Unfair Contract Terms: What Australian Small Businesses Need to Know

Since 9 November 2023, unfair contract terms (UCTs) in standard form contracts with consumers and small businesses are no longer merely voidable - they are unlawful and attract significant civil penalties under the Australian Consumer Law (ACL). The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 fundamentally changed the UCT regime, and businesses that have not reviewed their standard form contracts are now exposed to substantial enforcement risk. At Astris Law, we advise businesses on ACL compliance, including reviewing and updating standard form contracts to meet the new requirements.

What Is an Unfair Contract Term?

Under section 24 of the ACL (Schedule 2 to the Competition and Consumer Act 2010 (Cth)), a term in a standard form consumer or small business contract is unfair if:

• It would cause a significant imbalance in the parties' rights and obligations under the contract
• It is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term
• It would cause detriment (whether financial or otherwise) to the other party if relied upon

The court must consider the term in the context of the contract as a whole and have regard to the transparency of the term. A term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to the party affected.

What Changed in November 2023?

Before the 2023 amendments, unfair contract terms could be declared void by a court, but there were no penalties for including them. This meant businesses had little incentive to proactively review and remove unfair terms - the worst outcome was the term being struck out.

The new regime changes this substantially:

• Penalties: Proposing, applying or relying on an unfair contract term now attracts civil penalties of up to 50,000 penalty units for a body corporate (currently over $15.5 million) or three times the benefit obtained or 10% of annual turnover (capped at 2.5 million penalty units) - whichever is greatest
• Expanded small business definition: The threshold for small business contracts has been raised - a contract is a "small business contract" if at least one party employs fewer than 100 persons or has turnover of less than $10 million in the previous income year
• No contract value cap: The previous $300,000 (or $1 million for contracts longer than 12 months) threshold for small business contracts has been removed entirely
• Rebuttable presumption: If a court has previously declared a term of a similar kind to be unfair, there is a rebuttable presumption that the same kind of term in another contract is also unfair

What Is a Standard Form Contract?

A standard form contract is one that has been prepared by one party and is offered to the other on a "take it or leave it" basis with little or no opportunity for negotiation. Under s 27 of the ACL, a contract is presumed to be a standard form contract unless the party who prepared it proves otherwise. Factors the court considers include:

• Whether one party had all or most of the bargaining power
• Whether the contract was prepared by one party before discussions
• Whether the other party was required to either accept or reject the terms (rather than negotiate)
• Whether the other party was given an effective opportunity to negotiate the terms
• Whether the terms take into account the specific characteristics of the other party or the particular transaction

Examples of Potentially Unfair Terms

Section 25 of the ACL provides a non-exhaustive list of terms that may be unfair. Common examples include:

• Terms that permit one party (but not the other) to terminate the contract without cause
• Terms that allow one party to vary the terms, price or characteristics of the goods or services unilaterally
• Broad indemnity clauses that require one party to bear all risks regardless of fault
• Automatic renewal clauses that are not clearly disclosed
• Excessive termination fees or penalties
• Terms that limit one party's right to sue or restrict their available remedies
• Terms that assign intellectual property rights without adequate consideration

ACCC Enforcement Focus

The ACCC has identified UCT enforcement as a priority area. Since the new penalty regime commenced, the ACCC has publicly stated it is targeting industries where standard form contracts are prevalent, including insurance, telecommunications, franchising, agriculture and financial services. Businesses in these sectors should treat contract review as urgent.

Practical Steps for Businesses

Businesses that use standard form contracts should take the following steps:

• Audit existing contracts: Review all standard form contracts used with consumers and small businesses to identify potentially unfair terms
• Assess bargaining dynamics: Consider whether your contracts are truly standard form - if they are offered on a take-it-or-leave-it basis, the UCT regime applies
• Remove or redraft unfair terms: Terms that create a significant imbalance should be removed or rebalanced. Consider whether one-sided termination, variation or liability clauses can be justified
• Improve transparency: Ensure key terms are expressed in plain language, are prominent and are not buried in fine print
• Train relevant staff: Sales and contract management teams should understand which terms are at risk and how to handle customer queries about contract fairness
• Monitor ACCC guidance and court decisions: The rebuttable presumption means that terms found unfair in one case can affect all businesses using similar terms

Conclusion

The 2023 UCT amendments represent one of the most significant changes to Australian contract law in recent years. Businesses that continue to rely on unreformed standard form contracts face real enforcement risk and potential penalties in the tens of millions of dollars. Astris Law's regulatory and compliance team can review your standard form contracts, identify at-risk terms and implement changes to ensure compliance with the updated ACL provisions.

This article is for general information purposes only and does not constitute legal advice. You should seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.