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The Federal Court has declared a number of loan contracts entered into by a lender “void” after finding that the terms of the contracts were “unfair”.
The Federal Court of Australia has declared several terms within six small-business loan contracts entered into by Bendigo and Adelaide Bank after 12 November 2016 to be “unfair”.
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The Federal Court also declared that the same terms appearing in other standard form small-business contracts entered into by the bank with its customers in the same time period to be “unfair”.
As a result, Bendigo and Adelaide Bank will give an undertaking to the court not to use, or rely upon, any of the impugned terms in a manner that is unfair, or “causes any customers to suffer loss or damage”.
Justice Gleeson found that the unfair terms:
- caused a significant imbalance in the parties’ rights and obligations under the contract;
- were not reasonably necessary to protect the legitimate interests of Bendigo and Adelaide Bank; and
- would cause detriment to the small businesses if the terms were relied on.
Accordingly, the court declared that the terms were “void from the outset”, not from the time of the court’s declaration, with the remainder of the contract continuing to bind the parties.
The court also ordered that the contracts be varied by replacing the unfair clauses with new fair clauses by the parties.
The court ruled in favour of the Australian Securities and Investments Commission (ASIC), which took the bank to court in September 2016, stating that ASIC had a “public interest in seeking these declarations”
ASIC’s investigation revealed that some of the unfair terms gave the bank “broad discretion to unilaterally vary the terms and conditions of the contract without giving the borrower advance notice, or an opportunity to exit the contract without penalty”.
According to ASIC, other terms also allowed the bank to “take disproportionate actions in response to a breach” by, for example, calling a default “without giving the borrower an opportunity to remedy a breach”, or based on events that “do not present any material risk to the bank”.
Commenting on the verdict, ASIC commissioner Sean Hughes said: “ASIC is committed to protect small-business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms.
“Yesterday’s judgment shows that ASIC will take the necessary steps to enforce the law. Importantly, insurance firms should be preparing to extend these obligations in insurance contracts.
“We are pleased the government backed us with additional funding that was earmarked to enforce this area of the law.”
[Related: ASIC takes bank to court over ‘unfair’ loan terms]
