By Jim Bulling and Elise Hamblin
Fintech lenders must continue to take into consideration the unfair contract terms laws that have applied since 12 November 2016. As set out in a recent ASIC Report 565 “Unfair Contract Terms and Small Business Loans”, unfair contract terms are currently areas of concern for ASIC. To date, ASIC has found that eight lenders have failed to take sufficient steps to comply with their obligations under the unfair contract terms laws.
Key findings of the Report include the following:
- ASIC has identified broad “event of default” clauses as potentially unfair. For example, clauses which link “material adverse changes” or nominate “non-monetary events” to a borrower’s default are likely to be unfair. “Material adverse change” clauses give lenders a broad discretion to determine that a borrower is in default while borrowers lack certainty about the types of changes that will lead to default. Lenders have agreed to limit “non-monetary event” clauses to specific categories including unlawful behaviour, misrepresentation, use of loans for non-approved purposes and failure to maintain insurance.
- Broad indemnification clauses which saddle a borrower with the losses, costs and liabilities incurred by the lender may be unfair. For example, clauses which require a borrower to bear financial losses caused by a lender’s fraud, negligence or wilful misconduct have been highlighted by ASIC.
- The removal of “entire agreement” clauses. Small businesses can now rely on the conduct, statements and representations made by the lender rather than being solely confined to the written terms of the contract; and
- Broad “unilateral variation” clauses may be unfair because they allow lenders to vary contracts for any reason without the agreement of the small business owner. Some lenders have limited their ability to vary to certain triggers, including interest rate changes, in light of the unfair contract terms provisions.
ASIC has stated that it may undertake further work to examine small business loan contracts from lenders other than banks. Fintech lenders should accordingly review their contracts to rectify any unfair terms.