Australia introduced unfair contract term (UCT) reforms in November 2023. The updated requirements are designed to provide better protection for small businesses and consumers from unfair contractual practices.

Take a look at what constitutes unfair contract terms and which changes now apply:

What are Unfair Contract Terms?

As shared by consumer.gov.au, terms within a consumer contract may be deemed unfair if:

• they cause an imbalance in a party’s rights and obligations arising from the contract
• they are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
• they would cause detriment in some way to a party if it were to be applied or relied on

This definition has not changed under the new reforms. What has changed is penalties and protections.

In the past, unfair contract term protections have applied to small business contracts where one party to the contract is a business that employs fewer than 20 people.

In addition to this, while a court could previously declare a contract term to be unfair and void, unfair contract terms themselves were not prohibited to the extent that a business could be penalised for including UCTs in the first place.

Key changes and implications to unfair contract terms in Australia

The change introduced by the reforms clarifies the outright illegality of UCTs, which will now attract substantial penalties (up to $50 million for companies) under the Competition and Consumer Act 2010 and the ASIC Act 2001.

As part of the update, each unfair term in a contract will constitute a separate contravention, emphasising the severity of non-compliance.

The reforms expand the scope of protection for small businesses. To qualify for UCT protections in 2024, instead of employing fewer than 20 people, a business must now employ fewer than 100 people or have a turnover of less than $10 million for the previous income year. Additionally, under the ASIC Act, the UCT regime will apply to contracts with an upfront price of $5 million or less. This change is designed to provide better protection for smaller businesses.

Reforms also provide clarity on what constitutes a standard form contract, acknowledging that even minor negotiated changes may not exempt an agreement from this classification. This update aims to prevent businesses from exploiting loopholes to circumvent UCT regulations.

Consequences of Unfair Contract Terms

If a court confirms a contract term is unfair, the term within the contract will be void. If the rest of the contract can continue without that term, then it will continue to apply to the parties.

The court may make further orders to vary an unfair contract, prevent a similar term being included in future contracts or disqualify a person from managing a corporation.

Unfair Contract Term Reforms: Do you need to take action?

If your business has contracts with suppliers or customers that include terms you suspect are unfair under updated legislation, it’s important to review and update them with the help of your legal team.

ASIC advises you take the following steps:

• Consider both points of view
• Avoid broad terms
• Meet your obligations under the Australian Consumer Law
• Be clear and use simple language
• Be transparent and ensure key terms are clearly drawn

Similarly, if you have signed a contract with a client or provider (such as an insurance provider or lender) and are concerned about the terms, reach out to NPR Law Queensland for advice on 07 3555 6333.

Guidance and resources

For more information that will help you understand these reforms, take a look at some information and example case studies from the Australian Securities and Investments Commission (ASIC): ASIC Act