Lenders, both private and retail, will be aware of changes to the laws regarding Unfair Contract Terms (the "UCT") that take effect from 9 November 2023.
The UCT laws are contained in the Australian Consumer Law section of the Competition and Consumer Act 2010 (the "ACL") and the Australian Securities and Investments Commission Act 2001 (the "ASIC Act") and they address the obligation of contracting parties to ensure that there are no unfair terms in standard form contracts with consumers and small businesses. In so far as the contract relates to the provision of credit or financial services, it is the UCT laws in the ASIC Act that apply.
We discussed the nature and effect of the UCT laws under the ASIC Act and their imminent changes in detail in our publication designed for private mortgage funds titled Changes to Unfair Contract Terms Laws – What Private Lenders Need to Know. If you haven't read this publication, we encourage you to do so.
In this article, we will discuss in more detail some measures which all Lenders can implement to ensure that their loan documentation with consumers and small businesses complies with the UCT laws. Bear in mind that a Borrower or a Guarantor obtaining legal advice does not do away with the need to comply with the UCT laws and the associated risk of non-compliance.
- Do you have a standard terms contract?
Whether a document is or isn't a 'standard terms contract' is a matter of law. However, many Lenders, particularly those who negotiate loans on a case by case basis, do themselves a great disservice by employing language that directly invites the presumption that they are offering a 'standard terms contract' when that is not intended.
Lenders who are not intending to offer a 'standard terms contract' should consider the following:
- Avoid statements in covering letters and loan offers that describe the loan documents as being on the Lender's 'standard terms'.
- Avoid statements in covering letters and loan offers that imply the documents are offered on a take or leave it basis, such as forfeiture of the deposit if the documents are not signed and returned unchanged within a short period.
- Consider including a positive statement in your covering letters that the Lender is open to considering any reasonable changes.
- Consider including in your ancillary receipts documentation a statement to the effect that the Borrower was given the opportunity to negotiate the loan documentation, in addition to obtaining legal and financial advice.
- Reign in the broadness of rights and obligations
Loan documents are typically drafted in the Lender's favour and contain broad indemnities, rights and events of default designed to give the Lender the broadest options. Although a Lender will usually act commercially when relying on these terms, the Borrower cannot be expected to rely on the Lender's good faith, and there are certainly Lenders who have abused their rights. ASIC will ask you to amend broad rights and indemnities even if there is no allegation that you have used them unfairly in the past.
For example, Lenders should consider the following:
- Review indemnity clauses that are so broadly described that could result in the Lender being indemnified for matters in the Lender's own control or the Lender's own wrongdoing.
- Review default terms that are broad and neglect consideration of individual circumstances, or provide for the Lender to exercise its discretion in determining whether an event of default has occurred. A common culprit is broad 'material adverse change' events.
- Consider terms that could benefit from the words 'reasonable' (in connection with rights and determinations by the Lender) or 'material' (in connection with obligations and defaults by the Borrower).
- Reconsider terms which unreasonably restrict the Borrower or excuse the Lender
Aside from broadness, certain restrictions on the Borrower or liability exclusions of the Lender will simply be excessive and unreasonable. Once again, it usually comes down to their drafting, as the intention is usually legitimate, but the terms of the clause often go beyond the legitimate protection of the Lender.
For example, Lenders should consider the following:
- Review the drafting of 'entire agreement' clauses. Clauses which broadly seek to exclude any representation by the Lender and its agents will likely be unfair.
- Review the drafting of variation rights by the Lender. Although it is not uncommon for the Lender to have the right to vary certain terms, this should be restricted to what is reasonably necessary for the Lender's risk protection or the specific nature of the loan. Where there is a material variation and the Borrower's only remedy is to refinance, there should be no exit fees applicable and the repayment period given to the Borrower should be at least 90 days, if not more, having regard to the nature of the loan.
- Ensure the Borrower has the ability to remedy a situation if it is reasonably capable of remedy. For example, events of default based on external circumstances or third party breaches should still provide for the Borrower to be notified and have the opportunity to take action, if it is possible.
- Review conclusive evidence clauses. These are clauses that reverse the onus of proof and make it up to the Borrower to prove that the Lender has erred, and in the meantime, things proceed per the Lender's position. Consider replacing these provisions with a procedure for notification of dispute by the Borrower, and review by the Lender, during which no further action is taken. The Lender must also remain liable for any wrongdoing. Clauses to the effect that if the Borrower does not notify an error within a specified time, the Borrower is taken to have accepted the error or even indemnify the Lender for it, are likely to be unfair.
- Reduce complexity and bring important terms to the attention of the Borrower
An important consideration in whether a term is an unfair contract term is how transparent it is, so language and layout are important. We have come across documents that were terribly complex, containing circular definitions, or defined terms expressed as acronyms or which bear little relationship to their definition. Additionally, it is often the case that important terms appear deep within the text, in a manner that could easily be glossed over.
Lenders should consider the following:
- Consider what terms require definition, for example, terms that have a corresponding meaning in a schedule or which are determined by a formula or other system that requires explanation. For words that have a common English meaning, consider whether their definition helps the document, or unnecessarily lengthens or complicates the document.
- Avoid using technical legal language. Replace technical legal terms with their actual meaning.
- Consider the document layout and if it flows properly. Consider if you need more structure, such as headings and subheadings to help with reading and to bring important terms to light.
- Consider placing special terms and conditions, or those that have a special meaning, in the details section of the document, rather than in the main body of the document.
- Consider bringing terms that are critical to the Borrower's risk to the attention of the Borrower by highlighting those terms or referring to them in a warning statement at the end of the document. For example, if a guarantee contains a security interest or 'charging clause', you may want to bring it to the attention of the guarantor in order to more confidently rely on it after 9 November 2023.
What to do now?
The above suggestions are some ways in which loan documentation may be improved for compliance with UCT laws. What is ultimately right for you depends on your documentation and the circumstances of your lending.
However, we hope that reading this article has caused you to come to the following conclusions:
- Your loan documents likely need updating. We will be very surprised if they don't.
- The updates required are intended to clarify what you would ordinarily do as a sensible and prudent Lender and need not affect your commercial position.
- You probably can't make these updates yourself. Yes, this article was a bit self-serving.
We recommend that Lenders contact their legal service providers as soon as possible to update loan documentation suites to ensure that, as much as possible, they comply with the intention of the UCT laws.
It is not always possible to know what will or will not be considered an unfair term, given this can depend on the individual facts and not every term has been tried and tested in court. However, there is a sufficient body of information, both in the form of regulatory advice and from past court decisions on the application of these laws, to provide good guidance of the type of changes that should be implemented to improve your loan documentation.
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.
