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Unfair Contract Terms

March 2015

In our Winter 2014 Business Law Update we summarised the main changes to the consumer protection laws that are likely to affect businesses with effect from 17 March 2015.

Of the various aspects of the new regime, one area that is likely to have a particularly significant impact for business relates to unfair contract terms in standard form consumer contracts. From 17 March 2015, the Commerce Commission will be able to apply to the Court for a declaration that a provision in a “standard form consumer contract” is unfair. In the event that the application is upheld, the term cannot be relied upon or enforced.

What is a Standard Form Consumer Contract?

There are two elements to this issue. Firstly, the contract must be a “consumer contract”, which is a contract between a trader or supplier and a consumer (as opposed to business to business contracts). A consumer is anyone who purchases good or services of a kind ordinarily acquired for personal, domestic or household use or consumption and does not purchase the good or services for the purpose of reselling them or use them in the course of production or manufacture or to repair other goods for sale. In other words, a business may fall within a definition of a consumer, depending on the type of the goods or services and the use to which they are to be put.

The second element is whether or not the contract is a “standard form”. The legislation does not provide a precise definition of a standard form consumer contract and merely stipulates that it must be a contract in which the terms (other than exempt terms) “have not been subject to effective negotiation between the parties”.

The Court will determine whether or not a consumer contract is a standard from consumer contract based on the particular circumstances of the case but must take into account at least the following factors:

  • Whether one of the parties had all or most of the bargaining power;
  • Whether the contract was prepared by one party prior to any discussion about the transaction;
  • Whether a party was in effect required to accept or reject the terms of the contract and the form in which they were presented (ie: whether it was put on a “take it or leave it” basis);
  • The extent to which the parties had an opportunity to negotiate the terms of the contract;
  • The extent to which the terms of the contract take into account the specific characteristics of any party to it.

It is important to note that where there is an allegation that a contract is a standard form consumer contract, there is a presumption that this is the case unless the other party proves otherwise.

Standard form contracts that are commonly used in many industries are likely to be subject to the new regime including, for example, telecommunications contracts, gym memberships, pay television, hire purchase contracts, contracts for the supply of gas, water and electricity, motor vehicle sales, and real estate agency listing agreements.

What Terms May be Regarded as Unfair?

Once the Court is satisfied that the contract is a standard form consumer contract, the next stage of the enquiry is to establish whether or not a contract term is unfair. Unfairness involves three requirements being met:

  • The term would cause significant imbalance in the parties’ rights and obligations under the contract;
  • The term is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term; and
  • The term would cause detriment if it were to be enforced.

In determining the above criteria, the Court can consider any matter it considers relevant but must take into account the extent to which the term is transparent and also the provisions of the agreement as a whole.

The first requirement for there to be a significant imbalance is likely to be met in situations where:

  • The term gives rights to the business that it would not usually be able to obtain if the parties had equal bargaining power; or
  • The term protects the business in a way that significantly disadvantages the consumer; or
  • Imposes a burden of risk from consumers that the business was in a better position to manage.

In order to satisfy the second requirement, (that the term was not reasonably necessary to protect the legitimate business interests of the supplier) the supplier (who bears the burden of proof) will have to show that there is some legitimate interest that needs protection and that those interests cannot otherwise be reasonably protected by other means.

In relation to the third requirement (that the term would cause detriment to the other party if it were to be enforced) it should be noted that detriment is not limited to financial detriment. Other forms of detriment, such as delay in receiving goods or services, may be sufficient.

As mentioned above, in determining whether the above requirements are met, the Court must have regard to the extent to which the term is transparent and to the contract as a whole. Terms that are obscure, buried in the fine print or scheduled or found on a different web page or a different part of a document from other similar terms or worded in particularly complex or technical language may fail to meet the requirement of transparency.

The Court must also consider the contract as a whole. This means that the Court cannot consider a term in isolation but needs to look at the whole contract to see how the various terms inter-relate and the overall effect of the provision.

Examples of the types of clauses that are likely to be regarded as unfair are provisions that are likely to have the effect of permitting one party without the consent of the other party to:

  • Vary the terms of the contract;
  • Avoid or limit performance of the contract;
  • Terminate the contract;
  • Penalise another party for breaching or ending the contract;
  • Decide to renew or not to renew the contract;
  • Vary the up front price payable without the other party having a corresponding right to cancel;
  • Vary the characteristics of the goods or services to be supplied under the contract;
  • Determine for itself whether a contract has been breached or otherwise interpret its meaning.

What Terms are Exempt?

There are some terms in standard form consumer contracts that cannot be declared unfair, no matter what the term provides. Exempt terms include:

  • Terms that define the subject matter of the contract;
  • Terms that set the up front price payable (provided it is transparent);
  • Terms required or expressly permitted by any enactment.

The rationale for this is that essentially the main subject matter of a contract is that the goods or services that are being acquired under the contract. Terms that define the main subject matter of the contract are generally subject to genuine negotiations or the customer is provided with a clear choice as to what they are acquiring. As such, it is unlikely that the customer will misunderstand the goods or services that they are acquiring. However, the provisions of the Fair Trading Act relating to misleading or deceptive contracts may be applicable in the event that the consumer has been misled.

In terms of the up front price, this is essentially the “purchase price”. Provided the up front price is transparent, it cannot be regarded as unfair. The up front price will include all amounts the consumer needs to pay, including all future payments and interest under a credit arrangement. However, the up front price will not include any penalty provisions. Again, the rationale for this is that the up front price is likely to have been the subject of genuine negotiation or otherwise unlikely to be something about which the consumer suffers any misunderstanding. To illustrate the difference, a term that imposes a $500.00 penalty on a consumer who terminates a gym membership early could potentially be declared unfair, whereas a term under which they agreed to pay a weekly membership fee for 12 months to attend the gym could not (the latter being the up front price).

Enforcement

It should be noted that only the Commerce Commission can issue proceedings to have a term declared in a standard form consumer contract declared unfair. Consumers themselves have no direct right of recourse to the Courts under these provisions but can complain to the Commerce Commission.

Conclusions

We suggest that any business that has standard terms and conditions printed on the back of invoices, on account application forms or published on websites and the like are potentially subject to the new regime and needs to ensure that their terms and conditions are compliant. Therefore, businesses who are in any doubt should seek our advice for any transactions they enter into after 17 March 2015 (or any contracts that are varied after that date).