From 9 November 2023, small business loans of less than $5m will become subject to the existing Unfair Contracts regime.  New definitions and presumptions that operate against lenders will make prosecution easier, and severe penalties will make adverse outcomes very expensive.

The fees and interest charged by lenders following borrower default will be caught by the changes.  In my opinion the changes will not affect banks greatly because they already operate within the Banking Code of Practice, but they will have a very significant impact on some non-bank lenders.

The current position – a high bar

As things stand, a business borrower unhappy with the default fees or interest charged by a non-bank lender has very limited options.  They can argue that the charges are unenforceable because they are “penalties” – but this requires the borrower to show that the charges are “out of all proportion” to the greatest loss that the default might cause,[i] a high bar.

The new test – a much lower threshold

After 9 November 2023, the key question will be whether the default provisions sit within a standard form contract, and are unfair.

An unfair term is defined in the ASIC Act, [ii] as one that (my highlighting):

(a) …would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause significant detriment (financial or otherwise) to a party if it were to be applied or relied on.

Critically, the onus is on the lender to establish that a term is reasonably necessary to protect their legitimate interests.[iii]

What is a standard form contract?

Whether a contract is a standard form contract will be determined by the Court on a case by case basis.  The legislation does not provide a specific definition, instead it identifies matters for the Court to take into account, including whether:

(a)  one of the parties has all or most of the bargaining power relating to the transaction;

(b)  the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

(ba) one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made.

(c)  another party was, in effect, required either to accept or reject the terms of the contract…in the form in which they were presented;

(d)  another party was given an effective opportunity to negotiate the terms of the contract…

(e)  the terms of the contract…take into account the specific characteristics of another party or the particular transaction;

Notably, here again the onus is on the lender to establish that a contract is not a standard form contract.[iv]

Well-advised lenders will be reviewing their documentation to minimise the risk that it can be categorised as standard form – but that would appear to require more than repeated boilerplate invitations to negotiate.

Consequences

Individual borrowers will be able to take action, as now, but there will now also be a regulator on the scene, with a remit, and a very significant enforcement budget.

The Court will have wide powers to address unfair terms in a standard form contract: voiding part or all of the contract, injuncting to restrict enforcement, and making orders for redress.

Far more significantly, the Court will be able to impose civil penalty charges of (at least) $50m for each contravention.  Crucially, the penalties can be imposed regardless of whether or not the lender has actually relied upon, or invoked, the offending clause.

Which loans are affected?

Unsurprisingly the new regime applies to new loans made on or after 9 November 2023.  More significantly it will apply to existing loans that are renewed or varied after that date, which means that a lender might expose themselves to a $50m penalty by doing nothing more than (for example) agreeing to a one-month extension of an expiry date without a complete re-documentation.

[i] The test in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28

[ii] ASIC Act, Section 128G.

[iii] ASIC Act sub-section 12BG(4).

[iv] ASIC Act, sub-section 12BK(1).