Upon ASIC’s application, the Federal Court has declared several terms within some Bank of Queensland (BoQ) small business contracts unfair.

The unfair terms were in standard form loan contracts BoQ entered into with its small business customers after 12 November 2016.

‘Small business owners deserve to be able to enter into fair loan contracts, especially where they have little or no ability to negotiate the terms. ASIC will take action against unfair practices in standard form contracts, whether it be for consumers or the small business community,’ said ASIC Commissioner Sean Hughes.

The Court found that the following terms were unfair:

• unilateral variation clauses which allowed BoQ to vary the terms and conditions of their contracts without giving borrowers advance notice or an opportunity to exit the contract without penalty;
• event of default clauses which allowed BoQ to unilaterally determine whether a default has occurred as well as call defaults based on events that do not present any material risk to BoQ and without giving borrowers an opportunity to address the issue;
• indemnification clauses which allowed BoQ to make a claim against a customer for losses caused by BoQ’s mistake, error or negligence; and
• conclusive evidence clauses which meant that if BoQ issued a certificate stating an amount owing by a customer, that amount would be assumed to be correct unless the customer could prove otherwise.

The Court declared the unfair terms void from the start of the contracts and ordered that the unfair terms be replaced with new, fair terms agreed by the parties. These fair terms must also replace the unfair terms in all standard form contracts from 12 November 2016 (in the same form as those put before the Court), that BoQ has with small business customers.

In handing down the judgment, Justice Banks-Smith determined: ‘the declarations sought are appropriate because they serve to record the Court's disapproval of the contravening conduct, vindicate the claim by ASIC that the Bank had contravened the Act, assist ASIC to carry out the duties conferred upon it by the Act, and deter other corporations from entering into contracts containing unfair terms.’

The Court also accepted an undertaking from BoQ that the bank would not use or rely upon any of the unfair terms in any standard form contracts (in the same form as those put before the Court) with small business customers in the future.

Commissioner Hughes also said the decision was a timely reminder for insurers, following Government reforms extending unfair contract terms protections to consumer and small business insurance contracts from 5 April 2021.

‘Now that unfair contract term protections apply to insurance contracts for consumers and small business, we expect all insurers to have reviewed all standard form contracts for fairness,’ Commissioner Hughes said.

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Judgment (18MB)

Background

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

From 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form small business contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these standard form contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

• identifies the types of terms in loan contracts that raise concerns under the law;
• provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
• provides general guidance to all lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law.

Following Government reforms passed in early 2020, unfair contract terms protections apply to consumer and small business insurance contracts from 5 April 2021.

In May 2020, The Federal Court declared several terms within six small business contracts used by Bendigo and Adelaide Bank to be unfair (20-123MR).