By Andrew Peterson and Sarah Keene
The Consumer Law Reform Bill (the "Bill"), which proposes the most significant changes to consumer laws in New Zealand in more than 20 years, passed its first reading in the House in February and has now been referred to the Commerce Select Committee (the "Select Committee") for consideration.
It was unsurprising that the Bill passed its first reading given it has strong bipartisan support from all ends of the political spectrum. What was somewhat surprising, however, was that during the first reading the Minister of Consumer Affairs, Chris Tremain, invited the Select Committee to consider whether the Bill should include additional amendments to the Fair Trading Act 1986, legislating against:
- Unfair contract terms; and
- Unconscionable conduct.
While such provisions had initially been recommended by the Ministry of Consumer Affairs (the "Ministry"), the previous Minister of Consumer Affairs, John Boscawen, advised Cabinet to exclude them from the Bill in the face of considerable negative feedback from the business community and his view that such provisions may result in significant compliance costs for businesses with little or no benefit.
MPs from the Labour and Green parties also spoke in favour of including such provisions in the Bill during its first reading and this cross-party support increases the likelihood that such provisions could ultimately find their way into the Bill.
This Alert explores the scope of the potential "unfair contract" and "unconscionable conduct" provisions and the implications for businesses.
There are two key policy drivers behind the Bill:1
- To promote more efficient regulation. The Bill aims to achieve this by making New Zealand's consumer laws more principles-based, so that consumers can be broadly aware of their rights and transact with confidence without necessarily knowing the black letter wording of the statutes' prohibitions; and
- To harmonise New Zealand's consumer laws with that of Australia, as part of the Single Economic Market ("SEM") objective.
In light of this second objective, the Ministry had recommended to the previous Minister that the Bill introduce "unfair contract" and "unconscionable conduct" provisions into New Zealand's Fair Trading Act to match equivalent provisions in the Australian consumer law regime.2 The previous Minister had rejected that recommendation due to considerable negative feedback from the business community.
Unfair contract terms
An "unfair contract term" in Australia is a term in a standard form consumer contract that causes significant disadvantage to one party (typically the consumer) and is not reasonably necessary for the protection of the other party (typically the supplier). The consumer or the Australian Competition & Consumer Commission ("ACCC") may apply to the court to have unfair contract terms deemed void. There is no other penalty or consequence of a term being found to be unfair.
The rationale is that standard form contracts3 facilitate the incorporation of unfair contract terms because they are presented to consumers on a "take it or leave it" basis and consumers often do not even read the contents, so there is little potential for genuine consent.4
On the other hand, the benefits of such contracts are that consumers and businesses are able to take advantage of lower transaction costs. The efficiency benefits are particularly acute in industries where businesses have thousands or even millions of customers with multiple similar transactions.
The introduction of an uncertain, and emotive, concept such as "unfairness" into all standard form contracts has the potential to result in disadvantages for businesses and consumers alike - parties to standard form contracts will not know whether there are any void terms in their contract until a person seeks to enforce that contract,5 and the costs of such uncertainty will inevitably have to be passed on to consumers.
Despite the Ministry not having specifically identified a need for "unfair contract term" legislation in New Zealand, it recommended the introduction of such legislation on the basis that:
- Australia had undertaken an extensive process in developing its unfair contract provisions;
- The evidence was strong that Australian suppliers had been taking advantage of unfair contract terms at the expense of consumers;
- There is no evidence that consumers in New Zealand are less likely to enter into standard form contracts than consumers in Australia; and
- In the absence of evidence that New Zealand consumers are in a different position to consumers in Australia, "it is reasonable and efficient to rely on the Australian analysis."
The Australian Consumer Law specifically prohibits a person in trade, both in business-to-consumer and business-to-business transactions, from engaging in "unconscionable conduct". The remedies available include injunctions, damages and penalties of up to AUD$1.1 million.
The Australian Consumer Law does not provide a definition of "unconscionable conduct", but instead provides a range of factors that the Court may consider when determining whether conduct is unconscionable.6
The list of factors is surprisingly broad and includes: the relative bargaining strength of each party, whether the parties acted in good faith, whether the conduct was consistent with other dealings, prices available elsewhere, and whether the stronger party was willing to negotiate.
The Ministry noted that the term "unconscionable" is uncertain and fact specific, but the Ministry considered that this uncertainty had "been to the benefit of the suppliers in the unsuccessful cases taken by the ACCC."7 An alternative view is that the uncertainty has resulted in the ACCC prosecuting businesses that have complied with the law, causing the erosion of already limited government resources to no particular benefit.
It is also not clear that Australia's new prohibition has significant advantages over the existing doctrine of unconscionability, which has been developed by the Courts over several hundred years and is relatively well understood. The existing doctrine operates in New Zealand "to protect those who enter into bargains when they are under a significant disability or disadvantage," such as ignorance, lack of education, illness, age, mental or physical infirmity, stress or anxiety (and it is not meant to "relieve parties from 'hard' bargains or to save the foolish from their foolishness").8
The new Australian law significantly downplays the needs for a "weaker party" to be in a vulnerable position and opens up all commercial dealings to scrutiny, even between two commercial entities.
Nevertheless, the Ministry's preference was to introduce the Australian "unconscionable conduct" law into New Zealand as its view was that the existing equitable doctrine does not provide an adequate remedy for consumers or small businesses:9
- as it is only a defence where the "stronger party" seeks to enforce a contract through the Courts and, therefore, consumers and small business cannot themselves invoke the doctrine as a positive remedy to initiate proceedings against the "stronger party";
- as "it is practically impossible for a small business to claim the benefit of an unconscionability defence" given the factors required to prove a qualifying disadvantage; and
- as it is "unsatisfactory that there is generally no equivalent remedy available in New Zealand for consumers or small businesses that have the protection of [the unconscionable conduct provisions] in Australia".
Numerous submissions, particularly from the business community, opposing these provisions persuaded Cabinet to exclude them.10 The submissions set out the increased costs that such provisions would place on businesses, including:
- increased uncertainty arising from compromising freedom of contract and the vague and uncertain meaning of "unfair" and "unconscionable"; and
- increased compliance costs in ensuring that existing practices are compliant (by way of example, the previous Minister noted that the major trading banks would likely have additional upfront compliance costs of NZ$5 million each in ensuring that their existing standard form contracts would comply with such provisions).
The previous Minister ultimately advised Cabinet, in relation to both "unfair contract" and "unconscionable conduct" legislation, that harmonisation with Australia is not sufficient reason for making a change to New Zealand law, and that there would need to be conclusive evidence of a problem to introduce a law change that brings in increased uncertainty and compliance costs. Cabinet agreed with the Minister's views. Instead, the previous Minister directed the Ministry to reconsider a prohibition on "unfair contract terms" in 2014 (to allow time to observe Australia's experience with its equivalent provision enacted in 2010).
Cabinet's decision to exclude prohibitions on "unfair contracts" or "unconscionable conduct" from the Bill represented a principled regulatory approach that is in line with the Government's commitment to only introduce new regulation when it is required, reasonable and robust.11 Given the increased compliance costs and uncertainty that such provisions would place on businesses, it was sensible that these reforms were put on hold until there is greater certainty that the benefits will outweigh the costs. The current Minister's invitation to the Select Committee to consider these provisions creates further uncertainty for the business community, as it indicates the Government may be willing to reconsider its previous policy decisions and may support any recommendations from the Select Committee for their inclusion.
The Select Committee has called for submissions on the Bill, with a closing date for submissions of 29 March 2012. This could be the last opportunity for interested parties to have their views heard on the Bill, and any submitters will face the difficulty of needing to make submissions on the possible "unfair contracts" and "unconscionable conduct" amendments without any legislative drafting in the Bill to comment on. Nor did the Ministry's papers contain suggested drafting on these proposals that would enable targeted submissions - the Ministry's recommendations were at a conceptual policy level only. If the Select Committee is minded to recommend the inclusion of such provisions, it should operate a two-stage process that allows public submissions on the proposed drafting so that the detail of the proposals is subject to robust public scrutiny, which the Select Committee process is intended to provide.
If you are uncertain as to whether or how the Bill, including the "unfair contract" and "unconscionable conduct" proposals, may affect your business, please contact one of the contributors below.
1 Our earlier April 2011 and May 2011
Competition Alerts provide detail on the background of the Bill.
2 The Australian Consumer Law is contained in Schedule 2 to the Competition and Consumer Act 2010.
3 Common in telecommunications, finance, domestic building, gyms, motor vehicles, car rental and utilities contracting situations.
4 See: Ministry of Consumer Affairs. Consumer Law Reform Additional Paper; Unfair Contract Terms (September 2010). Retrieved from: http://www.consumeraffairs.govt.nz/pdf-library/legislation-policy-pdfs/CLR-Additional-paper---Unfair-contract-terms.pdf
5 The Ministry of Consumer Affairs recommended that the Disputes Tribunal have jurisdiction to declare that contract terms are unfair.
6 The full list of factors include:
- the relative strength of the bargaining positions;
- the imposition of unnecessary conditions;
- whether a party was able to understand the documents;
- whether any undue influence, pressure or unfair tactics were used;
- availability and price comparison of goods elsewhere;
- whether the conduct was consistent with other dealings;
- the requirements of an applicable industry code (i.e. the Franchising Code);
- whether the stronger party failed to disclose any intended future conduct that might have affected the other party's interests;
- whether the stronger party was willing to negotiate;
- whether the stronger party had the power to unilaterally vary a term or a condition of a contract between the parties for the supply of goods or services; and
- the extent to which the parties acted in good faith.
7 Ministry of Consumer Affairs, Consumer
Law Reform Additional Paper: Unfair Contract Terms (September
2010), at .
8 Gustav & Co Limited v Macfield Limited  NZCA 205, at .
9 See: Ministry of Consumer Affairs. Consumer Law Reform Additional Paper: Unconscionability (October 2005). Retrieved from: http://www.consumeraffairs.govt.nz/pdf-library/legislation-policy-pdfs/unconsionability.pdf
10 See: Cabinet Economic Growth and Infrastructure Committee. "Consumer Law Reform" (1 December 2010). Retrieved from: http://www.consumeraffairs.govt.nz/pdf-library/legislation-policy-pdfs/CLR-Cabinet-Paper-1.pdf
11 As set out in our April 2011 Alert.
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.