What a badly worded contract actually costs
Contract disputes rarely turn on exotic legal principles. They turn on ambiguity: two parties with a genuine disagreement about what the words they both signed mean. The most common sources of that ambiguity are scope (what services or goods were actually covered), payment (when money is due and what triggers an obligation to pay), termination (who can end the arrangement and on what notice), liability (who bears the loss when something goes wrong), and intellectual property (who owns work created under the contract).
The cost of ambiguity is not just the legal fees to resolve it. It is the time your management spends on a dispute instead of the business. It is the damaged relationship with a supplier or client. It is the debt that remains unpaid because your payment clause did not give you the leverage you thought it did. And in the worst cases, it is personal liability that attaches to a director who signed supplier terms without reading the personal guarantee in the annexure.
Good contract drafting allocates risk deliberately. A review before signing does not guarantee you will avoid every problem, but it means the risk allocation you accept is the one you chose, not the one the other side chose for you.
Standard-form contracts and the “just sign here” problem
Many of the contracts that cross a business owner’s desk are not negotiated at all. A supplier sends their standard terms. A platform presents click-through conditions. A landlord’s agent passes over a lease with a standard cover note. The implicit message is that this is how everyone does it and there is nothing to discuss.
This is where the unfair contract terms regime in the Competition and Consumer Act 2010 (Cth) becomes relevant. Part 2-3 of Schedule 2 to that Act, the Australian Consumer Law, governs unfair terms in standard-form contracts with consumers and small businesses. Under section 23, an unfair term in a standard-form consumer or small-business contract is void, meaning it cannot be enforced against the affected party even if both sides signed. Section 24 defines an unfair term as one that would cause a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect a legitimate interest, and would cause detriment to a party if it were applied or relied on. Section 25 lists examples, including terms that permit one party to unilaterally vary the contract, avoid or limit performance, or terminate without giving the other side a corresponding right.
Since reforms that took effect on 9 November 2023, the regime goes further. It is no longer sufficient to say that a term is simply void. Proposing, applying, or relying on an unfair term is now prohibited conduct that can attract substantial civil penalties: for a corporation, the greater of $50 million, three times the benefit obtained from the conduct, or 30 per cent of adjusted annual turnover during the breach period; for an individual, up to $2.5 million per contravention. Each unfair term can be treated as a separate contravention.
The small-business threshold was also expanded by those reforms. A contract is covered as a small-business contract if at least one party employs fewer than 100 people or has an annual turnover of less than $10 million. That captures a significant proportion of the business-to-business contracts that smaller Queensland businesses enter into every day.
If you are a business that issues standard-form contracts, the regime matters because your terms need to be reviewed for compliance. If you are a business receiving standard-form contracts, it matters because a term that appears to heavily favour the other side may already be void.
“A contract review is not about finding reasons to walk away. It is about knowing what you are agreeing to and where the risk sits.” |
The clauses that cause most disputes
Across commercial disputes, the same provisions come up repeatedly as the source of the problem. Knowing what to look for is the first step in deciding whether a review is warranted.
Liability and indemnity. These clauses determine who absorbs the financial consequence when something goes wrong. A broad indemnity can require you to compensate the other party for losses well beyond anything you could have caused or controlled. An exclusion of liability can strip away your right to recover when the other side fails to perform. These provisions often carry the biggest financial exposure in the contract and are frequently drafted in language that does not translate clearly into the situations where they would actually apply.
Termination. Many contract disputes are not about the underlying work at all. They are about one party ending the arrangement in circumstances the other considers wrongful. Termination clauses define when each party can exit, on what notice, and what consequences flow from an exit. A clause that allows the other side to terminate for convenience on short notice, or that treats a minor breach as grounds for immediate termination, can expose you to significant disruption without adequate warning.
Payment and retention of title. Ambiguous payment provisions are the root cause of a large proportion of commercial disputes. When payment falls due, what triggers the right to invoice, what deductions are permitted, and whether goods you supplied remain your property until paid for in full all turn on the drafting. Retention of title provisions can protect a supplier if a customer becomes insolvent, but only if the clause is drafted and, where required, registered correctly.
Dispute resolution. A clause that requires disputes to be resolved by arbitration in another jurisdiction, or that imposes strict notice requirements before a party can bring a claim, can significantly affect your practical ability to enforce your rights. These clauses are often treated as boilerplate and overlooked until there is a dispute.
Restraint of trade. Restraint clauses appear in employment agreements, sale of business contracts, and sometimes in commercial agreements where they would not obviously be expected. A restraint must be reasonable in its geographic scope and duration to be enforceable, and what is reasonable depends on the legitimate interest being protected. Too broad and the clause may not be enforceable; too narrow and it may not protect you. These provisions benefit from review at the drafting stage, not after the relationship has ended.
Personal guarantees. A personal guarantee in a commercial contract means a director or owner agrees to be personally liable for the obligations of their company. These are common in supplier credit applications, lease agreements and finance documents, and they are sometimes embedded in standard terms rather than set out in a separate document. A director who signs without understanding that they are giving a personal guarantee may be creating significant personal exposure that sits entirely outside the corporate structure they relied on for protection.
Signs a contract needs a review before you sign
Not every contract requires professional review. A straightforward engagement letter for routine services, where both sides know each other well and the value is modest, is genuinely lower risk than a long-term supply agreement with a counterparty you have not dealt with before. The question is how to tell the difference. The following are reliable indicators that a review is worthwhile.
The contract is long-term or difficult to exit. Duration and exit rights are closely connected. The longer you are committed, and the harder it is to leave, the more important it is to understand what you are agreeing to for that period.
The contract value is material to your business. There is no precise threshold, but a contract that represents a significant proportion of your revenue or expenditure justifies more scrutiny than one that does not. The cost of a legal review scales with the size of the agreement; the cost of a dispute does not.
A personal guarantee is involved. Whenever you are asked to sign in your personal capacity as well as on behalf of your company, that warrants advice. You should understand precisely what you are guaranteeing and whether any conditions or limitations apply.
You did not draft it. A contract drafted by the other side serves the other side’s interests by default. That does not make it unfair or unenforceable, but it means the risk allocation has not been considered from your perspective. Our commercial law team works through contracts drafted by the other side regularly and can identify where the balance is off.
The counterparty is unfamiliar. Established relationships carry context. A long-standing supplier who has never caused a problem is a different risk profile from a new counterparty whose credit position you do not know and whose conduct in a dispute you cannot predict.
The contract includes unusual or non-standard provisions. Anything that looks different from what you have seen before, anything you do not fully understand, or anything the other side is reluctant to explain is a prompt to seek advice. Legitimate contract terms can always be explained. If a clause cannot be explained in plain English, that is worth exploring before you sign.
If you regularly issue contracts to customers or suppliers, a periodic review of your standard terms against the unfair contract terms regime is also worth building into your compliance routine. You can read more at our business contracts page.
What this means for you
If you are asked to sign standard-form supplier or platform terms
The unfair contract terms regime may already render certain provisions void, regardless of whether you signed them. But void is not the same as absent: you may still need to assert that a term is void, which requires you to know the term exists. A review tells you what is in the contract and which provisions may be open to challenge.
If your business issues standard-form contracts
Since November 2023, using or relying on an unfair term is prohibited conduct, not merely grounds for a void clause. Each unfair term in each contract can attract a separate civil penalty. If your standard terms have not been reviewed since the reforms commenced, that review is overdue.
If you are buying or selling a business
Business sale contracts are among the highest-risk documents a business owner will sign. They typically include warranties about the state of the business, indemnities that can survive completion for years, restraint of trade provisions, and conditions that determine whether the transaction proceeds at all. These contracts almost always warrant full legal review before signing.
If you are entering a long-term commercial relationship
A franchise agreement, a lease, a long-term supply arrangement, or a services contract that runs for multiple years locks in terms that will govern the relationship through circumstances neither party can fully anticipate. Getting the framework right at the start is substantially cheaper than renegotiating or litigating mid-term.
Commercial contracts If you have a contract you are not sure about, or you want your standard business terms reviewed against the current regime, our commercial law team can help. A review before signing is almost always less disruptive than a dispute after the fact. |
This article is general information only and not legal advice. The unfair contract terms provisions summarised here are drawn from the Competition and Consumer Act 2010 (Cth) as amended by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), which took effect on 9 November 2023. How the law applies depends on the specific contract and circumstances. Contact Fraser Lawyers for advice specific to your situation.
If you would like to discuss your matter, you can book a consultation or call (07) 5554 6116.
