A Step Too Far – Unfair Contract Terms in Financial Services Contract

Joseph MannerJoseph Manner, commercial barrister practising in Sydney and Brisbane, shares his insights into unfair contract terms legislation in light of the recent decision in Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited. He will be delving further into this topic at the upcoming Commercial Litigation Conference 2021: Reforms and Developments on Thursday 18 March 2021.


The recent case Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited[1] in the Federal Court of Australia (“ASIC v Bendigo”) provided further cogent examples of those contractual terms which may fall afoul of the Australian Securities and Investment Commission Act 2001 and Australian Consumer Law provisions protecting consumers and small business where such terms have departed so egregiously from the acceptable norm of good commercial conduct as to attract the ignominious description of “unfair”. Of particular note in that case was that those were contracts for financial services and thereby a frontier case in respect of those provisions.

Legislation limiting the use of unfair contractual terms are contained within part 2, division 2, subdivision BA of the Australian Securities and Investment Commission Act 2001 for contracts relating to financial services, and Part 2-3 of the Australian Consumer Law, within Schedule 2 of the Competition and Consumer Act 2010 (Cth) for personal, domestic or household goods.

In ASIC v Bendigo, ASIC sought declarations pursuant to s. 12GND of the Australian Securities and Investment Commission Act 2001 (“the ASIC Act”) that certain terms contained within standard form finance contracts drawn by the defendant (“the Bank”) were unfair as defined by s. 12BG of the ASIC Act, and that accordingly those same terms are void ab initio pursuant to s 12GNB and s 12GNC of the ASIC Act (in the alternative to s. 21 of the Federal Court of Australia Act 1976 (Cth)).

The contracts themselves were asserted and held to be “Small Business Contracts” for the purposes of the legislation, such being the result of an extension of the legislation to protect small business as defined at s. 12BF(4) of the ASIC Act (extending from the previously protected consumer class of personal, domestic or household goods) in what was ostensibly recognition of the fact that small businesses are in most cases subject to the same vulnerabilities in entering into contracts as consumers, particularly when the counterparty is well resourced. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 amended the legislation accordingly, coming into effect on 12 November, 2016. S. 12BF(1)(b) of the ASIC Act requires that for the contract to be subject to the unfair terms provisions it must be  a “Standard Form Contract”, as defined by s. 12BK, characterised by, inter alia, whether one of the parties has retained the majority of bargaining power and pre-drafted the contract, and whether the counterparty was not afforded the opportunity to amend or negotiate the terms as originally drafted.

The ubiquitous standard form contract, whilst providing a degree of efficiencies for those entities that use them, are (correctly in my view) thought by some legal scholars to represent a measure of abrogation of genuine, free and informed consent to terms, and present “considerable limitations on [the party’s] ability to assess the merits of, or the risks inherent in, the terms of a contract.”[2] Accordingly, protection against unfair terms in those conditions is seen as a commensurate measure without upsetting the sacrosanct principle of freedom of bargain. The omnipresence and potential perilous nature of such contracts in the life of small business is apparent in the findings of the Australian Bureau of Statistics:[3]

  • Individual small businesses are offered standard form contracts an average of 7.6 times per annum;
  • 80% of small businesses are using standard form contracts annually;
  • 30% of small businesses spend less than 10 minutes reading standard form contracts;
  • 60% of small business standard form contracts were under $250,000;
  • the propensity to thoroughly review contracts is inversely proportionate to its complexity (the polar opposite of large business).

The ASIC Act provides the principles under which a term may be deemed unfair at s. 12BG which stipulates a triumvirate of factors manifesting unfairness where the term creates a “significant imbalance” in the parties rights and obligations under the contract, was not “reasonably necessary” to protect the party’s “legitimate interests”, and would cause detriment to the counterparty if relied upon, with transparency of the term being a legitimate consideration in determining the question of fairness. On the question of imbalance to rights, the House of Lords has stated that such is manifested in a term where its effect is “so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour”.[4]

In ASIC v Bendigo, a number of terms were declared unfair and thereby void ab initio by virtue of their specific and substantive characteristics in their effective distribution of rights to their beneficiary which is the Bank, and were consequently unfair. In making the respective declarations, the Court consistently considered case law in respect of the equivalent provisions of the Australian Consumer Law as they relate to the acquisition of goods and services (as opposed to financial services under the ASIC Act). The application of the principle wherein a term creates a significantly favourable effect to the drafter of the agreement thereby tipping the balance of rights and obligations in their favour is plainly evident. Adopting the distinct categories adopted by Gleeson, J, those characteristics crystallising unfairness were:

  1. Indemnification clauses making the customer liable for liability or loss incurred by the Bank that was not caused by the counterparty, had been caused by the Bank, or could have been avoided or mitigated by the Bank, and thereby deemed to create a significant imbalance in rights and obligations as between the parties as the customer had “no corresponding rights”, the circumstances in which the liability or losses could occur are not within the customer’s control, and the Bank’s control of the relevant circumstances could avoid or mitigate that liability and loss. [5]
  2. Event of default clauses where a significant imbalance in rights and obligations under the contracts had been manifested by the terms’ “disproportionately severe default consequences” and that none of the provisions “permit the customer to remedy a default which may be capable of remedy”.[6]
  3. Unilateral variation or termination clauses permitting 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 thereby creating a significant imbalance in the rights and obligations of the parties by the terms’ allowing for 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, to unilaterally vary the contract to permit one party only to vary the obligations at will, and to terminate if the customer does not accept the new terms without any corresponding rights for the customer.[7]
  4. Conclusive evidence clauses which in the event of proceedings in relation to the contract, placed the evidential burden upon the customer and further allowed the Bank but not the customer to terminate the contract if the customer did not pay an amount stated in a certificate issued by the Bank by a stipulated date by allowing that the certificate created by the Bank was conclusive evidence that such amount is owed but for manifest error or where the customer can prove the certificate to be incorrect. The Court held this created a significant imbalance in the parties’ rights and obligations by allowing the Bank to place the evidential burden on the customer despite the Bank being best placed in order to adduce such evidence, the Bank having no additional duty, the customer having no corresponding rights, and the certificates’ stated amount owing only capable of being impugned where the customer demonstrates “manifest error”.[8]

The question of balance was plainly and principally approached by Gleeson, J as a balancing  exercise predicated upon the existence or otherwise of corresponding or complimentary rights on the part of the customer or obligations on the part of the Bank. In the absence of those corresponding rights and obligations, the balance tips or (in the words of the House of Lords – “tilts”) unacceptably in favour of the party benefitting from the term, such that the provision has become plainly unfair for the purposes of the ASIC Act and is liable to be declared void ab initio.

Drafters of standard form contracts must thereby give careful consideration to the question of balance of rights and obligations in contracts including financial services contracts, such that a balance is truly maintained in respect of the effect of the terms overall under the contract, and that corresponding rights and obligations are considered and imbued into the terms, lest the offending terms are to be considered a step too far and struck out.

[1] [2020] FCA 716.

[2] Paterson, J.M., “The elements of a prohibition on unfair terms in consumer contracts” (2009) 37 ABLR 184, 190. See also Paterson J.M, “The Australian Unfair Contract Terms Law: The Rise Of Substantive Unfairness As A Ground For Review Of Standard Form Consumer Contracts” Vol. 33 Melbourne University Law Review (2009) 934, 940.

[3] ABS and Decision Regulation Impact Statement – “Extending Unfair Contract Term Protections to Small Businesses”, Consumer Affairs Australia and New Zealand, Treasury.

[4] Director General of Fair Trading v First National Bank Plc [2001] UKHL 52; [2002] 1 AC 481, [17].

[5] Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716,  [49] – [57].

[6] Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716, [58] – [65].

[7] Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716, [66] – [74].

[8] Australia Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716, [75] – [81].

Joseph Manner is a commercial barrister practising in Sydney and Brisbane appearing regularly in commercial matters with a particular practice focus upon consumer law, construction, property development, planning and environment, insolvency and defamation. He has undergraduate and postgraduate qualifications in law, economics and planning, is a qualified mediator and arbitrator and regularly advises government in probity and governance matters. Connect with Joseph via email or LinkedIn LinkedIn