What Constitutes an Unfair Contract Term in Australia?

Running a small business in Australia means entering into plenty of contracts - with suppliers, customers, landlords, and sometimes even partners or investors. Most of the time, you probably assume the contracts you sign are fair. But what happens if you’re handed a lengthy agreement loaded with dense legal language and you start noticing terms that just don’t seem right, or give the other side all the power?

That’s where the concept of an unfair contract term comes in - and if you’re a small business, it’s now a key area of protection under Australian law. Recent reforms to the Unfair Contract Terms (UCT) regime mean that businesses and consumers alike have stronger rights than ever to challenge unfair contract terms and seek better outcomes. But what exactly counts as “unfair”? And how can you make sure your contracts - or the ones you’re asked to sign - are in line with the law?

In this guide, we’ll walk you through what constitutes an unfair contract term in Australia, with practical examples, what the UCT regime means for your small business, and steps you can take to stay on the right side of the rules. We’ll also look at the consequences if you get it wrong, recent legal changes, and what’s coming in 2023 and beyond. Let’s dive in and put your mind at ease - with the right information, you can approach contracts with confidence.

What Is the Unfair Contract Terms (UCT) Regime?

The “unfair contract terms” regime is a part of the Australian Consumer Law (ACL), designed to protect small businesses and consumers from being pushed into contracts with terms that are one-sided or take advantage of their weaker bargaining position.

The UCT regime was first introduced in 2010 and applies nationally, including in all states and territories (like QLD and Victoria). Early on, it offered strong protection for consumers, and small business protections soon followed. As the business landscape has evolved - especially with more standard (or “take it or leave it”) contracts - the laws around unfair contract terms have become even stricter, with sweeping changes to unfair contract terms taking effect in 2023. These changes expand which contracts are covered and increase potential penalties for breaches.

When Does the UCT Regime Apply?

Not every contract is covered by unfair contract term laws. The UCT regime applies to:

• “Standard form contracts” - these are contracts that are pre-prepared, non-negotiable, and offered on a “take it or leave it” basis (think terms for memberships, supply, leases, or online agreements).
• Contracts for the supply of goods or services (including financial products) or the sale or lease of land.
• Small business contracts - as of 2023, this includes any business employing fewer than 100 people or with an annual turnover under $10 million.
• Consumer contracts (for personal, domestic, or household use).

It’s also important to note that unfair contract terms laws apply equally in all Australian states, so the rules are consistent no matter where you’re based.

What Makes a Contract Term "Unfair"?

Under Australian law, a term will be “unfair” if it:

1. Would cause a significant imbalance in the parties’ rights and obligations;
2. Is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term; and
3. Would cause detriment (financial or otherwise) to a party if it were applied or relied on.

All three of these elements must be met for a court to rule a term is unfair. In practice, the law aims to stop parties with more power (often larger companies or suppliers) from imposing one-sided terms onto smaller businesses or consumers who can’t negotiate for themselves.

What Does a "Significant Imbalance" Look Like?

A “significant imbalance” usually happens when one party can:

• Change the contract unilaterally (without consultation or agreement from the other side)
• End the contract for any reason, at any time, while the other party cannot
• Force the other party to pay fees, penalties, or charges even when it’s not reasonable
• Limit the other party’s ability to make a claim or get compensation

Examples of Unfair Contract Terms

The ACCC (Australian Competition & Consumer Commission) and courts have looked at a wide range of unfair contract terms cases in Australia. Here are some typical unfair contract term examples:

• Automatic renewal clauses: Where the contract automatically renews unless the small business gives notice, but doesn’t provide clear details about how to opt out (or makes it unreasonably difficult).
• Unilateral variation: The supplier can change pricing, terms, or product features without the other party’s agreement.
• Early termination fees: One party pays a hefty termination fee, but the other can terminate at any time for any reason.
• Unfair liability limits: Completely shifting liability or risk to the weaker party, regardless of fault.
• Barring legal claims: Terms trying to prevent the weaker party from suing or taking legal action.
• Exclusive indemnity clauses: Where one party must indemnify the other for events outside their control.

For more, check out our breakdown of unfair contract terms examples and how the courts have dealt with them.

What Contract Types Are Most at Risk?

Unfair contract terms can sneak into nearly any agreement, but we often see them in:

• Supplier and service agreements
• Standard hire or licensing contracts
• Lease or property agreements (including retail and commercial leases)
• Insurance policies for small businesses
• Franchise agreements
• Online terms and conditions (for platforms, SaaS, and ecommerce)

This is why it’s essential that small businesses - whether you’re a retailer, online seller, cafe operator, or consultant - review your contracts not only before signing, but as part of your regular risk management. Keeping on top of contract reviews helps you avoid costly problems down the track.

What’s Changed? Recent UCT Reforms & The Law As Of 2023

2023 ushered in some of the most significant changes to the unfair contract terms regime since it began. Here’s what every small business needs to know about the new landscape:

• Wider definition of “small business contract”: Now includes businesses with up to 100 employees or an annual turnover of $10 million.
• Bigger penalties: Courts can impose significant fines (potentially in the millions) for including or relying on an unfair contract term. This is a huge shift from the old regime where the worst that could happen was the term being voided.
• Automatic voiding: An unfair term is void (stripped from the contract), meaning businesses cannot enforce it.
• “Standard form” clarified: Even if you allow a bit of negotiation or make a few changes, the contract might still count as “standard form” under the law if it’s mostly take-it-or-leave-it.
• Broader contract coverage: Many more contracts now fall under scrutiny, including those in digital/online industries and some insurance contracts.

You can read more about these unfair contract terms changes and what they mean for small businesses here.

How Are Unfair Contract Terms Assessed – The Legal Test

When deciding whether a term is unfair, a court (or the ACCC, if it’s investigating) will consider a range of factors, including:

• The overall context of the contract (not just the one term in isolation)
• How transparent the term is (for example, whether it’s hidden in small print, hard to find, or written in legalese instead of plain English)
• If the term is offered on a take-it-or-leave-it basis, or whether the parties actually negotiated
• Whether the term is necessary to protect a legitimate business interest of the party relying on it

Even if a term looks tough at first glance, if it’s required for a clear and fair reason (like to meet a regulatory or safety requirement), it might be considered fair. The focus is on context and effect.

What Happens If a Contract Term Is Unfair? Penalties and Consequences

If a court rules a contract term is unfair:

• That term is void - as if it never existed
• The rest of the contract stands (unless it can’t operate without the term)
• If a business tries to enforce an unfair term, there can be substantial penalties - including for individuals, companies, and even for those who propose or rely on the term (not just if you succeed in enforcing it)
• The ACCC can investigate possible breaches and take enforcement action, including seeking penalties in court

This shift means businesses - even small ones - need to take contract compliance seriously. Now, including an unfair term can expose your business to significant fines and reputational risks, not just the removal of the term itself.

How Do I Know If a Contract Term Is Fair or Unfair?

Here are some quick checks you can use when reviewing contracts for possible unfair terms:

• Is the term only benefiting one side?
• Can the other party change the contract without your agreement?
• Are fees or penalties set at an unreasonably high level?
• Do you have to accept major risks or liability (like indemnifying the other party for things outside your control)?
• Are there terms that prevent you from leaving the contract, but allow the other party to terminate easily?
• Would you lose significant rights (like to claim compensation or access dispute resolution)?

If any of these red flags are present, it’s wise to get a legal review before signing or using the contract. You may also want to consider tailored contract review services that specialise in unfair contract terms compliance.

What Can I Do About Unfair Contract Terms in My Agreements?

If you spot a potential unfair contract term, you have a few different options:

• Negotiate: Many businesses (especially bigger ones) will be open to changing or removing problematic terms when flagged - especially now that tough penalties apply.
• Seek advice: A legal expert can advise whether a term is likely to be unfair, help you negotiate, or suggest changes to level the playing field.
• Report or challenge: If the other side refuses to budge, you can report the contract to the ACCC or your state’s fair trading authority, or apply to a court to have the term declared void (this is rare, but possible in serious cases).
• Adjust your own contracts: If you provide standard form contracts to others (like your own T&Cs or service agreements), ensure you remove or revise any unfair terms now. Non-compliance can land you in hot water - it’s not worth the risk.

Are There Any Contracts or Terms That Are Exempt?

Yes, some terms and types of contracts are exempt from the unfair contract term regime. For example:

• Terms that define the main subject matter of the contract (what’s actually being bought or sold)
• Terms that set the upfront price payable
• Terms required or expressly permitted by law (such as those required by another Act or regulation)
• Certain insurance contracts (although many are now covered)
• Contracts with large businesses (with more than 100 employees or $10 million turnover)

However, if you’re not sure whether a contract falls under the regime, it’s always safest to get a legal review.

Common Unfair Contract Terms Scenarios - What Should Small Businesses Watch Out For?

Here are a few common real-world situations where small businesses can get caught out:

• “Locked in” supply agreements: Imagine a cleaning business enters a standard supply contract that allows the supplier to change product pricing at any time (without your agreement) but doesn’t let you leave the contract without huge penalties. This gives the supplier too much power.
• “Hidden” auto-renewal terms: You sign a 2-year equipment lease, and discover (too late) that it auto-renewed for another year because you didn’t provide notice in a very short and obscure timeframe. This is often not fair if the renewal process isn’t clear and prominent.
• Retail lease with “one-way” break rights: The landlord can terminate the lease for “any reason,” but you (the tenant) cannot. This is likely unfair under the regime.
• Insurance contract with impossible obligations: Some insurance policies contain strict conditions or exclusions that may be assessed as unfair and struck out if they go beyond a legitimate business need.

For more insights and tips on contracts in your industry, see our guides to commercial leases and business service agreements.

How Can I Protect My Small Business?

Being proactive is the best way to avoid issues with unfair contract terms in your business. Here are some simple steps to follow:

• Make sure your contracts are drafted in plain English – clear, easy-to-read, and transparent
• Remove or rework any terms that only advantage you (or the other party) without a good reason
• If you use “standard” contracts, regularly review them for compliance with the latest UCT rules
• Don’t rely on “industry standard” contracts – these may still contain unfair terms if not updated for 2023 reforms
• Keep contracts brief, avoid unnecessary legal jargon, and ensure all terms are properly explained and understood before signing
• When in doubt, get a contract review by a legal professional
• Train your staff to look for “red flag” terms and encourage open communication during negotiations

What Legal Documents and Resources Can Help?

The right contract templates and reviews are essential to maintaining a fair, compliant relationship with customers, suppliers, and other third parties. Some important documents and resources to consider:

• Contract Review and Redraft: Use a contract review service to check your contract for unfair terms before you sign or pass it on to others.
• Terms & Conditions: If you run an online business, ensure your Website Terms and Conditions or Customer Contract are up-to-date and UCT-compliant.
• Service Agreements: Whether you offer professional services or supply products, a customised Service Agreement can help avoid disputes and protect your interests legally and fairly.
• Insurance Policy Review: If your business relies on insurance, have your policies reviewed for potentially unfair exclusions or obligations, especially in light of the new UCT regime.
• Employee and Supplier Contracts: Update these agreements regularly to ensure they remain balanced and enforceable under the latest unfair contract laws.

Every business is different, and not every document will be required for every business - but most small businesses will need several of these, and it’s always wise to speak to a legal expert to work out which documents you need and to ensure your contracts are fair and up to date.

Key Takeaways

• Unfair contract term laws in Australia protect small businesses and consumers from one-sided, hidden, or excessive terms in standard form contracts.
• The 2023 UCT regime reforms mean more businesses, contracts, and terms are now covered - and penalties for non-compliance can be substantial.
• A term is “unfair” if it creates a significant imbalance, isn’t reasonably necessary, and causes detriment if applied or relied on by the stronger party.
• Common unfair terms include unilateral variation, excessive exit fees, or clauses that allow only one party to terminate easily.
• To protect your business, regularly review your contracts, use plain and transparent language, and get legal advice where needed.
• If you come across an unfair contract term, seek to negotiate it - if that fails, you can challenge it under the law for removal and potential penalties against the party proposing it.
• Getting legal support early makes it easier to stay compliant and avoid business risks in the long run.

If you’d like a consultation about unfair contract terms for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.