ASIC’s review of unfair terms in small business loan contracts – impact on equipment financiers

In March 2018 ASIC released one of its periodic ‘Reports’ on how it considers various laws and regulations should work. Report No. 595 comprises a review of the changes the 4 major banks have made to their small business loan contracts, in the light of the new unfair contract terms (‘UCT’) regime. The Report’s comments have considerable relevance for equipment financiers.

In brief, for equipment finance contracts:-

  • The indemnity clause should be mitigated for contributory negligence by the goods owner/lessor;
  • If there is an “entire agreement’ clause it should be deleted;
  • Similarly, if there is a material adverse change clause in the event of default it should also be deleted;
  • Any cross-default clause is at risk of being deemed unfair (and hence, unenforceable), if the customer/lessee is otherwise observing the terms of the lease, primarily keeping its payments up to date;
  • Cross defaulting a customer/lessee is probably no longer available for non-monetary defaults in another business contract;
  • In the same vein, for non-monetary defaults under a particular finance contract the owner/lessor should provide a remedy period (“period of grace”) in which the customer has the opportunity to restore its position. Anywhere between 7 and 30 days;
  • This also applies where a change to business purpose is declared to be a default, although as a practical matter it is hard to see how such a change could be reversed. Perhaps this kind of stipulation is now out of date,
  • A default from customer change of ownership or control may properly be regarded as a credit event, but again a proviso for remediation is expected. Perhaps a change of control may better be categorised as a ‘review event’, and
  • In ‘specialised’ contracts such as bailments (eg floor planning) and invoice discounting, where financial covenants may form part of the terms, they will be regarded as unfair if the financier purports to treat every individual covenant breach as a trigger to call default.

And to complete the picture:

  • In copy cost or managed services contracts the financier’s right to increase print charges for toner and other third party costs will probably squeak through the UCT prohibition on unilateral (owner/ lessor) initiated variations, provided the cost increase can be substantiated, and
  • Still on copy costs contracts, as is well known by now the ‘holding over’ or automatic extension clauses are now considerably wound back, both in terms of the notice period required of the customer (reduced) and the mandatory extension period allowed (also limited).

The legal risk in these various terms is highlighted for the financier when a customer is in financial distress and that distress leads to administration or insolvency.