Standard form contract clauses found to be unfair and invalid by the Federal Court

Case note on Australian Securities and Investments Commission v Bendigo and Adelaide Bank Ltd [2020] FCA 716 (ASIC v Bendigo).

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Overview

On 28 May 2020, the Federal Court handed down the decision in ASIC v Bendigo, which found that certain terms in standard form small business loan contracts were unfair within the meaning of s 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (Act).

The terms in question in this case related to clauses dealing with indemnification rights, events of default, unilateral variation or termination and conclusive evidence clauses.

In its decision the Federal Court declared the unfair terms void ab initio, rendering the clauses invalid under section 12BF of the Act. The invalidated terms were replaced with new terms as negotiated between ASIC and Bendigo and Adelaide Bank (Bank) and the Bank also provided undertakings to ASIC and to the Court that it would not use or rely on any of the unfair terms.

The decision provides useful guidance to providers of financial products or financial services who may enter into standard form contracts with small businesses or consumers on the types of terms that may be considered unfair by ASIC and the courts.

Unfair contracts terms regime

The unfair contract terms regime under the Act applies to standard form contracts which relate to financial products and financial services. There is a similar regime in the Australian Consumer Law that applies to other types of contracts including small business contracts for the supply of goods or services, or the sale or grant of an interest in land.

Broadly, a term will be deemed unfair under the regime in the Act if the term:

      1. would cause a significant imbalance in the parties’ rights and obligations;
      2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
      3. would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.

In determining whether a term is unfair, the Court will have regard to the contract as a whole, as well as whether the term is transparent. If a term is unfair, the term is void. This means that the term is treated as if it never existed and cannot be enforced, but the contract, other than the unfair term, will continue to be binding.

Why were the terms considered unfair in this case?

Set out below is a broad summary of the terms that were found to be unfair by the Court in ASIC v Bendigo and the reasons why the court found those terms to be unfair.

Types of clause Points of unfairness
Indemnification clauses

Certain indemnification clauses were found to be unfair because the terms required that the customer indemnify the Bank in circumstances where:

      1. the customer did not cause the Bank’s loss;
      2. the loss was caused by the Bank’s mistake, error or negligence; and/or
      3. the loss could have been avoided and mitigated by the Bank,

and the customer did not have a corresponding right.

Event of default clauses

Certain event of default clauses in question were found to be unfair because:

      1. the terms allowed the Bank to take action, upon an event of default, which was disproportionate in its severity to the event of default;
      2. the terms did not permit the customer to remedy the default;
      3. the relevant default event may not involve any credit risk to the Bank (for example, if the customer provided inaccurate information about a director’s date of birth); and
      4. some triggers that would constitute an event of default were:
        • based on events entirely outside of the customer’s control (and within the Bank’s control);
        • based on the Bank forming a unilateral opinion on a matter (and the customer having no opportunity to remedy the default); and
        • expressed in ‘vague and largely undefined circumstances’ within the standard form contracts.

The consequences of a default were significant and could lead to the Bank being entitled to cancel all or part of any facility and the customer being required to indemnify the Bank for all costs incurred in relation to the event of default.

Unilateral variation or termination clauses

Certain unilateral variation or termination clauses in question were found to be unfair because the clauses:

      1. allowed the Bank to ‘unilaterally’ vary the contract, including to vary the services, the bank’s obligations, or reduce the amount of funds available to the customer;
      2. allowed the Bank to terminate the contract if the customer did not accede to the new terms; and

and the customer did not have any corresponding rights under the contract.

Conclusive evidence clauses

Certain conclusive evidence clauses were found to be unfair as the terms, if relied upon, would require the customer to disprove matters about which the Bank would be better placed to provide primary evidence. These clauses were also held to be unfair because they allowed the bank to conclusively state what was owed to it by the customer, and the customer had very limited ability to challenge the Bank’s position. In this case, the customer also did not have a corresponding right under the contract.

Justice Gleeson also noted the lack of transparency pertaining to the unfair contract terms, in that there were:

      1. multiple cross-references within the indemnity clause;
      2. catch-all drafting phrases (such as “without limitation”);
      3. there were instances where a defined term beared no relation to its actual definition;
      4. clauses headings and clause locations were not set out in a logical or transparent fashion; and
      5. a number of terms were convoluted with “legal language” (including the phrases “manifest error” and “legal expenses on a full indemnity basis”).