Unfair contract terms

Definition

Unfair contract terms are clauses in agreements that create a significant imbalance between the rights of a business and a consumer or small business. Under Australian Consumer Law, these terms can be declared void if they are deemed unfair, although the rest of the contract may remain enforceable.

Examples include terms that allow one party to vary or terminate the contract without notice, terms that penalise one party but not the other, or clauses that limit a consumer’s right to legal remedies. For instance, a subscription service that reserves the right to change fees at any time without allowing the customer to cancel may be found to contain an unfair term.

Advanced

The Australian Consumer Law provides a legal test to determine whether a contract term is unfair. A court or tribunal considers three key factors. Whether the term creates a significant imbalance between the parties, whether the term is reasonably necessary to protect the business’s interests, and whether it would cause detriment if applied or relied upon. Transparency is also taken into account, meaning terms must be expressed clearly and be accessible to consumers.

From November 2023, new penalties apply for including or relying on unfair terms in standard form contracts with consumers or small businesses. This significantly increases compliance risks. Businesses must review agreements such as online terms and conditions, supplier agreements, and subscription models to ensure they meet fairness standards.

Why it matters

• Protects consumers and small businesses from being exploited.
• Ensures fairness in standard form contracts.
• Reduces reputational and financial risks for companies.
• Promotes trust and transparency in commercial dealings.

Use cases

• Reviewing customer contracts for compliance with Australian Consumer Law.
• Auditing subscription terms to prevent hidden or one-sided conditions.
• Training staff on drafting fair commercial agreements.
• Resolving disputes where customers challenge unfair clauses.

Metrics

• Number of contract reviews and compliance audits completed.
• Enforcement actions taken by regulators such as the ACCC.
• Volume of disputes resolved through consumer protection channels.
• Penalties imposed for breaches of unfair contract term provisions.

Issues

• High financial penalties for including unfair terms after 2023 reforms.
• Risk of contracts being partially unenforceable.
• Reputational harm from media coverage of unfair treatment.
• Compliance challenges for businesses with multiple standard form agreements.

Example

A gym requires members to sign a contract that charges cancellation fees equal to the full remaining membership term. After investigation, the ACCC declares the clause unfair under the ACL. The term is voided, and the gym updates its contracts to introduce fairer cancellation conditions.