As a small business owner, you may be dealing with standard form contracts on a regular and systemic basis. A small business contract can run into issues like unenforceable terms, which can cause big headaches. Learning to spot unworkable or unfair terms can help you avoid problematic agreements in the future.
Key takeaways
Australian law uses three tests to determine if existing contract terms are unfair.
The law applies to consumer contracts and small business contracts.
There are common examples that show what unfair contract terms can look like.
Unfair contract terms can lead to significant penalties.
Early legal advice can help you manage unfair contract terms.
What makes a contract term legally unfair?
Unfair contract terms protections are important to support parties’ rights when they may not have as much bargaining power or ability to negotiate. The Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) both contain an unfair contract terms regime to protect consumers and small businesses.
Both laws apply three tests to determine if a particular term is considered unfair:
The parties’ rights and obligations arising from the term cause a significant imbalance.
The term isn’t reasonably necessary to protect the legitimate interests of the party that benefits from it.
Applying the term would cause significant detriment (financial or otherwise) for the affected party.
Terms aren’t automatically found to be unfair just because they’re inconvenient or onerous. The Court decides whether the tests are satisfied on a case by case basis. It considers the whole contract and the transparency of the term. Transparency refers to matters, such as:
Whether the term is in reasonably plain language.
The term is readily available to the affected party.
The term is legible.
Who the law protects
Unfair contract term provisions in the ACL and the ASIC Act apply specifically to standard form contracts. Standard form contracts apply standardised terms that are offered on a take it or leave it basis, leaving little to no room for negotiation. They may be standard form consumer contracts or small business contracts.
Consumer contracts
Consumer contracts cover transactions related wholly or predominantly to personal, domestic or household use or consumption. The relevant legislation depends on the type of contract:
ACL. The supply of goods or services, or a sale or grant of an interest in land.
ASIC Act. Financial products or services.
Small business contracts
The ACL covers the sale of goods or services, where at least one party:
Employs fewer than 100 fulltime-equivalent employees; or
Has an annual turnover of less than $10 million.
The ASIC Act retains the ACL’s small business criteria. However, instead of managing goods and services, it handles agreements where the upfront price payable under the contract is less than $5 million. As of 5 April 2021, insurance contracts may also be subject to an unfair contract term finding.
Common examples to watch for
We tend to find that unfair terms follow common patterns that can make them easier to identify. They often provide one party with considerable flexibility while restraining the other party. Here are some terms that may be found to be unfair:
Giving one party greater scope to terminate a contract.
Enabling one party to vary the terms of the contract without the other’s permission.
Allowing one party more leeway to limit their contractual obligations.
Potential penalties
Changes made in 2023 to unfair contract term law provisions introduced substantial penalties. Here’s what parties may face.
ACL penalties
Businesses may be required to pay the larger of:
$100 million (for conduct from 28 March 2026).
Three times the benefit’s value, if it can be determined.
30% of the business’s adjusted turnover during the breach turnover period (minimum of 12 months).
An individual may be required to pay up to $2.5 million for a breach.
ASIC Act penalties
Businesses may face the larger of:
50,000 penalty units (currently $18,200,000).
Three times the value of the benefit obtained.
10% of annual turnover up to a maximum penalty of 2.5 million penalty units (currently $910,000,000).
Individuals may have to pay either 5000 penalty units (currently $1,820,000) or three times the benefit obtained from the conduct.
What to do if you spot one
If you believe that you’re facing unfair terms, it may be worth getting legal advice as soon as possible. A qualified business lawyer may help you with issues, such as:
Determining if the contract term breaches relevant legal provisions.
Speaking with the other party to explore possibilities to alter the contract.
If you’re unsatisfied with remedies offered by the other party, you may consider escalating the issue to the Australian Competition and Consumer Commission.
Do you need help with standard form contracts?
If you’re concerned about facing unfair contract terms, our team can help. Contact us today to set up an initial consultation.
Disclaimer: This article provides general information only. It is not legal advice. Legal outcomes depend on your circumstances. You should speak with a lawyer before making decisions about your matter.
