Mortgage and Loan Docs can be unjust after 12 Nov 2016

The Competition and Consumer Act 2010 has been amended to protect small businesses from unfair contracts as of 12 November 2016. ASIC has released an information sheet on the changes to the law (INFO 211) ASIC interprets the new law as applying to loan contracts.

Which borrowers can claim protection?

Any business with less than 20 employees can claim the protection of the new law. This includes full time, part time and regular casual staff.

Standard Form

A protected contract is one which is in a standard form. ASIC interprets this, in broad terms, as being a loan contract that has been prepared by one party and is not subject to negotiation–that is, it is offered on a ‘take it or leave it’ basis.

A standard form contract does not literally need to be identical to other contracts the lender uses in order to be caught. In determining whether a contract is standard form the court will consider:

a) whether another party was, in effect, required either to accept or reject the terms of the contract;
b) whether another party was given an effective opportunity to negotiate the terms of the contract;
c) whether the terms of the contract take into account the specific characteristics of another party.

Bransgroves recommends that lenders negotiate with borrowers to make small but meaningful changes to their standard form. This will allow the retention of many clauses which might otherwise be struck down as unjust.

Some lenders may reject this advice and take the view that they do not want an unjust contract. However, it is not that simple. Many clauses which are standard commercial clauses in a mortgage document used for decades are in danger. With such a nebulous concept as “unjust” everything depends on the whim of the judge.

Instead of interpreting legislation, the judge is being asked for a conscience vote. It is quite amazing how varied judge’s attitudes are when freed from the constraints of the black letter law. For example, in New South Wales a judge found that a clause requiring the
borrower to pay legal costs of a failed Contracts Review Act defence was unjust. That judge must have felt that if a borrower wants to have a shot at knocking out your mortgage and fails, it is unfair to expect the borrower to pay your legal fees for defending against such an attempt.

Monetary limits

The new rules apply where the principal under the loan is less than $300,000, for contracts shorter than 1 year.

If the term is for longer than a year then the rules only apply if the principal under the loan is less than $1 million.

Transitional arrangements

If a term of a contract is varied after 12 November 2016, the rules will apply to the varied term but not to the rest of the contract. If the loan expires and is rolled over after 12 November 2016, the rules will apply from the date the loan is rolled over (even if the roll over is automatic).

Systemic danger

Lenders may take the view that these changes have little potential impact. If a borrower does get up and has a clause or two set aside it will not be expensive. In fact, we, at Bransgroves, apprehend that this new law will be invoked most often by external dispute resolution providers, (FOS or CIO).

Both FOS and CIO have a track record of scrutinizing standard form contracts for illegal clauses, in particular, deferred establishment fee clauses and penalty clauses. When they find one, they then report the matter to ASIC who order the lender to review all their loans going back 6 years and to compensate or refund customers.

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