Court declares bank's loan terms unfair

by Madison Utley29 May 2020

The Federal Court of Australia has declared several terms within six standard form small business loan contracts used by Bendigo and Adelaide Bank to be unfair.

The Justice 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 the bank
  • would cause detriment to the small businesses if the terms were relied on

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.

Other terms allowed the bank to take disproportionate actions in response to a breach by the borrower, such as calling a default without giving the borrower an opportunity to remedy a breach, or by calling a default based on events that do not present any material risk to the bank.

Bendigo and Adelaide Bank entered into the relevant contracts with its customers after 12 November 2016.

The court has declared that the terms were void from the outset, rather than from the time of the court’s declaration; however, the remainder of the contract not deemed to be unfair continues to bind the parties.

As such, the court has ordered that the unfair clauses be replaced with fair clauses that are developed via negotiations between ASIC and Bendigo and Adelaide Bank.

“ASIC is committed to protecting small business owners of Australia from unfair terms in loan contracts, particularly where business borrowers are confronted with inflexible standard terms,” said ASIC Commissioner Sean Hughes.

‘We are pleased the government backed us with additional funding that was ear-marked to enforce this area of the law."