Unfair Contract Terms are now Illegal and you can be fined for merely including them

Unfair Contract Terms: Key 2023 Changes Every Business Should Know

In November 2023, significant changes came into force under the Australian Consumer Law (ACL), reshaping the rules around unfair contract terms in standard form contracts. These reforms are aimed squarely at improving fairness and transparency in business dealings and come with substantial penalties for non-compliance. If your business uses standard contracts with consumers or small businesses, it’s essential to understand these changes and how they may affect your agreements.

What’s Changed?

Previously, a term found to be “unfair” under the ACL would simply be void and unenforceable. As of 9 November 2023, the regime has teeth. Businesses that include unfair terms in standard form contracts now face significant penalties, including:

• Penalties up to $50 million for companies;
• The greater of $2.5 million or three times the benefit gained from the unfair term, if that can be determined;
• Personal liability for individuals involved in making or using the contract.

What Makes a Contract Term “Unfair”?

Under section 24 of the ACL, a term is 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 advantaged by the term; and
• Would cause detriment (financial or otherwise) to a party if it were relied on.

Examples of Unfair Terms

The courts and ACCC have previously found the following types of terms to be unfair:

• Automatic renewal clauses that don’t provide reasonable notice or an easy way to opt out;
• Unilateral variation clauses allowing one party to change key terms (like pricing or services) without consent;
• Excessive termination fees that penalise consumers for ending contracts early;
• Limited liability terms that unreasonably restrict the consumer’s right to remedies;
• Broad indemnity clauses that unfairly shift liability to the weaker party.

Who Is Affected?

These changes apply to standard form contracts entered into or renewed on or after 9 November 2023, where:

• One party is a consumer, or
• One party is a small business (defined as employing fewer than 100 people or with annual turnover below $10 million).

How Can Businesses Avoid Penalties?

To avoid substantial fines and legal challenges, businesses should:

1. Audit existing contracts: Review all standard form contracts currently in use to identify potentially unfair terms.
2. Avoid one-sided clauses: Terms that give your business wide discretion, impose harsh penalties, or limit the other party’s rights are high-risk.
3. Ensure transparency: Make sure key terms are clearly disclosed, explained, and easy to understand.
4. Use plain English: Complexity can be a red flag. Contracts should be accessible to the average reader.
5. Provide meaningful choice: Even in standard forms, offering flexibility or the ability to negotiate key terms can reduce the risk.

Why Careful Drafting Matters

The days of “cut-and-paste” contracts are over. With penalties now attached, businesses can no longer afford to use outdated or overly aggressive templates. Clear, balanced, and customised drafting not only ensures compliance with the ACL but also builds trust and avoids disputes down the track. Whether you’re reviewing terms and conditions, service agreements, or supply contracts, legal advice is now more crucial than ever.

Final Word

The 2023 changes to unfair contract term laws reflect a broader trend toward greater accountability and fairness in commercial relationships. Businesses that act now to review and improve their standard contracts will not only avoid legal risk but also gain a competitive edge by showing they value transparency and fair dealing.

Need help reviewing your contracts? Our team can help you identify and remove unfair terms, and ensure your agreements comply with the latest legal standards.