Time running out on unfair terms? Bank on it
Despite legislative changes nearly four years ago making ‘unfair contract’ terms in certain standard form contracts unlawful, they continue to appear in many contracts. Given the prevalence of these terms (or the ambivalence of business to this legal change), it is no wonder that regulators – particularly the Australian Competition and Consumer Commission – is calling for the application of penalties to deter their ongoing use.
This point is well illustrated by a recent decision by the Federal Court that focuses on banking terms that have routinely been included in loan and facility agreements for many years. In ASIC v Bendigo and Adelaide Bank  FCA 716, the Australian Securities and Investments Commission (ASIC) which regulates unfair terms in financial contracts, obtained orders against Bendigo and Adelaide Bank in relation to four types of clauses in its standard form loan agreements, despite ASIC accepting that the clauses had not been used by the Bank.
The clauses which ASIC took exception to were contained within standard form contracts used by two divisions of the Bank, specifically, the Delphi Bank General Conditions and Rural Bank Facility Terms. The clauses fell into the following four broad categories:
- indemnification clauses
- event of default clauses
- unilateral variation or termination clauses
- conclusive evidence clauses.
ASIC alleged and the Bank accepted that the Bank’s standard form contracts fell within the scope of the unfair contract terms prohibition in the Australian Securities and Investment’s Commission Act 2001 (ASIC Act) and that the above clauses were unfair and therefore void.
Effectively, these clauses were unfair as they operated to make the customer liable to the Bank for any liability, loss or costs suffered by the Bank even in circumstances where the loss, liability and costs:
- had not been caused by the customer
- had been caused by the Bank’s mistake, error or negligence and/or
- could have been avoided by the Bank.
The Court held that the Indemnification Clauses were unfair on a number of bases. Firstly, the Court held that the Indemnification Clauses created a significant imbalance between the parties’ rights and obligations in that:
- the customer had no corresponding rights
- the circumstances in which the liability, loss or costs may have been incurred were not within the customer’s control
- the Bank controlled at least some of the circumstances in which the liability, loss or costs may have been incurred and could avoid or mitigate that liability, loss or cost.
For similar reasons, the Court also found that the Indemnification Clauses would create a detriment to the customer if the Bank relied on them. Finally, the Court found that the clauses were not transparent, for reasons including that they did not express the breadth of the borrowers’ obligation in reasonably plain terms and contained up to 35 defined terms.
ASIC also took issue with a number of clauses that sought to define ‘events of default’ under the contracts (Default Clauses). The Default Clauses stated that ‘events of default’ under the contracts (which had serious consequences for customers in that, among others, they triggered the Bank’s ability to cancel the contract) occurred in the following scenarios:
- where an untrue or misleading statement was made by the customer, no matter how insignificant
- where all or any part of a relevant document was terminated or became void or voidable
- in vague and largely undefined scenarios, such as where ‘anything similar to’ the specific events of default listed in the contract occurred.
The Court held that the Default Clauses were unfair, as they created a significant imbalance between the parties’ rights and obligations, largely as a result of the disproportionately severe consequences of a default occurring no matter how immaterial. Further, none of the clauses gave the customer an opportunity to remedy a default even where this was possible. Additionally, each of the Default Clauses created a default based on events that did not necessarily involve any credit risk to the Bank. Once again, the Court also held that the Default Clauses would cause detriment to a customer if the Bank relied on them. However, despite some of the clauses containing vague and imprecise language, the Court did not find that the clauses lacked transparency, as ASIC had alleged.
Unilateral variation or termination clauses
These clauses enabled the Bank to vary the upfront price of the contract, unilaterally vary the terms of the contract and in some cases, terminate the contract (Unilateral Variation Clauses). Unsurprisingly, the Court held that these clauses were unfair – in particular, as they created a significant imbalance between the parties’ rights and obligations because the customer did not have any equivalent rights to vary or terminate the contract and further, as the customer would suffer a detriment if the Bank relied on them (which could take the form of reducing the amount of funds available to the customer). The Court also held that a number of the terms lacked transparency for reasons including the fact that they contained complex defined terms and were contained under misleading sub-headings.
Conclusive evidence clauses
The final category of terms provided that, where the Bank issued a certificate stating an amount owed to it, this was taken to be conclusive evidence of the amount being owed unless the customer could prove an error had occurred (Conclusive Evidence Clauses). The Court noted that, in effect, these clauses imposed an evidential burden on the customer about matters in which the Bank would be best placed to provide primary evidence. They also had the effect of allowing the Bank (but not the customer) to terminate the contract if the customer did not pay an amount stated in the certificate. As a result, the clauses created a significant imbalance between the parties’ rights and obligations and the Court held that they were unfair.
Further, the Court held that the clauses would cause a detriment to the customer if the Bank relied upon them in circumstances where the certificate was wrong and the customer could not or did not seek to disprove it.
The Court made declarations that each of the clauses falling within the categories set out above were void and ordered the Bank to pay ASIC’s costs. Given that ASIC did not allege that the Bank had relied on any of the disputed clauses in a manner that was unfair or that had caused any customer to suffer loss or damage, it did not seek any additional orders.
This case shows that businesses need to review these long-standing (and easy to overlook) standard clauses which, although rarely or never used, are still subject to the unfair contract terms regime. Critically, ASIC proceeded with this action even where it accepted that the Bank had not relied on any of the terms in an unfair way and that the Bank had not caused customers any sort of loss or damage. The action foreshadows the prosecutorial approach that can be expected once penalties are added to the unfair contract terms regime. In other words, time is almost up for all businesses to get their house in order and review their standard form contracts in order to avoid future prosecution and penalties. It will be no defence to argue, "but we never used these clauses".
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