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Submission to Treasury review of ‘Unfair Contract Terms’ in Small Business Contracts

Submission to Treasury review of ‘Unfair Contract Terms’ in Small Business Contracts
Dr Evan Jones 16 June 2014  Submission to Treasury review of ‘Unfair Contract Terms’ in Small Business Contracts

The Rudd-Gillard Labor Governments moved to enhance consumer protection, combining strengthened provisions and a unified structure that standardised State-based consumer protection structures. This process resulted in legislation incorporated in a revamped Trade Practices Act, renamed the Competition and Consumer Act 2010 (but also, misleadingly, Australian Consumer Law).

Small business was then on the table, but ultimately excluded from the process. The regulatory attitude towards small business has for long been ambiguous. Sometimes it has been subsumed under the ‘consumer’ label (in a business vs consumer dichotomy), but without special attention to its character or needs. Sometimes it is treated as in the ‘business’ category, with an attendant implicit denial of its character or needs. In practice, then, the maltreatment by corporate business of small business has fallen between the regulatory cracks, with much help from corporate business lobbying.

However, at this moment, the federal Treasury is undergoing a review, with a view to extending protections against ‘unfair contract terms’, legislated for consumers, to the small business arena. This push is surprising, not least given the longstanding hostility of the corporate business lobby to any form of regulatory support for small business against predatory practices facing the sector. Moreover, the Treasury has never shown any interest or competence in the arena. More, the Productivity Commission, typically off with the fairies regarding the real world, is recommending the extension of ‘unfair contract terms’ protection. One must take one’s friends where one can find them.

The Treasury review process is outlined here. The Treasury Consultation Paper is available on that site. My submission to that review process is reproduced below. Passages in italics are taken from the Treasury Consultation Paper.

Note that this review process concerns all arenas in which the small business sector suffers predation from corporates. But the bank lender – SME/farmer borrower relationship should be at the top of the list of arenas where reform in contract terms is both essential and long overdue.



(Dr) Evan Jones

[previously Associate Professor, Department of Political Economy, University of Sydney]

5 June 2014

Personal Background

I have researched and written on the subordination of small business by corporate business in two sectors in Australia – that of the duopoly retailers vis-a-vis their SME competitors and suppliers, and that of banks vis-a-vis their SME (and family farmer) borrowers.

With respect to the banking sector, my involvement has been accidental but long-term. Since 2000, I have been the perennial recipient of information from self-described SME/farmer victims of their bank lenders. I lack formal training in law or in banking, but my academic background facilitates a ready comprehension of the character and abuse of economic power. Given the absence of fulsome involvement in this arena from those so formally qualified (save for rare exceptions), I have acquired an atypical familiarity with the character and extent of bank predation in Australia against SME/farmer borrowers.

It is a familiarity that nobody in authority to date has displayed any interest in. On the contrary, I have received nothing but disdain for my (unpaid) efforts on behalf of SME/farmer victims in a system in which they are peculiarly feted as unsung heroes. My concerns are summarised in my submission, #295, to the Senate Economics References Committee’s current ASIC Inquiry.


The call for an examination and proscription of ‘unfair contract terms’ in commercial contracts involving small business is a very welcome development.

UCTs embedded in commercial contracts involving SMEs are not an incidental by-product of the widespread use of ‘cost-effective’ standard contracts. They are an integral component of the strategic opportunism of corporates against their structurally weaker counterparts.

This state of affairs is facilitated by a legal and regulatory apparatus formally inhibiting abuse of the structured inequality but de facto inactive and complicit in the entrenchment of that abuse.

The extension of prohibition of select UCTs to the SME arena (in spite of ultimately discretionary definitional delineations) will constitute a significant step forward. Nevertheless that step will not be sufficient. It is necessary to complement such legislation with a conscientious application of the existing relevant regulatory apparatus. It is also necessary to confront the judicial myopia regarding the subjugation of SMEs via unconscionable or fraudulent contracts. Admittedly, the resolution of that partisanry is a long-term problem.

I.    Motives for the use of UCTs

6. What considerations influence the design of terms and conditions in standard form contracts?

 More precisely, ‘What considerations influence the use of UCTs in corporate contracts with SMEs?’

UCTs embedded in commercial contracts involving SMEs (henceforth including the family farmer) are not an incidental by-product of the widespread use of supposedly cost-effective standard contracts. They are an integral component of the strategic opportunism of corporates against their structurally weaker counterparts.

Corporates (and other firms in structurally privileged positions) use the SME domain as a natural and important source of ready plunder. Fish in a barrel. Arenas where SMEs are concentrated are key arenas for such plundering – retail tenancies, franchises, suppliers to and competitors of the retail duopoly, and (near universally) bank borrowers.{1} For example, rebates and discounts extracted by the retail duopoly from their suppliers are the foundation of the duopoly’s profits.{2}

II.    The extent of UCTs and what they represent

7. Over recent years there have been a number of concerns around the fairness of certain terms in contracts between big businesses and small businesses, with a number of anecdotal reports in the media and State and Territory regulators receiving a number of complaints from small businesses.

There have been indeed anecdotal reports in the media, but endless complaints to (federal and) State and Territory regulators. The anecdotal character of media reporting is misleading. The print (including rural) media has long abdicated its responsibility in this arena, strategically so – precious advertising revenue and collegial relationships at managerial level are at stake.

The Treasury Consultation Paper generally has a textbook-ish air – arguing from hypothetical and a priori principles. Some section of Treasury, the responsible Department for both trade practices and the finance sector, should have better acquaintance with the facts. Over several decades there have been endless Parliamentary inquiries following social pressure to give SMEs a legitimate place in the marketplace via appropriate amendments to the Trade Practices Act.{3}

In the financial arena, the well-publicised underbelly of the ‘foreign currency loan’ racket and the material placed before Parliament by the then Democrat Senator Paul McLean, shockingly treated for his pains, readily exposed the fact that comprehensive financial deregulation had had adverse implications for SMEs.{4}  If a business/farm is in trouble, the bank will readily default and foreclose the borrower rather than work with the borrower for mutually beneficial outcomes. But perennially a bank will default and foreclose on a transparently viable customer. There are also instances where a bank sets up a customer ab initio, sometimes with fraudulent documentation, in order to appropriate the customer’s personal assets.

A pinnacle of the Parliamentary Inquiry genre is the House of Reps Standing Committee on Industry, Science and Technology’s Finding a balance: towards fair trading Australia (May 1997).{5}  This report was atypically bipartisan, and it acquired atypical substance because it atypically promised and delivered confidentiality to SME complainants.{6}

Seventeen years down the track, the SME marketplace has experienced several steps forward, several steps back, the latter not least due to the fundamental structural power of the big end of town, not only over ‘the market’ but also over the legal, regulatory and political process.

III.    UCTs in the flesh

7. What terms are businesses encountering that might be considered ‘unfair’?

Each of the arenas listed above has its own UCTs, as befits the character of each sector. In retail, for example, some suppliers have been forced to install expensive logistics hardware and software compatible with that of the retailer but without a concomitant commitment on the part of the dominant retailer to a long-term supply arrangement – a withdrawal of which leaves the supplier destitute. Regarding the retail duopoly’s endless brutal treatment of its suppliers {7}, the duopoly’s awareness that its demands are unconscionable leads to the demands often remaining verbal, such that the UCTs in this long-term practice are not committed to paper. This particular connivance highlights that legislating against UCTs in formal contracts will not by itself stamp out the corrupt intent and unconscionable practices in the unequal corporate-SME commercial relationship.

I will restrict myself here to the bank lender – SME borrower domain. The ‘unfair’ terms are numerous.

•     Overdraft facilities that give the lender the right to cancel at its discretion – quintessentially unfair. Thus, the NAB facility     contains the phrase:{8} ‘… the Bank may cancel the facility at any time whether or not you are in breach of this agreement’.

•     It appears that the NAB is also employing such cancellation ‘rights’ in some mortgage facilities, even more draconian.{9}

•     The incorporation of ‘suspension’ clauses in mortgage documents, viz. 'All money payable by the Borrower under this document must be paid in cleared funds without set-off or counter-claim and free of all deductions as and where the Lender directs …' – as in CBA/BankWest’s successful claim for summary judgement in BankWest v O’Brien (NSWSC 456, 2 May 2012).
As I have written elsewhere: ‘McDougall [J] is saying to O'Brien and his partners – pay back the contracted loan debt and pursue a counter claim later. Of course, O'Brien doesn't have a spare couple of hundred million because the bank has relieved him of his key asset and sold it under value. Moreover, there would be no counter claim by O'Brien because he would be bankrupted by the bank post haste.’ {10}

•     The incorporation of ‘preservation’ clauses, complementing suspension clauses, in mortgage documents that preserve bank claims regarding debt due regardless of what other actions the bank takes.

•     The inclusion of ‘all money’ clauses (which would include personal guarantees of the mortgagor/s), thus facilitating the bank lender’s appropriation of a borrower’s entire assets subsequent to the bank defaulting the borrower on a particular facility,

•     The demand by the bank lender for personal guarantees by relatives (or other parties) of the mortgagor/borrower.

•     The incorporation of penalty interest rates (a universal phenomenon), applicable in the event of loan repayment irregularity and/or default, in the mortgage contract.

Regarding suspension clauses, the Trial judge in O’Brien gave summary judgement to BankWest, but it was overturned (a rare event in bank litigation) on appeal.{11}  The significance of such suspension clauses in allowing the bank lender to forestall attempted borrower redress against bank malpractice is manifest in the ‘Restructuring and Insolvency Alert’ by CBA/BankWest lawyers Ashurst Australia on 7 May 2013. Ashurst expressed shock horror at O’Brien’s appeal victory thus: ‘Suspension clauses in loan documents and guarantees are not capable of defeating an unconscionable conduct or a misleading and deceptive conduct claim made by a customer or a guarantor against a bank under the Australian Competition and Consumer Act 2010 (Cth) and its related legislation.’ Banks therefore need to ‘Reconsider the effectiveness of suspension clauses in light of the judgment …’. The unconscionable intent of suspension clauses is transparent in Ashurst’s near hysterical response.

Some of the claimed UCTs listed above are a means for the bank lender to shift ‘risk’ to the borrower – of perennial interest to the Treasury Consultation Paper. The demand for personal guarantees from the mortgagor/borrower and/or related parties is in this category. Through such guarantees the lender is attempting to cover itself from potential bad debts, but the motivation is generic – it is to facilitate minimisation of resources cost in the SME portfolio. The bank chooses to minimise investigation of (and assistance with) customer prospects because of the attendant resources cost and elects to act instead as money lender. Financial deregulation has essentially turned the banks into money lenders, at least with respect to their SME portfolios.{12 The professionalism ethos associated with the label ‘banker’ (in which the typical SME borrowers still, alas, retains trust) has been quietly dismantled.

However, other UCTs exist solely for predatory purposes, including ‘repayable at call’ facilities and suspension/preservation clauses. Importantly, penalty interest rates also fall within this category. There is much dispute (notably in commentary on media articles) about the function of penalty interest rates. But if penalty interest rates are about signalling risk the risk should be signalled up front in the loan rate (for the facility over its entire life), the level to be varied according to bank staff’s initial estimate of project viability. This change would have the merits of alerting the potential borrower to the ‘true’ costs of the proposed venture, potentially leading to dissuasion from its pursuit.

The application of penalty interest rates following repayment irregularity or default transparently has nothing to do with risk. If the borrower is in trouble on their own account, penalty interest rates merely drives the borrower further into difficulty irrespective of the substance of the borrower’s dilemma. If the borrower has been defaulted unconscionably or fraudulently (witness the mass defaults by the CBA of BankWest developers/hoteliers immediately after the former’s purchase of the latter), penalty interest rates constitute merely another dimension of the unconscionability/fraud. In short, application of penalty interest rates following irregularity and/or default (as at present) is essentially a means of the bank lender draining assets at a faster pace from the hapless borrower.

IV.    Detriment

9 [8]. What detriment have businesses suffered from UCTs and are there examples of business sectors where detriment is particularly prevalent?

I will confine myself here to the finance sector. To repeat, UCTs are merely the surface reflection of more elaborate and deeply entrenched modes of predation. Bank predation against SME borrowers, essentially unchecked at least since the mid-1980s, has left widespread carnage in its wake. The extent of farming foreclosures has been (and is at present) diabolical.

Bank loans to SMEs are almost inevitably firmly secured, first and foremost, by the business owner’s family residence. The foreclosed customer loses the family home, and not unusually all assets if tied to UCTs as above. For a foreclosed farmer with the property’s associated spiritual connotations, the loss is particularly wrenching. The foreclosed borrower will perennially be thrown onto dependence on public welfare assistance. Moreover, banks will perennially bankrupt foreclosed customers so that they are unable to pursue litigation against the foreclosing bank. The long-term bitterness that some foreclosed SME proprietors experience, dispossessed of viable businesses and subjects of naked corporate corruption without redress, is trenchant.

V.    Efficacy of ‘market forces’

22. What role do market forces play in reducing the incidence of UCTs and are they sufficient to address the problem?

The author of this sentence clearly has a wicked sense of humour. In the banking sector, market forces act to reinforce malpractice. The inevitable tendency to sectoral concentration has proceeded apace, little impeded by lax or non-enforcement of the anti-merger provision (s50) of the Trade Practices Act. Post-Campbell Report financial deregulation both promoted the privatisation or abolition of competing publically-owned institutions and the destruction of a public service culture in their transition phase (the Commonwealth Bank as exemplar), as well as the incorporation of more civic-minded building societies.

Banks ‘compete’ not in offering greater integrity in their dealings but in pursuing what they can get away with. A lowest common denominator for standards is then established. This phenomenon is well reflected in the move by second tier banks (Bendigo, Bank of Queensland) into a cynical treatment of their SME borrowers (albeit it appears not yet as prevalent as amongst the Big 4) – a move enhanced by second tier banks hiring personnel previously employed amongst the Big 4. The attitude is – if one bank can get away with it, why not us?

I wrote to the NAB CEO Cameron Clyne in July 2010, referring to a number of NAB foreclosed NAB borrowers who had then recently contacted me. I then noted:

The bank has accumulated a considerable mass of small business/farmer casualties whose economic livelihoods have been destroyed, who are hurting, and who are deeply bitter. The parlous status of these people is, in many cases, of the bank’s doing.

In my view there is a good argument for a strategic reorientation of reconciliation towards these people. Compensation is in order. What is several hundred million dollars (perhaps even a billion) if the bank were to clean the slate and build a new reputation on competence and rectitude? The bank would be home clear indefinitely for dominance in the SME/family farmer market.

The bank, alas, preferred business as usual, and thus it has proved to be, with ‘new’ NAB distressed victims still contacting me (for lack of an alternative sympathetic ear).

The crucial extra ingredient in this story (how banks consistently get away with malpractice) is that of misplaced trust. There is no textbook environment of full information. This is a matter of bank lender and necessarily ill-informed, relatively powerless, trusting borrower, engaging within an implicit formal culture of professionalism. The bank consistently gets away with malpractice because it abuses the potential borrower’s trust and betrays the implicit culture under which the borrower approaches the bank. This is the real ‘market forces’ on display.

VI.    Efficacy of self-regulation

24. Are there any industry led responses that currently address the identified problem, and have they been effective or ineffective?  

Self-regulation is an oxymoron. The August 1999 Baird Report, Fair Market or Market Failure? (another, rare, good inquiry and report), recommended a mandatory retail code of conduct. Due to the usual lobbying of the powerful entrenched interests, the recommendation was shelved. Over 14 years later, the issue is inevitably back on the agenda in the face of the retail duopoly’s unrepentant brutal predatory regime against its suppliers and SME competitors.{13}

Regarding the banking sector again. the Hawke-Keating government established the 1991 Martin banking inquiry to head off the rising protest regarding post-deregulation excesses of the banking sector. The last thing that the Hawke-Keating duumvirate wanted was substantial re-regulation of the sector. So the Martin Report buried dissent and, as a sop, handed self-regulation to the banks in the form of the banking ombudsman and the code of banking practice.

From the start, the banks worked to ensure that the capacity of the Banking Ombudsman was restricted and the import of the Code neutralised. A key arena of contention was coverage of SME borrowers, given that this arena was such a bountiful source of rewards as long as the borrower remained powerless. And thus it has come to pass in spades. The current (bank-financed) Financial Ombudsman Service is scandalously complicit in its treatment of SME complainants. The Code of Banking Practice remains a dead letter for SMEs. {14}

VII.    Efficacy of current regulation

9. What protections do businesses currently have when they encounter unfair contract terms and are they sufficient?

10. What regulatory responses are already in place that aim to protect small business from unfair contract terms and how effective are these mechanisms? …

21. Do existing enforceable regulatory mechanisms provide adequate, accessible and timely avenues for redress?

The state of play depends on the sector. Onerous retail tenancy contracts of small retailers facing corporate shopping centre landlords are to a certain extent now monitored by Small Business Commissioners (the Victorian SBC having been set up predominantly for that purpose), etc. The mandatory franchising code (following the recommendation in Finding a Balance) originally modified somewhat the imbalance of power between franchisor and franchisee, but ongoing abuses by franchisors have necessitated perennial inquiries and perennial reworking of the ground rules.{15}  In both these sectors, offsetting UCTs and the intent beneath them involves a permanent work in progress, not least because governments on a bipartisan basis are such reluctant participants.

The domain of the retail duopoly is an arena absent of functional offsetting regulation of any sort. It is a sore that was severely aggravated during the parlous eight-year Chairmanship of Graeme Samuel of the ACCC. In a speech on 4 November 2004, Samuel articulated an assertive mentality:

Competition … benefits those businesses that are able and motivated to take advantage of the powerful forces driving their particular market. The corollary, of course, is that businesses that are unable or unwilling to respond to the, often daunting, challenge of competition, will languish and may ultimately fail. But this is the essence of an open market economy. …

What is not clear however, in the claims and counter-claims that are made by small and big business respectively in relation to these matters, is whether the primary case has been made for regulatory intervention. … The difficulty in this area is that so often those who seek regulatory intervention have failed to first demonstrate the case for intervention.

Taking the kindest of interpretations of Mr Samuel’s statement, one would infer that the ACCC Chairman was dramatically ill-informed on his brief. Moreover, the ACCC’s Small Business Commissioner (a legislated consequence of Finding a Balance) was missing in action during the Samuel incumbency. Thankfully, the current ACCC Chairman, Rod Sims, has belatedly taken up the cudgel in this shockingly neglected terrain.

But to banking. There are multiple regulators; there is legislation; there are the courts. None of it is functional for SME purposes. APRA does not concern itself with bank lending malpractice. Following a Finding a Balance recommendation, s51AC, addressing business to business unconscionability was legislated into the Trade Practices Act in 1998. The ACCC took no action against a bank under this section, though copious raw material was available. Responsibility for unconscionable conduct in financial services was handed to ASIC (s12CB/CC) in the amended ASIC Act, August 2001, operative March 2002.{16} ASIC has taken not a single case under these sections since it was handed responsibility – a scandal of the first order. I have covered this issue in my submission to the current ASIC inquiry, as above.

The federal Treasury itself has adjured responsibility in this domain.{17 Treasury Deputy Secretary Jim Murphy (the highest ranking finance sector regulatory official in the country) outlined the Pilate-like washing of hands before the Senate Economics Committee hearings during the Post-GFC Banking Inquiry hearings, 8 August 2012 (the subject is the CBA foreclosure of myriad BankWest borrowers):

I do not think it is for a Treasury official to comment on those business practices. I would say that there is a framework there. This may not be solace to people who feel aggrieved or who feel that they were not given a fair shake. But there is a framework there for them to be able to take action if they feel that, in terms of the current laws of the land and in terms of what is fair and reasonable, that did not occur. We have to face the reality that this a commercial contract between borrowers and lenders. …

What government does is set in rules and obligations on all the elements of the system, and one would hope that those rules are tight enough to ensure fair results for everyone, whether it is the borrower or the lender. So I can understand that people may have found that the actions of CBA were not to their liking, or that people were very critical of them, but I think there are arrangements in place whereby they can take action if they feel that way.

What of Mr Murphy’s ‘arrangements in place’? There is FOS – as noted, part of the problem. There is ASIC – as noted, comprehensively missing in action. Then there are the courts. Ah yes, hideously expensive litigation, which the bank victim, deprived of her/his assets, is directed to pursue as a resolute individual. There such lone individual will face a bulwark, mediated by an ethics-free legal profession corrupted by unlimited funding from a well-resourced banking sector, and presided over by a judiciary whose training and subsequent acculturation generates (with very rare exceptions) no understanding of bank malpractice nor sympathy for its victims. One can only assume that Mr Murphy is not well informed of the recent history of litigation involving banks and their customers.

In short, there is a regulatory apparatus in place relevant to SME bank customers, but it is entirely a Clayton’s system. It is an excuse for doing nothing to help SME victims of their bank lenders – a state of affairs of which every bank victim who has experienced it is bitterly aware.

VIII.    The ‘sanctity of contract’

70.3. maintain, to the maximum extent possible, the ‘sanctity of contract’.

There is little that is sacred about the ‘sanctity of contract’. At least in so far as the more powerful players who predominantly set the terms of a contract are concerned.

By all means stamp out as much as possible the UCTs. But one also has to address the culture that generates UCTs in the first place, that which finds means beyond blatant UCTs to exert its will. In the banking arena, there is no limit to what the sector considers its ‘legitimate business interests’. This is an ambition that, through centuries of mutual back-scratching, is supported unstintingly by the overwhelming bulk of the legal profession. This from Weerasoria’s Banking Law and the Financial System in Australia, a preeminent banking law textbook (6th edn., 2006, p.488):{18}

The following principles govern the situation where a customer borrows from a bank:
•    A loan from a bank to a customer in a commercial context is a transaction in which the bank is entitled to seek and obtain the best terms it can.

•    A bank is entitled to have regard solely to its own commercial interest. …

It is also an ambition supported in general by the Australian judiciary (many members of whom have acted for the banks on their way to the bench). Witness the judgement of Gleeson CJ in Australian Competition & Consumer Commission v Berbatis Holdings, HCA 18, 9 April 2003:

One thing is clear, and is illustrated by the decision in Samton Holdings itself. A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests. … Parties to commercial negotiations frequently use their bargaining power to ‘extract’ concessions from other parties. That is the stuff of ordinary commercial dealing.

Berbatis is a landlord/tenant dispute{19} , not a bank/customer dispute. But Gleeson’s ‘reasoning’ is quintessentially representative of the court’s weltanshauung with respect to bank/borrower litigation.{20} As thus embodied in the decisive (derivative) opinion of de Jersey J in Westpac v Potts (on appeal), QSC, 657 of 1988, 16 April 1992:{21}

The situation is in the end like that described by Deane J. in Sutherland Shire Council v Heyman, pp.502-3 … “Indeed, in a competitive society, the infliction of pure economic loss upon another will commonly be concomitant of the successful pursuit of personal advantage by the way of lawful conduct in that there can be discerned, in many commercial and financial transactions, a correlation between the attainment of personal gain for one’s self and the sustainment of economic loss by another.”

Anything goes, the law of the jungle applies.

The legal profession appears to be hampered by the narrowness of its training, rooted in the long glorious tradition of the English Common Law and in contract law. The predilections of judges presiding over litigation of foreign currency loan cases in the late 1980s and early 1990s is instructive. Of those judges (rare) who decided for the borrower, they preferred to decide on grounds of negligence (of advice) under the general (Common) law rather than resort to the then available statute law – s52 (misleading and deceptive conduct) of the Trade Practices Act. Judges appear to be a product of their training and their acculturation amongst like souls, immune to learning on the job. They are generally oblivious to the desperate future of bank victims, who regularly appear before the bench, deprived of their livelihood and future by bank perfidy.

The other profession that matters, the economists, is similarly hampered by its other-worldly tertiary training (of which I am a representative product). With a syllabus dominated by the grand abstractions, and with courses in industrial organisation / trade practices and in economic history now in very short supply, the representative professional economist has no exposure whatsoever to the structural brutality of the real-world marketplace.

Thus is the regulatory apparatus disempowered from understanding SME subordination and assisting in the alleviation of its plight.

Apart from the manifest partisanry towards the powerful party in catering to the ‘law of the jungle’ ethos, there is a striking lacuna in conventional legal/judicial practice regarding contracts. The typical contract will not be a one-off self-contained affair, the mutual obligations of participants to be neatly wrapped. The typical contract will be part of an ongoing series – moreover, one in which some dimensions remain unspecified. The lack of comprehensive specifications is not an oversight but reflects the complex and inevitably open or discretionary character of the ‘exchange’. This openness or discretionary character is characteristic of the key arenas in which SMEs operate, and in their relationships with more powerful entities this characteristic is a ready vehicle for exploitation against SMEs to take place.

Thus one academic, in attempting to analyse the peculiar character of the franchisor-franchisee interaction, has used the term ‘incomplete contract’.{22}  Quite. More, the franchisor-franchisee relationship is intrinsically not one of equals, no matter how well informed and ‘rationally-minded’ are the participants. The relationship bears resemblance to the (pre-capitalist) master-servant relationship, in which discretion of the more powerful party is integral to the interaction.

Legal academics attempting to understand franchising could well have drawn clues from employment law, in which the relationship of employer-employee is also of a master-servant hue (refashioned for capitalist modernity), courtesy of which separate tribunals have long evolved that implicitly acknowledge the structurally unequal character of the relationship.{23}

It appears that the legal academic pursuit of ‘incomplete contracts’ (or ‘relational contracts’) has been sparse and opaque at best. In any case, the Australian legal profession and its judiciary has apparently remained oblivious of the issue and the complexities involved. Typical bank litigation will involve the judge holding that the borrower has incurred the debt to the lender as per the contract and thus the borrower is liable for the debt – end of story.

More, a court will not typically demand proof from the bank lender of its claimed debt quantum. Yet that debt quantum will be determined by the bank in a discretionary manner (ably assisted by the penalty interest rate effect, legal and receiver charges additions, etc.). In addition, a court will not demand proof from the bank lender that it continues to own the mortgage itself, given that securitisation of the mortgage portfolio is now de rigueur amongst bank lenders. Finally, a court will even overlook the situation in which a mortgage contract has been fraudulently constructed. Thus was Patricia Thirup (and her husband) subject to an elaborate scam in which her name and credit rating was stolen by a gang of criminal masterminds that included a NAB insider, and signatures forged on the fraudulent mortgage documents of which the Thirups remained oblivious. The court handed the Thirups’ residence to the NAB, no questions asked.{24}

As for the discretionary character of the bank-borrower contract, consider one example among countless. The trio Kay, Canli and Inak went to the NAB in 2003 with a small scale suburban Sydney development proposition. They were given a loan of one-year duration, with a promise that it would be rolled over and with a comparable (relatively cheap) interest rate. The fine details of the promises (and thus of the agreement on which the loan was taken out) were not articulated in the wording of the contract. At the end of the 12 months the NAB broke its commitments. This behaviour is par for the course – the (short-term) bill facility is now an integral component of long-term SME lending, and the bank lender retains discretion over the terms on which any bill will be renewed. In the Kay/Canli/Inak case, the borrowers won in court{25}, but this is an atypical outcome for litigation on a lender’s broken promises. More, the NAB, assisted by the confidential nature of the ultimate settlement, took no lessons from its loss.

But now to Exhibit A of cases of bank lender discretion – that of the CBA mass foreclosure of BankWest borrowers shortly after the CBA took over BankWest. The CBA applied a simple formula. Call in the valuers, count on the beholden valuer sector for a dramatic reduction in the estimated value of the borrower’s assets which triggers an unacceptable loan to valuation ratio, apply penalty interest rates, default the borrower and call in the separately predatory receivers, and sell off the borrower’s assets under value, leaving the typical borrower with a residual debt. Devaluations gaining publicity were transparently farcical (Butler, Neale); others were known to be the result of bank directions to the valuer (Shannon, Winton). More, Jim Neale extracted objective proof that property values in NSW did not sink as claimed by the CBA, or as glibly accepted by the courts and the relevant regulators and bureaucratic personnel. The evidence points to fraud, and on a mass scale, pure and simple.

In short, the ‘sanctity of contract’ is a plaything amongst the more powerful party to any commercial contract, and an idea held in thrall only by those who live in ivory towers.

IX.    UCTs and the finance sector

130. A final issue is whether to extend UCT provisions to contracts for financial products and services. …

45. Do you consider that the UCT laws within the ASIC Act should be extended to apply to small business contracts?

Is the Pope Catholic? As outlined above, it is imperative that UCT provisions covering SMEs be extended into finance sector contracts. In this sector, UCTs are an integral, though not the only, component of de facto ‘legalised’ predation occurring against SMEs on a daily basis.


One welcomes this initiative to extend anti-UCT provisions to SMEs in their contractual commercial interactions with more powerful parties. One acknowledges definitional and boundary difficulties, but it is imperative for the ongoing viability of this enterprising and worthy sector that a start be made in dismantling UCTs in such structurally unequal relationships.

However, as emphasised above, UCTs are merely symptomatic of a deeper problem. After attacking UCTs, it is imperative that the regulatory system be reformed, radically in such sectors as banking and finance, and that the relevant bureaucratic and political personnel acknowledge and confront the entrenched nature of corporate predation against SMEs/farmers and work, belatedly, towards Finding a Balance.


{1}. This issue is covered in my 2005 Working Paper, 'Small Business - Corporate Business Relations: Dimensions of structural subordination in Australia', and (for the retail duopoly) in my 2006 report, ‘The Australian retail duopoly as contrary to the public interest’.
{2}. Jones, ‘The Australian retail duopoly as contrary to the public interest’, p.12. (Changes in accounting standards have since allowed the two major retailers to avoid disclosing rebate/discount figures.
{3}. Representative is the dismay of the SME community following the establishment of the Dawson examination of the Trade Practices Act and subsequent 2003 Report, with its transparently pro-big business agenda. There then followed years of resistance to SME claims for a functional Trade Practices Act – led by the Business Council of Australia, and ably supported by the Law Council of Australia, the Australian Financial Review, a quiescent responsible Minister (Treasurer Peter Costello) who appointed Dawson, and a bevy of academic ‘experts’. C/f my ‘The market mechanism in reality and myth’, Journal of Australian Political Economy, No.68, Summer 2011/12.
{4}. Given that financial deregulation in Australia has been presumed to have delivered only universal benefits, the adoption of this unquestioned assertion as an unquestionable axiom has led to the necessary marginalisation of evidence to the contrary. The burying of the foreign currency loan implications and Senator McLean’s exposures in the politicised report, A Pocketful of Change, by the 1991 Martin banking inquiry, gave carte blanche to the banking sector to treat the SME sector as fair game, which remains operative to this day.
{5}. This iconic report cannot be found on the Parliament of Australia website. More, the Committee that gave birth to it has long since been disbanded, noteworthy and appropriate given that the government currently in power believes neither in Industry, nor in Science, nor in Technology.
{6}. Coincidentally, the author cited in fn.4 of the Treasury consultation paper was a dominant author of the Finding a Balance report.
{7}.  C/f Sharp, ‘Coles turns the screw on suppliers’, Sydney Morning Herald, 3 March 2009; Hawthorne & Heffernan, ‘Suppliers squeezed: Woolies accused’, Sydney Morning Herald, 6 July 2012; etc.
(8). This wording is from a NAB facility some years ago; I presume that the essence (if not the exact phrase) remains intact in the NAB’s current overdraft facility wording.
{9}. C/f NAB v McCall, QSC 25, 28 February 2011.
{10}. Jones, ‘CBA/BankWest unconscionability and the courts’, Online Opinion, 18 July 2013.
{11}. O’Brien v BankWest, NSWCA 71, 31 January 2013.
{12}.  And especially following the abolition of the hands-on Commonwealth Development Bank in 1996, following the full privatisation of the parent CBA.
{13}. As ‘admirably’ embodied in the belated exposure of the behaviour of Coles’ senior executive John Durkan.
{14}. The evolution of the Code of Banking Practice is briefly covered, inter alia, in my ‘The NAB, small business and the willful ignorance of judges’, Independent Australia, 16 June 2013.15. The seemingly endless saga in this domain is canvassed at length in Paula Pyburne, ‘Franchising in Australia: striking a balance or tipping the balance?’, Parliamentary Library, 29 November 2013.                                                                                                                                                                          

{15}. The seemingly endless saga in this domain is canvassed at length in Paula Pyburne, ‘Franchising in Australia: striking a balance or tipping the balance?’, Parliamentary Library, 29 November 2013.
{16}. The Treasury paper appears to have mistakenly labeled these provisions – c/f fn.46, p.56, ‘And the equivalent ASIC Act provision, section 22CB’.
{17}. This assertive articulation of Treasury detachment is not helped by the fact of the ‘revolving door-ism’ of Treasury officials finding placement with banks subsequent to employment in the Treasury ranks – in some cases at very high levels.
{18}. Weerasoria’s dictum is readily transparent in his titling of another of his publications, ‘Banks owe no fiduciary or ‘special duty’ to customers: a reaffirmation’, Australian Banking & Finance Law Bulletin, April 2000.
{19}. Berbatis, the landlord, had demanded transparently oppressive conditions from a disadvantaged tenant in a powerless position.
{20}.  Compensatory notions of ‘duty of care’ under equity or of unconscionability at common law (then in s51AA TPA) have been severely quarantined to those lacking the requisite comprehension facilities (c/f Amadio). SMEs, by definition, are excluded from this minor chamber where ethics is given its due.
{21}. The Westpac success in Westpac v Potts (the judgment not publically available) represents, in this author’s opinion, a low point in the endemic asymmetry in the treatment of bank borrowers in litigation. See my ‘Westpac, the Foreign Currency Loans Scandal and the de Jersey Factor’,, 26 March 2014.
{22}. Gillian Hadfield, ‘Problematic Relations: Franchising and the Law of Incomplete Contracts’, Stanford Law Review, January 1990.
{23}. Indeed, for a long time the NSW Industrial Relations Commission accommodated litigation with respect to franchising. The NSW IRC included franchising in the broad regulation of unfair contracts in 1959. A High Court judgement in 2006, however, cut off that option. See the Ripoll Parliamentary report, Opportunity not opportunism: improving conduct in Australian franchising, December 2008, par.3.53.
{24}. NAB v Thirup, before Johnston J, NSWSC 911, 17 August 2011.
{25}. Kay v NAB, NSWSC 1116, 30 September 2010. The victory of the trio in court and in a subsequent mediation  was significantly and atypically facilitated by assistance from outside forces.

The evolution of the Code of Banking Practice is briefly covered,
Last modified onFriday, 20 June 2014 10:13

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