Unfair Contract Terms and Private Lending – Are your loan documents on unfair terms?

15 Aug Unfair Contract Terms and Private Lending – Are your loan documents on unfair terms?

Lenders are subject to a wide range of regulatory requirements, including obligations owed to small business borrowers and consumers under the Australian Securities and Investment Commission Act. The Treasury Laws Amendments (More Competition, Better Prices) Bill 2023 takes effect from 10 November 2023 and seeks to expand those protections in respect of unfair contract terms contained in loan documents. The expanded regime will apply to all new small business and consumer contracts which are entered into after that date. If finance documents are signed prior to 10 November 2023, but are varied on or after the date, the new regime will also apply to the varied or renewed document.

The new law seeks to provide greater protections for small businesses from unfair contract terms by reducing their prevalence in standard form contracts. This will help to improve consumer and small business confidence when entering into standard form contracts.

The changes seek to accomplish four key things:

1) Broaden the application of the current ‘unfair contract law’ regime so the protections will include a wider range of borrowers, notably those:

(a) where the ‘upfront price payable’ under the loan document is no more than $5,000,000 (excluding interest); and

(b) where at least one party to the finance document is a business that employs less than 100 persons or has a turnover of less than $10,000,000;

New civil penalties will be imposed on lenders for breaches of the unfair contract terms laws;

2) to allow a Court to find that finance documents were under an unfair ‘standard form contract’; and

3) to enable Courts to impose civil penalties and find terms in finance documents are unenforceable, merely because the lender proposed terms in the finance documents.

The Act’s emphasis on fostering competition is likely to have a notable impact on the lending sector. Lenders will need to adapt to this changing landscape. It is recommended they review finance documents and related processes for transactions that fall within the $5,000,000 threshold, to ensure that for new loans, variations, or renewals, the new legislation is considered. It will be important to consider:

• whether your due diligence processes are sufficient to ascertain whether the borrower and any guarantor is a small business under these new definitions;
• reviewing precedent terms in standard documents to ensure they are not unfair including whether any terms-
  • would cause a significant imbalance in the parties’ rights and obligations arising under the documents,
  • are not reasonably necessary to protect the legitimate interests of the lender, or
  • would cause detriment to the borrower if they were to be applied or relied on; and
• timelines and opportunities for borrowers and guarantors to review and negotiate finance documents.

The Act establishes further responsibilities for lenders which our team can assist you in better understanding. If you have any queries related to the Act or anything mentioned in this article, please contact Jonathan Harris, Senior Associate jharris@harrisco.com.au or Ian Smith, Director ismith@harrisco.com.au

This article is intended to provide general information on the identified legal topics and does not constitute legal advice and should not be relied upon as such.