Unfair Contract Terms Protections to Cover Small Businesses

unfair contract terms protections

Unfair Contract Terms Protections Extended to Small Businesses.

As of November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 extended the unfair contract terms protections to cover small businesses. Prior to this only consumers benefited.

The Changes to Unfair Contract Terms Protections

The changes apply to the Australian Securities and Investments Commission Act 2001 (ASIC Act), which covers financial services and products. It also applies to the Australian Consumer Law (ACL). Now that the amendments have taken effect, section 23(1) of the Australian Consumer Law reads:

 “A term of a consumer contract or small business contract is void if:

(a)   the term is unfair; and

(b)   the contract is a standard form contract.”

If a court finds that a term is unfair it will be invalid and will not bind the parties. However the rest of the provisions of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Small Business Contracts

A contract is a small business contract if:

  1. the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
  2. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  3. either of the following applies:
    • The upfront price payable under the contract does not exceed $300,000; or
    • The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The number of employees working for a business excludes casual employees unless employed on a regular basis.

Standard Form Contracts

If a party to a proceeding claims that a contract is a standard form contract, then the court will assume this is the case unless proved otherwise. Section 27(2) of the ACL outlines a number of matters that a court must take into account in considering whether a contract is a standard form contract. These include the bargaining powers of the contracting parties and if the terms of the contract looks at the specific characteristics of another party or the particular transaction. Another consideration is if the contract was prepared without negotiation.

What is an Unfair Term?

Section 24 of the ACL states that a term is unfair if:

  1. it causes a significant imbalance in the parties’ rights and duties arising under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who is advantaged by the term; and
  3. it causes harm (whether financial or otherwise) to a party if it were to be applied or relied on.

While assessing if a term is unfair a court will consider whether the term is ‘transparent’. This means it is legible, expressed in plain language, presented clearly and is freely available to all involved parties. If the term hides in the fine print or legalistic, complex language is used, it is unlikely that the term will be considered transparent.

The court will also read the relevant term against the contract as a whole. For instance, other terms in the contract which offset the unfair term.

For more details on unfair terms visit the Australian Competition & Consumer Commission (ACCC) website.

Implications for lenders and credit providers

These changes are very broad in their application. So lenders (and other businesses) should review their standard form contracts used in transactions involving small businesses to ensure they are compliant. The following types of contractual terms are some examples of terms needing review:

  • Default fee provisions and liquidated damages clauses;
  • Automatic rollover provisions under lease agreements;
  • Rights to unilaterally vary contracts;
  • Clauses denying a party’s obligations to act reasonably and in good faith.


Related articles

Private Lenders: What is the Future of Small Business Loans?

Standard Terms: How Binding are They?

Unfair Contract Terms for Small Businesses Tested in Court


This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

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