Charging termination fees in Australia, what makes a fee legal and enforceable

Charging a termination fee when a customer ends a contract early is legal in Australia, but only if the fee clears two hurdles. It must be a genuine pre-estimate of the loss you will actually suffer rather than a disguised punishment, and if it sits in a standard form contract with a consumer or small business it must not be an unfair term under the Australian Consumer Law. A fee that fails either test is unenforceable, and since 9 November 2023 proposing or relying on an unfair term can attract a substantial pecuniary penalty.

This guide sets out who those rules apply to, the four duties they place on your business, what happens if you get it wrong, and the compliance steps you can take this week.

Who the termination fee rules apply to

The two legal frameworks have different reach, and knowing which one captures your contract is the first compliance step.

The penalty rule applies to every contract

It is part of the common law, so there is no turnover threshold, no employee count and no contract value that takes you outside it. Any clause that requires a payment on early termination can be challenged as a penalty, whether the other party is a consumer, a business or a government department.

The unfair contract terms regime applies only to standard form contracts

The Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth), the ACL) makes an unfair term of a consumer contract or small business contract void if the contract is a standard form contract. A standard form contract is one prepared by one party on a take-it-or-leave-it basis. There is a presumption that the contract is standard form, so if you prepared it, you bear the onus of proving it is not.

The regime bites where either of these descriptions applies:

• Consumer contract: the supply is to an individual for personal, domestic or household use. This covers most retail services, gym memberships, subscription software and venue hire sold to people.
• Small business contract: at least one party carries on a business and employs fewer than 100 persons, or had a turnover of less than $10 million in its last income year. The definition in s 23 of the ACL catches far more business-to-business suppliers than many owners expect.

Since 9 November 2023, the rules apply to standard form contracts made or renewed on or after that date, and to terms varied or added on or after that date, as the ACCC explains. If you renew an annual agreement with an old termination clause, the new rules apply to that renewal.

Duty 1: Make the fee a genuine pre-estimate of loss, not a penalty

The common law refuses to enforce a clause that operates as a penalty. In Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525, the High Court confirmed that the question is whether the amount is extravagant, exorbitant or unconscionable, or out of all proportion to the legitimate interest of the party in the contract being performed. That legitimate interest is not confined to the costs directly caused by the early exit. In Paciocco itself, late payment fees of $35 and $20 were upheld even though the bank's directly attributable costs were around $3, because the bank had broader legitimate interests in provisioning, collection and regulatory capital costs.

Two features of the penalty rule matter for termination fees.

First, the rule is not limited to breaches of contract. Since Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, a fee triggered by an event that is not a breach, including a customer's early termination for convenience, can still be a penalty. You cannot avoid the rule by structuring the fee as "termination for convenience" rather than "termination for breach".

Second, the fee must be a genuine pre-estimate of loss, in the sense developed from Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 and applied in Paciocco. The drafting should tie the figure to identifiable loss categories: time already invested in onboarding, non-refundable supplier payments, the discount given for a minimum term, and capacity you held open that you cannot quickly resell. A blanket charge of the entire remaining contract value, with no credit for the costs you save by not delivering, is the classic penalty profile and is routinely the first thing challenged.

Build mitigation into the clause. If you can rebook the slot, resell the stock or cancel the supplier order, the fee should reduce by what you recover or save. A clause that promises to credit savings looks like a pre-estimate; one that ignores them looks like a punishment.

Duty 2: Keep the term fair under the unfair contract terms test

If your contract is standard form, the fee must survive the three-part unfairness test in s 24 of the ACL. A term is unfair if it would cause a significant imbalance in the parties' rights and obligations, it is not reasonably necessary to protect the legitimate interests of the party advantaged by it, and it would cause detriment to the other party if applied or relied on.

The burden is on you. Section 24 presumes that a term is not reasonably necessary to protect your legitimate interests unless you prove otherwise. That presumption is why a fee clause needs a documented rationale, not just a number.

The court must also consider whether the term is transparent and look at the contract as a whole. Section 25 of the ACL lists examples of terms that may be unfair, and two of them track termination fees directly: a term that permits one party, but not the other, to terminate the contract, and a term that penalises one party, but not the other, for a breach or termination. A clause that charges the customer a fee for leaving but gives the customer no equivalent protection, or applies only when the customer exits and not when you do, is precisely the shape the examples flag.

The practical test is symmetry and proportionality. A sliding scale that reflects notice given, a capped percentage of remaining fees, or a fixed sum tied to onboarding costs all have a fair shape. An automatic, one-sided fee that applies regardless of your actual loss, or that operates even when you have already resold the capacity, does not.

Duty 3: Make the fee transparent and consistent with your marketing

Transparency is a statutory factor in the unfairness assessment, and s 24 of the ACL defines it: the term must be expressed in reasonably plain language, legible, presented clearly and readily available to the party affected. That is a drafting obligation, not a courtesy.

The clause should state what triggers the fee, any notice period and how notice must be given, the date from which the fee applies, the calculation method, and what costs the fee covers. A worked example helps: "If you cancel fewer than 30 days before the event, you pay 50% of the booking fee, which covers non-refundable supplier costs and the reduced chance of reselling the date."

Transparency also extends beyond the contract. Your pricing page, proposal and onboarding materials should tell the same story as the clause. If the website promises a simple monthly plan with no mention of exit fees, and the contract imposes a hefty termination charge, the mismatch supports an unfairness argument and makes a dispute far more likely. Train your team on when the fee applies, who can waive it, and how any credit or offset is calculated, and record the basis on which the fee figure was set when the contract is signed.

Duty 4: Do not propose, renew or rely on an unfair term

The November 2023 reforms turned unfair terms from a purely remedial problem into a conduct problem. Under s 23 of the ACL, it is now a contravention to make a standard form consumer or small business contract that contains an unfair term you proposed, and a separate contravention to apply or rely on an unfair term. Each unfair term is a separate contravention, so a contract carrying three problematic clauses attracts three sets of exposure.

That creates a specific obligation for legacy contracts. Because the rules apply to contracts made or renewed, and terms varied or added, on or after 9 November 2023, an annual renewal or a variation notice can bring an old termination clause within the penalty regime for the first time. Before you roll out a renewal, a price rise or a variation, review the termination and cancellation provisions. If a template predates the reforms, treat it as suspect until it has been checked.

Consequences of getting it wrong

The consequences run from the individual invoice to the regulator's court room:

• The fee is unenforceable: A penalty clause is struck out entirely. An unfair term is void, and under s 23 the rest of the contract continues to bind the parties if it can operate without the term. You lose the fee and, in some cases, the benefit of the surrounding termination machinery.
• Pecuniary penalties: Since 9 November 2023, courts can impose penalties for proposing or relying on unfair terms. Under s 224 of the ACL, the maximum for a body corporate is the greater of $100 million, three times the value of the benefit obtained, or 30% of adjusted turnover, and for an individual it is $2.5 million, for each contravention.
• Regulator action: The ACCC enforces the ACL for most goods and services, and ASIC for financial products. The regulators can seek declarations that a term is unfair, injunctions against using it, and redress orders that compensate affected customers, under ss 250 and 243A of the ACL. A single customer complaint can become a broader investigation if the term appears across your whole template.
• Commercial fallout: Refunds, chargebacks, complaints and a reputation for punitive terms are usually more costly than the fee you were trying to collect, particularly when the clause is plainly one-sided.

Compliance checklist for your termination fee

Work through these steps before any standard form contract goes out:

• Identify every standard form contract you use and test its termination or cancellation clause against s 24 of the ACL.
• Write down the loss categories the fee is meant to cover, how the figure was calculated, and the date of that assessment, and keep it with the contract file.
• Cap the fee, credit savings and mitigation, and link the amount to notice given where possible.
• Draft the clause in plain English with triggers, notice periods and a worked example.
• Review any template before a renewal, price rise or variation, since those events bring the post-November 2023 rules into play.
• Align pricing pages, proposals and onboarding materials with the clause, and set a clear waiver approval process.
• If you take deposits, state in the same document whether they are refundable and how they interact with the fee.

Where a lawyer helps

A commercial lawyer can review your standard terms against the unfair contract terms test, assess whether a specific fee is defensible as a genuine pre-estimate, and redraft the clause so the calculation method and mitigation promises are enforceable. That work is most valuable before the template goes out, not after a customer challenges the fee. A lawyer also assists where you need to amend existing agreements, respond to an ACCC or ASIC inquiry, or enforce a fee in a dispute, where the penalty question is ultimately a matter of evidence and argument.

The pre-estimate you have to be able to prove

The duty most often missed is not drafting the clause at all. It is documenting, at the time the contract is signed, why the fee is what it is. Both the penalty rule and the unfair contract terms test ultimately turn on evidence of your legitimate interest: what onboarding cost, what supplier commitment, what discount you gave away. If the only record is a number in a template, you are relying on assertion, and the presumption in s 24 puts the onus on you.

The threshold that catches businesses by surprise is equally specific. Most business-to-business suppliers assume the unfair contract terms regime protects only consumers. It does not. A contract with any business that employs fewer than 100 people or turns over less than $10 million is a small business contract, and the standard form presumption means you must prove the other side had a real opportunity to negotiate. This week, pull your standard contract, find the termination clause, and write down what the fee covers and how the figure was derived. That one page of notes is what makes the difference between a genuine pre-estimate and an unenforceable penalty.