Lending to a small business under a standard form loan contract will be susceptible to new unfair contract terms protections under the Australian Consumer Law and the Australian Securities and Investments Commission Act.
The new unfair contract terms protections will apply to all standard form contracts used by lenders entered into or renewed on or after 12 November 2016 in connection with small business lending.
Related amendments have been made to the ASIC Act as ASIC has responsibility for enforcing the consumer protection provisions, including the unfair contract terms laws, in relation to financial products and services.
Application of the Legislation
The new unfair contract protections will apply under the following circumstances:
- the contract is for the supply of financial goods or services such as a loan contract.
- the contract must be standard form.
- one party must be a ‘small business’.
- the amount payable under the contract must not exceed $300,000, or $1 million if the contract runs for more than 12 months.
Under the unfair contract protections a small business is a business employing less than 20 people including casual staff employed on a regular and systematic basis.
Standard Form Contract
The law does not define a ‘standard form contract’.
However ASIC has published its view that:
“in broad terms, a standard form contract is one that has been prepared by one party to the contract and is not subject to negotiation between the parties – that is, it is offered on a ‘take it or leave it’ basis.”
“If a consumer alleges that a contract is a standard form contract, the contract is presumed to be a standard form contract unless proved otherwise.”
“A Court may take into account any relevant matter, but must take into account whether:
- one of the parties has all or most of the bargaining power relating to the transaction.
- the contract was prepared by one party before any discussion relating to the transaction occurred between the parties.
- another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented.
- another party was given an effective opportunity to negotiate the terms of the contract.
- the terms of the contract take into account the specific characteristics of another party or the particular transaction.”
Terms Not Caught by the Unfair Contract Protections
The following specific contract terms are also excluded:
- terms that define the main subject of the contract.
- terms that set the upfront price payable.
- terms that are required or expressly permitted by Statute.
Impact of Changes
The legislation will prohibit “unfair contract terms” in standard terms and conditions of a loan contract.
If a Court finds that a term in a standard form contract is unfair, the term is void. This means that the term is treated as if it never existed. However, the contract will continue to bind parties if it is capable of operating without the unfair term.
Other potential remedies are:
- varying a contract or arrangement as a Court sees fit
- refusing to enforce all or any of the terms of a contract or arrangement
- directing the Lender to refund money
Likely provisions in loan contracts which may susceptible to challenge under the Unfair Contract Protections are:
- Default provisions
- Fees and Charges, particularly in relation to default, early repayment or exit
- Lender’s unilateral right of variation
- Lender’s right to avoid or limit performance of the contract
- Unilateral right of a Lender to determine whether the loan contract has been breached or to interpret its meaning
For advice on the implications of the unfair contract terms laws and guidance on regulatory risk, please contact our Financial Services team.