02 Aug The Unfair Contract Terms Regime: Post-November 2023
The unfair contract terms regime protects consumers and small businesses from contract terms that create a significant imbalance and do not reasonably protect the interests of the advantaged party.
What are Unfair Contract Terms?
Part 2-3 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) sets out the law which generally prohibiting unfair contract terms.
Part 2, Div 2 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) provides similar protections in respect of financial products and services.
Unfair Contract Terms under Australian Consumer Law
The Australian Consumer Law defines an unfair contract term as being a term of a standard form consumer contract or small business contract that is unfair.
Consumer contracts are those concerning the supply of goods or services, or sale or grant of an interest in land, that are wholly or predominantly for personal, domestic or household use or consumption.
Small business contracts also concern the supply of goods or services, or sale or grant of an interest in land, but include at least one party who carries on a business with fewer than 100 persons or which has a turnover less than $10,000,000.
Unfair Contract Terms under the ASIC Act
The provisions under the ASIC Act relating to unfair contract terms almost replicate those contained in the Australian Consumer Law.
However, the ASIC Act only provides protections in respect of contracts that are for financial products or for the supply or financial services.
Further, a small business contract must exceed $5,000,000 to fall under the unfair contract term provisions.
Application of Unfair Contract Terms Legislation
The Full Court of the Federal Court of Australia set out the principles applicable to the unfair contract terms regime in Australian Securities and Investments Commission v Auto & General Insurance Company Limited [2025] FCAFC 76 as follows:
1. The three elements for determining unfairness of a contractual term are whether the term:
a. causes a significant imbalance to the parties’ rights and obligations arising under the contract;
b. is not reasonably necessary to protect a legitimate interest; and
c. would cause detriment, whether financial or otherwise.
2. The elements above are to be assessed as at the date of the contract.
3. The person alleging unfairness must prove there is a significant imbalance and detriment. The other party must prove there is a legitimate interest.
4. Significant imbalance refers to a party’s rights and obligations tilting significantly in their favour.
5. A party’s legitimate interest will depend on the nature of the business of the party and the context of the contract as a whole. This requires consideration of the proportionality of the alleged unfair term against the interest being protected, and alternatives available to the party relying on the term.
6. Detriment does not need to have occurred. It only requires proof that detriment would exist in the future due to application of or reliance on the term.
7. Courts have the discretion to consider any matter it thinks relevant. However, they must take into account the extent to which a term is transparent and the contract as a whole. This requires attention to be pad towards terms that might counterbalance the alleged unfair contract term.
8. There are examples of unfair contract terms in section 25 of the Australian Consumer Law and section 12BH of the ASIC Act. These provisions offer guidance on the types of terms which are of concern but do not prohibit those terms.
Conclusion
Parties should be careful when engaging in commercial dealings. If a contract appears to lean too much in your favour, it may include terms that are unfair.
Parties to a contract should also consider other provisions of the Australian Consumer Law relating to commercial dealings, as discussed here.
Previously, the law only voided contract terms deemed unfair. However, since November 2023, courts can issue significant penalties of up to $50,000,000 for companies and $2,500,000 for individuals for each unfair term used.
GENERAL AND CONTACT INFORMATION
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