Since our first article on unfair contract terms in early 2025, maximum penalties for using unfair contract terms have increased dramatically. For small businesses that use standard form contracts, awareness of unfair contract terms can help you protect your business, build good will with your customers, and guard against unfair contract terms that you might encounter with suppliers. In this article, we give a refresher on unfair contract terms and what the new penalties mean for your small business.
A quick refresher: what is an unfair contract term?
A person or business will have breached laws on unfair contact terms if:
- The contract is a consumer contract or a small business contract; and
- The contract is a standard form contract; and
- A person applies or relied on an unfair term in that contract.
If there is a breach, the unfair terms may be void and unenforceable, and penalties can apply.
It’s important to note that slightly different requirements apply to contracts for the provision of financial products or services, which are governed by ASIC. Check with an experienced lawyer as to which regime applies to you.
What’s a ‘consumer contract’ or ‘small business contract’?
A consumer contract is any contract for the supply of goods or services, or for the sale or grant of an interest in land, where the buyer is buying for (mostly) personal, domestic or household use or consumption. For example, even if you’re selling industrial ovens, if your customer just really likes baking and isn’t using the oven for business purposes, your contract to sell the oven is a consumer contract.
A small business contract also relates to contracts for the supply of goods or services or the sale or grant of an interest in land. However, small business contracts have another three requirements:
- The first is that at least one party was entering the contract in the course of carrying out their business. For example, your gym membership contract wasn’t signed as a part of carrying out your business, that was signed in your personal capacity.
- Second is that that party must have had fewer than 100 people employed at the time of entering the contract. This doesn’t include casual workers unless they’re working on a regular and systemic basis, and part-timers count as a proportional fraction of a full-time worker.
- Third is that that party’s turnover in the last income year was less than $10 million.
What’s a ‘standard form contract’?
Standard form contracts are when one party offers the contract on a take-it-or-leave-it basis without opportunity for negotiation. An example of this might be your gym membership: you can’t negotiate on the terms of use or the price you pay, all you can do is ‘take it or leave it’.
What’s the meaning of ‘unfair’?
A term is unfair if:
- It creates a significant imbalance between the parties’ rights and obligations under the contract; and
- It is not reasonably necessary to protect the advantaged party’s legitimate interests; and
- It would cause detriment to a party if the term is relied on.
What changed in 2026?
In March 2026, the maximum penalties for breaching the Australian Consumer Law doubled, including for unfair contract terms. Now, the maximum penalty for a companies is the greatest of $100 million, three times the value of the benefit obtained from the breach, or 30% of adjusted turnover during the breach period. For individuals, the maximum is $2.5 million.
While small businesses aren’t likely to face maximum penalties, the cost of a modest penalty, legal costs for disputes and the cost of redrafting your contracts together can be extremely expensive. Knowing this, it’s cheapest to fix your standard form contracts in advance.
Common unfair contract terms
The common thread with unfair contract terms is that they give one party powers or rights that the other party doesn’t get access to. This includes:
- One-sided variation rights: you can change price or scope at will, and the customer cannot exit in response
- Automatic renewal with narrow cancellation windows (these are also targeted by the new subscription laws applying from July 2027. You can read more in our subscription laws article.)
- Broad indemnities where the disadvantaged party covers losses it did not cause
- Unequal liability, where one party gets limited liability and the other has unlimited liability
- Termination for convenience for only one party or hefty termination fees
- Clauses letting you withhold or set off payments without a matching right
- Wide restraints or exclusivity that outlast the deal
Context also plays a huge role in determining unfairness, so terms that match the list above aren’t always ‘unfair’.
What next?
Your customer contracts, supplier contracts, and website or subscription T’s and C’s are often standard form contracts that are subject to laws on unfair contract terms. Book a free consultation and we will identify the terms most likely to cause trouble, with a fixed fee quote before any redrafting starts.
