Lenders - New reforms to Unfair Contract Terms Regime attract harsh penalties
Lenders - New reforms to Unfair Contract Terms Regime attract harsh penalties

Lenders to amend loan agreements to remove “unfair contract terms” to avoid risk of harsh penalties.

The new “unfair contract terms” provisions came into play on and from 9 November 2023, and captures Lender’s loan agreements and term sheets.

Amendments to the Australian Securities and Investment Commission Act 2001 (Cth.) (ASIC Act) and the Australian Consumer Law (ACL) will expand on the existing prohibitions against the use, application and reliance of terms in contracts which are considered “unfair”. In addition, ASIC and the courts will have the power to penalise Lenders for the inclusion of unfair contract terms in their loan agreements, including harsh civil penalties.

The new provisions capture loan agreements that:

  • are entered into on or after 9 November 2023 or existing agreements that are renewed, rolled over or varied on or after 9 November 2023
  • have a loan amount of $5 million or less
  • are a “standard form contract” or a “small business contract
  • a “standard form contract” is an agreement typically used by a lender for transactions of a similar nature. There is a presumption that the contract is a “standard form contract” unless proved otherwise. A standard form contract is, as it sounds, a contract that is typically used by a Lender in respect of transactions of the same type.
  • A “small business contract” is where at least one party (such as the borrower or a guarantor) is a business that employs less than 100 people (revised from 20 people) and the upfront price payable under the contract does not exceed $5 million (this threshold has been increased from $300,000 or $ 1 million where the contract term was more than 12 months).

What is an Unfair Contract Term

The meaning of an ‘Unfair Contract Term’ is defined in section 128G of the ASIC Act as a term that:

(a) …would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause significant detriment (financial or otherwise) to a party if it were to be applied or relied on.

A recent example1of some terms that have been considered to be “unfair contract terms” by the Court include:

  1. termination rights provided to one party if another party does not pay an amount stated;
  2. variations can be approved by only one party (including, but not limited to, price increases and varying the financial services provided i.e. unilateral variation by a Lender);
  3. indemnification clauses that are not limited to liability, loss or costs that the indemnifying party has caused;
  4. event of default clauses that allow discretion to the party in favour of the default to determine that the default has occurred; and
  5. event of default clauses not permitting the defaulting party to remedy such default.

Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957.

Overview of the UCT changes

Prior to 9 November 2023, if a Lender sought to rely on an “unfair” contract term contained in a “small business contract” or a “standard form contract”, the Court could declare the contract term void. Under the new provisions, the Court will also have the power to void, vary or refuse to enforce part or all of a contract which contains an unfair contract term. In addition, Courts will have the power to prevent a Lender from entering info future contracts which contain a declared unfair contract term or relying on a declared unfair contract term in any existing contract.  

Further, a summary of the new UCT changes effective on and from 9 November 2023, is set out below:

  1. Wider scope of application:

Under the ASIC Act, the unfair contract term provisions will capture a small business contract, if a two-limb test is met:

  1. Upfront price threshold - loan agreements with facility amounts of $5 million or less; and  
  2. Employee threshold - if a party to the agreement (including the lender, borrower or guarantor) is an individual or a business that employs less than 100 people and / or has an annual turnover of less than $10 million.
  1. Deeming agreements void and unenforceable
    Any mere inclusion of an “unfair” contract term by entering into a “standard form contract” and “small business contract” will be deemed as a contravention irrespective of whether or not a lender relied on the clause(s). A court will be able to deem the term or the whole contract void and unenforceable just because an unfair term was proposed or included in the agreement.
  2. Harsh civil penalties
    Strengthening the remedies and enforcement by creating new significant civil penalty provisions under the ASIC Act, including:
  • for corporate Lenders, penalties will be the greater of:
    1. $50 million;
    2. 3 x the benefit of the value obtained; and
    3. 30% of the Lender’s adjusted turnover during the breach turnover period for the offence.
  • for individual Lenders, penalties of up to $2.5 million (increased from $2 million).

Lenders are subject to an individual penalty for each contravention.

  1. New remedies for contraventions
    Expanding the powers of the Court, including injunctive relief, such that:
  1. the Court can exercise their power to prevent loss or damage that is or is likely to be caused;
  2. non-parties to a contract have remedies including:
    • a person who is party to the proceedings; or
    • a person on whose behalf ASIC has brought a matter before a court (i.e. ASIC will be regulating contracts and can bring proceedings on behalf of a Borrower);
  3. terms in contracts will be deemed ‘unfair’ if that term is the same or substantially similar to a term of a contract that has been declared as ‘unfair’ (and does not need to form part of the application to the Court).

Key takeaways

We suggest that all Lenders review their term sheets and facility agreements to ensure there are no “unfair” contract terms, for example:

  • Unfair default provisions with no cure periods;
  • cross-default provisions;
  • penalty clauses;
  • unconscionable fees and unjust interest rates; and / or
  • have unilateral terms for amendment.

Lenders should note these changes given the harsh consequences for failure to comply with the Unfair Contract Terms Regime, including the above financial penalties.


We anticipate that there will be no hesitation in cracking down on non-compliance. If you require guidance on ensuring that your loan agreements and term sheets align with the new UCT changes, then please do not hesitate to contact us for assistance:

Gregory Conomos

Melinda Patroulias

Rosehannah Lambert

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