Boilerplate provisions in private credit offer letter not unfair

In December 2023, following negotiations, DCZ Early Learning (borrower) signed the offer letter provided by Semper Mortgage Management (lender) to borrow $2.4 million to fund its purchase of a childcare business. Ultimately, the borrower’s business purchase and the loan did not proceed. The lender claimed payment and sought security for its fees and costs under clauses 8 and 9 of the offer letter. The borrower then commenced proceedings in the Queensland Supreme Court, seeking a declaration that clauses 8 and 9 of the offer letter were unfair within the meaning of section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and therefore void and unenforceable. The lender counterclaimed for payment, under clauses 8 and 9, of its fees and costs of $150,260.

Under clauses 8 and 9: 

• the borrower and the guarantors for the loan (together, the obligors) were immediately liable to pay the lender’s fees and costs on acceptance of the offer;
• the lender’s fees and costs were payable even if the loan was not made for any reason; and 
• the obligors, as security for payment of the lender’s fees and costs, charged their real and personal property, both present and future. 

Notably, the quantum of the lender’s fees and costs were not included in clauses 8 or 9 but set out separately in a proposed funding table. Clauses 8 and 9 were boilerplate provisions and were not negotiated by the borrower.  

Under the ASIC Act, 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 for a financial product or for the supply of financial services.^[1] 

The parties in the proceedings agreed the offer letter was a small business contract for a financial product or the supply of financial services. As a result, the question for the Court to determine was if the offer letter was a standard form contract and, if so, whether clauses 8 and 9 were unfair. 

In determining if the offer letter was a standard form contract, the Court considered six factors, including if the borrower was given an effective opportunity to negotiate the terms of the contract during the five rounds of negotiation prior to the offer letter being signed. ^[2] After considering the six factors, the Court concluded the lender had overcome the statutory presumption that the offer letter was a standard form contract. The Court placed particular emphasis on the fact the borrower negotiated meaningful changes to the offer letter prior to its execution.

Despite the above finding, the Court also thought it appropriate to consider if clauses 8 and 9 were unfair. Under the ASIC Act a term will be unfair if:

• it would cause a significant imbalance of the parties’ rights;
• it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and 
• it would cause detriment to a party if it were applied. ^[3] 

In addition to the above, when assessing if a term is unfair, a court must consider the transparency of a term and the contract as a whole.^[4] 

The effect of clauses 8 and 9 was to make the lender’s fees immediately payable and secured, irrespective of the loan being provided. The Court found the grant of security for the lender’s fees would cause detriment to the borrower.

Nevertheless, having regard to the level of fees being set out in a table separately from clauses 8 and 9 and the evidence before it, the Court did not consider that clauses 8 and 9 caused a significant imbalance of the parties’ rights or that the clauses were not reasonably necessary to protect the legitimate interests of the lender. The Court considered the offer letter as a whole and found clauses 8 and 9 to be transparent despite not explaining how the lender’s fees were calculated. Consequently, the Court was unable to conclude that clauses 8 or 9 were unfair and dismissed the borrower’s claim.

[1]Australian Securities and Investments Commission Act 2001 (Cth) s 12BF.

[2]Australian Securities and Investments Commission Act 2001 (Cth) s 12BK(2).

[3]Australian Securities and Investments Commission Act 2001 (Cth) s 12BG(1).

[4]Australian Securities and Investments Commission Act 2001 (Cth) s 12BG(2).