Unfair contract terms and standard form contracts, what small businesses need to know

Every business that sells goods or services on written terms assumes its contract will be enforced. The unfair contract terms regime in the Australian Consumer Law (the ACL), found in Schedule 2 of the Competition and Consumer Act 2010 (Cth), is the exception that can undo that assumption. If a court finds that a term of a standard form contract is unfair, the term is void. And since 9 November 2023, proposing or relying on an unfair term is itself a contravention of the law, carrying penalties of up to $100 million for a company.

The regime exists because some contracts are presented on a take it or leave it basis. Where one party holds all the bargaining power, the law steps in to stop that party from relying on terms that would never survive a real negotiation. This article explains how the scheme works end to end: the conditions that must be met before a term can be struck down, what happens once a term is found to be unfair, who enforces the law, and where the risk concentrates for a small or medium business.

Who is involved in the unfair contract terms regime

Four sets of actors drive the scheme:

The drafting business: usually the supplier of goods or services, or the landlord or financier, that prepares the standard form contract and proposes its terms.
The counterparty: an individual consumer, or a small business that enters the contract in the course of carrying on its business. Their only realistic choices are often to accept or reject the contract.
The regulators: the Australian Competition and Consumer Commission (ACCC) enforces the ACL regime for most goods and services. The Australian Securities and Investments Commission (ASIC) enforces the mirror provisions in the Australian Securities and Investments Commission Act 2001 (Cth) for financial products and services such as loans, insurance and financial advice.
The courts: the Federal Court, and state and territory courts and tribunals, decide whether a term is unfair, can declare it void, and since the 2022 reforms can impose penalties and make orders to redress loss.

The interests of the drafting business and the counterparty pull in opposite directions, which is why the regime applies an objective test of fairness that the court assesses, rather than deferring to what the parties actually agreed.

The first trigger: a standard form contract

A term can only be struck down if its contract is a standard form contract: one prepared by one party and presented on a take it or leave it basis, with the other party given little or no real opportunity to negotiate.

The law makes this easy for a challenger to establish. Under s 27(1) of the ACL, if a party alleges that a contract is a standard form contract, it is presumed to be one unless another party proves otherwise. The burden therefore sits with the business that drafted the contract.

In deciding the question, s 27(2) requires a court to consider:

Relative bargaining power: whether one party has all or most of the bargaining power in the transaction.
Standardisation: whether the party has made other contracts in the same or substantially similar terms, and how many (a factor added on 9 November 2023).
Prepared in advance: whether the contract was prepared before any discussion about the transaction took place.
Take it or leave it: whether the counterparty was effectively required to accept or reject the terms as presented.
Opportunity to negotiate: whether the counterparty was given an effective opportunity to negotiate the terms.
Individualisation: whether the terms take into account the specific characteristics of the counterparty or the transaction.

The 2023 changes also clarified that a contract can still be a standard form contract even where the counterparty was able to negotiate minor or insubstantial changes, could select a term from a range of options, or where a third party negotiated different terms on another contract. A small concession here and there will not remove a contract from the regime.

The second trigger: a consumer or small business contract

The regime protects two kinds of counterparty.

A consumer contract, defined in s 23(3) of the ACL, is a contract for the supply of goods or services, or the sale or grant of an interest in land, to an individual whose acquisition is wholly or predominantly for personal, domestic or household use. Retail sales to individuals will almost always fall within this definition.

A small business contract, defined in s 23(4), is a contract for the supply of goods or services, or a sale or grant of an interest in land, where at least one party makes the contract in the course of carrying on a business and either:

Employs fewer than 100 persons: at the time the contract is made, casual employees are only counted if employed on a regular and systematic basis, and part-time employees count as a fraction of a full-time equivalent; or
Has a turnover of less than $10 million: for its last completed income year, worked out using GST concepts of supplies.

This is a significant expansion of the original regime. When the provisions first extended to small business contracts on 12 November 2016, they covered only businesses employing fewer than 20 people, and only where the upfront price did not exceed $300,000, or $1 million if the contract ran for more than 12 months. From 9 November 2023 the headcount and price tests were replaced, and there is no longer any cap on the value of the contract. A multi-million-dollar supply contract can now be caught if the customer is a small business.

Even where a contract is a standard form consumer or small business contract, s 26 of the ACL excludes three categories of term from review: terms that define the main subject matter of the contract, terms that set the upfront price, and terms that a law requires or expressly permits. The upfront price is the consideration disclosed at or before entry into the contract, not amounts contingent on future events such as default interest or exit fees.

The third trigger: what makes a term unfair

Under s 24(1) of the ACL, a term is unfair if three conditions are all satisfied:

Significant imbalance: the term would cause a significant imbalance in the parties' rights and obligations under the contract.
Not reasonably necessary: the term is not reasonably necessary to protect the legitimate interests of the party advantaged by it. Under s 24(4), the advantaged party must prove it is reasonably necessary; the law presumes it is not.
Detriment: the term would cause detriment, financial or otherwise, to the other party if it were applied or relied on.

In assessing these questions, s 24(2) requires the court to take into account the transparency of the term and the contract as a whole. A term is transparent if it is expressed in reasonably plain language, is legible, is presented clearly, and is readily available to the party affected. Buried clauses in dense fine print are harder to defend than a plainly worded term the customer could actually read.

Section 25 of the ACL lists the kinds of terms that may be unfair, including:

Unilateral variation: a term permitting one party to vary the terms of the contract, or to vary the upfront price without giving the other party a right to terminate.
Unilateral termination: a term permitting one party to terminate the contract, or to avoid or limit its own performance.
Penalties: a term penalising one party for breach or termination, or imposing an excessive interest rate or fee on late payment.
Restricted recourse: a term limiting one party's right to sue, limiting the evidence it can adduce, or imposing the evidential burden on it.
Self-judging clauses: a term permitting one party unilaterally to decide whether the contract has been breached or to interpret its meaning.
Assignment: a term permitting one party to assign the contract to the detriment of the other party without consent.

The list is not exhaustive. A term does not need to appear in s 25 to be struck down, and a term that resembles one of the examples is not automatically unfair.

What happens when a term is found unfair

The consequences operate in two layers.

First, under s 23(1) of the ACL, an unfair term in a standard form consumer or small business contract is void. It is treated as if it was never part of the contract. Under s 23(2), the rest of the contract continues to bind the parties if it can operate without the unfair term, so the business loses the benefit of the term but cannot walk away from its other obligations.

Second, since 9 November 2023, the conduct itself is unlawful. Under s 23(2A), a person contravenes the ACL by making a contract that contains an unfair term that they proposed. Under s 23(2C), a person contravenes the ACL by applying or relying on, or purporting to apply or rely on, an unfair term, even one they did not draft. Section 23(2B) makes clear that each unfair term is a separate contravention, so a contract containing three unfair terms exposes the drafter to three separate breaches.

These contraventions attract pecuniary penalties under s 224 of the ACL. For a body corporate, the maximum penalty for each contravention is the greater of $100 million, three times the value of the benefit obtained from the conduct, or, if that benefit cannot be determined, 30 per cent of the company's adjusted turnover during the period of the conduct. For an individual, the maximum is $2.5 million.

Alongside penalties, the regulators and affected parties have a full toolkit. Under s 250 of the ACL, a court may declare a term unfair on the application of a party to the contract or the regulator. Once a declaration is made, s 243A allows a court to order the advantaged party to redress loss or damage caused by the term, and s 243B allows the regulator to seek orders preventing similar terms in future contracts and redressing loss in existing ones. The regulators can also seek injunctions, accept court-enforceable undertakings, and issue public warning notices.

The regulators in action

The regime has been enforced actively since the small business extension. In Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd (2017), the Federal Court declared, by consent, that eight terms in the waste management company's standard form contracts with small businesses were unfair and void. It was the ACCC's first successful action under the small business provisions, and it involved standard form contracts running into the tens of thousands, establishing that common clauses such as unilateral variation and termination rights would be closely scrutinised.

In 2022, in proceedings against Fuji Xerox (now Fujifilm Business Innovation Australia), the Federal Court declared that 38 terms across 11 standard form contracts with small businesses were unfair and void. The contracts had been entered into by many thousands of small businesses. The ACCC has also used its investigation powers to secure voluntary amendments to contracts in industries from fertiliser supply to franchising without going to court.

ASIC enforces the equivalent protections for financial products and services such as loans, insurance and financial advice under the mirror provisions of the ASIC Act. The 2022 reforms amended the ASIC Act in the same terms as the ACL, so the prohibitions and penalties apply equally to financial products, and ASIC has updated its guidance for small businesses accordingly.

Where businesses get caught

The most common trap is the legacy contract. Under s 305 of the ACL, the 2023 changes apply to contracts made on or after 9 November 2023, and to contracts renewed on or after that date. Critically, the changes also apply to a term that is varied or added to an existing contract on or after that date. A business that has not looked at its standard terms in years is not protected by timing: every renewal, and every variation of a single term, brings the contract within the strengthened regime.

Other common traps include:

Penalty stacking: because each unfair term is a separate contravention, a contract with several problematic clauses produces multiple penalties, not one.
Relying on an inherited contract: a business that buys another company, or takes over a franchise network, inherits its contracts. Relying on an unfair term in a contract it did not draft is still a contravention under s 23(2C).
Automatic renewal: terms that roll contracts over automatically, or that permit the supplier to change price or scope without a termination right, sit squarely within the s 25 examples.
B2B services: the regime is not limited to consumer sales. Service agreements, supply agreements, leases and franchise agreements with small business customers can all be caught.

When legal help is needed

The regime is best managed before a dispute arises. A lawyer reviewing a standard form contract will identify the clauses at risk under s 25, assess whether each can be justified as reasonably necessary under s 24(4), and redraft the terms so they are transparent and proportionate. If the ACCC or ASIC has already raised concerns about a contract, legal advice becomes urgent: responding to a regulator's inquiry, negotiating an undertaking, or defending court proceedings all require specialist input, and the penalty exposure means the stakes are high.

The audit your next renewal deserves

The risk concentrates at renewal. The moment a standard form contract is renewed or varied, the full weight of the 2023 regime applies to it, including the penalties. A contract drafted ten years ago, with unilateral variation rights, automatic renewal and a fee escalation clause, is not a legacy asset; it is a liability that crystallises at the next renewal. Before that renewal happens, run a clause-by-clause audit against the s 25 examples, ask whether each term is reasonably necessary to protect the business, and have the contract redrafted where the answer is unclear. Artificer Legal's commercial lawyers can review standard form contracts and advise on exposure before a regulator does it for you.