25 August 2014

Unfair contract terms – reviewed your standard forms yet?

The Commerce Commission released draft guidelines of its proposed approach to new provisions on unfair contract terms.
New Zealand Consumer Protection
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The Commerce Commission has released draft guidelines setting out its proposed approach to new provisions on unfair contract terms under the Fair Trading Amendment Act 2013.

Terms common to standard form contracts across a range of industries may be deemed "unfair" under the new regime, which will come into effect on 17 March 2015, so it is important that you review your contracts to ensure any potentially unfair terms are justifiable.

Submissions on the guidelines close on 30 September.

What is an unfair contract term?

Only the Commission can seek a declaration that a term in a standard form consumer contract is unfair. The Court must be satisfied that the term:

  • would cause a significant imbalance
  • is not reasonably necessary to protect legitimate interests, and
  • would cause detriment if applied.

The Court must take account of the contract as a whole (e.g. a potentially unfair term may be counterbalanced by additional benefits such as a lower price) and the extent to which the term is transparent to the "average reasonable consumer". The Commission considers that a person claiming reasonable necessity has to satisfy a high threshold, including having to show the legitimate interest cannot reasonably be protected by another fairer means.

Unfortunately the guidelines remark only that transparency is a mandatory consideration, without attempting to resolve how it should interface with the three hallmarks of unfairness. What if an unnecessary but very clear term causes imbalance and detriment?

A term declared "unfair", cannot be applied, enforced or relied upon.

Early targets?

The guidelines identify 13 industries in which standard form contracts are common (perhaps indicating the Commission's early hit list): telecommunications, finance, utilities, gyms, residential construction, motor vehicle sales, travel, online apps and software, pay TV, hire purchase, retirement villages and residential tenancy and real estate.

The insurance industry is an exception. No insurance contracts entered into before 17 March 2015 are covered by the unfair contract terms provisions, even if renewed or varied after that date.

The grey list

The Commission singles out for particular attention the "grey list" in the Act of terms which "may" be considered unfair. The grey list includes provisions that permit one party but not the other to:

  • terminate, vary or renew
  • penalise another for breach or termination, or
  • avoid or limit liability or enforcement rights.

One or more of these terms will be included in most standard form consumer contracts. The Commission will presume them to be unfair unless counterbalanced by a compensating benefit (such as a lower price), an ability to terminate, adequate notice, or a reciprocal right. The Commission's approach is consistent with the Australian experience where these grey list terms have accounted for nearly 60% of complaints under their comparable legislation.

Exempt terms

A term cannot be declared unfair if it:

  • is expressly permitted by legislation
  • defines the main subject matter of the contract, or
  • sets the up-front price payable under the contract.

When does the price become a penalty?

Price is defined to include contingent consideration, but the Commission argues that an (exempt) payment requirement may become an unfair penalty if the amount is disproportionate to any cost or loss or there is no exchange of value. While penalties for breach or termination are on the grey list, it is questionable whether the Commission can properly review the fairness of payment obligations in other contexts.

Businesses should ensure all price terms are clear and expressed in plain language, and be prepared to justify the amount and triggers for payment.

Extension to small businesses?

As we prepare for the introduction of the new regime, the Australian Treasury has just completed a consultation process on behalf of Consumer Affairs Australia and New Zealand regarding the proposed extension of unfair contract terms protection to small businesses as well as consumers.

We do not consider this is necessary or desirable at this stage. Time should be allowed for the new framework to bed in before we consider broadening its coverage. And in New Zealand, unlike Australia, businesses which purchase goods of a kind ordinarily acquired for personal, domestic or household use (and not for resale or use in production) are "consumers" and are already subject to the unfair contract terms protections.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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