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18 March 2015

Unfair Contract Terms

New laws are now in force restricting the use of unfair terms in standard form consumer contracts. Suppliers of goods or services may need to update their standard terms and conditions. In some cases, there are serious penalties if an unfair term is used.

Key points:

Suppliers can no longer hide behind their standard form contracts when a dispute arises with a consumer. New law dealing with unfair contract terms in standard form consumer contracts ("UCT legislation") commenced on 17 March 2015. The main points with the UCT Legislation are:

  1. There are serious consequences for including an unfair term in a standard form consumer contract, including a fine of up to $200,000 for individuals and up to $600,000 for companies. 
  2. Business-to-consumer sales of personal or domestic goods or services will be affected where the business uses a standard form contract that allows no effective opportunity to negotiate the terms. Business-to-business will not come under the UCT Legislation except where the sale involves personal or domestic goods or services.
  3. For a term to be unfair, it must create a significant imbalance between the parties, cause detriment to one party and must not be reasonably necessary to protect the legitimate interests of the supplier. The term must be clear, concise and easily understood. A term hidden in fine print or in a schedule may be vulnerable.
  4.  Suppliers will need to update their contracts and consider removing any terms that might give them an unfair disadvantage over consumers.
  5. If a term is challenged, the supplier will have the onus of proving that the term is not unfair.

Highlighted Industries:

The Commerce Commission has highlighted industries that use standard form consumer contracts, and which may therefore be at risk. These include telecommunications, utilities, gyms, motor vehicle sales, travel, real estate and residential tenancies, day care centres, self-storage facilities, events and entertainment, car parking and retirement villages.

Timing:

The UCT legislation will apply to standard form consumer contracts issued after 17 March 2015. It will also apply to contracts issued prior to that date and which are renewed or varied after that date.

Who will be affected?

Suppliers using standard form consumer contracts must comply with the UCT Legislation. Parties will not be able to contract out of the UCT Legislation.

What is a "consumer contract"?

This is a contract where a supplier or trader sells goods or services of a kind ordinarily acquired for personal, household or domestic use, and where the consumer does not intend resupplying or manufacturing the purchased item. It follows that a company who supplies televisions to a business for its conference rooms will come within the UCT Legislation (because televisions are of a kind ordinarily acquired for personal, household or domestic use).

This may also be true of a company that sells laptops or mobile phones to a business. It won’t however apply where a dealer sells a second hand motorcycle to a business that intends to upgrade and refurbish the motorcycle for sale. Nor where a company sells food to a supermarket chain.

What is a "standard form consumer contract"?

This is a consumer contract in the supplier’s standard form that has not been subject to effective negotiation between the parties. The court will determine this on a case-by-case basis and will take into account the following factors:

  1. Whether one party has all or most of the bargaining power;
  2. Whether the contract was prepared before any discussion between the parties occurred;
  3. Whether one party was required to accept or reject the terms in the form presented;
  4. Whether there was an effective opportunity to negotiate;
  5. The extent to which the terms take into account the specific characteristics of a party.

Consumer contracts presented on a "take it or leave it" basis without effective negotiation will be standard form consumer contracts subject to the UCT Legislation. We expect a court will require strong evidence before it declares that a particular consumer was given an effective opportunity to negotiate. Consider a car hire company that takes bookings online and requires customers to "accept" its terms and conditions just prior to the transaction being confirmed. Customers are given an opportunity to read the terms. If the contract contains a term that might be unfair, or a term that was not easily understood, then we expect a court to lean towards finding a reason for declaring they are dealing with a standard form consumer contract. The point to take away is that the safest course is to review and update standard form consumer contracts to comply with the UCT Legislation. This would present a marketing opportunity and should reduce the number of disputes with customers.

Exempt Terms:

Terms that define the main subject matter of the contract or set the up-front price will be exempt and are unable to be declared as unfair. An example would be a two year mobile phone contract. The customer could not claim that the length of the two year term is unfair as that is the main subject matter of the contract. Nor could a customer complain that a term is unfair just because the price is too high. It is important to note that the up-front price must nonetheless be transparent such that it is easy to ascertain and understand, otherwise it will be open to challenge.

What is "unfair"?

A term can be declared unfair if the court is satisfied that all of the following three requirements are met:

  1. The term would cause a significant imbalance in the parties’ rights and obligations under the contract; and
  2. The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged; and
  3. The term would cause detriment (whether financial or otherwise) to a party if it were applied.

In assessing there three elements, a court must take into account the extent to which the contract is transparent, and the contract as a whole.

Significant imbalance:

There are a number of examples of what might cause a significant imbalance given in the UCT Legislation (section 46M – see Fair Trading Amendment Act 2013), and in the Commerce Commission’s Unfair Contract Terms Guidelines (page 12). There will be many terms that are on the borderline, and it will not be an easy exercise assessing them (better the lawyers are called in). The prudent course is for a supplier to review each term of its standard contract from the customer’s perspective and identify any that may cause an imbalance (not necessarily a significant imbalance) in the supplier’s favour. These should be closely scrutinised by reference to the examples referred to above and case law. Also, the contract as a whole should be considered as other terms could remove the imbalance.

Look out for terms that allow one party (generally the supplier) to do something but not the other (generally the consumer), like a right to terminate for breach or to vary the terms without the customer’s approval.

Reasonably necessary to protect legitimate interests:

The Commerce Commission says that any party claiming reasonable necessity faces a high threshold and will need to show that the interest being protected by the term cannot reasonably be protected by fairer means. An example might be a supplier that requires a non-refundable deposit. Keeping the deposit if a customer cancels may be reasonably necessary to cover the suppliers costs relating to the sale.

Detriment:

Detriment to the consumer should be relatively easy to prove. It is not limited to financial detriment and may include delay or distress caused by a particular term. Actual detriment is not required; the question is whether the term "would" cause detriment.

Transparency:

When considering if a term is unfair, the court must also assess whether the term is transparent to the consumer. The court will look at whether the term is in reasonably plain language, clearly presented and readily available. Legal jargon that can only be understood by lawyers will be vulnerable. As will terms hidden in fine print or in schedules that disadvantage the consumer. Terms that customers have previously complained about must be closely considered. If they remain necessary, it is important they are clearly brought to the consumer’s attention in some way.

Examples of Unfair Terms:

The UCT Legislation includes a list of examples of terms that may be unfair. These are intended for guidance only. The Commerce Commission says it will pay particular attention to standard form consumer contracts that contain any of those examples. They are set out below:

  1. A term that permits one party (but not another party) to avoid or limit performance of the contract;
  2. A term that permits one party (but not another party) to terminate the contract;
  3. A term that penalises one party (but not another party) for a breach or termination of the contract;
  4. A term that permits one party (but not another party) to vary the terms of the contract;
  5. A term that permits one party (but not another party) to renew or not renew the contract;
  6. A term that permits one party to vary the upfront price payable under the contract without the right of another party to terminate;
  7. A term that permits one party unilaterally to vary the characteristics of the goods or services to be supplied;
  8. A term that permits one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  9. A term that limits one party’s liability for its agents (such as a supplier that tries to exclude liability for representations made by sales people);
  10. A term that permits the supplier to transfer its obligations in the contract to another party without the consumer’s consent;
  11. A term that limits one party’s rights to sue another party.

Of course contracts containing any of these examples should be closely considered and either the clauses removed or other clauses inserted so the unfairness is removed.

Who can enforce the Unfair Contract Terms?

Only the Commerce Commission can enforce the UCT Legislation. It will do so on its own initiative or at the request of a party to a consumer contract. It can apply to court for a declaration that a term is unfair.

Final Tips

It will no longer be safe to rely on provisions in standard form contracts that, up until now, have successfully passed risk and cost onto consumers. It is now imperative that suppliers ask their solicitor to review their standard form consumer contracts and the process leading up to the point of sale to reduce the risk of a term being challenged. The review should be conducted from the customer’s perspective on a "no surprises" basis.