Small Business Owners – Recent Decision on Guiding Principles for Unfair Contract Terms

By June 11, 2020 May 17th, 2022 Blogs, Business

June 2020

Small Business Owners – Recent Decision on Guiding Principles for Unfair Contract Terms


On 12 November 2016 small businesses were given significant rights in respect of unfair terms in contracts they have with larger corporations.  Since then the Courts have made a number of rulings that provide guidance on unfair contract terms.  A recent case provides further insight into the principles that will assist small businesses get out of unfair contracts.

key takeaways:

  • The Court reiterated that the lack of transparency in a contract term may make the term an unfair contract term, if the term is drafted in complex legal language and not in easy to understand plain English.
  • In determining whether a term is unfair or not, the Court will consider whether the term creates a significant imbalance in the parties’ rights and obligations in favour of the supplier and would cause disproportionately severe consequences to the customer if enforced.
  • Small business owners have the right to seek a declaration from the Court that any unfair contract terms are void and not enforceable, and to seek an order to replace such unfair terms with fair clauses.


Small businesses, like individual consumers, are often offered contracts on a ‘take it or leave it’ basis, with limited or no opportunity to negotiate the terms.  These are generally known as ‘standard form’ contracts.  Small businesses commonly enter into these types of contracts for financial products and services, including business loans, credit cards and overdraft arrangements.

The unfair contract laws apply to ‘standard form’ contracts for small business, which were entered into on or after 12 November 2016 and where:

  • the contract is for the supply of financial goods or services (including loan contracts);
  • at least one of the parties is a ‘small business’ employing fewer than 20 people (including regular casual workers); and
  • the upfront price payable under the contract does not exceed $300,000.00, or $1 million if the contract is for more than 12 months.

Since the amendments took effect in November 2016, the Australian Securities and Investments Commission (ASIC) has investigated and taken action against large corporations regarding unfair contract terms with small businesses.  In March 2018, ASIC released a report which:

  • identified the types of terms in small business loan contracts that raised concerns under the law;
  • provided details about the specific changes that have been made by the ‘big four’ banks to their small business loan contracts to ensure compliance with the law; and
  • provided general guidance to lenders with small borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law.

JJ Richards Case

The first case relating to unfair contract terms was Australian Competition and Consumer Commission vs JJ Richards & Sons Pty Ltd [2017] FCA 1224 (JJ Richards case).  In this case, the Australian Competition and Consumer Commission alleged that the ‘standard form’ contracts between JJ Richards & Sons Pty Ltd (JJ Richards) and its small business customers contained eight (8) unfair contract terms.  One of the unfair contract terms was the price variation clause which allowed JJ Richards to unilaterally increase the price of services for any reason.  That clause created a significant imbalance in the absence of any corresponding right of the customer to terminate the contract or obtain a change to the scope or scale of services provided under the contract in response to a price increase.  Another unfair contract term was the indemnity clause which created an unlimited indemnity in favour of JJ Richards, even when the loss incurred by JJ Richards was not the customer’s fault, and JJ Richards could have avoided or mitigated the risks.  The Court concluded that those eight terms were unfair contract terms and therefore, void.

Bendigo and Adelaide Bank Case

The latest case on unfair contract terms was Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 (Bendigo and Adelaide Bank case).  In deciding this case, the Court considered what constituted an unfair contract term.

The Court also interpreted the requirement of ‘transparency’ – whether the term was expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by that term.

ASIC alleged that several terms within six business contracts used by Bendigo and Adelaide Bank were unfair.  Specifically, the indemnification clauses, the event of default clauses, the unilateral variation or termination clauses and conclusive evidence clauses.  Some of the unfair terms gave Bendigo and Adelaide Bank broad discretion to unilaterally vary terms and conditions of the contract without giving the borrower advanced notice, or an opportunity to terminate the contract without incurring a penalty.  Other terms allowed Bendigo and Adelaide Bank to take disproportionate actions in response to a breach by the borrower.  For example, by asserting a default without giving the borrower an opportunity to remedy a breach, or by asserting a default based on events that did not present any material risk to the bank.

The Court also accepted ASIC’s submission that some of the terms were not transparent because they were drafted in technical legal language, which did not state in reasonably plain terms the scope of the borrowers’ obligations and did not contain appropriate cross-references.

The Court found that the terms were unfair because:

  • they caused a significant imbalance in the parties’ rights and obligations;
  • there were not reasonably necessary in order to protect the legitimate interests of Bendigo and Adelaide Bank; and
  • they would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon.

The Court declared that the terms were void from the outset and ordered that the contracts be varied by replacing the unfair terms with new fair clauses.

Contact Us

If you are a small business and have entered into or about to enter into a ‘standard form’ contract which you believe contains unfair terms, contact us today for legal advice on the best course of action in protecting your rights as a customer.

Craig Higginbotham and Richen Mojica
11 June 2020

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