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Leave small businesses “a loan”: Federal Court declares unfair terms in Bank of Queensland finance contracts with small businesses

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Upon application from ASIC, the Federal Court has determined that several terms contained within Bank of Queensland’s (BoQ) small business contracts are unfair.

This decision follows on from a suite of government reforms passed in 2020, under which the unfair contract terms regime was extended to apply to consumer and small business insurance contracts.

Notably, in November 2020 reforms were proposed which could see penalties handed down for parties using an unfair term in their standard form contracts and thus more bite to the unfair contract terms regime. However legislation implementing these laws is yet to be introduced into parliament.

In 2020 ASIC was successful in bringing a claim against another bank, Bendigo and Adelaide Bank, with the Federal Court declaring that their small business loan contracts contained terms which were unfair.

Unfair contract terms regime overview

Since November 2016 the unfair contract terms protections have applied to standard form small business contracts. A contract will be standard form where the small business is offered a contract for financial products or services on a ‘take it or leave it’ basis – that is, where the small business has limited or no opportunity to negotiate the terms.

A small business under the unfair contract terms regime is defined as a business which employs fewer than 20 people. Further, for the regime to apply, the upfront price payable under the standard form contract must be either

  1. less than $300,000; or
  2. $1million or less if the contract is for 12 months or more.

The Federal Treasury has also suggested that they intend to amend the definition of a “small business” to include a business which has fewer than 100 employees or has had an annual turnover of less than $10,000,000 in the previous income year.

The key types of clauses that fall foul of the unfair contract terms regime include those that:

  1. Allow one party to unilaterally avoid, vary, assign or terminate the contract without the consent of the other party;
  2. Allow one party to unilaterally vary the characteristics or the price of the goods or services (without giving the other party the right to terminate in those circumstances);
  3. Restrict a party’s rights to terminate the contract;
  4. Suspend or terminate the services being provided to the consumer;
  5. Make the consumer liable for things ordinarily outside their control;
  6. Prevent a consumer from relying on the representations made by the business; or
  7. Attempt to limit the operation of the statutory consumer guarantees.

Decision of the Federal Court

The Court found that the following terms were unfair:

  • Unilateral variation clauses which allowed BoQ to alter the terms and conditions of the contracts without first giving borrowers notice or an opportunity to terminate the contract without incurring a penalty.
  • Event of default clauses which allowed BoQ to determine whether a default had occurred as well as call defaults based on events that do not present any material risk to BoQ and without giving borrowers the opportunity to be heard in relation to the issue.
  • Indemnification clauses which allowed BoQ to indemnify themselves against a customer for losses caused by BoQs mistake, error and negligence.
  • Conclusive evidence clauses which would operate where BoQ issued a certificate stating an amount owing by a customer, that amount would be assumed to be correct unless the customer could prove otherwise.

There was no evidence, or even any assertion, that BoQ had relied on these terms or caused customers any loss or damage.  However, it is important to note this does not have to be established for a term to fall foul under the unfair contract terms regime.

Penalty

The Federal Court determined that the impugned terms were unfair from the start of the contracts and ordered that the unfair terms be replaced by new terms as agreed between the parties.

The Court also accepted an undertaking from BoQ that they would not use or rely upon any of the unfair terms in standard form contracts with small businesses in the future.

Key takeaways

ASIC Commissioner Hughes warned that this decision reinforces that ASIC will take action against unfair practices in standard form contracts, whether it be for consumers or the small business community.

Commissioner Hughes also noted that this decision is a timely reminder for insurers to review their contracts following government reforms extending the reach of the regime to insurance contracts with individuals and small businesses which commenced in April 2021.

In light of the proposed reforms and potential extension of penalties, it is prudent to review any standard form contracts you may have with small businesses for unfair terms. Even if your contracts are not currently captured under the unfair contract terms regime, they may be soon as the discussion at treasury level suggests that reforms will soon be introduced to widen the reach of protections for small businesses.

To assist you undertake this exercise McCabes has created MC Act (Assess Contract Terms), an app that can be used to assess whether you are a party to a contract that is covered by the Unfair Contracts Regime and whether that contract contains any unfair terms.  We encourage you to complete the free online assessment today.

McCabes has extensive experience acting in both contract and consumer law matters, and we are well placed to assist you understand how the unfair contract regime may apply to and affect your business contracts.

Contributors

Guy Lewis
Associate
Emma Connolly
Lawyer

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