Unfair contract term protections for small businesses
This is Information Sheet 211 (INFO 211). It explains how the law protects small businesses from unfair terms in contracts for financial products and services.
It describes how small businesses can challenge a term under the unfair contract terms law in the Australian Securities and Investments Commission Act 2001 (ASIC Act), what happens if a term is unfair, and what ASIC can do.
The unfair contract terms law applies to a term in a small business contract if:
- at least one party to the contract is a ‘small business’
- the contract is a ‘standard form contract’
- the contract is for a financial product or service, and
- the contract was entered into or renewed on or after 12 November 2016, or a term in an existing contract was varied on or after 12 November 2016.
For an insurance contract, the unfair contract terms law will apply if the insurance contract is entered into or renewed on or after 5 April 2021, or a term in an existing contract is varied on or after 5 April 2021.
A contract is a small business contract if:
- at least one party to the contract is a ‘small business’ – that is, a business that employs fewer than 100 people at the time the contract is signed (including casual employees employed on a regular or systematic basis, and part-time employees as an appropriate fraction of a full-time equivalent employee) or has a turnover for the last income year of less than $10,000,000, and
- for contracts for financial products or services, the upfront price payable under the contract does not exceed $5,000,000 (the ‘cap’) – for other types of contracts, there is no cap.
Individual consumers are also protected by the unfair contract terms law: see Information Sheet 210 Unfair contract term protections for consumers (INFO 210).
Standard form contract
The unfair contract terms law covers standard form small business contracts for financial products or the supply, or possible supply, of financial products or services.
A ‘standard form contract’ is a contract that has been prepared by one party to the contract (the business offering the product or service) without negotiation between the parties. In other words, it is offered largely on a ‘take it or leave it’ basis.
However, a contract may still be a standard form contract even when:
- the small business has the opportunity to negotiate changes to the contract, provided the changes are minor or insubstantial
- the financial services provider allows the small business to select a term from a range of pre-prepared options, and/or
- the small business is entering into both the first contract and another contract with the financial services provider, and has the opportunity to negotiate terms for that other contract.
Small businesses commonly enter into standard form contracts for financial products and services such as contracts for business loans, credit cards, insurance cover or broker agreements.
If a small business alleges that a contract is a standard form contract, the contract is presumed to be a standard form contract unless proven otherwise.
In determining whether a contract is a standard form contract, a court may take into account any relevant matter, but must consider whether:
- the financial services provider has all or most of the bargaining power relating to the transaction
- the contract was prepared by the financial services provider before any discussion with the small business about the transaction
- the financial services provider has repeatedly used the same or a substantially similar contract, and if so, how often
- the small business was in effect required to either accept or reject the contract as it was offered (i.e. on a ‘take it or leave it’ basis)
- the small business was given an effective opportunity to negotiate the terms of the contract, and
- the terms of the contract take into account the specific characteristics of the small business or the particular transaction.
Contracts and terms that are not covered
The unfair contract terms law in the ASIC Act does not cover the following contracts:
- individually negotiated contracts
- the constitutions of companies, managed investment schemes or other kinds of bodies
- medical indemnity insurance contracts
- insurance contracts that are not contracts for financial products or services under the ASIC Act, including contracts for private health insurance, compulsory third-party insurance, and workers compensation insurance
- guaranteed renewable life insurance policies made or entered into before 5 April 2021 and subsequently renewed on or after 5 April 2021
- certain life insurance policies made or entered into before 5 April 2021 which, subsequent to 5 April 2021, have been replaced, linked or unlinked
Note: Linked life insurance policies bring different life insurance products together with a combined amount of cover. The premium for linked policies is typically lower than the total cost of each product. Sometimes linked policies can be unlinked to make them standalone policies.
- the operating rules of licensed financial markets or clearing and settlement facilities, or
- real time gross settlement systems approved as payment and settlement systems by the Reserve Bank of Australia.
There are also specific types of contract terms that are excluded: see Table 1.
Type of term
Terms that define the main subject matter of the contract
The ‘main subject matter’ of a contract is the product or service acquired under the contract (i.e. the basis for the existence of the contract).
For insurance contracts, the main subject matter is limited to what is being insured.
For example, under a comprehensive car insurance policy, the main subject matter is the car that is being insured. The term that describes the car cannot be considered under the unfair contract terms law.
Terms that set the upfront price payable
The ‘upfront price payable’ is the amount disclosed to the small business for the supply of the product or service at or before the time the contract is entered into. It does not include any fees or charges for something that may or may not happen during the contract.
For example, for a business loan contract the upfront price includes the amount borrowed (principal), the interest rate, and any establishment fees disclosed when the contract is entered into, but not loan default fees as these fees are contingent on the borrower defaulting.
Note: Interest is disregarded when calculating the upfront price payable for the purpose of determining whether a contract does not exceed the cap for a small business contract. It should otherwise be regarded as forming part of the upfront price.
For insurance contracts, the upfront price payable is the premium. The amount of the premium is also affected by the amount of the excess or deductible payable. While the excess or deductible does not form part of the upfront price payable, a term that sets the amount of the excess or deductible is also not covered by the unfair contracts terms law if it is a transparent term that is clearly disclosed before or when the contract is entered into.
Terms that are required or expressly permitted by a law of the Commonwealth, or a state or territory
These terms cannot be considered under the unfair contract terms law.
Terms that are taken to be included in a contract by operation of a law of the Commonwealth, or a state or territory
These terms are excluded to the extent that the relevant law mandates their inclusion.
However, if the term is included in such a way that would go beyond the requirement of the law and is unfair, then the unfair contract terms protection can still be applied.
Terms that result in other contract terms being included in a contract because of the operation of another law of the Commonwealth, or a state or territory
These terms are excluded to the extent that the provisions would prevent the other terms from being included or operating as required by the law.
However, if the term is included in such a way that would go beyond the requirement of the law and is unfair, then the unfair contract terms protection can still be applied.
The following are examples of terms that cannot be considered under the unfair contract terms law.
Example 1: Upfront price payable for a loan contract
Ria runs a small business and seeks a loan of $950,000, repayable over 25 years, from a lender. The interest rate on the loan is 10% per year. There is an establishment fee of $5,000, and a late fee is payable for each late payment.
For the purpose of determining whether Ria’s loan contract meets the threshold test to be covered by the unfair contract terms law, the upfront price payable is calculated by including the amount borrowed (principal) and the establishment fee. The interest rate is disregarded. The $950,000 and the establishment fee of $5,000 together fall below the $5 million upfront price payable under the contract threshold, so the contract is covered by the unfair contract terms law.
Terms that state the upfront price payable (which includes the amount borrowed and the establishment fee of $5,000) and are disclosed when Ria takes out the contract cannot themselves be considered unfair. These terms set the upfront price payable and define the main subject matter of the contract.
Although the interest rate is to be disregarded when calculating the upfront price payable for the purpose of determining whether a contract is a small business contract (see note in Table 1), it should otherwise be considered as a part of the upfront price payable. It is therefore the main subject matter of the contract, so it also cannot be considered unfair.
However, late fees and any other contingent fees are subject to the unfair contract terms law and could breach the law if they meet the definition of ‘unfair’ (as described under ‘What makes a contract term unfair?’).
Example 2: Transparency of the excess of an insurance contract
9876 Pty Ltd is a small business and it applies for a business interruption insurance policy. The first year’s premium is $1,800 and the amount of the excess payable if 9876 Pty Ltd makes a claim is specified in the policy schedule. The amount of the excess would clearly be disclosed at the time 9876 Pty Ltd enters into the insurance contract, and therefore it cannot be considered under the unfair contract terms law.
If, however, the amount of the excess is not captured in a transparent term that discloses the amount of the excess at or before the time 9876 Pty Ltd enters into the insurance contract, that term is subject to unfair contract terms law and could breach the law if it meets the definition of ‘unfair’ (as described under ‘What makes a contract term unfair?’).
Only a court can determine whether a contract term is unfair. A term in a standard form small business contract is ‘unfair’ if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract
- is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term, or
- would cause detriment (financial or otherwise) to a small business if it were to be applied or relied on.
When a court decides whether a term is unfair, it must consider the extent to which the term is transparent. A term is ‘transparent’ if it is legible, expressed in reasonably plain language, presented clearly, and readily available to any party affected by the term.
A term may not be transparent if, for example, it is hidden in the fine print or written in legal or complex language.
Transparency is, however, just one of a number of factors a court will consider. A term that is transparent could still be unfair.
The court must assess the unfairness of a term in the context of the contract as a whole.
Whether a term is unfair can depend on its effect when read together with the other terms of the contract. This means that a term could be unfair in one contract but not unfair in another.
The court may also consider any other matters it thinks relevant, and will determine whether unfairness arises in a particular contract on a case-by-case basis.
Examples of unfair terms
The following are examples of small business contract terms that may be unfair under the unfair contract terms law.
Example 3: Excessive default fees
Jose’s small business obtains a loan of $20,000 from a lender, to be repaid with interest in monthly instalments on the last day of each month. The loan is secured by a mortgage over Jose’s home. The contract contains a term which requires Jose’s business to pay a fee of $5,000 to the lender if it defaults on the loan.
Despite always meeting his repayment obligations on time in the past, Jose’s business fails to pay the monthly instalment on June 30. Although Jose intends to make the repayment in early July, and the loan is secured by his home, the lender demands Jose’s business pay the default fee of $5,000 for failing to make a monthly repayment under the loan.
This term is likely to be unfair if it imposes a cost on Jose’s business that exceeds the amount required to protect the lender from loss.
Example 4: Obligation to pay for defective goods or services
Zahra’s small business enters into a lease for shop fittings. A term of the contract provides that the lessor is not responsible for any inherent faults with the goods and the lessee must continue to make repayments for the remainder of the lease term, regardless of whether the goods operate as intended.
This presents an imbalance in the parties’ rights because it is something over which the lessor, but not the small business, has control. The small business is likely to suffer detriment as a result.
Example 5: Right to unilaterally vary the contract
Mai’s small business enters into a loan contract. Under a term of the contract, the lender has the right to vary any term or condition of the contract in unspecified ways, if the lender gives Mai’s business five days’ notice in writing. The contract permits this even if the lender, for example, increases its fees significantly.
The term may be unfair as it gives the lender broad discretion to unilaterally vary any term or condition in unspecified ways, without giving Mai’s business a real and reasonable opportunity to exit the contract without penalty rather than accept the variation. For example, if Mai’s business needs to refinance or sell assets to exit and repay the loan, this is likely to take more than five days.
If a court finds that a term in a standard form contract is unfair, the term will be void. This means that the term is treated as if it had never existed. However, the contract will continue to bind the parties if it can operate without the unfair term.
A fine may be imposed if a financial services provider proposes, applies, relies on, or purports to apply or rely on, an unfair contract term. Each unfair term included in a standard form contract may attract a separate fine.
If a court finds that a term is unfair, it can make a range of orders, including to:
- declare all or part of a contract to be void
- vary a contract
- refuse to enforce some or all the terms of a contract
- prevent the same or a substantially similar term from being included in any future standard form small business or consumer contract
- disqualify a person from managing a corporation
- require a financial services provider to publish information specified by the court
- direct a financial services provider to refund money or return property to the small business affected, or
- direct a financial services provider to provide services to the small business affected, at the provider’s expense.
If a court has declared that the term is unfair and a financial services provider subsequently seeks to apply or rely on the unfair term, it will contravene the ASIC Act.
A court can then:
- grant an injunction
- order the financial services provider to provide redress to the small business affected, or
- make any other orders the court considers appropriate.
If a small business thinks that a term in their contract is unfair, they can challenge it.
A beneficiary under a small business insurance contract can also challenge a term in a small business contract if they think it is unfair. A beneficiary under an insurance contract is a party who is not expressly stated on the certificate of insurance to be the insurance policyholder but who stands to benefit directly from a claim under a policy. For example, if a small sporting association enters into a small business contract to insure against personal injury incidents of its members, a member of the sporting association can challenge a term in that contract if they think that the term is unfair.
Here is what a small business (or beneficiary) can do if they want to challenge a term of their contract:
- Step 1: Complain to the financial services provider
First, they can make a complaint to the financial services provider they have the contract with to try to get the result they want.
They can also seek assistance from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), which provides dispute resolution support.
Small business contracts that are covered by an industry code may have additional protections, including protections similar to those provided under the unfair contract terms law. Examples of industry codes are:
- the Code of Banking Practice administered by the Australian Banking Association
- the Customer Owned Banking Code of Practice administered by the Customer Owned Banking Association
- the General Insurance Code of Practice administered by the Insurance Council of Australia, and
- the Life Insurance Code of Practice administered by the Financial Services Council
- Step 2: Complain to the Australian Financial Complaints Authority
If the financial services provider cannot resolve the complaint, they may be able to complain to the Australian Financial Complaints Authority (AFCA). AFCA provides consumers and small businesses with a free and independent dispute resolution scheme to assist with resolving financial complaints.
- Step 3: Apply for a court to declare the term unfair
Depending on the result of the complaint to AFCA, they can apply to a court for a declaration that the term is unfair. If they are successful, the term will be void.
ASIC, as well as any party to the contract, or a beneficiary under an insurance contract, can apply to a court to have a term declared unfair. ASIC has successfully taken court action to have unfair terms removed from standard form small business contracts since this regime came into effect.
We cannot endorse contract terms or declare that they are unfair. Only a court can decide whether or not a term is unfair.
We do not generally take action for a small business unless it is in the wider public interest, and we can only take action if the matter is within our area of responsibility.
ASIC is responsible for enforcing the unfair contract terms law only for financial products and services. For other goods and services (e.g. franchising), responsibility is shared between the Australian Competition and Consumer Commission (ACCC) and the state and territory consumer protection agencies.
For more information about unfair terms in contracts for non-financial products and services, contact the ACCC.
Where to get more information
For more information on the unfair contract terms law, see these guides and releases:
- REP 565 Unfair contract terms and small business loans
- Unfair contract terms: A guide for businesses and legal practitioners – an industry report by the ACCC, ASIC and state and territory consumer protection agencies (as at October 2023, this guide did not reflect the extension of the unfair contract terms protections to insurance contracts, or the introduction of the civil penalty regime)
- 20-123MR Court declares Bendigo and Adelaide Bank contract terms unfair (29 May 2020)
- 19-239MR ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms (4 September 2019)
- 19-238MR ASIC sues Bank of Queensland for use of unfair contract terms (4 September 2019)
- 18-262MR Prospa removes unfair loan terms for small business borrowers and guarantors (7 September 2018)
- 18-073MR ASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
- 17-278MR Big four banks change loan contracts to eliminate unfair terms (24 August 2017)
- 17-139MR ASIC and ASBFEO hold banks to account on unfair contract terms (16 May 2017).
You can also call ASIC on 1300 300 630 or ask a question online.
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.
Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.
This information sheet was updated in November 2023.