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Unfair contract terms: why your standard form consumer contracts should be reviewed now!

March 17, 2015


Partners Simon Vannini
Senior Associates Andrew Tetzlaff

Unfair contract terms Consumer law

In September of last year we reported on the amendments to the Fair Trading Act 1986 with regard to the introduction of a prohibition on ‘unfair contract terms’ in standard form consumer contracts.

These changes come into force on 17 March 2015. Accordingly, it will be important for any business who uses a standard form consumer contract to be across these changes and to have had any standard form consumer contract or terms of trade reviewed for compliance.

Who will the prohibition on unfair contract terms apply to?

The prohibition on unfair contract terms will apply to any industry who uses a ‘ standard form consumer contract’ when providing goods or services that are of a kind that are ordinarily acquired for personal, domestic or household use or consumption, as opposed to commercial use.

Although the prohibition applies to anybody who uses a standard form consumer contract, some key industries have been identified including:

  • telecommunications;
  • finance;
  • utilities, such as electricity or gas services ;
  • gym memberships;
  • residential construction;
  • motor vehicle sales;
  • travel (such as airfares and rental cars);
  • day care centres;
  • online apps and software;
  • pay TV; and
  • retirement villages.

Contracts for insurance will also be covered, but special rules and exemptions will apply.

What is a standard form contract?

Standard-form consumer contracts are generally considered to be contracts which are not usually negotiated between parties and where one party (generally the business) would give a pre-prepared contract to the consumer to sign before the goods or services are provided. These contracts are generally offered on a ‘take it or leave it’ basis and typically the same contract would be used for all of the businesses’ customers/consumers.

Any pre-prepared contract or standard terms of trade are likely to be a standard-form consumer contract.

How will the prohibition on unfair contract terms apply?

The way in which the prohibition on unfair contract terms will work is that it allows a consumer to make a complaint to the Commerce Commission alleging that a contractual terms is unfair. It will then be up to the Commerce Commission to investigate and if considered appropriate, to apply to a court for a declaration that a particular term or terms used in a standard form consumer contract are ‘unfair’. Once declared to be ‘unfair’ it would be an offence to continue to try to use or enforce that term.

What are unfair contract terms? - factors

Although providing a definitive answer to what might be considered to be an unfair contract term is beyond the scope of this article, there are three factors that a court will consider in determining whether a term or terms of a contract are unfair, being:

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

A court can also consider any matter that it thinks relevant, but must take into account the contract as a whole and the extent to which the term is "transparent".

It is also important to note that some terms of a contract cannot be declared to be unfair. These include the main subject matter of the contract (eg the goods or services being provided), the upfront price, or any term expressly permitted by law.

What should you look out for?

If you have, or are currently using a standard form consumer contract, you may wish to review that contract.

Clauses to look out for include (without limitation) ones that have the effect of permitting one party to unilaterally:

  • vary the terms of the contract;
  • avoid or limit performance of the contract;
  • terminate the contract;
  • penalise another party for breaching or ending the contract;
  • renew or not renew the contract;
  • vary the price payable under the contract without the right of another party to terminate the contract;
  • vary the characteristics of the goods or services to be supplied under the contract; or
  • determine whether the contract has been breached, or interpret its meaning.

Why is this relevant?

If you use a standard form consumer contract as part of your business, you will need to keep abreast of the unfair contractual terms legislation. It may also be wise for a periodic review of any standard form contract to be undertaken. With potential fines of up to $600,000 for companies per breach, or $200,000 per breach for individuals, there are plenty of commercial incentives to get your contracting process and standard form contract terms right.

The information in this article is intended as a general guide only and is not intended to be legal advice. Detailed legal advice should be obtained to cover a specific situation.