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:
- Entire agreement clauses have been removed from the banks' small business lending contracts, or will no longer be applied.
- Broad indemnification clauses have been removed or will no longer be applied.
- 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.
- Banks will limit the use of Financial Indicator Covenants as a means of causing a default event.
- 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:
- Are they clearly expressed in plain English?
- 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.
- Are all provisions reasonably necessary to protect our legitimate business interests?
- Do they strike a fair balance between our interests and those of the client or customer?
- 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?
- Is a term, when looked at together with other terms and the contract as a whole unfair?
- 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.