Unfair contract terms: penalties small businesses should know

For years, unfair contract terms were simply declared void; big suppliers could include them with little downside beyond unenforceability. That comfort zone closed in November 2023, when civil penalties arrived for proposing or using unfair terms in standard form small business contracts. If your business issues quotes, subscriptions or service agreements from templates, this regime now applies to your paperwork, and the cost of ignoring it has moved from theoretical to very real¹²³.

Does the regime cover your contracts?

Two boxes must be ticked:

1. Standard form: one party effectively sets the terms and the other signs or clicks without real negotiating power
2. Small business involvement: generally, a party employing fewer than 20 people or with annual turnover below $10 million; thresholds have been adjusted over time, so verify current figures

Consumer contracts sit under the same umbrella alongside small business contracts. The regime reaches supplier agreements, SaaS subscriptions, logistics contracts, franchise documents, equipment hire and countless other templates.

Why the law targets standard forms

The rationale matters because it tells you what regulators hunt for. Standard form contracts exist because negotiating every deal individually is impossible at scale; nobody wants to kill that efficiency. Instead the law polices the temptation it creates: a drafter who faces no negotiation knows they can slip in one-sided terms that customers never read.

That is why penalties attach even where the unfair term is never enforced. Merely proposing the term in a template is the contravention. Waiting until a customer complains, or assuming quiet terms are harmless terms, misreads the regime entirely; regulators test published templates precisely because the harm lies in the offering.

The unfairness test

Under sections 23 and 24 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law), a term is unfair when:

• It causes a significant imbalance in the parties’ rights and obligations
• It is not reasonably necessary to protect the drafter’s legitimate interests
• It would cause detriment, financial or otherwise, if relied upon

Courts also weigh transparency. A clause buried in eight-point font counting against readability, while clearly disclosed terms protecting genuine commercial interests may survive. Certain core subject matter, like upfront price and main subject definitions, gets qualified exemptions where properly disclosed.

Transparency is not just formatting; it is comprehension. A rollover clause printed in bold across the signature page still fails if its effect is disguised. The question regulators and courts ask is whether an ordinary small business owner, reading the contract once without a lawyer, would understand the term’s practical operation before signing. Drafters who test their clauses against that imaginary reader generally land close to compliant; drafters who optimise for obscurity do not.

What actually changed

Before the reforms, the worst outcome for an unfair term was having it struck out. Now, proposing, applying or relying on such terms is itself unlawful conduct attracting penalties scaled to match the most serious competition breaches, which run into the tens of millions of dollars for large groups. Regulators including the ACCC actively test templates across industries, and directors should assume enforcement interest rather than immunity.

Clauses that keep failing the test

Templates across the market contain recurring offenders worth reviewing urgently:

• Automatic rollover renewals locking customers into further years unless they cancel inside narrow windows
• Unilateral variation rights letting one side change price, scope or terms without consent
• Termination asymmetry: supplier can exit anytime while customer faces long minimum terms and exit fees
• Broad indemnities making the customer responsible for losses beyond its control
• One-sided liability caps capping supplier liability at trivial amounts while customer liability is unlimited
• IP grabs claiming rights over the customer’s own materials

Each fails the test in a predictable way. Rollover clauses create imbalance by rewarding inattention; unilateral variation removes any certainty about what was agreed; asymmetric termination lets one side walk freely while the other is locked in; and sweeping indemnities transfer losses the customer cannot control or price. If your template contains a clause you would never accept when sitting on the other side of the table, that instinct is close to the legal test itself.

Fixing your paperwork sensibly

Compliance does not mean gutting every protective clause; it means balance and justification:

1. Audit all template contracts against the unfairness factors
2. Keep only terms you can articulate a legitimate reason for, proportionate to actual risk
3. Redraft remaining protections transparently, with key terms highlighted before signature
4. Align renewal, termination and pricing mechanics so both sides face similar rules
5. Record the reasoning behind each clause, useful evidence if a regulator asks

Treat the review as recurring rather than one-off. Thresholds move, regulators publish new guidance on specific industries, and business models drift; a template compliant in 2024 can drift out of step by 2027. Diary an annual contract health check alongside your insurance renewals, and revisit templates whenever you launch a new product line or pricing structure. Businesses signing other parties’ standard forms should run the same checklist in reverse: flag suspect terms before signing, request changes in writing, and photograph or save the exact version signed.

Signing a supplier’s take-it-or-leave-it deal? The same rules protect you, so flag suspect terms rather than absorbing them silently.

Want your standard contracts reviewed? Contact Bell & Senior Lawyers for a free initial chat, and see our commercial practice, commercial resources and contract resources .

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