On 28 May 2020, the Federal Court of Australia handed down its decision in ASIC v Bendigo and Adelaide Bank [2020] FCA 716, declaring several terms contained in six standard form small business contracts used by the Bendigo and Adelaide Bank (the Bank) to be unfair.

The Court’s decision is of particular relevance to banks, insurance firms and other providers of financial products or financial services who may enter into standard form contracts with small businesses or consumers.  It also provides useful guidance in respect of any contract or term which would be captured by the Australian Consumer Law (ACL) unfair contract terms regime.

A background to the unfair contract terms regime – ASIC Act

The unfair contract terms regime in the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) deals with unfair contract terms in standard form, small business contracts which relate to financial products or services.  The regime in the ASIC Act is similar to the unfair contract terms regime which exists in the ACL, which applies to consumer and small business contracts for the supply of goods or services, or the sale or grant of an interest in land.  Employee and contract value tests apply to determine whether a contract is a small business contract and therefore subject to the unfair contract terms regime. 

In general terms, a term in a standard form contract will be “unfair” if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment to a party if it were to be applied or relied on. 

In assessing unfairness, a court will have regard to the term in the context of the contract as a whole, as well as whether the term is transparent. 

Clauses considered by the courts

The impugned terms in the present case related to clauses dealing with indemnities, events of default, unilateral variation or termination and conclusive evidence provisions.  The court declared each clause was unfair.  Additionally, the Court made a number of findings about the transparency of some of these terms.

Indemnification clauses

The Court declared the specific indemnification clauses were unfair because they required the customer to indemnify the Bank where:

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

and the customer did not have a corresponding right. 

Event of default clauses

The Court declared the event of default clauses were unfair because:

• they allowed the Bank to take action, following the event of default, which were disproportionately severe to the event of default;
• they did not permit a customer to remedy the default;
• the relevant event of default may not involve any credit risk to the Bank (for example, if a customer provided misleading or untrue information about a director’s date of birth); and
• some event of default triggers 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); and
  • expressed in vague and largely undefined circumstances.   

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

Unilateral variation or termination clauses

The Court declared the unilateral variation or termination clauses were unfair because they allowed the Bank to vary:

• the services, or reduce the amount of funds available to the customer;
• its obligations, and allowed the Bank to terminate if the customer did not accept the new terms,

and the customer did not have a corresponding right.

Conclusive evidence clauses

The Court declared the conclusive evidence clauses were unfair because they:

• shifted the evidential burden on to the customer, in circumstances where the Bank was best placed to provide primary evidence;
• 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,

and the customer did not have a corresponding right.

Transparency

The Court made various comments about transparency (or lack thereof).  The key issues identified by the Court were:

• a multiplicity of cross-references in the indemnity clause;
• open-ended / catch-all drafting in the indemnity clause (the court criticised the use of examples “without limitation”);
• where the name of a defined term bears no relationship to its actual definition (for example, the defined terms “Periodic Review” and “Periodic Revaluation” did not have a “periodic” aspect);
• clause headings / clause location:
  • a unilateral variation or termination clause was contained in a section of the contract titled “Use of facility”, which was not likely to suggest that the clause could concern cancellation of the facility; and
  • other unilateral variation or termination clauses were not transparent because their title or heading did not suggest the breadth, nor the comprehensive nature of the changes permitted by it; and
• the use of “legal language”, such as:
  • the phrase “determination of any amount … is conclusive in the absence of manifest error” in the conclusive evidence clause; and
  • the phrase “legal expenses on a full indemnity basis” in the indemnity clause.

Relief

The impugned terms were declared void ab initio by the Court.  The Bendigo and Adelaide Bank has given an undertaking to ASIC and will give an undertaking to the Court, that it will not use of rely upon any of the impugned terms.  A number of these clauses were redrafted by the parties in negotiation and will replace the unfair clauses.

Authors: Sophie Bogard and Andrew Hii