Insight
Unfair Contract Terms in Australia
What the 2023 penalty regime means for standard terms, small business contracts, SaaS terms, customer contracts and supplier documents.
In short
An unfair contract term is a term in a standard form consumer or small business contract that goes too far in favour of one party. Since 9 November 2023, unfair contract terms are not just void — businesses can face penalties for proposing, using or relying on them.
Next step: if your customer, supplier, SaaS, franchise, finance or service terms have not been reviewed since the 2023 changes, ask for a fixed-fee unfair contract terms review. Start here.
The unfair contract terms regime is now one of the most important contract-law risks for Australian businesses using template terms. It applies to standard form consumer contracts and small business contracts, and it gives regulators a direct path to penalties where a business leaves unfair terms in its documents.
What the unfair contract terms law does
The regime sits in the Australian Consumer Law and, for financial products and services, the ASIC Act. It does not rewrite every hard bargain. It targets standard form contracts where one side effectively says, "these are our terms", and the other side has little or no ability to negotiate.
If a court finds a term unfair, the term is void. For contracts entered, renewed or varied from 9 November 2023, the business may also face civil penalties for proposing the term, applying it, or seeking to rely on it.
The statutory test
A term is unfair if all 3 limbs are met:
- it would cause a significant imbalance in the parties' rights and obligations;
- it is not reasonably necessary to protect the legitimate interests of the party advantaged by it; and
- it would cause detriment, financial or otherwise, if relied on.
The court looks at the contract as a whole and at how transparent the term is. A term hidden in dense drafting is worse, but a plainly written term can still be unfair if it overreaches.
Who is covered
The regime covers standard form consumer contracts and standard form small business contracts. For small business contracts, the current test generally captures a contract where at least one party has fewer than 100 employees or annual turnover below $10 million. The old upfront-price threshold was removed, so high-value contracts can now be covered if the small business test is met.
This means a supplier dealing with SMEs cannot assume a contract sits outside the regime just because the contract value is large, the customer is sophisticated, or the terms are business-to-business.
What counts as a standard form contract
A standard form contract is usually a template document prepared by one party and offered on a take-it-or-leave-it basis. The court can consider factors such as bargaining power, whether the contract was prepared before the transaction, whether the other party had a real opportunity to negotiate, and whether the contract was tailored to the deal.
Small changes to commercial details do not necessarily make a contract negotiated. A business can still be using a standard form contract even if price, dates, parties, quantities or a few special conditions change.
Clauses regulators and courts look at first
| Clause type | Why it can be risky |
|---|---|
| Unilateral variation | One side can change price, scope, service levels or terms without meaningful notice or an exit right. |
| One-way termination | The supplier can terminate, suspend or cancel for broad reasons, while the customer has limited rights. |
| Broad indemnities | The customer indemnifies the supplier for losses caused by the supplier's own conduct or matters outside the customer's control. |
| Liability exclusions | Liability is excluded or capped in a way that strips out meaningful remedies or operates only one way. |
| Automatic renewal | The contract renews without clear notice, a fair cancellation window or a practical way out. |
| Assignment and subcontracting | One side can transfer the contract or subcontract performance while the other cannot object or exit. |
| Evidence and discretion clauses | One side's records, opinion or certificate becomes conclusive, even where the other side may have a real dispute. |
Why imported templates are a problem
Many Australian businesses start with US, UK or global templates. Those documents often include arbitration clauses, class action waivers, broad indemnities, unilateral price-change rights and liability carve-outs that do not translate neatly into Australian law.
The High Court's decision in Karpik v Carnival is a useful warning. A contract nominating foreign law did not switch off Australia's unfair contract terms regime, and a class action waiver in standard consumer terms was found unfair. A foreign governing law clause is not a reliable way around Australian statute — see also governing law and jurisdiction clauses.
What businesses should do now
The sensible starting point is a clause-by-clause review of documents actually used with customers, suppliers, franchisees, licensees, subscribers or small business counterparties. Do not only review your newest template. Old templates, online terms, renewal terms and sales-team order forms are often where the risk sits.
- Identify which documents are standard form contracts.
- Map whether consumers or small businesses are counterparties.
- Review one-sided rights, indemnities, termination, variation, renewal and liability provisions.
- Check whether the drafting states a legitimate commercial reason for the clause.
- Rewrite high-risk clauses so they protect the business without overreaching.
- Train sales and account teams not to threaten reliance on clauses that have been retired.
Where this shows up most often
Unfair contract terms risk appears in more places than a signed services agreement. It can sit in SaaS terms, website terms, platform rules, purchase order terms, distributor agreements, equipment hire terms, finance documents, guarantees, franchise documents, subscription contracts and standard customer onboarding packs.
If the document is part of your repeat sales motion, it is worth checking. For online contracting, start with SaaS terms of service and website terms and conditions. For broader commercial documents, see business contract drafting and review.
Frequently asked questions
What are unfair contract terms in Australia?
They are terms in standard form consumer or small business contracts that create a significant imbalance, are not reasonably necessary to protect a legitimate interest, and would cause detriment if relied on.
Are unfair contract terms illegal?
Yes. For relevant contracts entered, renewed or varied from 9 November 2023, proposing, using or relying on an unfair contract term can attract civil penalties. Before those amendments, the main consequence was that the term was void.
Does the regime apply to business-to-business contracts?
Yes, where the contract is a standard form small business contract. The regime is not limited to consumers.
Does making a term clear make it safe?
No. Transparency helps, but it is not a complete answer. A transparent clause can still be unfair if it gives one party rights that are too one-sided.
Can a contract choose overseas law to avoid the rules?
Usually no. Australian statutory protections may still apply where the conduct or contract is connected with Australia. Karpik v Carnival is the key example.
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