Financial services business successfully defends unfair contract claim

Case facts

The facts in DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024] QSC 120 (DCZ) were as follows:

• In late 2023, DCZ Early Learning (Customer) needed to settle a purchase contract before Christmas.
• The Customer’s broker obtained an Indicative Letter of Offer from Semper Mortgage Management (Business).
• The letter was subject to extensive negotiation and the fifth version of the letter was signed by the Customer, who agreed to borrow $2.4 million. The Customer also paid a $5,500 commitment fee.
• The Business obtained property valuations and personal guarantees, then lodged caveats and PPSR registrations.
• The Customer became unhappy and indicated that the purchase was unlikely to settle before Christmas and demanded removal of caveats and PPSR registrations, claimed the letter was not binding and requesting a refund of $8,800.
• The Business counter-demanded for payment of $366,260 for various fees under the letter.
• The Customer and guarantors applied to the Court arguing that clauses 8 and 9 of the letter, which dealt with liability to pay fees and security for fees were void and of no effect because of unfair contract term (UFT) laws.
• The relevant law relied on by the Customer was the UFT provisions in section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). This law regulates UFTs for financial products and services. (For non-financial services contracts, the UFT provisions are contained in the Australian Consumer Law.)

Issues

Four elements must exist for a term to be void under section 12BF of the ASIC Act:

1.         The contract must be a consumer or small business contract – this element was not in dispute between the parties.

2.         The term must be unfair.

3.         The contract must be a standard form contract.

4.         The contract must pertain to a financial product or the supply of financial services – this was also not in dispute.

The first and last elements were not in dispute in the case. This left the Court to decide the second and third issue. The third issue, whether the contract was a ‘standard form’ contract was the focus of the decision.

The position under s 12BK(1) of the ASIC Act is that it is enough for a claimant to allege a contract is a standard form contract and that is then presumed to be the case unless the respondent can prove otherwise. In this case, this meant that it was up to the Business to rebut the presumption the letter was not a standard form contract.

Was the letter a standard form contract?

There is no definition in the ASIC Act for the expression ‘standard form contract’. Rather, the Act sets a framework for the court to decide the issue in light of the evidence. The Act lists six factors to guide the court’s decision making process. They are whether:

• one of the parties has all or most of the bargaining power relating to the transaction
• one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made
• the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
• another party was, in effect, required either to accept or reject the terms of the contract
• another party was given an effective opportunity to negotiate the terms of the contract
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Applying the relevant factors to the facts of the case, Justice Freeburn determined that the Business did not hold all or most of the bargaining power, emphasising that unequal bargaining power alone is not enough. Key to being able to make this finding were the following factors:

• There was extensive evidence of negotiations between the Customer (through its broker) and the Business. These negotiations resulted in five versions of the letter. The evidence also established extensive negotiations surrounding significant terms of the deal.
• The fact that negotiations did not specifically address clauses 8 and 9 was irrelevant. Justice Freeburn noted that these terms could have been adjusted if requested, as suggested by the evidence.
• Evidence was given that the Business did not conduct itself by taking a ‘take it or leave it’ stance during negotiations. Rather, the evidence showed a negotiation occurred.
• Lastly, the letter was tailored to the Customer’s situation and the proposed transaction.

Weighing all these factors, Justice Freeburn concluded that the contract was not a standard form contract. Consequently, the Business succeeded in disproving the presumption that the contract was standard form.

Were the terms unfair?

Despite it being strictly unnecessary to do so, the Court also decided whether clauses 8 and 9 were unfair. This required the Court to apply the test in section 12BG of the ASIC Act, which defines what an unfair term is.

A term is unfair if all of the following apply:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The test in the section also states that a court may take into account such matters as it thinks relevant, but must also take into account the following:

• the extent to which the term is transparent
• the contract as a whole.

A term is transparent if it is all of the following: (a) expressed in reasonably plain language; (b) legible; (c) presented clearly; and (d) readily available to any party affected by the term.

Applying this test, Justice Freeburn rejected the contention made by the Customer that clauses 8 and 9 were unfair. His Honour held that ‘the effect of clauses 8 and 9 is not really to create a significant imbalance’. While his Honour agreed that clauses 8 and 9 caused detriment to the Customer, all other elements of the test of unfairness were found against the Customer, with the ultimately conclusion being that the terms were not unfair within the meaning of section 12BC of the ASIC Act.

Comments

Being able to rebut a presumption about a key (and often overlooked element) in the UFT regulations is not an uncommon occurrence in these situations. Often the focus is not on the issue of whether the contract is standard form but on the substance of the terms in question. Here, the Business successfully defended serious allegations by positioning itself to disprove a core element presumed against it.

The Business also won its fallback argument by proving the terms in question were not unfair.

The decision provides a useful illustration of how to defend against allegations of UFT breaches.

Positioning your business to counter allegations of UFT non-compliance requires robust systems and business practices. This includes having a well-drafted contract and ensuring that key organisational representatives understand the regulatory framework in which they operate.

The evidence of negotiations was also crucial for the Business in this dispute. Being in a position to demonstrate that negotiations took place, the extent and subject matter of those negotiations, and that negotiations were fair and conducted at arm’s-length will assist in the defence of UFT claims. Good record keeping is also a valuable risk-mitigation strategy, especially when negotiations are verbal.

Disputes with customers can escalate into significant business and legal risks. For instance, if the standard clauses in the Business’ letter of offer were deemed unfair, it may have jeopardised other transactions, forced changes to its business model, and exposed the company to regulatory investigations and risks.

Conclusion

This case serves as a reminder to all businesses, particularly those in the financial services industry, to ensure that UFT compliance is taken seriously and that allegations by customers and investigations by regulators are given the highest priority.

Cooper Grace Ward has a leading team of expert lawyers ready to assist you with UFT compliance, disputes and regulatory investigations and actions. If you would like any information about this article, please get in touch with one of our key contacts.