Australia: Unfair contract terms – What is the problem?

You want to download an app on your phone, sign up for a service of some kind or rent a car. Someone comes to the door or telephones you and wants you to commit to a contract.

You just want the app or the service. You can't be bothered reading the contract, which is full of small incomprehensible language that would take you ages to read. You know that even if you do read it, there is nothing that you could do to change it. It's "take it or leave it", so you just click the button or sign on the dotted line that confirms that you've read and understood the terms. Everyone, including the service provider knows that most people have not read or understood the terms.

Since 2011, the Australian Consumer Law has protected consumers who enter contracts like these from unfair terms. Any terms in the contract that are not fair – having regard to things like whether the term or terms:

  • result in a significant imbalance between the rights of parties
  • are not reasonably necessary to protect the legitimate interests of the party presenting the contract, or
  • would cause detriment to the consumer, may be declared void.

While it is not an offence to have an unfair term in a contract, a court can also vary the contract, refuse to enforce it, or order that a party refund money or provide a service for no charge. The provisions don't apply to a term that defines the main subject matter of the contract or sets the upfront price payable under the contract.

What if you are a small financial services business (employing less than 20 people) needing to finance your growth and you talk to the bank about a loan? The bank will effectively provide you with terms and conditions on a "take or leave it" basis. Are you similarly protected? Since November, 2016 the unfair contract terms have also covered standard form small business contracts. For loan contracts, the laws extended to cover small business loans up to $1,000,000. So, if you are that small financial services business entering into a loan contract, the answer is: "Yes, you are protected."

Here is an example of unfair contract terms in operation.

A small business obtains a loan from its bank to assist with working capital. The business has worked out the repayments it could afford and it has never skipped a payment. Lately its revenue has been down and things have been a bit tight. It is pretty sure this is a short term issue and the owners have been drawing a bit less from the business; but the business has still never missed a payment to the bank.

The business is surprised to get a notice from the bank telling it that it is in default under the terms of the loan and the bank is requiring early repayment. The bank has said that the business is in breach of its financial indicator covenants. It has also made a policy decision that it is too highly exposed to the industry sector the business is in and wants to "de-risk" its book. It has taken the view that there has been a material adverse change in circumstances and it has the right under the contract to terminate the contract. Having always made its payments the business is incredulous at the bank's claim that the business has defaulted.

There are a number of terms in the bank's standard form loan contracts that have the potential to work unfairly.

Examples include clauses that:

  • allow the bank to vary the contract unilaterally
  • enable the bank to trigger defaults and debt recovery (based on financial indicator covenants) even if all loan repayments are being made
  • enable the bank to terminate a loan for unspecified negative changes in circumstances
  • are entire agreement clauses, seeking to prevent customers from relying on representations made to the customer orally outside the written contract
  • are broad indemnification clauses where the borrower covers losses and costs due to the fraud, negligence or misconduct of bank employees .

On the flip side of the coin, if you provide financial products and services to small businesses the obligation to avoid these terms applies to you. It should be "old news" to you by now, but the question remains: "Have you responded adequately to these changes in the law?"

ASIC is responsible for enforcing the unfair contract terms law in relation to financial products and services.

A review conducted by Kate Karnell, the Australian Small Business and Family Enterprise Ombudsman and ASIC into loans offered to small businesses by the big four banks was less than complimentary in relation to the banks' implementation of the new regime one year after its introduction. She was quoted as saying "It seems to be saying that compliance with the law is somehow voluntary, when you get around to it" "This is simply not the case." (See Cara Waters – Sydney Morning Herald 15 March 2018.)

Following intervention by ASIC after the review, the banks made the following changes to their small business lending contracts:

  1. Entire agreement clauses have been removed from the banks' small business lending contracts, or will no longer be applied.
  2. Broad indemnification clauses have been removed or will no longer be applied.
  3. Clauses allowing the bank to treat a loan as being in default because of a "material adverse change", without any clarity about what types of changes could result in a default, have been removed or will no longer be applied.
  4. Banks will limit the use of Financial Indicator Covenants as a means of causing a default event.
  5. Banks will limit unilateral variation clauses to defined events and providing customers with a reasonable opportunity to exit the contract before the changes take place.

The Ombudsman and ASIC will be re-calibrating their systems to look at the next tranche of non-bank lenders and have said "there is no excuse whatsoever for any bank or non-bank lender or for that matter anyone in the financial sector not to comply." (See Cara Waters – Sydney Morning Herald 15 March 2018.)

These provisions don't just apply to the banks and to loan contracts, but to the rest of the financial services industry as well.

TIP 1: If you are a non-bank lender and you have not already done so, it is essential that you review your small business loan contracts for provisions such as those listed above and take similar steps to those taken by the banks.

Insurance contracts are currently excluded from the regime. However, it is government policy to extend the regime to insurance contracts covered by the Insurance Contracts Act 1984 so that the same protections that are available for consumers and small businesses in relation to other financial products will be available in relation to insurance. The consultation period expires on 24 August, 2018. There will be some tailoring of the law to suit insurance contracts.

TIP 2: Even if you are not a lender, but you are

  • a provider of financial products or services; or
  • an insurer (whether general or life)

it would be timely, if you have not already done so, to conduct a review of your standard form "take it or leave it" contracts.

Here are some questions you might ask:

  1. Are they clearly expressed in plain English?
  2. Do they provide me with the right to change the contract without seeking further agreement from the client or customer? If so, this may be unfair.
  3. Are all provisions reasonably necessary to protect our legitimate business interests?
  4. Do they strike a fair balance between our interests and those of the client or customer?
  5. Do we seek indemnifications from the client or customer in relation to losses that are our own fault, or that arise from a risk that the client or customer is not in a position to control?
  6. Is a term, when looked at together with other terms and the contract as a whole unfair?
  7. Are the circumstances in which we can terminate the contract clearly stated and fair?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Grant Holley
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Australia
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Australia
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions