Unfair Contract Terms & Australian SMBs | Awelle

This article addresses the unfair contract terms (UCT) regime under Part 2-3 of the Australian Consumer Law (ACL) (Schedule 2 to the Competition and Consumer Act…

Lisa Muscatello's avatar

Lisa Muscatello

By the Awelle Legal Team — practising Australian lawyers.

Scope and application

This article addresses the unfair contract terms (UCT) regime under Part 2-3 of the Australian Consumer Law (ACL) (Schedule 2 to the Competition and Consumer Act 2010 (Cth), ss 23–28) and the mirrored provisions in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (ss 12BF–12BM), which apply only for financial products and services (including insurance).

Under the UCT regime, a term of a consumer contract or small business contract is void if the term is unfair and the contract is a standard form contract (ACL, s 23).

Unfair contract terms are an area of major risk for businesses supplying goods, services, or an interest in land to individuals for personal, domestic or household use or to a ‘small business’ counterparty where the contract is in ‘standard form’. The ACL sets out significant civil penalties and legal consequences that can be imposed in relation to contract terms that are unfair. In addition, an unfair contract term could lead to financial and reputational damage. It is imperative from a risk management point of view that businesses understand the UCT regime and review their contracts (and amend terms where necessary) to ensure all terms comply with the ACL.

This article sets out a high-level and general overview of the UCT regime and focuses on the ACL. Whether a term is unfair may differ depending on the type of contract (general commercial, financial services or insurance), the type of parties (small business, individual, policyholder, government), and the type of industry involved.

Application of UCT regime

A person will contravene the UCT regime under the ACL if:

• the person makes a contract, or applied or relied on a term of a contract (or proposed to do so);
• the contract is a consumer contract or small business contract;
• the contract is a standard form contract (such as non-negotiable “take it or leave it” contracts);
• a term of the contract is unfair; and
• the person proposed the unfair term.

A consumer contract is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

Under the ACL, a contract is a small business contract if the contract is for a supply of goods or services, or a sale or grant of an interest in land and at least one party to the contract satisfies either or both of the following conditions:

• the party makes the contract while carrying on a business and at a time when the party employs fewer than 100 persons;
• the party’s turnover (see ACL s23 to determine turnover) for the party’s last income year (within the meaning of the Income Tax Assessment Act 1997) that ended before when the contract is made, is less than $10,000,000.

There is no cap on contract value. Under the ASIC Act the same small business threshold applies, but only to contracts with an upfront price of $5 million or less.

Jurisdiction

A company incorporated in, or carrying on business in, Australia can be subject to the UCT regime even where the counterparty is not an Australian resident, the contract is made overseas, and it is governed by foreign law. A foreign choice-of-law or exclusive-jurisdiction clause does not exclude the regime.

The High Court held (in Karpik v Carnival plc \[2023\] HCA 39) that the unfair contract provisions (ACL, s 23) apply to all standard-form consumer contracts provided that one of the parties carries on business in Australia or is incorporated in Australia and no additional territorial connection is required.

Documents typically covered by the UCT regime

Standard terms and conditions, sale/supply contracts, online (click-wrap/scroll-wrap/web-wrap) terms, end user licence agreements and software licensing, purchase order conditions, consulting/service/maintenance contracts, head contractor–subcontractor agreements, hire/lease/licensing conditions, tender conditions, non-disclosure agreements, notices/tickets (such as for venues), building contracts, standard industry form contracts in construction industry and employment conditions.

Key legal principles

What makes a term unfair

A term of a standard form consumer or small business contract is unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term; and
• would cause detriment (financial or otherwise) to a consumer if applied or relied on.

The court must consider the transparency of the term and the fairness of the term in the context of the contract as a whole. It is important to be aware that context is important, because what is invalid or unfair in one commercial contract and set of circumstances might be commercially justified in another, even if they provide for a similar business arrangement.

A term is exempt from being unfair if it defines the main subject matter of the contract, sets the upfront price payable, or is a term required to be included by a law of the Commonwealth, a state or a territory.

The ‘Grey List’ is a non-exhaustive list in the ACL of the kinds of terms of a consumer contract or small business contract that may be unfair (ACL s 25). Note that it does not create a presumption of unfairness. Examples include a term that:

• permits, or has the effect of permitting, one party (but not another party) to:
• avoid or limit performance of the contract;
• terminate the contract;
• vary the terms of the contract;
• renew or not renew the contract; or
• vary the upfront price payable under the contract without the right of another party to terminate the contract;
• permits, or has the effect of permitting, one party unilaterally to:
• vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; or
• determine whether the contract has been breached or to interpret its meaning;
• penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
• limits, or has the effect of limiting, one party’s vicarious liability for its agents;
• permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
• limits, or has the effect of limiting, one party’s right to sue another party;
• limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
• imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; or
• has an effect of a kind, prescribed by the regulations.

Consequences of an unfair term

Proposing, applying, relying on, or purporting to apply or rely on an unfair term is a contravention attracting a civil penalty. Each unfair term in a contract can attract a separate penalty.

The term is void (treated as if it never existed) and the balance of the contract continues to bind the parties if it can operate without the term.

Courts may make a broad range of orders to prevent or reduce loss or damage – for example, to declare all or part of the contract void; vary the contract; refuse to enforce some or all terms; make orders to prevent or reduce likely (not just actual) loss; prevent use of the same or a substantially similar term in future or existing standard form contracts (across the whole business, and even where the relevant contract is not before the court); disqualify a person from managing a corporation; require publication of information; and direct refunds, return of property or provision of services.

Current maximum penalties

Enforcement pathways

Consumers and small businesses can complain directly to the business to challenge a term that they think is unfair, complain to an organisation (such as the Australian Financial Complaints Authority, Australian Competition and Consumer Commission (ACCC), state/territory consumer protection agencies) and apply to the court to make a declaration that the term is unfair and make appropriate orders.

Case law in brief

Court decisions have refined how the unfairness test operates in practice, without changing the statutory test itself. The courts have highlighted the following principles and considerations.

• Transparency helps but does not cure a substantively unfair term (Anderson v Kincumber Nautical Village in relation to a fee escalation clause; Karpik v Carnival \[2023\] HCA 39 which was a class action on unfair contract terms).
• Broad or undefined unilateral discretions are high-risk (Tomasso v IG Markets Ltd \[2025\] WA SC 338s; ASIC v PayPal Australia Pty Ltd \[2024\] FCA 762). However, the same kind of clause can survive if it is proportionate, evidence-based and linked to a clear legitimate interest (ASIC v Auto & General \[2024\] FCA 272).
• Significant imbalance and reasonable necessity both need to be made out on the evidence, not inferred from a theoretical risk and misleading conduct and unfairness are assessed as separate questions, meaning that a term can fail one test and pass the other (ASIC v HCF Life \[2026\] FCAFC 81).

Considerations when drafting contractual terms

Variation, renewal and termination

• Favour reciprocal rights and balanced terms. If you can vary, renew or terminate unilaterally, consider whether the counterparty should have an equivalent or offsetting right (e.g. a right to terminate without penalty if the other party varies the contract).
• If a one-sided discretion is commercially necessary, define its trigger with objective, ascertainable criteria, and avoid an open-ended concept like ‘error’ or ‘at our discretion’. Consider listing specific examples of when it may be exercised.
• For price variation clauses, avoid a price increase without giving the counterparty a genuine right to terminate before that increase takes effect.
• For automatic renewal clauses, build in a real, reasonably timed window to terminate before renewal, and make sure exiting does not carry a disproportionate cost.

Fees and costs

• Use a proportionate, formula-based approach (e.g. tied to CPI or a defined, objective cost driver) rather than an open discretion. However, do not assume a clear formula is enough on its own.
• Each component of the formula should be capable of substantiation with financial evidence and linked to a legitimate business need.
• Avoid double-counting elements that are already captured elsewhere in the pricing structure. Avoid combining an escalation right with no corresponding right for the counterparty to terminate if the increase is unacceptable.

Indemnities and liability

• Avoid pairing an uncapped or broad indemnity from the customer with an ‘as is’ or heavily limited liability position for the supplier. This is a recognised high-risk pattern, particularly in technology, SaaS and platform contracting where terms are often adapted from offshore templates.
• Check that limitation of liability and indemnity clauses are proportionate to the risk actually being allocated, and that they don’t place disproportionate commercial risk on the weaker party without a clear justification.

Dispute resolution

• Assess whether arbitration (or another alternative dispute resolution mechanism) is genuinely proportionate to the likely value of a typical claim. A mechanism that is disproportionately costly relative to likely claim values is high-risk, even where it applies equally to both parties.
• Present dispute resolution clauses prominently and in plain language, because the process of accessing the clause, not just its wording, can itself be scrutinised.
• Where a class action waiver or similar mechanism is used, consider whether it has the practical effect of discouraging a party from pursuing a legitimate claim, not only whether it formally preserves an individual right to sue.

Notification and disclosure

• Include specific examples of the kinds of changes or information that must be notified, rather than an unqualified obligation to disclose ‘anything’.
• Draft by reference to how a reasonable counterparty would read the clause in the context of the contract as a whole (not a literal, worst-case reading).
• Where the clause relates to an exclusion or right that is qualified by another statute (for example, an insurance exclusion qualified by the Insurance Contracts Act 1984 (Cth)), reflect that qualification clearly in the disclosure and marketing materials themselves — administering the term fairly in practice will not excuse presenting it as absolute on its face, since misleading conduct and unfairness are assessed under separate tests.

Evidencing the drafting choices made

• Keep a record of the legitimate interest each one-sided or discretionary clause is intended to protect, why the clause is suited to protecting it, and why realistic alternatives would not achieve the same protection with a materially lesser burden on the counterparty. The party advantaged by a term generally carries the onus of establishing it is reasonably necessary.
• Don’t assume a term is safe on the basis that no consumer has yet complained, and equally do not assume a term is exposed purely because a theoretical risk of detriment can be argued. Both an unfairness case and a defence to one depend on evidence of real, practical effect, not speculation about what a term could in principle do.
• Where a clause could be characterised as both an unfairness risk and a misleading or deceptive conduct risk (ACL s 18 / ASIC Act s 12DF), review it against both tests. Satisfying one does not satisfy the other.

Common pitfalls to be aware of

Scoping mistakes

• Assuming a counterparty is ‘too big’ to be a small business. The test turns on headcount or turnover, not the size or value of the contract.
• Treating the ACL as the only relevant regime for a financial product or service. The ASIC Act applies its own (narrower, price-capped) small business test.
• Overlooking that a variation or renewal of an existing contract can trigger fresh application of the regime to the varied term (even where the original contract pre-dates current thresholds).
• Overlooking master agreement/statement of works structuring risk or assuming an SOW issued under an older master agreement is automatically insulated from the current regime, without checking how the instrument is drafted.
• Relying on a foreign choice-of-law or exclusive-jurisdiction clause to contract out of the regime. The regime can still apply to Australian and foreign companies carrying on business in Australia.

Drafting mistakes

• Treating the Grey List as a checklist of automatically unfair terms, rather than as a guide the court weighs against the full three-limb test.
• Assuming transparent, well-drafted terms are immune from challenge. Clear disclosure does not cure a term that is substantively unnecessary or imbalanced.
• Leaving broad, unqualified discretions (price variation, error correction, suspension, termination) without objective criteria or specified examples of when they can be used.
• Pairing an uncapped or broad customer indemnity with an ‘as is’ or low-liability position for the supplier.
• Presenting an exclusion, entitlement or notification obligation as absolute on its face where it is in fact qualified by another statute. Fair administration in practice will not excuse misleading drafting.

Evidence and process mistakes

• Failing to build or retain the financial or commercial evidence needed to justify a pricing or fee-escalation mechanism if it is later challenged.
• Failing to keep a record of the legitimate interest a discretionary or one-sided term protects, and of the alternatives considered. The advantaged party generally carries the onus on reasonable necessity.
• Underestimating the evidentiary burden on an unfairness claim in either direction. Courts will not infer significant imbalance from a merely theoretical or speculative risk of detriment, but a business also cannot assume a term is safe just because no disadvantage has yet been evidenced.
• Treating ‘not misleading’ as proof a term is ‘not unfair’, or vice versa. These are distinct statutory tests, meaning a term can fail one and pass the other, so both need to be checked.

Questions to consider during drafting and negotiation process

When drafting or reviewing a contract, consider the following questions.

• Have both parties’ perspectives been considered (especially considering how the term operates in practice)? Are the rights and obligations of the parties balanced?
• Are each of the terms transparent and clear?
• Is each term linked to a legitimate interest? Do any of the terms go beyond what is necessary to protect legitimate interests?
• Could any of the terms cause unnecessary financial or non-financial disadvantages?
• Do the termination and amendment provisions apply equally to both parties?
• Do any penalties for breaches or termination apply equally to both party?
• Is the contract and each of its terms defensible and fair (and not just legally permissible on paper)?
• Should legal advice be obtained to review the contract and ensure compliance with UCT laws?

Resources

For further information, refer to:

• Contracts (ACCC)
• Unfair contract term protections for consumers (ASIC)
• Unfair contract term protections for small businesses (ASIC)

This article is prepared for general guidance and comment only, and neither purports nor is intended to be advice on any particular matter.