Penalties for Unfair Contract Terms 

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Table of Contents

• What Makes a Contract Term ‘Unfair’?
• Unfair Contract Terms Reforms 
• The Fuji Case 
• What Should You Do?
• Key Takeaways
• Frequently Asked Questions

Many individuals and small businesses will have limited bargaining power when entering a new contract. Under the Australian Consumer Law, consumers and small businesses that are party to standard form contracts are protected against unfair contract terms. Under the current unfair contract terms regime, if a court finds a term  ‘unfair’, it will be void. Importantly, the Federal Government announced plans to strengthen protections against unfair contract terms. This includes making unfair contract terms illegal and introducing heavy penalties for breaches of the regime by businesses. The Federal Court’s ruling in the recent Fuji case further demonstrates how a business’s decision to retain unfair contract terms in their standard form contracts can attract significant regulatory and financial consequences. As a business owner, now is an excellent time to review your contracts to see how these changes may affect you.

What Makes a Contract Term ‘Unfair’?

Essentially, a standard form contract is a contract that allows only one party to set the terms and conditions. Thus, the other party is unable to negotiate the terms. Currently, if a term in a standard form contract is ‘unfair’, the term will be void and unenforceable. 

A contract term will be ‘unfair’ if it:

• causes a significant imbalance in the rights and obligations of the parties;  
• is not reasonably necessary to protect the legitimate interests of the business; and
• causes detriment to one party if the other party seeks to rely on it.

For example, this may include terms that enable one party (and not the other) to:

• avoid or limit their obligations under the contract;
• terminate the contract; 
• penalise the other party for breaching or terminating the contract; or 
• vary the terms of the contract.

Unfair Contract Terms Reforms 

The Federal Government released a new draft bill in August 2022. It aims to strengthen protections for consumers and small businesses by introducing changes to unfair contract term laws. Under the new plans, unfair contract terms are not only void but also illegal and punishable by significant civil penalties. 

For corporations, these penalties are likely to be whichever of the following is higher:

• $10 million;
• three times the value of the money the business imposing the unfair contract term stands to earn due to the term; or
• 10% of the business’s annual turnover for the preceding 12 months, where the court cannot determine what benefit that business obtained.

For individuals, such as sole traders, the maximum civil penalty is $500,000.

In addition, the new changes will allow the Court, in addition to their current powers, to:

• presume a contract to be unfair if the same or similar term has been deemed unfair in another proceeding that dealt with similar circumstances (e.g., court proceedings for another business in the same industry);
• make orders to prevent loss or damage resulting from unfair contract terms; and
• stop a person entering into contracts containing the same or similar terms or applying or relying on a term in any existing contract with the same or similar term (whether or not the contract is before the Court).

Furthermore, the Federal Government also plans to amend the definition of small business contracts to expand the classes of contracts to which the regime will apply. 

The Fuji Case 

The Fuji case shows how a business’ noncompliance with the unfair contract terms regime can significantly harm its operations.

The Court deemed the following terms ‘unfair’ in the Fuji case:

What Should You Do?

Although the timeframes for the reforms are not yet confirmed, it is important for you to understand how these reforms may affect you and to ensure your business is ready for the changes. Accordingly, if your contracts contain unfair terms, you may risk going to court, reputational harm and significant penalties. 

Therefore, to prepare, you should:

• identify any standard form contracts that your business currently uses; and 
• seek legal review and amendments to your standard contracts to determine if they include unfair contract terms.

Key Takeaways

In light of the proposed changes to the unfair contract terms regime, you need to review your business contracts to ensure you make any necessary amendments and remove unfair contract terms. As demonstrated by the Fuji case, having unfair contract terms could significantly affect your business operations. 

Accordingly, if you need assistance reviewing your standard form contracts to ensure they comply with the new changes to the unfair contract terms regime, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions