It is often the case that small businesses and borrowers will enter into contracts with their financial institutions thinking they have little to no negotiating power when it comes to standard form contracts. However, the Federal Court has recently voided unfair contract terms found in standard form contracts between Bendigo and Adelaide Bank Limited and small-business borrowers.
On 28 May 2020, the Federal Court of Australia handed down its decision in Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 finding that the Bank had offered unfair contract terms to small businesses under their standard form contracts. In its judgment, the Federal Court found that the terms found to be ‘unfair contract terms’ were not necessary to protect a bank’s interest but rather, merely harmful to small business borrowers.
Since 12 November 2016, the unfair contract terms provisions which applied to consumers under the Australian Consumer Law (ACL) were extended to cover Standard Form Contracts entered by small businesses, with the Australian Securities and Investments Commission Act 2001 (Cth) effecting application of the unfair contract terms provisions to financial service providers such as banks.
Standard form contracts are typically designed to limit or provide no opportunity for consumers and small businesses to negotiate the terms and are offered on a ‘take it or leave it’ basis. Common standard form contracts entered into by small businesses include contracts for financial products and services, such as business loans, credit cards, and overdraft arrangements.
The Australian Securities and Investments Commission commenced proceedings against Bendigo and Adelaide Bank alleging the Bank had sold 15,529 non-compliant loans which included terms that:
- created a significant imbalance in rights and obligations between the lender and borrower;
- 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.
ASIC argued that some of the unfair contract terms gave the Bank broad discretion to unilaterally vary the terms and conditions of the contract without giving a borrower advance notice, or an opportunity to exit the contract without penalty. While the other unfair contract terms allowed the Bank to take disproportionate actions in response to a breach by a borrower.
The Federal Court held that the unfair contract terms be void from the outset, with the remainder of the contract continuing to bind the parties, and ordered that the contracts be varied by replacing the unfair contract terms with new and fair clauses in place their place.
If in the course of negotiating a refinance, or a borrowing with your lender, you consider that the standard form contract terms are onerous or unnecessarily disadvantage you or your business, you do not have to sign that dotted line!
