The Federal Court has identified several terms in standard form small business loan contracts issued by Bank of Queensland as unfair. The terms cover indemnification, events of default, unilateral variation or termination, and conclusive evidence clauses.

The matter was brought to the court by ASIC but BOQ made a joint submission with the regulator agreeing that the clauses were unfair.

In Australian Securities and Investments Commission v Bank of Queensland (FCA 957), the court reviewed more than 10 contracts and ruled that a number of standard terms in each are unfair because “each clause causes a significant imbalance in the parties’ rights and obligations arising under the relevant schedule contract and in the standard form contracts because it provides rights and entitlements to the bank without incorporating commensurate or ameliorating rights or entitlements for the customer”.

It also ruled that each clause is unfair because “it is not reasonably necessary in order to protect the legitimate interests of the bank and it would cause detriment to the relevant counterparty if relied upon”.

The offending terms include:

indemnification clauses that apply to losses not caused by a customer’s default and that have the effect of limiting the bank’s vicarious liability for its agents; event of default clauses that allow the bank to unilaterally determine whether a default has occurred; event of default clauses that do not permit the customer to remedy a default capable of remedy and which create defaults based on events which may not involve any material change in credit risk; unilateral variation clauses that permit the bank to vary the upfront price of the contract, the financial services to be supplied under the contract and other terms of the contract; and conclusive evidence clauses that have the effect of imposing an evidential burden on the customer in proceedings relating to the contract.

The court ordered that each of the contracts be varied and that “the declaratory relief sought in respect of the specific contracts in evidence” be extended to all the bank’s small business contracts containing the “impugned terms”.

This is the second case of this type that ASIC has taken to court. In June last year, the Federal Court ruled that several terms in standard form small business loan contracts issued by Bendigo and Adelaide Bank divisions, Delphi Bank and Rural Bank, were unfair.