Key takeaway points
- The Supreme Court of Queensland has recently dismissed an application for certain loan clauses to be declared void and of no effect under the unfair contract terms (UCTs) regime.
- The decision provides some very timely case law on the proper application of the UCT regime, which was broadened and reinforced with harsher penalties in late 2023.
- Ultimately, the Court decided that the Questionable Clauses were not unfair contract terms. Though they may have been questionable, they passed interrogation and were allowed to stand.
- This case indicates that the judiciary will consider carefully whether the UCT regime applies. Contracting parties should take note that, in a scenario where the impugned clauses sit within a contract that has been robustly negotiated, the UCT regime is unlikely to apply.
Unfair contract terms regime case update: DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024] QSC 120
Justice Freeburn of the Supreme Court of Queensland has recently dismissed an application for certain loan clauses to be declared void and of no effect under the unfair contract terms (UCTs) regime. The decision provides some very timely case law on the proper application of the UCT regime, which was broadened and reinforced with harsher penalties late last year.
Facts of the case
In December 2023, the borrower and first applicant, DCZ Early Learning Pty Ltd (DCZ), arranged urgent finance in the amount of $2.4 million for its purchase of a childcare business by signing an ‘Indicative Letter of Offer’ from lender Semper Mortgage Management Pty Ltd (Semper). The offer letter that was signed was the fifth version of the letter presented to DCZ.
The Indicative Letter of Offer included two clauses challenged as UCTs (the Questionable Clauses):
- a clause providing that all fees, costs and disbursements outlined in the letter must be paid by DCZ, whether or not the loan was ultimately made; and
- a clause providing that DCZ charged in favour of Semper all its interest in any real and personal property, present and future, to secure the fees, costs and disbursements.
Upon realising that DCZ may have had cold feet and may not proceed with taking out the loan, Semper enforced the Questionable Clauses by lodging caveats and PPSR registrations in order to secure their fees, costs and disbursements, amounting to $366,260 (including the interest expected to be charged for the first 6 months).
DCZ alleged that the Questionable Clauses were void and of no effect pursuant to section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
Decision
Ultimately, the Court decided that the Questionable Clauses were not unfair contract terms. Though they may have been questionable, they passed interrogation and were allowed to stand.
Reasoning
Section 12BF of the ASIC Act provides that a term of a consumer contract or a small business contract is void if:
- the term is unfair;
- the contract is a standard form contract; and
- the contract is a financial product or for the supply of financial services.
The Court gave consideration to the first and second of these limbs (the third limb being clearly met in this case).
In considering whether a contract is a standard form contract, the Court observed that the six factors set out in section 12BK of the ASIC Act must be taken into account:
- Is all or most of the bargaining power held by one party?
- Has a party entered into another contract on the same or similar terms?
- Was the contract prepared by one party before any transaction discussions between the parties took place?
- Was one party required to accept or reject (e.g. “take it or leave it”)?
- Was a party not given an effective opportunity to negotiate?
- Do the terms of the contract not take into account the specific characteristics of a party or the particular transaction?
Furthermore, under section 12BK(3) of the ASIC Act, a Court may find that a contract is a standard form contract even where there has been an opportunity for a party to negotiate changes that are minor or insubstantial in effect, or where a party has been able to select an option from a range of options determined by another party, or there has been an opportunity for a party to another contract or proposed contract to negotiate the terms of that other contract or proposed contract. Regarding the first factor, the Court found that Semper did not have all or most of the bargaining power. The negotiations traversed five versions of the Indicative Letter of Offer, and neither party held the “whip hand”. Though Justice Freeburn recognised that the Questionable Clauses may have been “standard” clauses, this did not render the entire contract a standard form contract. His Honour remarked, “A contract that is drafted from scratch, and without utilising at least some standard terms, is a rare beast.”
The second factor was found to be satisfied, as Semper had entered into many such contracts. However, the third, fourth, fifth and sixth factors were not satisfied, with Freeburn J. concluding, “In a real sense, the Indicative Letter has been tailored to DCZ and to this transaction. Some of that tailoring occurred through negotiation. This is not a case where DCZ has been required to accept a generic contract.”
On balance, the Court found that the contract was not a standard form contract.
Further considerations on Questionable Clauses
Whilst that would have been enough for the UCT regime not to apply, Justice Freeburn went further in his considerations, analysing the Questionable Clauses themselves and commenting upon whether they were unfair.
Under section 12BF of the ASIC Act, a term is unfair if it would cause a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect the advantaged party’s legitimate interests and would cause detriment to the other party if applied or relied on.
The Court took an approach that linked the concept of “significant imbalance” in s12BF to “industry practice”. In other words, if it was industry practice, the Court was inclined to say that an imbalance was not “significant”. Regarding the Questionable Clause requiring the payment of the fees, costs and disbursements, amounting to $366,260 (including the interest expected to be charged for the first 6 months), the Court found that there was no evidence that this was not industry practice in the world of private lending. The fact that these fees, costs and disbursements may have been payable even where Semper failed to lend (as opposed to DCZ failing to borrow) was acknowledged as creating an imbalance. However, the Court was not prepared to say this was a significant imbalance, citing again the absence of industry evidence.
Regarding the Questionable Clause pertaining to the charge over DCZ’s real and personal property, DCZ attempted to argue that this was unfair because there was no corresponding right whereby DCZ would hold a charge over Semper’s property. This argument did not impress the Court. His Honour perceived that it was Semper lending money and therefore Semper assuming the risk, rendering this a transaction difficult to see through a “reciprocal lens”. This was not a case where there ought to have been a corresponding right.
In considering whether the Questionable Clauses were reasonably necessary to protect the legitimate interests of Semper, Justice Freeburn enumerated multiple items of preparation work which Semper was obliged to undertake in advance of lending the funds. His Honour found that “Semper had a legitimate interest in ensuring that it was not out-of-pocket for that time, effort and expense.” The large total of these fees did draw a slightly critical eye. However, Justice Freeburn pointed to a lack of evidence to suggest that the fees were unreasonable or surpassed “what is regularly charged by equivalent private lenders for a similar relatively urgent short-term loan.”
Regarding whether the Questionable Clauses would cause a detriment to DCZ if applied or relied upon, Justice Freeburn concluded that the clause by which Semper obtained a right to charge DCZ’s property to secure its fees did indeed constitute a detriment. It could “hardly be characterised as other than a detriment”, in His Honour’s view.
However, the satisfaction of this single element of the multi-part definition of “unfair” did not disturb the Court’s overall view that the Questionable Clauses were not unfair.
Lessons for contracting parties
This case indicates that the judiciary will consider carefully whether the UCT regime applies. Contracting parties should take note that, in a scenario where the impugned clauses sit within a contract that has been robustly negotiated, the UCT regime is unlikely to apply. An interesting addendum to this decision is the subsequent decision giving payment orders: DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024] QSC 140. It is clear in that decision that Semper dropped its claim of $216,000 for the interest expected to be paid on the loan for the first 6 months, with Justice Freeburn remarking, “On any view, the claim for that component was an adventurous one. The loan did not proceed and so, if DCZ paid that component, it would be paying Semper interest for a loan that had not be [sic] advanced.” This left an amount of $150,260 ordered to be paid by DCZ to Semper in respect of the fees, costs and disbursements that were the subject of the Questionable Clauses.
If you are concerned about how the UCT regime may affect your business, or what level of negotiation is required to make your contracts not ‘standard form contracts’ please contact Kerry Gibson or Steve Latham to understand exactly how you may be affected, and how to protect your business’ interests in light of the decision analysed above.
