Variation to unfair contract terms in loan contracts ordered by Australian court
The recent Australian case of ASIC v Bendigo and Adelaide Bank Limited provides useful insights as to some types of clauses that may be considered unfair under the New Zealand prohibition on unfair contract terms. In that case the Federal Court of Australia (FCA) ordered that numerous terms in Bendigo and Adelaide Bank Limited’s (the Bank) loan contracts with small businesses be varied after declaring them to be unfair.
What is the relevance of this case and who may it affect?
When a term in a contract may be considered “unfair” is important to businesses large and small. The Fair Trading Act 1986 (Fair Trading Act) currently provides protection for consumers against unfair contract terms in standard form consumer contracts. If a term is declared unfair, the term cannot be enforced. The Fair Trading Amendment Bill, currently before Parliament, proposes to extend that protection regime to standard form trade contracts where the consideration is $250,000 or less (see our previous alert here).
All businesses who use standard form consumer contracts should consider their terms against the findings in the case, and once the Fair Trading Amendment Bill is enacted those who use standard small trade contracts should do the same. The case will be of particular interest to banks and other financial services providers because of the subject matter.
What happened in ASIC v Bendigo and Adelaide Bank Limited?
Following admissions by the Bank, the FCA declared numerous terms spanning several of the Bank’s contracts with small businesses unfair under the unfair contract terms regime in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). It grouped the unfair terms into four types: indemnification clauses, event of default clauses, unilateral variation or termination clauses and conclusive evidence clauses.
These clauses were broadly drafted requiring customers to indemnify the Bank, for example, for all costs, fees, expenses and losses incurred by the Bank in connection with the relevant finance agreement. The FCA held that, on their proper construction, the indemnification clauses could be relied upon by the Bank to require the customer to indemnify the Bank for losses that the customer had not caused, which were caused by the Bank’s own mistake, error or negligence or that could have been avoided or mitigated by the Bank.
The FCA considered that the terms were unfair because they created a significant imbalance in the parties’ rights and obligations and would create a detriment to the customer if relied upon. This is because:
- the customer had no such corresponding rights;
- the customer may be required to pay money to the Bank in circumstances where the loss or costs were not within the customer’s control; and
- the Bank controlled the circumstances in which some of the losses or costs may be incurred and could avoid or mitigate them.
The FCA also took account of a lack of transparency in finding that the terms were unfair.
Event of default clauses
The relevant clauses specified various events or circumstances which purported to be events of default, which gave the Bank various rights including the right to cancel all or part of any facility, make the outstanding sum due immediately and require the customer to pay break costs.
The clauses considered unfair by the FCA were those that could create an event of default in the following circumstances:
- the provision of misleading or untrue information which is insignificant, such as an error as to a directors’ date of birth;
- any part of the contract becoming void or voidable because it has been declared by the Court to be unfair;
- the Bank unilaterally forming an opinion that something has happened where the Bank’s opinion may be wrong; and
- in “vague and largely undefined circumstances”.
The FCA found that the terms were unfair because they created a significant imbalance in the parties’ rights and obligations and would cause detriment to the customer if relied upon. This is because of the disproportionately severe consequences that could result, because none of the event of default clauses permitted the customer to remedy the default and because each of the clauses created a default based on events that may not involve a credit risk to the Bank.
Unilateral variation or termination clauses
These clauses allowed the Bank to unilaterally vary the upfront price of the contract, the financial services to be supplied under the contract and other terms without the customer’s consent. For example, giving the Bank the right to reduce the amount of funds available to the customer on the condition only that the Bank give 14 days’ notice.
The FCA found that the terms were unfair because they created a significant imbalance in the parties’ rights and obligations if relied upon. This is because the terms:
- allowed the Bank to reduce the amount of funds that a customer would otherwise be able to utilise by giving notice, but that period of notice may not be sufficient to allow the customer the opportunity to refinance;
- allowed the Bank to ‘unilaterally' vary the contract at will;
- in some cases, permitted the Bank to terminate the contract if the customer did not accept the new terms; and
- did not provide the customer with corresponding rights.
The FCA also considered the terms would cause detriment to the customer because there would be detrimental consequences for the customer whether or not they accepted the variation, such as termination of the facility and a requirement to pay a termination fee if the varied terms were not accepted.
Conclusive evidence clauses
These clauses provided that certain information provided by or matters determined by the Bank (such as the amounts owed by the customer) was conclusive evidence of its validity.
The FCA found that the terms were unfair because they created a significant imbalance in the parties’ rights and obligations and would cause detriment if relied upon. This is because:
- the terms required the customer to disprove matters upon which the Bank is best placed to provide the primary evidence. This would result in detriment for the customer if the information was wrong but the customer could not disprove it;
- there was no additional duty on the Bank (for example, to ensure that the information was true and correct);
- the customer had no corresponding right; and
- in the case of one of the contracts, the customer could only contest the amount stated in the certificate issued by the Bank if the customer demonstrated “manifest error”.
New Zealand regulators and Courts do not necessarily follow the approaches adopted by their Australian counterparts. However, the New Zealand Commerce Commission has taken similar positions to the FCA in relation to in standard form consumer contracts under the Fair Trading Act.
Under that Act, a term in a consumer contract is unfair if the Court is satisfied that the term:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
This is the same test that was before the FCA under the ASIC Act. What is not clear in New Zealand is whether a Court would have the ability as the FCA did to vary terms at first instance – those powers arise only once a provision has been declared “unfair” and the supplier seeks to include the unfair term in a standard form contract or rely on or enforce it. However, during the declaration process, the Court can describe the context or conditions in which a term’s inclusion in a standard form contract means that the term is unfair.
In any event, banks and other financial services providers should review for unfair terms their standard form agreements with consumer customers now, and with trade customers that have a value below $250,000 ahead of the Fair Trading Amendment Bill being enacted and coming into force. Particular attention should be given to those terms which fall within the examples given in section 46M of the Fair Trading Act or which could have disproportionate consequences for customers if relied upon by the lender, such as clauses which allow a lender to terminate a facility and charge break costs due to events outside of a customer’s control, events which do not create a credit risk for the lender or in unclear or undefined circumstances.