Contract terms unfair?

by | Sep 29, 2015 | General property Law, Sale and Purchase

Standard form contracts used in residential property development breach the Fair Trading Act 1986 if they are a consumer contract that contains “unfair terms”.  This was part of the changes to consumer law that applies to contracts from 17 March 2015.

This might be relevant to:

  • Residential building contracts
  • Agreements for sale of a property (including sales off plans)
  • Consultant’s terms of engagement
  • Real estate agency contracts

Business to business contracts are excluded.  This applies only to business to consumer contracts.

The contract needs to be “standard form” for the prohibition on unfair terms to apply.  If the terms of the contract are not subject to effective negotiation or the contract is offered on a “take it or leave it” basis then it will probably be a standard form contract.  So refusals to amend standard terms might bring your contract within this regime?

An unfair term is:

  • A term that would cause a significant imbalance in the parties rights and obligations; and
  • A term that is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it; and
  • A term that would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.

A Court will need to look at these issues and the whole contract to see how the terms interrelate and what is the overall effect.  Terms that might appear unfair at first blush may not be unfair in the context of the whole contract and vice versa.

Examples of terms that might be unfair include:

  • Unequal cancellation rights e.g. a sunset date that allows only the vendor a right to cancel.
  • Terms that excuse proper performance of the contract e.g. a clause limiting a consultant’s liability to a maximum of $500,000.
  • Rights to vary the characteristics of the goods and services to be supplied or the interest in land to be sold e.g. powers given to the developer to significantly change the development and/or the property being sold.
  • Suspending rights under a guarantee or warranty if full payment has not been received.

The Commerce Commission is the watchdog and policeman.  It can apply to the Court for a declaration that a contract term is unfair. Contracting parties cannot bring claims directly. However they can complain to the Commission.

If a term is found to be unfair then it cannot be used in new contracts.  It can no longer be relied on and enforced in existing contracts.  If the business tries to use or enforce the term it can face conviction and a fine of up to $200,000.00 (individuals) or $600,000.00 (companies and other bodies corporate). An injunction and/or orders directing a party to refund money or pay damages are also possible.

In its “Consumer Issues Report” published 24 September 2015 the Commission noted that current areas of concern include:

  • Unfair contract terms and conditions that expose consumers to financial detriment; and
  • Impediments in activating consumer warranties e.g. master build warranties, leaving consumers unprotected

By Denise Marsden

By <a href="" target="_self">Denise Marsden</a>

By Denise Marsden