Lenders and unfair terms in finance documents

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By Peter Kennedy, Partner

Lenders should be aware of major changes to the Unfair Contracts laws introduced last November by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act) which will take effect from 10 November 2023.

If finance documents are signed prior to 10 November 2023, but are varied or renewed on or after that date, the Act will also apply to the varied or renewed finance documents.

The changes to the Act will:

  1. expand the scope of the existing Unfair Contract Terms (UCT) laws so they will apply to a broader range of small business borrowers, namely those:
  1. where the ‘upfront price payable’ under the loan documents is no more than $5,000,000 (excluding interest); and
  2. where at least *one party to the finance documents:
  • is a business that employs less than 100 persons; or
  • has a turnover (at the time the contract is made) of less than $10,000,000. This test will often be satisfied, for example, in finance deals involving an SPV which has been newly incorporated for a specific project or deal.

*Note: The Act refers to ‘one party to the contract’. Arguably, this will mean that a Guarantor which is a party to the finance documents may be a small business, thereby triggering the application of the Act to all parties.

  1. for the first time introduce significant civil penalties which may be imposed on lenders for breaches of the UCT laws.
  2. mean that finance documents (for example a loan agreement or a security document) may be found by a Court to be an unfair ‘standard form contract’, despite there being an opportunity for the borrower and other parties to negotiate the This is significant for the reason that under the current law, the opportunity for the borrower and other parties to negotiate the terms of the documents would usually be regarded by a Court to mean that the documents are not ‘standard form contracts’ and are not unfair.
  3. mean that a Court will not be required to find that the borrower has suffered any loss before the Court finds that the documents are unfair or before imposing penalties on the lender. In other words, a Court may impose large civil penalties and find terms in finance documents to be unenforceable, merely because the lender proposed terms in the finance documents, if those documents are negotiated by the parties, are then signed, and are subsequently found by a Court to be unfair.
  4. mean that repeat usage of finance documents by a lender must be taken into account by a Court when determining whether a contract is a standard form contract which may contain terms which are unfair and unenforceable.


In light of these changes, prior to the commencement of these changes in November, we recommend lenders review their finance documents and related processes for loans up to $5,000,000 to ensure that for new loans or variations or renewals of existing loans after 9 November :

  • They collate data to ascertain whether the borrower and any guarantor is a small business under these new definitions;
  • Review the terms of their ‘standard’ loan and security documents to consider whether they may be unfair. The relevant tests for this are whether any terms in the loan documents:
  • would cause a significant imbalance in the parties’ rights and obligations arising under the documents;
  • arenot reasonably necessary to protect the legitimate interests of the lender, and
  • would cause detriment (financial or otherwise) to the borrower if they were to be applied or relied on.
  • Ensure borrowers and guarantors are given ample opportunity to review and negotiate finance documents. Lenders should consider any requests for amendment having regard to the above tests.

In particular ASIC and the Courts are expected to have particular regard to entire agreement clauses, broad indemnification clauses, certain types of events of default clauses such as those triggered by inaccurate representations, material adverse change clauses, financial indicator covenants such as LVR, unilateral variation clauses and assignment clauses.

For further information, please do not hesitate to contact us.

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