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Unfair Contract Terms – An Overview

In November 2022 the Australian Consumer Law was amended to introduce dramatic changes to the Unfair Contracts Terms law in Australia. Penalties for breach of the law have been significantly increased and the entities entitled to protection under the law has been expanded. The government has delayed implementation of the law for 12 months to give businesses an opportunity to review their standard form contracts and make amendments.

Peter Jackson



Since 1 July 2021 unfair terms in standard form contracts for financial products and services have been subject to oversight by ASIC. The unfair contract term protections for consumers were first introduced as part of the Australian Consumer Law from 1 July 2011. The protections were extended to cover standard form contracts for small businesses from 12 November 2016 and insurance contracts for consumers and small businesses from 5 April 2021.

In a well known case (Australian Competition and Consumer Commission v ByteCard Pty Ltd Federal Court of Australia Jessup J), following action by the ACCC, the Federal Court declared that four clauses in standard form consumer contracts were unfair contract terms and therefore void.

The clauses that were declared unfair were to:

  • unilaterally vary the price under an existing contract without also providing the customer the right to terminate
  • exclude liability, while providing an organisation with virtually unlimited indemnity
  • unilaterally terminate the contract at any time with or without cause or reason

The court declared that the clauses were unfair because they:

  • created a significant imbalance in the parties’ rights and obligations
  • were not reasonably necessary to protect legitimate interests ; and
  • if applied or relied upon, would cause financial detriment to a consumer.

On 28 October 2022 significant changes to these laws passed through Parliament, receiving Royal Assent on 9 November 2022 to come into effect on 9 November 2023.

The changes widen the scope of businesses covered by the unfair contract law and dramatically increase the penalties for breaches. The delay in the implementation of the amendments is to provide companies time to review their consumer contracts to ensure that terms are not unfair.

Consumer Contracts are Impacted

The law applies to consumer contracts. A contract can be entered into in a number of ways, including:

  • signing a document
  • agreeing over the telephone
  • under the Electronic Transactions Act under State or Federal law by clicking “I agree“ on a website
  • by acting in accordance with the contract

A contract is a consumer contract if it is for the supply of goods or services or the sale or grant of an interest in land to an individual for predominately personal, domestic use or consumption.

The contracts affected will be those entered into after the commencement of the new law, as well as any existing standard form contracts that are renewed after the commencement date. If a term of a contract is varied following commencement of the laws, the new laws will apply to the term as varied, unless the variation involves renewal of the contract as a whole, in which case the entire contract will come within the scope of the new regime.

Some contracts are excluded from the unfair contract terms provisions, they include:

  • contracts of marine salvage and towage
  • a charter party of a ship
  • contracts for the carriage of goods by ship
  • constitutions of companies, managed investment schemes or other kinds of bodies
  • contract terms regulated by the Insurance Contract Act 1984
  • private health insurance contracts
  • state and commonwealth government insurance contracts and re-insurance contracts

Examples of contracts affected, provided by ASIC

Insurance contract

Larissa and Mehmet buy a home building insurance policy for their family home. Under the policy, if their home is damaged or destroyed, the insurer can choose to pay a cash settlement, rather than rebuild or repair the home. The term allows the insurer to settle a claim by paying Larissa and Mehmet the amount it would cost the insurer to rebuild or repair the home.

The term may be unfair because the insurer may calculate the cost of rebuilding or making repairs to be less than the amount it would actually cost Larissa and Mehmet themselves to rebuild or make repairs.

The right to unilaterally vary a contract

Allegra enters into a loan contract for $20,000 to buy a new car. The contract contains a term which allows the lender to vary any term or condition of the contract if the lender gives Allegra five days’ notice in writing. The contract permits this even if the lender, for example, increases its fees significantly.

The term may be unfair because it gives the lender broad discretion to unilaterally vary any term or condition in unspecified ways, without giving Allegra a real and reasonable opportunity to exit the contract without penalty rather than accept the variation. For example, if Allegra needs to refinance or sell assets to exit and repay the loan, she is likely to need more than five days.

In addition, the unfair contract terms provisions do not apply to the terms that define the main subject matter of a contract. For example, a contract cannot be challenged as unfair if a consumer has had a change of mind about acquiring a particular goods or service.

Russell enters into a personal loan contract with a lender for $50,000, repayable over five years. The interest rate on the loan is 5% per year. There is an establishment fee of $1,000, and a late fee of $50 is payable for each late payment.

Terms that state the upfront price payable – including the amount borrowed, the interest rate and the establishment fee of $1,000 – and that are disclosed when Russell takes out the contract, cannot themselves be considered unfair. These terms set the upfront price payable and define the main subject matter of the contract.

However, the late fee can be considered under the unfair contract terms law.

Small business protection

The amendments to the law also apply to small businesses to protect them in standard form contracts for products or services or for the sale or grant of an interest in land. A small business is one that has fewer than 100 employees or less than $10 million turnover in the previous income year.

Employees are countered by:

  • considering the number at the time the contract is agreed
  • including any casual employees if they are employed on a regular and systemic basis
  • not including the employees of any related business entities

ACCC Chair Gina Cass – Gottlieb said: “Many small business complaints about big business are about unfair contract terms and it will be an enormous boost to small business that there will be a far stronger deterrent against the use of such terms.”

Standard form contract

Standard form contract is not defined but in broad terms it is one that is prepared on a take it or leave it basis. Contracts of this type are often seen in transactions relation to telecommunications, finance or gym memberships.

If a court is asked to decide if a contract is a standard form contract the court must take into account the following:

  • whether there was an imbalance in the bargaining power between the parties
  • whether the contract had been prepared by one party before discussion between the parties had commenced
  • whether it was a take it or leave it contract, that is whether one party was required to accept the contract in the form it was presented
  • whether there was an opportunity to negotiate the terms of the contract
  • whether the contract takes into account the specific characteristics of the other party or the transaction.

Under the legislation the Minister has the power to list other matters that might be taken into account.

In any proceedings in relation to whether a contract is a standard form contract and the terms unfair there is a presumption that it is which is rebuttable by the party that prepared the contract.

Unfair terms

A contract term is unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations arising under the contract
  • is not reasonably necessary to protect the legitimate interests of the stronger party
  • causes detriment ( financial or otherwise ) to the counter-party if relied on.

In deciding whether a term is unfair the court must consider the extent to which the term is transparent. For a term to be transparent it should be written in plain English, not be written in complex legal language, hidden in the fine print and easily available to all parties affected by the term.

Consequences of having unfair contract terms

From 9 November 2023 unfair contract terms will be illegal and from that date penalties for having unfair contract terms in agreements will come into effect. For corporations the maximum penalty is $50 million, three times the “reasonably attributable “benefit obtained from the conduct or 30% of adjusted turnover during the breach turnover period ( including that of related bodies in a corporate group ) if the benefit cannot be ascertained. In the case of individuals the penalty has increased to $2.5 million.

It is important to note that many of the penalties can be sought at any time within 6 years from the date the contract term was declared to be an unfair contract term. Further, many of these orders will also bind a person affected by the order, even if that person was not a party to the original proceedings, for example, a subsequent purchaser of the business.

If a court makes an order that a contract term is unfair it can make a range of orders including:

  • declaring all or part of the contract to be void,
  • vary the contract,
  • refusing to enforce some or all of the terms of the contract,
  • directing the business to refund money or return property to the consumer affected,
  • directing the business to provide services to the consumer affected, at the business’ expense.

If a court has declared that a contract term is unfair and a business subsequently tries to apply or rely on the unfair term, the business may contravene the ASIC Act and the court may then:

  • grant an injunction to restrain the business from using the unfair term
  • order that the business provides redress to the consumer affected, or
  • make any other orders the court considers appropriate

When a court considers whether a contract term is unfair it will look at the term in the context of the whole contract. For example, a term may be unfair in one context but not another. It may also be the case that an unfair term is counterbalanced by other terms more favourable to the consumer, such as a lower price. It is also the case that sometimes favourable terms are counterbalanced by unfair terms that the consumer is not aware of, such as implied terms, or terms contained in another document such as a schedule or if the terms are written in legalese that is difficult to follow.

Peter Jackson


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