As you may be aware, on 17 March 2015, changes to the Fair Trading Act (introducing unfair contract term provisions) come into force.

These changes mean that, from 17 March 2015, a person must not, in trade, include an unfair contract term in a standard form consumer contract or apply, enforce or rely on an unfair contract term in a standard form consumer contract (UCT Provisions).

The UCT Provisions will apply to all "standard form consumer contracts" entered into on or after 17 March and also to those contracts (except insurance contracts) that are renewed or varied after that date. No insurance contracts entered into before 17 March will be covered by the UCT Provisions even if they are renewed or varied after that date.

If you have not already reviewed your standard (consumer facing) terms and conditions in light of the UCT Provisions, then we suggest that you do this soon. The changes will come into force in a few weeks and it is our expectation that the Commerce Commission will be proactive in terms of its enforcement of the provisions.

We set out below a brief summary of the new UCT Provisions, their application and the consequences for you of non-compliance.

Definition of "standard form consumer contract"

A "standard form consumer contract" is a contract that:

  1. is in a standard form: meaning that the terms of it have not been subject to effective negotiation between the parties (essentially, the contract is offered on a take it or leave it basis); and
  2. is a consumer contract: meaning the goods or services being supplied are of a household, domestic or personal kind. This means that the UCT Provisions will apply not only to standard form contracts between suppliers and personal consumers, but also business to business contracts where the goods or services are ordinarily acquired for household or domestic use and will not be used by the business customer in production or for resupply in trade.

Some common forms of standard form consumer contracts will be contracts governing the supply of travel and tourism (including airfare, rental cars and tours), car parking, telecommunications, professional services, finance, electricity, residential construction, travel, childcare services, daily deals or coupon specials, pay TV, retirement villages, rental appliances, self-storage facilities, real estate and hire purchase agreements. Also terms and conditions for the purchase of online apps and software will be caught.

It should be noted that, if the Commerce Commission alleges the contract is a 'standard form contract', the court will presume it is, unless the supplier can prove otherwise.

What is an "unfair contract term"

The court will declare a term to be unfair if it meets all three of the following requirements:

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

In determining whether these three limbs are met, a court may take into account any matters it thinks relevant, but must take into account the extent to which the term is transparent (i.e. whether the term is expressed in reasonably plain language, legible, presented clearly and readily available) and the contract as a whole.

Exempt terms

A court will not be able to declare certain terms to be unfair. These are terms that:

  1. define the main subject matter of the contract or set the upfront price payable under the contract. These terms are exempt as it is expected that such matters will have been negotiated or, at a minimum, take into account by a consumer before entering into the relevant contract; and/or
  2. are required or expressly permitted by any enactment.

There are also specific exclusions in the new legislation for insurance contracts, where some specified terms are deemed to be reasonably necessary to protect the interests of the insurer and are exempt from being declared unfair.

Examples of potentially "unfair" terms

The Commerce Commission includes in the legislation a "grey list" 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.

It is likely that one or more of these terms will be included in your (and most businesses') standard form consumer contracts. The court will presume them to be unfair unless counterbalanced by a consumer benefit (such as a lower price), an ability to terminate without penalty, adequate notice, or a reciprocal right.

What this all means for you

From 17 March, you will need to ensure that new standard form contracts (and any standard form contracts subject to variation or renewal) that relate to household, domestic or personal products do not contain terms that could be deemed to be "unfair" by a court (based on the tests outlined above). The problem faced right now is that a number of factors will be taken into account by a court when making such a declaration and until certain terms have been tested in the courts, no real certainty exists around how the court will approach particular terms that may not be overtly "unfair" but do have some risk associated with them.

A proper legal review of your terms by one of our team (who have experience in undertaking these reviews) will enable you to mitigate the risks of breaching the UCT Provisions while also retaining, to the extent possible, those key commercial and operational requirements of your business. Our view is that, when undertaking these unfair contract term reviews, careful consideration must be given to balancing the rights of the consumer (and risks of a breach of the UCT Provisions) against the commercial interests of the business.

If the Commerce Commission considers that a standard form consumer contract term is unfair (under its own steam or as a consequence of a consumer complaint), it can go to the District Court or High Court to seek a declaration that it is unfair. If a term has been declared unfair by a court, you can no longer apply, enforce or rely on that term.

If you do continue to use or enforce the unfair term you may be convicted and fined under the Fair Trading Act (companies up to $600,000 per breach) and ordered to pay damages or to refund money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.