and the corresponding ACL regime) deems a term unfair if:

• it would cause a significant imbalance in rights and obligations;
• it is not reasonably necessary to protect the legitimate interests of the advantaged party (which is presumed and for the advantaged party to prove otherwise); and
• it would cause detriment to a party if applied or relied on.

(Gleeson J usefully summarises the entire statutory regime and case law at [7]-[36].)

Courts are required to take into account the extent to which the term is ‘transparent’: in reasonably plain language, legible, presented clearly and readily available.

In this case, each of the impugned terms fell within the ‘grey list’ of example terms that may be unfair in s. 12BH, which, although not automatically giving rise to a presumption of unfairness (Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited (2015) FCR 33 at [44]), courts  ‘cannot ignore’.

The Court accepted the joint submissions that all four impugned terms were unfair.

Of greater interest were comments made about the contested issue of transparency. Gleeson J found that the indemnities were also not transparent because they were drafted in legal language, and ultimately referred to 35 different defined terms, with liberal use of the phrase ‘without limitation’, and including the concept of ‘legal expenses on a full indemnity basis’.

However, her Honour was not persuaded that the event of default clauses lacked transparency, apparently because, although extremely broad, they were clearly drafted.

The unilateral variation clauses lacked transparency for a number of reasons, including that a term defined as a ‘Periodic Review’ misleadingly did not have any periodic aspect, and that a title to one clause, ‘Changes’, did not suggest the breadth of the term.

In terms of conclusive evidence, her Honour found that ‘determination of any amount … is conclusive in the absence of manifest error’ was too legalistic, however that a ‘certificate signed by us… is conclusive evidence… unless proved incorrect’ was sufficiently transparent.

(iv) Relief

The Court made declarations that the impugned clauses were ‘unfair terms’ and void ab initio, and ordered that certain indemnity and unilateral variation clauses be varied to new drafting that the parties agreed would avoid the impugned unfairness. For the terms deemed unfair, only the particular sub-clauses impugned were declared void, and the rest of each clause was undisturbed. The bank was also required to undertake not to use or rely upon certain contract terms.

(v) Implications

The decision is a timely reminder to pursue continuous improvement and proactive review of standard form contracts to modify potentially unfair terms particularly given that, ultimately, the term may not be able to be relied upon. In addition, it provides useful guidance around which regularly used legal phrases and drafting techniques in banking documents will endanger clauses by rendering them not ‘transparent’. It is also a reminder that, although clauses on the ‘grey list’ are not necessarily void (if the court can be persuaded otherwise), they are an attractive (and potentially easy) target for the regulators.

In this case there was no evidence that the bank had previously relied upon any of the unfair contract terms, and therefore orders in relation to remediation were not sought, however that remains a danger for banks that fall foul of the regime.

Finally, this case highlights how adopting the right strategy in reaction to regulators’ pursuit of legacy issues can minimise the pain while producing workable outcomes. The entire litigation was resolved in 7 months. In a sign of current global circumstances, but also an impressive result for the parties seeking to avoid unnecessary costs, the decision was made on the papers without the need for a hearing.