The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) which amends the Competition and Consumer Act 2010 (Cth) (ACL Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) received Royal Assent on 9 November 2022.¹

The changes expand on the current regime for unfair contract terms (UCT) and come into effect on 9 November 2023.

While the changes impact both the ACL Act and the ASIC Act, we will focus here on the ASIC Act as it is the most relevant for unregulated credit providers.

What are the changes?

The changes to the UCT regime in the ASIC Act include:

• imposing penalties for a party that ‘relies on, or purports to apply or rely on’ an unfair contract term; and
• increasing the scope of contracts captured by the UCT regime, through expansion of the thresholds that determine whether a party is a ‘small business’.

The purpose of these changes is to provide greater protections for consumers and small businesses from unfair contract terms in standard form contracts.

Are unregulated loan documents impacted by these changes?

The short answer is that if they are loan documents provided on a ‘take it or leave it’ basis where the principal of the loan does not exceed AU$5 million, then they are likely to be subject to the new regime.

Section 12BF of the ASIC Act deals with unfair terms in consumer contracts and small business contracts. Section 12BF provides that an unfair term of a consumer contract or small business contract will be void if:

• that term is unfair; and
• that contract is a standard form contract; and
• that contract is a financial product or a contract for the supply, or possibly supply of financial services.²

An existing document that falls within the scope of the new regime is not impacted, however if that existing document is varied on or after 9 November 2023, the varied terms (or potentially the entire document depending on the circumstances) will be caught.

What is a consumer contract?

A consumer contract is a contract under which at least one of the parties to it is an individual who is acquiring goods or services under the contract wholly or predominantly for personal, domestic or household use or consumption.

This is unlikely to be relevant for unregulated loan documents.

What is a small business contract?

Under the amended section 12BF of the ASIC Act, a contract is a small business contract if:

• the upfront price payable under the contract does not exceed AU$5 million (for the provision of credit, the upfront price refers to the principal amount of the loan); and/ or
• at least one party to the contract:
  • ­is a business that employs fewer than 100 persons; and
  • has an annual turnover of less than AU$10 million.

Given the second limb is a low bar³, almost all loan agreements where the principal of the loan is less than $5 million will be considered a ‘small business contract’ for the purpose of the UCT regime.

What is a standard form contract?

There is no definition of a standard form contract in the ASIC Act.

Whether a contract is a standard form contract will be determined by the courts.⁴ Currently, section 12BK of the ASIC Act provides that while a court may consider matters it thinks relevant, but it must consider whether, among other things:

• one of the parties has all or most of the bargaining power relating to the transaction;
• the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
• another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
• another party was given an effective opportunity to negotiate the terms of the contract; and
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

As discussed in our previous update on UCT reforms, the new changes to be inserted into section 12BK of the ASIC Act mean that a contract may be determined to be a standard form contract despite there being an opportunity:

• to negotiate changes to contract terms that are minor or insubstantial in effect;
• to select a term from a range of options; or
• for a party to another contract (or proposed contract) to negotiate terms of the other contract (or proposed contract).

Unregulated credit loan documents are a prime example of what may be deemed as standard form, where the lender provides pre-drafted loan documents to the borrower, especially on a ‘take it or leave it’ basis.

What terms are ‘unfair’?

Section 12BG of the ASIC Act (to which no changes are being proposed) provides that a term is unfair if:

• it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of terms that may be unfair in loan agreements include terms that allow a lender to:

• unilaterally vary the interest rates, fees, charges, or other key items of a loan without giving the borrower a reasonable opportunity to exit the contract or adjust their repayments;
• declare an event of default based on vague or broad criteria, such as a material adverse change in the borrower’s circumstances, or ambiguously defined breach of any other contract by the borrower; and
• impose excessive fees or charges for early repayment or default.

What happens if my loan document has unfair terms?

If a term in a loan document is found to be unfair, it will be void and unenforceable. Where an unfair contract is capable of being severed from the rest of the existing contract, the contract will continue to bind the parties and operate without the unfair term.⁵ Borrowers may also seek remedies such as declarations of contravention, injunctions, compensation orders, or any other orders that a court considers appropriate. ASIC may take action against lenders who use unfair terms in their loan documents to deter them from doing so in the future.

Penalties

In addition to the above, the new changes bring breaches of the UCT regime within the scope of the existing penalties regime under the ASIC Act. Each unfair contract term in a contract will be considered a separate contravention.

The penalties are significant. Both businesses and individuals involved in the contraventions could be subject to penalties. For businesses, this could be as high as AU$50 million for each contravention by a company.

Next Steps? Speak to Dentons

We have been following changes to the unfair contract terms regime since its inception in 2011 and have helped our clients manage the risks associated with its expanding scope over the years. Please get in touch if you have any questions or need help reviewing your loan documents to ensure they are compliant with the new regime.

1. Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) s 2.
2. We consider that a loan agreement or credit contract for the provision of a loan or other financial accommodation to be a contract that is a financial product.
3. Given the second limb can apply to either the lender or the borrower, this threshold will generally always be satisfied.
4. Note however that section 12BK of the ASIC Act provides that if a party to a proceeding alleges that a contract is a ‘standard form contract’, then it is presumed to be so unless proven otherwise by the counterparty.
5. Australian Securities & Investments Commission, Unfair contract term protections for consumers | ASIC, Information Sheet 210 (23 October 2020).