The Federal Court of Australia has declared several terms within six small business contracts used by Bendigo and Adelaide Bank to be unfair. The relevant contracts are standard form 鈥榮mall business鈥� loan contracts which the bank entered into with its customers after 12 November 2016. ob体育 was also successful in having the Federal Court declare the same terms appearing in other standard form small business contracts, entered into by the Bank with its customers in the same time period, to be unfair.
The Bendigo and Adelaide Bank will give an undertaking to the Court not to use, or rely upon, any of the impugned terms in a manner that is unfair, or causes any customers to suffer loss or damage.
Justice Gleeson found that the unfair terms:
- caused a significant imbalance in the parties鈥� rights and obligations under the contract;
- were not reasonably necessary to protect the legitimate interests of Bendigo and Adelaide Bank; and
- would cause detriment to the small businesses if the terms were relied on.
ob体育鈥檚 investigation revealed that some of the unfair terms gave the bank broad discretion to unilaterally vary the terms and conditions of the contract without giving the borrower advance notice, or an opportunity to exit the contract without penalty. Other terms allowed the bank 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 by calling a default based on events that do not present any material risk to the bank.
In handing down the judgment on 28 May 2020, Justice Gleeson noted that ob体育, as the statutory authority responsible for enforcing the ob体育 Act, has a public interest in seeking these declarations.
The Court declared that the terms were void from the outset, not from the time of the court鈥檚 declaration, with the remainder of the contract continuing to bind the parties. The Court also ordered that the contracts be varied by replacing the unfair clauses with new fair clauses by the parties following successful negotiations between ob体育 and Bendigo and Adelaide Bank.
ob体育 Commissioner Sean Hughes said, 鈥榦b体育 is committed to protect small business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms.鈥�
鈥榊esterday鈥檚 judgment shows that ob体育 will take the necessary steps to enforce the law. Importantly, insurance firms should be preparing to extend these obligations in insurance contracts鈥� he added.
鈥榃e are pleased the Government backed us with additional funding that was ear-marked to enforce this area of the law.鈥�
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Background
Since 1 July 2010, ob体育 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 ob体育 Act were extended to cover standard form 鈥榮mall business鈥� contracts.
Small businesses, like consumers, are often offered contracts for financial products and services on a 鈥榯ake it or leave it鈥� basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as 鈥榮tandard form鈥� contracts. Small businesses commonly enter into these 鈥榮tandard form鈥� contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.
The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:
- the contract is for the supply of financial goods or services (including loan contracts);
- at least one of the parties is a 鈥榮mall business鈥� (under the ob体育 Act, a business employing fewer than 20 people); and
- the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.
In March 2018, ob体育 released Report 565: Unfair contract terms and small business loans. The report:
- identifies the types of terms in small business loan contracts that raise concerns under the law;
- provides details about the specific changes that have been made by the 鈥榖ig four鈥� banks to their small business loan contracts ensure compliance with the law; and
- provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the Unfair Contract Terms law.
For more information about ob体育鈥檚 previous work relating to unfair contract terms in small business contracts, refer to: