What are unfair contract terms?

The law targets standard form contracts: documents offered on a take-it-or-leave-it basis with little or no negotiation, such as memberships, service terms, loan paperwork, small business supply agreements and digital platform terms. A court asks three questions. Does the term create a significant imbalance in the parties' rights and obligations? Is it reasonably necessary to protect the legitimate interests of the party relying on it, or could a narrower clause do the same job? Would it cause detriment, financial or otherwise, if applied?

Courts also look at whether the contract was genuinely negotiable, whether the term is written in plain language or buried in legalese, whether it is actually applied in practice, and how transparent the key obligations are, particularly fees, penalties and automatic renewals. Being a standard form contract makes a term subject to the test; it is not a defence.

Unilateral variation: 'we may change the fees or terms at any time without notice' gives one party open-ended power over the other's obligations. One-sided termination: 'we can end your contract immediately for any reason; you cannot' creates a serious imbalance in exit rights. Excessive penalties: an early exit fee equal to the whole remaining contract value is punitive rather than compensatory. Overbroad exclusions that remove liability even for negligence leave the other side without a remedy, and automatic renewals with a short, concealed opt-out window cause detriment.

The fix is usually narrower drafting. 'We may vary prices at any time' becomes 'we may vary prices with 30 days' notice, only to reflect changed supplier costs or regulatory requirements'. For lenders, that means limiting unilateral variation, setting notice periods and objective triggers, making termination rights mutual and keeping default fees in line with actual loss.

If a court finds a term unfair, it is void and treated as if it never existed; the rest of the contract stays on foot unless it cannot operate without it. Since 9 November 2023, proposing, applying or relying on an unfair term has also been unlawful in itself, and each unfair term is a separate contravention carrying civil penalties. Regulators and courts can seek declarations, injunctions, compensation orders and enforceable undertakings. For credit and other financial contracts, ASIC enforces the mirror provisions in the ASIC Act.

If you think a term is unfair, save the contract, highlight the clause and gather the emails and billing records showing how it was applied. Raise it with the business in writing first, asking them to amend or justify the clause. On a finance or credit contract, use the lender's internal complaints process and then AFCA; otherwise complain to the ACCC or ASIC depending on the sector, or use a small claims tribunal for low-value disputes.