Unfair contract terms in SME lending - 5 clauses that may place lenders at risk

In August 2026, ASIC released its 2026-27 Corporate Plan. The plan identifies non-bank small business lending practices as a focus area for the regulator (p. 13). It specifically calls out the use of unfair contract terms in the relevant standard form agreements.

The plan places standard form SME loan agreements firmly in the spotlight. Non-bank lenders should carefully consider how the unfair contract terms regime applies to their lending arrangements.

Unfair Contract Terms (UCT)

An unfair term may expose a non-bank lender to enforceability challenges, regulatory action, and reputational damage, particularly where contractual rights are embedded within automated credit decision-making, servicing and collections processes.

The regime does not prevent lenders from protecting their legitimate commercial interests. Instead, it requires those protections to go no further than what is reasonably necessary to protect those interests.

In this article, we examine five clauses commonly found in standard form SME loan agreements and consider how some of these clauses have been considered by the courts in recent decisions.

Application of the Unfair Contract Terms (UCT) Regime

The UCT regime applies to:

• new contracts entered into on or after 9 November 2023, and  

• existing contracts that are renewed or varied on or after 9 November 2023.

Broadly, a loan agreement will be subject to the UCT regime where it is a ‘standard form contract’ and is either a ‘consumer contract’ or a ‘small business contract’ (s 12BF(1) of the ASIC Act).

A loan agreement is a ‘small business contract’ if the loan amount is $5 million or less and either:

• the business employs fewer than 100 full-time equivalent people, or

• the business has an annual turnover of less than $10 million in the previous income year at the time the contract is made (s 12BF(4) of the ASIC Act).

1. Broad events of default

SME loan agreements commonly include events of default that extend beyond a failure to pay.

These may cover:

• inaccurate representations

• breaches of non-financial obligations

• changes in control

• adverse changes in the borrower’s position or circumstances that the lender considers prejudicial to its interests.

These provisions serve legitimate purposes. For instance, a lender may need to intervene before repayment prospects, or the value of its security deteriorates.

The UCT risk arises where a provision permits serious consequences following an immaterial, technical, or readily remediable breach by the borrower.

Lenders need to consider whether each event:

• is connected to a genuine credit, repayment, or security risk

• contains an appropriate materiality threshold

• is defined by objective criteria

• provides an opportunity to remedy the breach, where appropriate, and

• produces consequences proportionate to the seriousness of the event.

2. Unilateral variation and repricing

Non-bank SME lenders may need flexibility to respond to changes in funding costs, regulation, portfolio performance and borrower risk.

SME loan agreements may therefore permit the lender to change interest rates, fees, limits, eligibility criteria or other contractual settings.

These rights become more exposed to UCT risk where the lender is given the right to unilaterally vary the contract for any reason, without objective triggers or meaningful notice. The issue is particularly acute if the borrower cannot avoid the new position by repaying or terminating the facility without disproportionate cost.

Although not a lending case, Tomasso v IG Markets Ltd [2025] WASC 338 illustrates a relevant point. In this case, a customer of an online trading platform sought to recover a $5.5 million windfall that landed in his account following a system error that was subsequently reversed by the platform operator. The operator exercised a right that permitted it to unilaterally void or amend transactions affected by ‘manifest error’, while the customer had no corresponding right.

Although the provider had legitimate financial and reputational interests in being able to enforce such a clause, the Court considered the power broader than what was reasonably necessary to address those interests. At [221], the Court observed that the relevant risks could have been addressed through a provision that automatically treated the affected transaction as void from the outset, or by a mechanism allowing the client to request an amendment to the transaction. The provision was nevertheless found to be unfair despite the Court accepting that it was transparent.

Lenders need to ask whether the relevant provisions:

• clearly identify the circumstances permitting the change

• correspond to the legitimate interest being relied on

• require reasonable notice to be provided to the borrower

• operate no more broadly than necessary, and

• give borrowers a practicable response where the change is materially adverse.

3. Acceleration and immediate enforcement

Acceleration provisions allow a lender to make all outstanding amounts immediately due and payable following an event of default.

They are fundamental to credit risk management and enforcement, but may become vulnerable when triggered by a minor or technical breach with no material effect on repayment risk.

The relevant question is not merely whether an event of default occurred. It is whether the contractual consequence bears a reasonable relationship to the seriousness of that event.

A proportionate approach may distinguish between payment defaults, serious credit events, and remediable non-monetary breaches. It may also provide notice and cure periods before acceleration, except where delay would materially prejudice the lender.

4. Broad indemnities and exclusions of liability

Indemnities can legitimately protect a lender against losses caused by borrower conduct, transaction risks, third party claims and enforcement.

The concern is whether the borrower assumes losses that it did not cause, cannot control or that arise from the lender’s own conduct.

A useful illustration can be found in Australian Securities and Investments Commission v Venture 5 Group Pty Ltd [2026] FCA 1278. This case concerned an online credit provider that offered small amount credit contracts. The lender relied on an indemnity provision that extended to intentional, negligent and dishonest conduct by the lender itself, without an equivalent protection for consumers. Related limitation of liability provisions also restricted the consumers’ rights to pursue the lender for its conduct.

In that case, the Court found that the combined effect of those provisions produced a substantial one-sided allocation of risk in favour of the lender. These terms were declared unfair and the lender was ordered to pay a $3.5 million penalty.

When reviewing indemnities, lenders should consider whether:

• the loss has a sufficient connection with the borrower’s acts or omissions

• liability is confined to reasonably foreseeable or reasonably incurred loss

• the provision excludes lender negligence, fraud, dishonesty, or wilful misconduct

• overlapping indemnities expose the borrower to duplicate recovery, and

• the agreement preserves appropriate borrower rights and remedies.

5. Enforcement and collection costs

Lenders have a legitimate interest in recovering reasonable costs caused by default. Without cost-recovery rights, those expenses may ultimately be borne by the performing portfolio.

The UCT risk arises where recoverable costs are unlimited, insufficiently connected to default or enforcement, or recoverable regardless of whether they were reasonably incurred. Similar concerns arise where a certificate issued by the lender is treated as effectively conclusive evidence of the amount owed.

In AMP Bank Limited v Abudahou [2026] VSC 229, the borrowers challenged a number of mortgage and loan provisions, including provisions permitting the bank to recover enforcement expenses and legal costs incurred in connection with enforcement action.

The Court rejected the borrowers’ UCT arguments, observing that they had not identified how the relevant terms satisfied the statutory test. The Court also noted that the relevant contractual and statutory framework contemplated recovery of properly incurred enforcement expenses.

The decision should not be read as suggesting that enforcement cost provisions are immune from scrutiny. Rather, it highlights the importance of identifying the particular clause under challenge, the legitimate commercial interest being protected, and the specific reason why the provision is said to go no further [BP1] than what is reasonably necessary.

When reviewing enforcement and cost-recovery provisions, lenders should consider whether:

• costs are confined to amounts reasonably incurred

• the costs are sufficiently connected to preserving or enforcing the lender's rights

• the borrower can understand the scope of potential liability

• the provision avoids duplicate recovery under multiple clauses, and

• the agreement contains a clear rationale for the allocation of those costs.

What should you do now?

The cases do not suggest that SME lenders need to abandon legitimate credit protections.

They instead point to three disciplines: use objective triggers where possible, calibrate consequences to the risk being addressed, and explain clearly how important rights or obligations operate.

A targeted review should test not only contractual wording, but also how rights are used in credit, servicing, and collections processes. SME lenders should be able to identify the legitimate interest(s) protected by each high-impact provision, explain why the provision is proportionate, and demonstrate that narrower alternatives were considered.

For non-bank lenders, that is the practical difference between a document review and a defensible UCT approach.

If you would like assistance reviewing your SME loan agreements or assessing your approach to unfair contract terms, please contact our Finance & Capital team.

Authors: Rebecca Hegarty, Karen Wong & Juan Roldan

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.