Business lending unfair contracts


Jaime Lumsden Kelly

Small business lenders are in the spotlight following ASIC’s report on unfair contract terms in small business loans. With ASIC setting clear expectations about how small business lenders will amend their contracts, it’s important to get this right.

Who is protected?

A small business employs less than 20 employees (excluding casual employees), meaning the first issue to be resolved is whether one or both parties is a small business.

Does the contract need to have a certain dollar value?

Yes – to qualify for protection, the contract must be a standard contract and either:

  • 12 months or less in duration with an upfront price payable of less than $300,000; or
  • More than 12 months in duration with a contract value of less than $1,000,000.

What is ‘standard’?

A standard contract is one for the supply of goods or services or for the sale of land where, for example:

  • the small business isn’t given a real opportunity to discuss or negotiate the terms of the contract;
  • the contract was prepared before discussions between the parties; or
  • the terms of the contract are not specific to one party or to the particular transaction.

What’s an unfair term?

A term which causes significant unbalance to someone’s rights and obligations, would cause them detriment if it was relied on, and is not reasonably necessary to protect the legitimate interests of the party relying on it is unfair.

This includes terms that allow one party to:

  • unilaterally change the contract terms or vary the price;
  • limit or avoid their liability or obligations in an unjustified manner;
  • restrict the ability for a party to terminate the contract;
  • lock the other party into automatically renewing the contract;
  • assign contract rights without consent;
  • impose excessive fees, penalties or interest rates;
  • limit a party’s right to sue or the evidential burden that applies if a party commences legal proceedings; or
  • restrict the other party’s rights of redress or interfere with their access to insurance.

Terms required by law or which set the price of the contract are not unfair.

The onus is on the (big) business relying on the term to prove the term is not unfair. Obviously, clear and transparent clauses where a reasonable balance has been struck between the interests of the parties are less likely to be unfair.

Things to consider

ASIC ‘s view is that certain ‘standard’ clauses in loan agreements are unfair. This includes:

  • entire agreement clauses, allowing the lender to deny responsibility for representations made outside the contract;
  • broad indemnity clauses, requiring the borrower to indemnify for the lenders fault; and
  • unilateral variation clauses, enabling lenders to vary without agreement from the borrower.

ASIC also considers that clauses setting out non-monetary defaults have a high risk of being unfair clauses, including:

  • financial indicator covenants (such as LVR) triggering defaults where there is no material risk to the lender;
  • material adverse change events of default clauses, giving lenders discretion to treat a loan as in default for unspecified ‘material adverse changes’; and
  • other non-monetary defaults, which give lenders rights that are disproportionate to the credit or other risks e.g. rights to call defaults even where the borrower has met regular repayments.

If you have any questions or need help redrafting your standard contracts, we’re more than happy to assist.

Author: Jaime Lumsden Kelly

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