Unfair contract terms 

The unfair contract terms regime is statutory — the Australian Consumer Law, sch 2 to the Competition and Consumer Act 2010 (Cth) — and it does something the general law will not: it allows a court to strike a term out of a contract that was validly formed, simply because the term is unfair. That is a significant intrusion on freedom of contract, and its boundaries are drawn narrowly — it reaches only standard form contracts, only with consumers and small businesses, and only terms that fail a demanding three-part test.

Which contracts are covered

Three conditions must all be met.

The contract must be a consumer contract — for goods, services or an interest in land acquired wholly or predominantly for personal, domestic or household use — or a small business contract. The small business threshold was widened in 2023 and is now defined by employee numbers and turnover; the earlier contract-value cap was removed, so the version of the regime that applies depends on when the contract was made.

The contract must be standard form. The question is whether one party had all or most of the bargaining power and prepared the contract before discussions began, and whether the other party was effectively required to accept or reject it as presented. A contract is presumed standard form once alleged to be, and the party asserting otherwise must prove it — a genuine, effective opportunity to negotiate is what displaces the presumption, not a formal invitation to comment.

Certain terms are excluded from review altogether: the main subject matter of the contract, the upfront price, and terms required or expressly permitted by law. The exclusions matter because they mean the regime does not police the bargain itself, only the machinery around it.

The test for unfairness

A term is unfair under s 24² only if all three limbs are satisfied:

1. it would cause a significant imbalance in the parties' rights and obligations;
2. it is not reasonably necessary to protect the legitimate interests of the party advantaged by it; and
3. it would cause detriment, financial or otherwise, if applied or relied on.

The second limb carries a presumption against the drafter: a term is presumed not reasonably necessary unless the party advantaged proves it is. That reversal does real work in practice.

In applying the test the court must consider transparency — whether the term is expressed in reasonably plain language, legible, presented clearly and readily available — and the contract as a whole. Transparency is not a separate limb, and a clearly drafted term can still be unfair. But an opaque term buried in a schedule will rarely survive.

Terms presumed to be unfair

The legislation lists examples, which operate as a guide rather than a blacklist: terms permitting one party but not the other to avoid or limit performance, to terminate, to vary the terms, to renew or not renew, to vary the price after acceptance, or to unilaterally determine whether the contract has been breached. Each is characterised by asymmetry, and asymmetry is the recurring theme of the whole regime.

Consequences

An unfair term is void under s 23¹ — treated as never having been included — while the rest of the contract continues to bind the parties if it is capable of operating without that term. The remedy therefore attacks the term, not the contract.

Since 2023 the regime also carries civil penalties: proposing, applying or relying on an unfair term contravenes the ACL and exposes the party to substantial pecuniary penalties, calculated per term rather than per contract. That change transformed the practical significance of the regime, which until then had no sanction beyond voidness.

The relationship with unconscionability and misleading conduct

The unfair contract terms regime overlaps with the other consumer protections but does different work, and a good answer keeps them apart:

• Unconscionable conduct targets the way a bargain was made — the exploitation of a special disadvantage, or conduct against conscience assessed against the statutory factors. It looks at behaviour.
• Misleading or deceptive conduct targets representations, and asks whether conduct was apt to lead into error.
• Unfair contract terms targets the content of the term itself, in a standard form contract, regardless of how the contract was made or what was said.

A term may be unfair without anyone behaving badly. Conversely, a fairly drafted term can still be part of unconscionable conduct. Pleading all three is common; conflating them is not.

What "standard form" means

The regime applies only to standard form contracts, and a contract is presumed to be standard form once a party alleges it. The other party bears the onus of showing otherwise.

The matters the court takes into account include whether one party had all or most of the bargaining power, whether the contract was prepared before any discussion, whether the other party was in effect required to accept or reject it as presented, and whether they were given an effective opportunity to negotiate. The existence of a minor negotiated variation does not take a contract outside the regime.

The transparency requirement

A term is more likely to be found unfair if it is not transparent — meaning expressed in reasonably plain language, legible, presented clearly, and readily available to the affected party.

Transparency is not a separate ground of invalidity. A transparent term can still be unfair, and a term buried in fine print is not unfair merely for that reason. It feeds into the overall assessment, and in practice it is often what tips the balance where the substantive effect of the term is borderline.

Exclusions

Certain terms are carved out and cannot be assessed:

• terms that define the main subject matter of the contract;
• terms setting the upfront price payable, provided the price is transparently disclosed; and
• terms required or expressly permitted by a law of the Commonwealth, a State or a Territory.

The upfront price exclusion does not extend to contingent charges — fees payable only on a later event, such as a default fee or an early termination charge, remain assessable.

Certain contract types are also excluded, including shipping contracts, company constitutions, and specified insurance contracts governed by their own regime.

Applying this in a problem question

1. Establish coverage in three steps — consumer or small business, standard form, and not an excluded term — before touching the merits.
2. Identify when the contract was made, because the small business threshold and the penalty regime both changed in 2023.
3. Apply each of the three limbs separately, and state expressly that all three are required.
4. Put the onus of the second limb on the party relying on the term, and say what legitimate interest is asserted.
5. Address transparency and the contract as a whole as matters the court must consider, not as extra limbs.
6. Conclude on consequences: the term is void, the contract survives if it can, and penalties may follow.

Self-check

• Have I confirmed the contract is standard form, and noted who bears the onus on that?
• Have I excluded the upfront price and main subject matter from review?
• Have I required all three limbs rather than reasoning from imbalance alone?
• Have I addressed the civil penalty exposure as well as voidness?