From 1 July 2010 the Unfair Contract Terms regime applied to contracts for financial services and from 12 November 2016 the regime was extended to cover “standard form contracts” involving “Small Businesses”. In November 2022 this was further amended to strengthen the law relating to unfair contract terms and in particular the penalties as a deterrent for breach; these provisions are to take effect on 9 November 2023. For lenders and borrowers, the first enquiry must be whether the financial or credit contract is a standard form contract. There will be a presumption that the contract is a standard form contract, and it will be for the financial services provided to prove otherwise.

An indication of how the courts will view such a contract can be seen in ASIC v Bendigo and Adelaide Bank [2020] FCA 716 in which case a number of contract clauses were declared to be unfair.

Clauses that were declared to be void included:

• Indemnities for the bank from the borrower in the event of losses occurring for any reason including losses incurred by the bank caused by its own negligence, fraud or misconduct.
• Certain event of default clauses including events of default that had consequences that were disproportionate to the actual default. Such a clause may be the inclusion of a covenant such as a loan to valuation ratio clause in a small business contract where a breach does not present a credit risk to the borrower or more simply providing an incorrect birth date of the borrower.
• Clauses that did not give the borrower any opportunity to remedy the default. Other event of default clauses that were held to be unfair included those that relied on events that were totally outside of the control of the borrower or based on the bank forming his own view on a particular issue.

All those in the financial services sector whether as a lender or borrower should review their contracts to assess whether they are standard form contracts and contain unfair terms.

As to the consequences of breaching the unfair contract terms regime, penalties will range from $500,000 for individuals up to $50 Million for organisations.

Please contact our Unfair Contracts team if you need assistance to review your standard form contracts to remove any unfair terms.