Small Business and Unfair Contract Terms

Overview

Small businesses are often required to sign standard form contracts, agreements where the terms are pre-set and non-negotiable. These contracts can contain unfair terms that put one party at a significant disadvantage. To address this imbalance, Australian law now provides protections for small businesses from unfair contract terms.

What Does the Law Say?

Since 12 November 2016, protections have been in place under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) for small businesses dealing with unfair contract terms in standard form contracts.

These protections were strengthened in November 2023 through significant amendments to the Competition and Consumer Act 2010, which now:

Prohibit unfair contract terms in standard form contracts;
Introduce civil penalties for proposing, using, or relying on unfair contract terms;
Expand the definition of a small business to include businesses with:
- Fewer than 100 employees or
- An annual turnover of less than $10 million.

The expanded scope and significant civil penalties for unfair contract terms ensure greater deterrence and robust protection for small businesses. Any small business facing unfair contract terms now has stronger and clearer legal recourse.

When Do These Protections Apply?

The unfair contract term laws apply where:

The contract is for a financial product or service and insurance;
At least one party to the contract is a small business, as defined above;
The contract is a standard form contract (i.e. pre-prepared contracts by one party to the contract without negotiations between the parties).

There is no longer a monetary cap (such as the previous $300,000 or $1 million threshold) on the upfront price payable under the contract for these laws to apply, except for contracts for financial products or services. However, there is a cap of $5,000,000 on the upfront price payable for contracts for financial products or services.

What Constitutes ‘Unfair’?

A contract term is likely to be considered unfair if it:

Causes a significant imbalance in the parties’ rights and obligations;
Is not reasonably necessary to protect the legitimate interests of the party benefited by the term;
Would cause detriment (financial or otherwise) to the small business party if enforced.

Examples of potentially unfair contract terms include:

Allowing one party (but not the other) to:

Avoid or limit their obligations;
Terminate the contract unilaterally;
Vary prices, terms, or the scope of services;
Impose penalties for breach or termination.

What Happens if a Term Is Unfair?

If a court or tribunal finds that a term is unfair:

The term is void, it will have no legal effect;
The rest of the contract remains enforceable, so long as it can operate without the unfair term;
Under the 2023 amendments, the party responsible for proposing or using the unfair term may also face civil penalties and injunctive relief.

Excluded Contracts and Contract Terms

Some types of contracts and terms are excluded, such as:

Terms that define the main subject matter of the contract;
Terms that set the upfront price payable under the contract;
Terms that have been negotiated;
Certain insurance contracts;
Contracts relating to shipping;
Constitutions of companies, managed investment schemes or other kinds of bodies.