Unfair contract terms 2026: what's banned and the penalties

What changed in 2023

The Australian Consumer Law now includes specific prohibitions against including or relying on unfair contract terms in standard-form consumer or small-business contracts. This change took effect from 9 November 2023. unfair contract terms auditor

Prior to this date, unfair contract terms could be declared void, meaning they were deemed to have no legal effect. However, businesses were not subject to civil penalties for including such terms. The introduction of the prohibition means that businesses now face potential penalties for this conduct.

Each individual unfair term within a contract is now considered a separate contravention of the Australian Consumer Law. This means that a contract containing multiple unfair terms can result in multiple penalties.

What makes a term unfair

A term in a contract is considered unfair if it creates a substantial imbalance in the rights held by the parties. This imbalance must be assessed in the context of the agreement.

For a term to be deemed unfair, it must also not be reasonably necessary to protect a legitimate interest of the party who drafted the contract. Even if an imbalance exists, the term may be considered acceptable if it serves a genuine and justifiable purpose for the contract provider.

Finally, the term must cause detriment if it is enforced. This detriment can be financial or otherwise. To be subject to the unfair contract terms provisions, the contract must be a standard-form contract and not effectively negotiated.

• Unilateral variation or termination rights
• Automatic renewals
• Disproportionate penalties

The penalties

Penalties for breaching the unfair contract terms provisions are substantial. For companies, the maximum penalty that a court can impose is the larger of $50 million, three times the value of the benefit obtained through the breach, or 30% of the company’s adjusted turnover during the period the breach occurred. Individuals face a separate, defined maximum penalty. Businesses can use the penalty estimator to gain a better understanding of potential exposure.

Beyond financial penalties, courts have broad powers to address unfair contract terms. They can make orders to void or vary the offending terms within a contract. This means a court can effectively rewrite parts of a contract to make it fairer.

Furthermore, courts can order a company to refund money to customers who were negatively impacted by the unfair contract terms. This provides a direct remedy to affected parties and underscores the seriousness with which these breaches are viewed.

How to comply

To ensure compliance with the unfair contract terms legislation, businesses must systematically review their contract templates. This involves auditing every standard-form template used when dealing with consumers or small businesses. The purpose of this audit is to identify and address terms that may be deemed unfair.

A key focus of the compliance process is the removal or rewriting of specific types of contract terms. Unilateral terms, automatic-renewal clauses, and those imposing disproportionate penalties are particularly likely to be scrutinised. These terms should be amended or eliminated to ensure fairness. Businesses may also seek assistance from an unfair contract terms auditor.

Evidence of genuine negotiation can be a crucial factor in determining whether a contract is considered a 'standard form' agreement. If a contract has been substantially altered through negotiation with a party, it may be less likely to be subject to the unfair contract terms provisions. Therefore, businesses should maintain records demonstrating any such negotiations.