Many small businesses sign contracts they had no real chance to change. Phone plans, advertising deals, courier services and waste collection often come as a set document. You can sign it or walk away. Australian law gives small businesses some protection when those contracts contain unfair terms.
Those protections became much stronger on 9 November 2023. Unfair terms can now lead to large penalties, not just a court order striking them out. This post explains the general rules, who they cover and what to do if a term looks unfair. It is useful for businesses that supply standard contracts and for those that sign them.
The unfair contract terms rules sit in the Australian Consumer Law. That law is Schedule 2 of the Competition and Consumer Act 2010 (Cth), and the relevant sections are 23 to 28. The Australian Competition and Consumer Commission (ACCC) is the regulator for most contracts. Financial products and services fall under ASIC and a parallel set of rules in the ASIC Act 2001.
The rules protect consumers as well as small businesses. This post focuses on contracts between businesses. If you are setting up, contracts are one of many legal issues to sort out when starting a new business. Another is how the law treats what customers say about you online, including the line between bad reviews and defamatory statements.
A standard form contract is prepared by one party, and the other party has little or no real chance to negotiate. The ACCC explains that the customer often cannot change any, or most, of the terms. A contract is presumed to be standard form, so the business that prepared it has to prove otherwise. Courts look at bargaining power, whether there was any discussion before the contract was prepared and whether there was a real chance to negotiate.
Since 9 November 2023, courts can also consider whether the business has used the same or similar contracts before. A contract can still be standard form even if the other party could make minor changes. The same applies if they could only pick from preset options. Small tweaks or a menu of choices do not stop a contract being standard form.
The definition widened in 2023. For contracts made or renewed from 9 November 2023, a small business is one with fewer than 100 employees or annual turnover under $10 million. Before that date, the test was 20 or fewer employees plus a limit on the upfront price of the contract. That contract value limit has now been removed.
The ACCC suggests that if a business is unsure, it should assume its customers fall under these thresholds. That is sensible advice for anyone who drafts terms for other businesses. It also means many more contracts are covered than before. Some of the changes apply only when a contract is renewed or a new one is signed.
A term is unfair only if it meets all three parts of a legal test. The test is set out in the Australian Consumer Law. The ACCC explains it on its page about unfair contract terms, and the three parts are below.
Courts must look at the contract as a whole, not just the single clause. They also consider whether the term is transparent. The ACCC says a term is transparent if it is in reasonably plain language, clear and not hidden. Long contracts with buried terms can raise concerns for that reason.
The law gives examples of terms that may be unfair when they favour one party but not the other. These include terms that let one side avoid or limit its own obligations. Terms that let only one side end the contract or change its terms are also listed. So are terms that penalise only one side for a breach or for ending the contract.
The ACCC gives a broadband example. A contract that lets the business change prices during a three year term, with no right for customers to leave, is likely to be unfair. The same price term is likely not unfair if another clause lets customers who object leave without penalty. Context matters, and one clause can balance another.
The same habit of reading terms closely applies to staff agreements. Knowing what can happen if you breach your employment contract is part of the same picture. Different rules apply to employment, so get advice on each type of agreement.
Some terms sit outside the unfair contract terms rules. Terms that set the upfront price are excluded, so a price cannot be challenged under these rules just because it seems high. Terms that define the main subject matter of the contract are excluded too. Terms required or permitted by another law, company constitutions and contracts for shipping goods by sea are also outside the rules.
Before the changes, a court could only declare a term unfair and void. Since 9 November 2023, businesses must not propose, use or rely on an unfair term in a standard form contract with a consumer or small business. The ACCC announced the new penalties before they began. For a company, the maximum is the greatest of $50 million or three times the benefit gained. If the benefit cannot be worked out, the alternative is 30% of adjusted turnover during the breach period.
Individuals can face penalties of up to $2.5 million. If a term is found to be unfair, it is void and no longer applies. The rest of the contract keeps going if it can work without that term. The ACCC or ASIC can also seek an injunction to stop a business using the term in future.
Start by reading the contract closely and noting the clauses that worry you. A lawyer can help you write to the other business and explain why a term may be unfair. In South Australia, for example, a complaint can then go to Consumer and Business Services. The Small Business Commission may also assist. The bodies and the help on offer differ between states.
You can also complain to the ACCC, or to ASIC for financial products. These regulators cannot settle individual disputes or declare a term unfair. They may contact a business to ask it to remove a term they see as very unfair. Only a court can make a final decision on whether a term is unfair.
Checking contracts also matters when a business changes hands. Supplier and customer agreements are among the things to consider when selling your business. Buyers will often want to review those contracts. Clear and fair standard terms make that review simpler.
The rules apply to standard form contracts. If both sides genuinely negotiated the terms, the contract may not be standard form. However, the law presumes a contract is standard form unless the business that prepared it proves otherwise. Making minor changes or choosing from preset options does not by itself change that.
For contracts made or renewed from 9 November 2023, the test is fewer than 100 employees or annual turnover under $10 million. Older contracts that have not been renewed or varied may fall under the earlier test. That test was 20 or fewer employees with a limit on the contract price. Check the date your contract was made or last changed.
Generally not under these rules. Terms that set the upfront price are excluded. The same goes for terms that define the main subject matter of the contract. Other laws may still apply, so get advice if you think you were misled.
The unfair term is void and no longer applies. The rest of the contract continues if it can work without that term. Both parties are still bound by the remaining terms. A court makes the final decision on whether a term is unfair.
This article is general information only and is not legal advice. The unfair contract terms rules are national, but state agencies, other laws and processes differ by state and territory. Laws and thresholds also change over time. Please speak with a qualified lawyer about your own contracts.
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