Unenforceable contract terms can expose businesses to legal risk, costly disputes, and reputational damage. Whether you’re drafting a supply agreement, reviewing standard-form service contracts, or negotiating a business sale, it’s essential to identify and avoid clauses that could be invalid under Australian law.
This guide, prepared by our contract lawyers, outlines key legal risks, relevant legislation, and practical drafting strategies to help you maintain legally enforceable contracts.
Key Takeaways
- Unfair terms in standard-form consumer or small-business contracts are void under s 23 of the Australian Consumer Law (ACL)
- Penalty clauses, excessive restraints of trade, and contracts contrary to public policy are unenforceable at common law
Clauses that exclude non-excludable consumer guarantees are invalid and may lead to penalties
Incorrect execution of deeds can invalidate them entirely
- Courts assess reasonableness, proportionality, and legitimate business interests when determining enforceability
Statutory Framework
Australian Consumer Law (ACL)
Under section 23 of the ACL (in Schedule 2, Competition and Consumer Act 2010 (Cth)), a term in a standard-form contract is “unfair” and deemed unenforceable if it:
Creates a significant imbalance in rights and obligations;
Is not reasonably necessary to protect the advantaged party’s legitimate interests;
Would cause detriment if enforced.
Drafting Tip: Where applicable, clearly state the agreement was negotiated and explain any non-mutual provisions.
Further, sections 64–64A of the ACL prohibit contracting out of consumer guarantees for goods or services ordinarily acquired for personal, domestic, or household use.
A typical “no refunds” clause will be ineffective and may expose the business to pecuniary penalties.
Contract Review Act 1980 (NSW)
Under section 7 of the Contract Review Act, NSW courts may refuse to enforce or vary a contract that is unjust in the circumstances existing when it was made. While the Act applies only in New South Wales, its principles often influence equitable relief Australia-wide.
National Credit Code (NCC)
Under Part 4 Div 4 of the NCC, courts can reopen unjust consumer credit contracts. Businesses offering credit must take care to avoid unfairness.
Common Law Grounds of Unenforceability
1. Illegality and Public Policy
Contracts to commit an illegal act or evade legal obligations are void (see Yango Pastoral v First Chicago Australia Ltd (1978) 139 CLR 410).
2. Uncertainty and Incompleteness
A promise to use “commercially reasonable efforts” may fail for vagueness unless objective criteria or industry standards are included (see Scammell v Ouston [1941] AC 251).
3. Penalty Clauses
A clause is void if it imposes a penalty out of proportion to a legitimate interest (Andrews v ANZ, Paciocco v ANZ).
Tip: Draft liquidated damages based on a genuine pre-estimate of loss.
4. Restraint of Trade
A restraint clause is likely to be unenforceable unless reasonable in scope, time, and geography and protects a valid interest (e.g., goodwill or IP) (see Nordenfelt v Maxim Nordenfelt [1894] AC 535).
To assess reasonableness, courts typically consider the restraints:
- Nature of protectable interest (confidential information, goodwill)
- Geographic scope
- Duration
- Proportionality to the interest protected
Execution of Deeds
To be legally valid, a deed must typically be:
Titled as a deed (e.g., “Executed as a Deed”);
Signed on paper or via an approved electronic platform under s 127(1) of the Corporations Act 2001 (Cth);
Witnessed when required (e.g., QLD, VIC for individuals).
Failure to meet these standards renders the deed ineffective. Learn more about Deeds of Release in our article.
Drafting Strategies to Avoid Unenforceable Clauses
To keep your contracts strong and legally enforceable, follow these practical drafting tips:
Check the law before you draft: Review each key clause against relevant legislation like the Australian Consumer Law (ACL), National Credit Code (NCC), and the Corporations Act.
Explain any one-sided terms: If a clause gives more power to one party (like the right to terminate or indemnify), make sure there’s a clear and fair commercial reason behind it.
Be clear and specific: Avoid vague language like “reasonable efforts.” Use defined terms or clear, measurable standards to reduce ambiguity.
Narrow restraint clauses: Limit any non-compete or restraint clauses by time, location, and purpose – and only if there’s a legitimate business interest to protect.
Add a severance clause: This allows the rest of the contract to remain valid if one part is found unenforceable.
Follow proper deed execution rules: Make sure deeds are signed and witnessed correctly under the Corporations Act or your state’s laws, especially for electronic signing.
Recent Case Law
ACCC v JJ Richards & Sons Pty Ltd
The Federal Court voided several terms in waste-management contracts, including:
Automatic renewal without notice;
Unilateral price changes;
Indemnities unrelated to fault.
Lesson: Courts scrutinise unfair power imbalances even in B2B deals.
Frequently Asked Questions
What is the difference between an unfair term and an illegal term?
An unfair contract term is void under the ACL but the rest of the contract remains. An illegal term (e.g., one that seeks to launder money) renders the entire contract unenforceable.
Do unfair contract term laws apply to business-to-business contracts?
Yes, where at least one party employs fewer than 100 staff or has an annual turnover under AUD 10 million and the contract is standard-form.
How do I know if a liquidated damages clause is a penalty?
Compare the amount payable on breach with a reasonable pre-estimate of likely loss at the time of contract formation. Excessive multiples or sums unrelated to loss are red flags. Learn more about the when liquidated damages are unenforceable and the penalty doctrine in our article.
Can a broad indemnity clause be unfair?
Yes, if it requires one party to indemnify the other regardless of fault or creates a significant imbalance without legitimate justification.
Are click-wrap online terms treated the same way under the ACL?
Generally yes. If the contract is standard-form and offered on a take-it-or-leave-it basis, unfair terms legislation applies.
