Contracts are how a business buys supplies, rents premises, borrows money, insures its assets and signs up customers. Many of those agreements arrive as standard forms: pre-prepared documents offered on a take-it-or-leave-it basis, with the party who wrote them holding all the bargaining power. The law that polices what can go inside those forms is the unfair contract terms regime in the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth).
The regime exists because a party who writes a standard form can quietly load it with terms that protect its own interests at the expense of the other side. It allows a court to strike out a term that is unfair, and since November 2023 it has also exposed the party who proposed the term, or who relied on it, to substantial penalties. This guide explains how the regime actually works: which contracts it reaches, what makes a term unfair, what happens when one is found, and where the risks concentrate for a small business.
Who does what in the unfair contract terms regime
A handful of actors sit behind the rules, and it helps to know which one you are dealing with:
- The business that prepared the form: the party who wrote the standard terms and proposed them to consumers or small business customers. It carries the compliance risk.
- The consumer or small business counterparty: the party handed the form. A small business can apply to a court for a declaration that a term is unfair, and it negotiates from a stronger position now that penalties are on the table.
- The ACCC: enforces the unfair contract term provisions of the ACL for goods, services and land. It can investigate, seek declarations, injunctions and penalties, and accept court-enforceable undertakings.
- ASIC: enforces the parallel unfair contract term provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) for financial products and services, including business loans and most insurance contracts.
- State and territory fair trading agencies: can enforce the same rules, which apply uniformly across Australia.
- The courts: the Federal Court and state and territory courts hear applications for declarations, orders and penalties.
The split between the ACCC and ASIC matters in practice. A standard form supply agreement with a cafe or a cleaning business sits with the ACCC. A business loan, a finance lease or an insurance policy sits with ASIC. The two regimes are drafted in near-identical terms, so the test for unfairness is the same whichever regulator is involved.
Which contracts the regime covers
The unfair contract terms rules do not apply to every contract. Three conditions must be met: the contract must be a standard form contract, it must be a consumer contract or a small business contract, and it must be for the supply of goods or services or the sale or grant of an interest in land (financial products are covered through the ASIC Act).
Standard form contracts
Most of the contracts that catch a small business are standard forms: membership terms, supply agreements, leases, online terms and conditions. Section 27 of the ACL sets out how a court decides whether a contract is a standard form contract. If one party alleges that a contract is standard form, it is presumed to be unless the other side proves otherwise. The court then looks at whether one party had all or most of the bargaining power, whether the contract was prepared before any discussion occurred, whether the other party could only accept or reject it, and whether it was given an effective opportunity to negotiate the terms.
One point is easy to miss. Since the 2023 reforms, a contract can still be standard form even if the other side was allowed to negotiate changes that are minor or insubstantial, or to select a term from a range of options set by the drafter. A supplier who lets a customer tweak a few ancillary clauses has not necessarily escaped the regime.
Consumer contracts and small business contracts
A consumer contract is a contract for goods, services or an interest in land supplied to an individual wholly or predominantly for personal, domestic or household use, under section 23 of the ACL. A customer's home renovation, car purchase or phone plan is a consumer contract; a business's own purchases are not.
A small business contract is broader, and this is where most small businesses need to pay attention. Under s 23(4), a contract is a small business contract if it is for the supply of goods or services, or the sale or grant of an interest in land, and at least one party employs fewer than 100 people or had a turnover of less than $10 million for its last income year. Only one party needs to qualify, which means a contract between a large supplier and a small customer is caught. For counting employees, casuals count only if they work on a regular and systematic basis, and part-time employees count as a fraction of a full-time equivalent.
The November 2023 reforms widened this definition considerably. The employee threshold was raised from fewer than 20, and the old limits on the upfront price of the contract, which had been $300,000, or $1 million for contracts running longer than 12 months, were removed entirely. Many more agreements are now covered than before.
The three-part test for unfairness
This is the heart of the regime. Section 24 of the ACL says a term is unfair if all three of these conditions are met:
- Significant imbalance: the term would cause a significant imbalance in the parties' rights and obligations arising under the contract.
- Not reasonably necessary: the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it.
- Detriment: the term would cause detriment, financial or otherwise, to the other party if it were applied or relied on.
All three limbs must be satisfied. A term that merely favours one side is not automatically unfair. The imbalance must be significant, the term must go further than needed to protect a genuine business interest, and the other party must actually be worse off if the term is used.
The second limb carries a presumption. Under s 24(4), a term is presumed not to be reasonably necessary to protect the legitimate interests of the party who would be advantaged by it, unless that party proves otherwise. In practice, the party who wrote the term must explain the legitimate interest it protects and show that the term is proportionate to that interest.
Transparency and the contract as a whole
When deciding whether a term is unfair, a court must take into account how transparent the term is and the contract as a whole, under s 24(2). 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, under s 24(3). A clause buried in dense legalese is far harder to defend than a clearly worded one, even if the substance is identical. The court also looks at the whole contract: a term that looks one-sided in isolation can be fair if the contract as a whole rebalances the parties' positions.
Examples of terms that may be unfair
Section 25 of the ACL gives a non-exhaustive list of the kinds of terms that may be unfair. The ones that matter most to small businesses are:
- Unilateral variation: a term that lets one party, but not the other, vary the terms of the contract, or vary the upfront price without giving the other side a right to terminate.
- One-sided termination: a term that lets one party terminate the contract but not the other, or terminate without reasonable cause.
- One-sided penalties: a term that penalises one party for a breach or termination but not the other.
- Automatic renewal: a term that lets one party renew or not renew the contract, typically paired with an obscure or difficult opt-out process.
- Unilateral changes to what is supplied: a term that lets one party change the characteristics of the goods, services or land to be supplied without the other party's consent.
What is carved out
Section 26 of the ACL excludes some terms from the unfairness test altogether: terms that define the main subject matter of the contract, terms that set the upfront price payable, and terms that are required or expressly permitted by a law of the Commonwealth or a state or territory. A landlord cannot challenge the rent figure itself, and a customer cannot challenge the price line in a purchase order. But the exclusion is narrow. It protects the price and what is being bought and sold, not ancillary terms that happen to sit near them.
What happens when a term is found to be unfair
Under s 23(1) of the ACL, an unfair term of a consumer or small business standard form contract is void, as if it never existed. Under s 23(2), the contract continues to bind the parties if it is capable of operating without the unfair term. A court can declare a term unfair on the application of a party or a regulator under s 250, and can make orders to redress loss caused by the term or to stop the same or substantially similar terms being used in future contracts under ss 243A and 243B.
The November 2023 reforms added something new. Under ss 23(2A) and 23(2C) of the ACL, it is now a contravention simply to propose an unfair term in a standard form consumer or small business contract, or to apply or rely on an unfair term, and each unfair term is a separate contravention. The penalties under s 224 of the ACL are substantial: for a body corporate, the greater of $100 million, three times the value of the benefit obtained from the conduct, or 30 per cent of adjusted turnover during the breach period; for an individual, up to $2.5 million. Equivalent penalties for breaches of the ASIC Act unfair contract term provisions for financial products commenced in November 2023 as well. The Treasury announcement on the commencement date made clear the shift was deliberate: unfair contract terms are now outlawed, not merely unenforceable.
How the rules are enforced in practice
Both regulators have used the regime against standard form contracts in small business settings. In ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224, the Federal Court found unfair terms in a waste management company's standard form contracts with small business customers. More recently, ASIC brought its first unfair contract term proceedings against an insurer, against Auto & General over its home and contents policies. ASIC alleged that a term requiring customers to notify the insurer if anything changed about their home or contents was unfair under the ASIC Act, because the obligation was too broad for customers to practically meet and the consequences of failing to meet it were unclear.
Enforcement is not limited to winning cases. The ACCC reviews standard form contracts across whole industries, urges businesses to remove or amend unfair terms before they cause harm, and takes court action where businesses refuse. The ACCC's guidance in the lead-up to the 2023 reforms was explicit: once penalties applied, proposing or relying on an unfair term could attract a penalty even where no customer had actually been harmed.
Where unfair terms tend to hide
Some contract types attract more attention than others. The regime reaches standard form contracts for goods, services, financial products and land, which in practice covers supplier and service agreements, retail and commercial leases, franchise agreements, online terms and conditions, business loans and most insurance contracts. Insurance is a good example of how coverage has expanded: the unfair contract term protections were extended to insurance contracts with consumers and small businesses on 5 April 2021, following the Banking Royal Commission, and are enforced by ASIC through the ASIC Act rather than the ACL.
Auto-renewal clauses, unilateral price variation, broad indemnities and terms that remove one party's right to claim compensation are the ones that most often end up in regulator sights. A useful test before signing anything: if a term benefits only the party who wrote the contract, could not realistically be complied with, or removes a right you would otherwise have, treat it as a red flag. The same test applies to the standard forms your own business sends out.
When it makes sense to get a lawyer involved
Three situations justify professional input. The first is before you sign a standard form contract that matters to your business: a lease, a franchise agreement, a major supply agreement or a finance facility. A lawyer can identify the terms that would not survive an unfairness challenge and negotiate changes while you still have leverage.
The second is before your own standard forms go out. If you supply goods or services to consumers or to other small businesses on your own terms and conditions, those documents carry the risk. A review that removes or redrafts the one-sided terms is far cheaper than defending a regulator investigation or a court application, and it eliminates the exposure to penalties that now attaches to proposing an unfair term.
The third is after a dispute has crystallised. If a customer or supplier is relying on a term you believe is unfair, or a regulator has contacted you about terms in your contracts, the question of whether the term meets the s 24 test, and the strategy for responding, are legal assessments that benefit from an experienced eye.
The 2023 changes turned a contract problem into a regulator problem
Before the November 2023 reforms, the worst outcome for including an unfair term was that a court declared it void. The commercial risk was contained: the term could not be enforced, but the business that wrote it faced no penalty. That has changed completely. Proposing an unfair term is now a contravention in its own right, punishable by penalties running into the tens of millions of dollars, and the ACCC and ASIC have both signalled that standard form contracts are an enforcement priority. For a small business, the practical consequence is simple: the time to find and fix an unfair term is before the contract is signed or sent out, not after a regulator or a counterparty has found it for you.