Written by James Carnie and Tabitha Lau

Laws prohibiting unfair contract terms (“UCT Laws”) will come into force on March 18, 2015.

The UCT Laws, which have been added to the Fair Trading Act, provide an avenue for consumers to complain to the Commerce Commission about unfair contract terms. If the Commission agrees, it can seek a declaration from the courts deeming the term to be unfair, and therefore unenforceable.

UCT Laws apply to Standard Form Consumer Contracts

The UCT laws apply to “consumer contracts” that are “standard-form”.

Whether a contract is a “consumer contract” depends largely on the type of goods or services provided, and adopts the same criteria as the Consumer Guarantees Act (meaning that a business may also be a “consumer” if it acquires goods or services for non-commercial purposes).

A consumer contract will usually be seen as “standard form” if the terms of the contract have not been subject to effective negotiation between the parties (often where contracts are offered on a “take it or leave it” basis). Standard form contracts are commonplace in many industries, such as hire purchase, utilities, finance, real estate, motor vehicle sales, travel, and online apps and software, among others.

If the Commission alleges that a consumer contract is a “standard-form” contract, the onus falls on the business provider to prove otherwise. Evidence indicating that both parties had an effective opportunity to negotiate where neither party had most of the bargaining power or showing that the contract terms take into account specific characteristics of the consumer will assist in rebutting this presumption.

The UCT Laws apply to standard form consumer contracts that are entered into, renewed or varied after 17 March 2015.

Unfair Terms

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

• The term would cause a “significant imbalance” in the parties’ rights and obligations arising under the contract.
• The term is not “reasonably necessary” to protect the legitimate interests of the party who would be advantaged by the term.

The onus will be on businesses to prove that a favourable term is reasonably necessary to protect its legitimate interests. For example, by showing that the penalty imposed on the consumer for cancelling a contract reflects the cost of that cancellation to the business.

• The term would cause detriment (whether financial or otherwise) to a party if the term were applied, relied on or enforced.

The scope of “detriment” under this requirement is broad and is not limited to financial detriment. Any delay or distress caused by the term will also be taken into account. Further, it is enough to show that detriment would occur if the term were to be enforced. Actual detriment need not have occurred.  

In deciding whether a term is unfair, the Court can also consider any matter it thinks is relevant, but must take into account:

• The extent to which the term is transparent; and
• The contract as a whole.

The Court will look at the contract in its entirety in assessing whether a significant imbalance exists. A term that, if read in isolation, might appear highly favourable to one party could be offset by another term in the contract, reducing its potentially detrimental effect. For example, the burden of a high cancellation fee might be balanced out by the ticket’s low price.

A declaration that a term is unfair does not end the contract as a whole. The contract will continue to bind the parties in all other respects.

Some contract terms are exempt from UCT Laws

Some contract terms are not subject to the UCT Laws and cannot be declared unfair, including:

       i. Terms that define the main subject matter of the contract.

This covers the goods or services the consumer acquires under the contract. These are often subject to genuine negotiation and it is unlikely that the customer misunderstands what they are acquiring.

ii. Terms that set the upfront price payable under the contract, to the extent that the price term is transparent.

The “upfront price” includes the fee that is payable under the contract. It may also include contingencies, insofar as these contingencies are transparently set out in the contract.

     iii. Terms required or expressly permitted by any enactment.

Terms susceptible to challenge

The UCT Laws offer a non-exhaustive “Grey List” that warns of terms that could possibly be regarded as unfair. Examples include terms that allow one party (but not the other) to:

• Vary the terms of the contract;
• Avoid or limit performance of the contract;
• Terminate the contract;
• Impose penalties for breach or termination;
• Renew or not renew the contract;
• Vary the upfront price without the right of termination by the other; or
• Vary the characteristics of the goods or service to be supplied.

Consequences of contract terms breaching UCT Laws

If a court declares that a term in a standard form consumer contract is unfair, then that term may not be applied, enforced or relied on. Other contracts containing that term will also be unable to enforce that term.

If a business or person continues to apply or enforce the unfair term, consequences include:

• Fines of up to $600,000 for a company or $200,000 for an individual.
• Refund of the price or damages for the breach
• Corrective advertisements
• Management banning orders (for repeated offences)

Other Key Points

The Commerce Commission has recently confirmed that there will be no grace period to allow for compliance with the new UCT Laws, and that the Commission intends to seek early court declarations. In that light, businesses need to ensure compliance before the UCT Laws come into force on 18 March 2015. Ignoring an unfair term in a standard form consumer contract until a court declaration is made will render that term unenforceable in all other future contracts containing the same term.

We anticipate that contract terms enabling financial penalties, complete liability disclaimers and unilateral variation rights (amongst others) will be targeted by the Commerce Commission.

There are various techniques/ approaches to prepare a standard form consumer contract that will avoid or reduce the potential application of UCT Laws. If you require further information or assistance with your consumer contracts, please let us know.

For more information on matters covered in this paper, please contact:

James Carnie, Principal

DDI:    +64 9 306 8002

Email:  james.carnie@clendons.co.nz

Disclaimer

This Background Paper by its nature cannot be comprehensive and cannot be relied on by any client as advice. This Background Paper is provided to assist clients to identify legal issues on which they should seek legal advice when setting up business in New Zealand. Please consult the professional staff of Clendons for advice specific to your situation.