In Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 the Federal Court of Australia declared several terms within standard form small business loan contracts used by two Bendigo and Adelaide Bank divisions, Delphi Bank and Rural Bank, to be unfair within the meaning of s 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) and were therefore void pursuant to s 12BF(1) of the Act.

The Court also ordered that the contracts be varied by replacing the unfair clauses with new fair clauses agreed by the parties following negotiations between ASIC and Bendigo and Adelaide Bank.

ASIC did not allege that the Bank has relied upon any of the unfair terms in a manner that is unfair, or that has caused any customers to suffer loss or damage. The Bank has given an undertaking to ASIC and will give an undertaking to the Court, not to use or rely upon any of the unfair terms.

The unfair terms fall into four categories:

• indemnification clauses;
• event of default clauses;
• unilateral variation or termination clauses; and
• conclusive evidence clauses.

Indemnification clauses
Justice Gleeson concluded that the relevant clauses of the Bank’s standard conditions could be relied on by the Bank to make the customer liable for liability, loss or costs suffered or incurred by the Bank that:
(1) the customer has not caused; and/or
(2) has been caused by the Bank’s mistake, error or negligence; and/or
(3) could have been avoided or mitigated by the Bank.

Justice Gleeson concluded that these terms create detriment to the customer if applied or relied upon in an unfair manner because the customer may be required to pay money to the Bank in which the liability, loss or costs incurred are not within the customer’s control, and may not have been caused by the customer, and may have been caused by the mistake, error or negligence of the Bank or its agents, and could have been avoided or mitigated by the Bank or its agents.

Event of default clauses
Justice Gleeson concluded that the significant imbalance in the event of default terms is created:
(1) by the disproportionately severe default consequences;
(2) because none of the event of default clauses permit the customer to remedy a default which may be capable of remedy;
(3) because each of the clauses creates a default based on events that may not involve any credit risk to the Bank (for example, by providing misleading or untrue information such as a director’s date of birth); and
(4) because they create an event of default when:
(a) an untrue or misleading statement being made or repeated by the customer (or its guarantors) which can in the context of the contract be insignificant, for example, an error as to a director’s date of birth;
(b) any part of a relevant document being capable of becoming void or voidable, for example, due to ASIC’s litigation which is entirely within the control of the Bank and not the customer;
(c) the Bank unilaterally forms an opinion that something has happened where the Bank’s opinion may be wrong or it may also be reasonable to hold the opposite opinion and the customer has no entitlement to rectify any matter on which the Bank’s opinion is based; and
(d) in vague and largely undefined circumstances.

Unilateral variation or termination clauses
Justice Gleeson concluded that the unilateral variation or termination clauses permit the Bank to vary the upfront price of the contract, the financial services to be supplied under the contract, and other terms of the contract.

These terms create a significant imbalance in the parties’ rights and obligations because:
(1) the terms allow the Bank to vary the financial services to permit the Bank to reduce the amount of funds that the customer would otherwise be able to utilise. The Bank’s entitlement to do so is limited by the requirement that it give notice but that notice period may not be sufficient to provide the customer with an opportunity to refinance;
(2) the terms allow the Bank unilaterally to vary the contract to permit one party, but not the other, to vary the obligations at will;
(3) some of the terms permit the Bank to terminate if the customer does not accept the new terms; and
(4) the customer has no corresponding rights.

Terms which allow the Bank to cancel any part of the facility would cause the customer detriment if relied upon because they reduce the amount of funds available to the customer. If the customer wishes to terminate the facility as a result of the Bank relying on one of these terms, unspecified fees and break costs may be payable. That would have the effect of imposing a termination fee regardless of the reason for termination.

Terms which allow the Bank unilaterally to vary the terms of the contract, unless used to reduce fees and charges payable or (otherwise benefit the customer) will cause detriment if relied upon in an unfair manner because:
(1) if the customer accepts the change, it will incur higher fees and charges (or some other consequence which is detrimental to it); and
(2) if the customer fails to accept the revised terms or fails to provide the additional security requested the facility may terminate in which case the customer is required to pay the outstanding sum within 30 days. Unspecified fees and break costs may be payable. That would have the effect of imposing a termination fee regardless of the reason for termination.

Conclusive evidence clauses
Justice Gleeson concluded that the conclusive evidence clauses had the effect of imposing the evidential burden on the customer in proceedings relating to the contract. These clauses also have the effect of allowing the Bank but not the customer to terminate the contract if the customer does not pay an amount stated in a certificate created by the Bank by a stated date, in circumstances where the certificate created by the Bank is conclusive evidence of the amount claimed unless the customer is able to demonstrate “manifest error”, or the customer is able to prove that the certificate is incorrect.

These terms create a significant imbalance in the parties’ rights and obligations because:
(1) the term allows the Bank to impose, by the issuing of a certificate, an evidential burden on the customer about matters upon which the Bank is best placed to provide primary evidence;
(2) the Bank has no additional duty;
(3) the customer has no corresponding right; and
(4) the customer can only contest the amount stated in the certificate if the customer can demonstrate “manifest error”.

Each of the terms would cause detriment if relied upon because it requires the customer to disprove matters about which the Bank is best placed to provide primary evidence. Further, it would cause detriment if relied upon in circumstances where the certificate was wrong but the customer could not or did not seek to disprove it.

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