A court declaration that six small business contracts used by Bendigo and Adelaide Bank were unfair has implications for the insurance industry, which becomes subject to the same law banning unfair terms in April next year.
The Federal Court agreed with the Australian Securities & Investments Commission on Friday that several terms in the bank’s standard-form business loan contracts were unfair.
The ruling applies to thousands of Bendigo’s business customers, because judge Jacqueline Gleeson ruled that the same terms in Bendigo’s other standard-form small business contracts were also unfair.
ASIC commissioner Sean Hughes said the regulator was committed to protecting small business owners from unfair terms in loan contracts, particularly when they were confronted with inflexible standard terms.
“Importantly, insurance firms should be preparing to extend these obligations to insurance contracts,” Mr Hughes said.
Like consumers, small businesses are often offered contracts for financial products on a “take it leave it” basis, entering into contracts where they have limited or no opportunity to negotiate the terms.
Legislation banning unfair contract terms was introduced in November 2016.
The following year, the big four banks agreed with ASIC and the Australian Small Business and Family Enterprise Ombudsman to eliminate unfair terms from their contracts.
ASIC then turned its attention to smaller lenders, including Bendigo, armed with additional government funding to enforce the law.
The four categories of clauses found to be unfair by Justice Gleeson related to indemnification, events of default, unilateral variation of terms and conclusive evidence.
ASIC’s investigation revealed that some of the unfair terms gave the bank broad discretion to unilaterally vary the conditions of the contract without giving the borrower advance notice, or an opportunity to exit the contract without penalty.
Other terms allowed Bendigo to take disproportionate actions in response to a breach by the borrower; for example, by calling a default without giving the borrower an opportunity to remedy a breach, or calling a default based on events that did not present any material risk to the bank.
Justice Gleeson ruled that the terms were void from the outset, not from the time of the court’s declaration, with the remainder of the contract continuing to bind the parties.
She ordered variations to the contracts so that the unfair clauses were replaced by new, fair clauses after successful negotiations between ASIC and the bank.
ASIC did not argue that Bendigo relied on the impugned clauses in an unfair manner, or that they caused the customers any loss or damage.
The agreement between the big four banks, ASIC and ABSFEO resulted in the removal of a number of terms, including “entire agreement clauses” which absolved the bank from responsibility for conduct, statements or representations made to borrowers outside the written contract.
Indemnification clauses were significantly limited, where there was a requirement for the customer to cover expenses incurred due to the fraud, negligence or misconduct of the bank, its employees or a receiver appointed by the bank.
Terms that allowed banks to call in a default for an unspecified negative change in the circumstances of a customer, known as material adverse change event clauses, were removed.
Banks also agreed to restrict their ability to vary contracts to specific circumstances.
If a customer wants to exit the contract as a result of a variation demanded by the bank, they now have a period of 30-90 days in which to do so.