Unfair contracts

Business

Businesses who engage with consumers will need to ensure their contracts are up to scratch ready for the "Declaration of unfair terms" within the Fair Trading Act to come into effect on 17 March 2015. This is especially relevant for those businesses who use "standard form" contracts. The changes aim to enhance consumer protection.

The last of the legislative change to be implemented under the Consumer Law Reform Bill will come into effect on 17 March 2015. This will be implemented by way of amendments to the Fair Trading Act 1986 (FTA) by the insertion of a new heading titled “Declaration of unfair contact terms” and new sections 46H to 46M in the FTA.

The introduction of the new unfair contract terms provisions will affect businesses that deal with consumers generally on the basis of a “standard form” contract or “standard” terms of trade. Businesses that commonly use standard form contracts include gyms, telecommunication/power supply companies, pay television operators, motor vehicle sales, travel agent, retirement villages and so on.

The Commerce Commission has published guidelines which provide general information relating to the unfair contract terms provision and guidance on the Commerce Commission approaches in regards to assessing whether a term is unfair.

Under the new unfair contract terms provisions the Commerce Commission can apply to the court for a declaration that a term in a standard form consumer contract is unfair (section 46H FTA).

If the court decides that a term in a standard form consumer contract is an unfair contract term then the business will be prohibited from including the term in their standard form contract or from applying, enforcing or relying on such a term.

If a business then continues to use or enforce the unfair term it may be convicted and be fined up to $600,000 per breach (in the case of a company) or $200,000 per breach (in the case of an individual). The convicted party can also be ordered to refund money or pay damages.

Contracts entered into by consumers prior to 17 March 2015 will not be affected but those entered into after this date will be.

What are unfair contract terms?

An “unfair contract term” is defined in the FTA as a term in the consumer contract that a court has declared, under section 46I (of the FTA), is an unfair contract term.

Four grounds must be satisfied in order for the court to issue a declaration that a term is unfair, including:

  • The term is in a contract that is a consumer contract;

  • The consumer contract is a standard form contract;

  • The declaration (of the unfair term) is not prohibited by the fact that the term defines the main subject matter of the contract, sets the upfront price payable under the contract, or is a term required or expressly permitted by law, (e.g.) permitted under another legislation; and

  • The term is unfair.

What is a consumer contract?

The unfair contract terms provisions do not affect all contracts, only those standard contracts where one party is a consumer.

Consumer” is defined in section 2 of the FTA as someone acquiring goods/services of a kind ordinarily acquired for personal, domestic, or household use or consumption; and not acquiring goods/services for the purpose of resupply in trade, consumption in the course of production or manufacture, or (in the case of goods) repairing or treating in trade other goods or fixtures on land.

Is it a “standard form” contract?

A court may determine that a contract is “standard form” where there has not been effective negotiation of terms between the parties.

In determining whether a contract is a standard form contract, the courts must (without limitation) take into account the following factors:

  • The bargaining power of one party, (e.g.) whether one of the parties has all or most of the bargaining power;

  • Whether the contract was “pre-prepared” by one or more parties before any discussions relating to the transaction occurred with the other party/parties;

  • Whether one or more parties was in effect required to “take it or leave it”;

  • The extent to which the parties had an effective opportunity to negotiate the terms; and

  • The characteristics of parties to the contract.

The presumption in court proceedings is that a contract is presumed to be a standard form contract unless any other party to the proceedings proves otherwise.

Section 46M of the FTA lists several examples of the kind of terms that may be deemed unfair contract terms by a court in a consumer contract – these include:

  • A term that permits, or has the effect of permitting one party (but not another party) to avoid or limit performance of the contract;

  • A term that permits, or has the effect of permitting one party (but not another party) to terminate the contract;

  • A term that permits, or has the effect of permitting one party (but not another party) to vary/ renew the terms of the contract;

  • A term that penalises, or has the effect of penalising one party (but not another party) for a breach or termination of the contract;

  • A term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied under the contract;

  • A term that permits, or has the effect of permitting, one party unilaterally to determine whether a contract has been breached or to interpret its meaning;

  • A term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; and

  • A term that limits, or has the effect of limiting, one party’s right to sue another party.

It should be remembered that these examples are provided as guidance only and should not be considered as unfair in all circumstances, likewise, the list is not exhaustive and a term not listed within S46M may still be considered unfair depending on the circumstance.

Exempt terms – some contract terms cannot be declared unfair

Notwithstanding the above, some terms cannot be declared unfair. Section 46K of the FTA sets out these “exempt” terms which include:

  • A term that defines the ‘main subject matter’ of the contract; or

  • A term that sets the upfront price payable under the contract; or

  • A term that is required or expressly permitted by any enactment.

Terms that define the subject matter of the contract or set the upfront price payable are generally terms which are “obvious”. This means consumers are most likely to pay attention to these terms and negotiate them, hence it is less likely for such terms to be confusing to the consumers.

Terms that are covered by other legislation include for example a term in a loan agreement which allow lenders to charge a fee for early repayment which is permitted under the Credit Contracts Act.

Is the term unfair?

Under s46L, the court must be satisfied that all three of the following requirements are met to declare a term to be unfair, the three elements of the test are:

  • The term would cause a significant imbalance in the rights and obligations of the parties arising under the contract;

  • The term is not reasonably necessary to protect the legitimate interests of the party; and

  • The term would cause detriment (whether financial or otherwise) if applied or relied upon.

In deciding whether the three elements to the test are satisfied, the court can consider any matter that it considers relevant, but it must take into account the transparency of the term within the contract, and the contract as a whole.

A new definition of “transparent” is now included in the FTA. Under section 2 of the FTA, a term is “transparent” if it is:

  • Expressed in reasonably plain language; and

  • Legible; and

  • Presented clearly; and

  • Readily available to any party affected by the term.

In addition to transparency, the second mandatory requirement is for the court to take into account the “contract as a whole”. This means that when determining whether a clause is unfair, it cannot be considered in isolation. The court must look at the whole contract to see how the terms interrelate and the overall effect of the particular term.

Some terms that currently exist in certain standard consumer contracts which are clearly “one-sided” are obviously unfair and should be reviewed and updated accordingly, other terms may require further discussions and evaluations depending on the circumstance.

What should you do?

If your business uses standard term contracts and trades generally with consumers then this is an opportune time to review your standard term contracts to ensure they comply with the new legislation. Please contact our Business Team if you would like any further advice.

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