Unfair Contract Terms

by | Feb 23, 2015 | Business Law

The Commerce Commission has long been the watchdog for consumers purchasing goods and services in New Zealand.  Part of their role is to protect consumers from traders or sellers who engage in unfair or deceptive conduct.

Historically this has involved monitoring activity such as collusion between firms and price fixing, which leads to a hike in prices and holes in the pockets of consumers.  However, with the current consumer law reform being implemented, the Commission’s powers are about to extend much “closer to home”, giving them power to scrutinise everyday contracts for goods and services.

The Consumer Law Reform Bill passed its third reading in December 2013.  Many of the changes have already been implemented, relating to areas such as online auctions, door-to-door sales and extended warranties.

Broadly speaking, the changes strengthen the rights of the consumer- for example, traders using online portals such as TradeMe must now clearly stipulate that they are online traders and notify buyers that their transactions are covered by the Fair Trading Act and the Consumer Guarantees Act. Upcoming changes relating to unfair contract terms continue on in this vein and businesses are well advised to take heed of the changes and to revisit their contracts accordingly.

Businesses who enter into “consumer contracts” can have the terms of those contracts scrutinised by the Commission.  To be captured by the legislation, the contracts have to be for goods or services that are normally acquired for domestic or personal purposes (as opposed to commercial goods).  For example, a hire purchase agreement for bed (ordinarily for household use) will be caught by the provisions, whereas a contract for the provision of cleaning services for an office building would not.

The contracts must also be standard-form contracts- those that are automatically provided to the consumer without any negotiation over the terms.  They must have been entered into on or after 17 March 2015, however crucially, the changes also apply to existing contracts that are renewed or varied on or after that date.

The Commission has the power to strike out terms that are unfair, rendering them unenforceable.  The only exceptions are terms that are classified as exempt- that is, terms that define the main subject matter of the contract, that determine the price of the goods/services or that are permitted by other legislation. What constitutes an unfair contract term has been the subject of much discourse, however under the changes, the Commission must be satisfied that:

  • The term will create a significant imbalance between the parties- this will determine on the facts of each situation, but it would include a term that protects the interests of the business by materially disadvantaging the consumer;
  • The term is not necessary to protect the legitimate interests of the party that would be advantaged by it- the Commission can decide whether the business has a legitimate business interest that needs protecting and whether the contract term is the best way to give that protection, or whether it could be done by another means; and
  • The term would cause detriment to the disadvantaged party – this need not be financial detriment- it could include distress suffered by the other party or a delay in receiving the goods and services.

Businesses will need to be aware of what types of terms are likely to fall afoul of the Commission.  Such terms could include:

  • A term that allows one party (but not the other) to cancel or vary the contract;
  •  A term imposing a penalty on one party for breaching the contract, but not the other; and
  • An exorbitant cancellation fee that is disproportionate to the loss suffered by the business.

Businesses also need to be mindful of how certain contract terms are presented to consumers.  When deciding upon the fairness or otherwise of a contract term, the Commission is obliged to consider the transparency of the contract as part of an overall fairness test.  A term is said to be transparent if it is clearly presented and easily understood by an ordinary person.  A term is likely to be deemed as unfair if it is obscured in the fine print of a written contract or if it is phrased using overly technical language.  As an obvious example, a contract for a gym membership containing a fine print provision obliging the consumer to pay a $2000 cancellation fee would likely be deemed as unfair.  If the Commission declares a term to be unfair then the business is prohibited from continuing to use it in any future contracts.  If the business persists then the Commission can impose a large fine or issue an injunction.  Equally as detrimental to a business however, is the thought of being closely monitored by the Commission or put on any type of “blacklist” because of a contractual term that could easily have been removed.

AlexanderDorrington can help businesses comprehend the changes already made to New Zealand’s consumer law legislation, as well as those changes (such as unfair contract terms) that are still to come.  We offer a broad range of commercial services and can assist businesses in revisiting their existing consumer contracts and ensuring that they comply with the new legislation.

By Jeremy Ansell