Unfair contract terms in bank documents

In our article Unfair terms in contracts: Protection for consumers and small businesses, we noted that the Australian Consumer Law provides that unfair terms in standard form consumer contracts are void, and that this protection had been extended to small businesses from 10 November 2016.

ASIC announced recently that the big four banks have reviewed their small business loan contracts and made specific changes to eliminate any unfair terms from their contracts. ASIC has indicated that the changes mean:

• The loan documents will not contain ‘entire agreement clauses’ that absolve the bank from responsibility for conduct, statements or representations they make to borrowers outside the written contract.

• The operation of the banks’ indemnification clauses will be significantly limited. For example, the banks will now not be able to require their small business customers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the bank, its employees or a receiver appointed by the bank.

• Clauses which gave banks the power to call in a default for an unspecified negative change in the circumstances of the small business customer (known as ‘material adverse change event’ clauses) have been removed – so that the banks will now not have the power to terminate the loan for an unspecified negative change in the circumstances of the customer.

• Banks have restricted their ability to vary contracts to specific circumstances, and where such a variation would cause a customer to want to exit the contract, the banks will provide a period of between 30 and 90 days for the consumer to do so.

The banks will limit the use of financial indicator covenants in small business contracts to certain classes of loans (eg property development and specialised lending, such as margin loans). The banks have agreed that financial indicator covenants will not be applied to property investment loans.

The Australian Consumer Law will apply to loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff. However, the banks have agreed to extend the protection to loans up to $3 million, and there are industry calls to extend this even further. Customers affected by the changes will be contacted by their bank. It is hoped that other lenders will follow this lead and review their contracts.

Please contact us if you have any questions in relation to unfair contract terms in bank documents.