Unfair contract term changes: what they mean for small business

The unfair contract terms rules changed significantly in late 2023. If your business uses standard form contracts, the change matters, because an unfair term is no longer just unenforceable. It can now cost you a penalty. This guide explains what changed and what to do about it.

What the law covers

The unfair contract terms regime is part of the Australian Consumer Law. It applies to standard form contracts, which are the take-it-or-leave-it contracts offered on the same terms to many customers, with little or no negotiation. It protects consumers and small businesses who are offered these contracts.

A term is unfair, broadly, if it would cause a significant imbalance in the parties' rights, is not reasonably necessary to protect the other party, and would cause detriment if it were relied on. Classic examples include a right for one party to change the price or the terms unilaterally, or to terminate when the other party cannot.

What changed on 9 November 2023

Two things changed, and both are significant.

First, unfair terms became unlawful and penalised. Before the change, a court could only declare an unfair term void, so the worst outcome for a business was that the term could not be enforced. Now, proposing, using, or relying on an unfair term in a standard form contract is a breach that attracts penalties.

Second, the protection reaches more businesses. The definition of a small business contract was expanded, so more contracts are caught than before.

The penalties are serious

This is the part that has changed the calculation for businesses. The maximum penalties are high. For a company, the maximum for each breach is the greatest of $50 million, three times the value of the benefit obtained from the conduct, or, if that cannot be determined, 30 per cent of adjusted turnover during the breach period. For an individual, the maximum is $2.5 million.

Just as importantly, each unfair term can be treated as a separate breach, so the exposure can multiply across a contract and across every customer the contract was used with.

Which contracts are caught

The regime applies to a standard form contract that is either a consumer contract or a small business contract. A contract is a small business contract, broadly, where at least one party is a business that employs fewer than 100 people or has an annual turnover of less than $10 million. The previous cap on the contract value was removed, so there is no longer an upper limit that takes a contract outside the rules.

What this means in practice

Our view is that most small and medium businesses using standard form contracts should have those contracts reviewed. Terms that were common for years now carry real risk. The ones we look at most closely are broad rights to vary the contract or the price unilaterally, one-sided termination rights, automatic renewal terms that are hard to exit, broad limitation and indemnity clauses, and penalties dressed up as fees.

The practical point is that the downside has changed. A term that is merely unenforceable costs you nothing until someone challenges it. A term that is unlawful can cost you a penalty whether or not you ever tried to rely on it. That is why this is worth acting on rather than leaving.

What to do now

If your business uses standard form contracts with consumers or small businesses, a review is the sensible step. We look at whether the contract is standard form, whether the counterparty is protected, and whether any term crosses the line, then suggest redrafting to keep the commercial protection you need without the risk. Doing this now is far cheaper than a regulator inquiry or a penalty later.

Frequently asked questions

When did the changes take effect? On 9 November 2023.

What is the maximum penalty? For a company, the greatest of $50 million, three times the benefit obtained, or 30 per cent of adjusted turnover during the breach. For an individual, $2.5 million.

Does this apply to my business? If you offer standard form contracts to consumers or to small businesses, very likely yes. The small business threshold is broadly fewer than 100 employees or under $10 million turnover.

What should I do about my existing contracts? Have them reviewed against the rules and redrafted where a term is at risk. This is cheaper than waiting for a challenge.

Keep reading

• Corporate and commercial law
• Key clauses every commercial contract should include
• Website terms and conditions for a small business

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.