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Is your standard form contract in shape?

September 27, 2017

Contacts

Senior Associates Sarah Lee

Consumer law Unfair contract terms

The Commerce Commission (Commission) has recently completed its third review into unfair contract terms, this time focusing on the gym and fitness industry. This follows reviews of retail telecommunications and energy contracts in 2016. Read on to see what the Commission had to say and to make sure your contract terms are fighting fit!

Why Gyms?

More than 700,000 New Zealanders belong to a gym or fitness centre. Most consumers are required to enter into standard form membership agreements when they join up, giving them little say in the deal.

The Commission’s review considered 10 standard membership agreements from a range of gym and fitness providers nationwide, including 'fixed term' and 'flexible' contracts. The Commission wanted to understand how many contained potentially unfair contract terms, particularly those relating to renewal, cancellation, variation and liability.

What are unfair contract terms?

The Fair Trading Amendment Act 2013 made a number of changes to the Fair Trading Act 1986, including introducing the “unfair contract terms” provisions. Unfair contract terms (UCTs) are those that create a significant imbalance of rights between businesses and consumers in “take it or leave it” types of consumer contracts that are not open for negotiation. Examples of UCTs are captured in clause 46M of the FTA. If the Commission considers that a term is unfair, it can apply to the courts for a declaration.  

The FTA says that for a term to be declared unfair by the courts, three requirements have to be met:

  • the term must cause a significant imbalance between the parties;
  • the term must not be reasonably necessary to protect the legitimate interests of the business; and
  • the term must cause detriment if it were to be relied upon.

Outcome of the review

The review identified a number of potential issues across a wide range of gym contracts, including the following.

1. Joining periods

The Commission was concerned about minimum joining periods and specifically, what happens when the minimum period is up. Some contracts clearly stated that the contract would automatically renew, while others weren’t clear about the term of the contract going forward.

The Commission noted that automatic renewals may be unfair where the consumer is not given a choice about renewal. This can be mitigated by issuing reminders before an automatic renewal takes place, or by allowing members to cancel the contract for a period after the renewal.

2. Changing the deal

The Commission identified a number of contracts that let the gym vary the contract without needing the member’s consent. Changing the services that gyms provide, the cost of the membership, or the terms of the membership might be unfair where the gym does not provide adequate notice of such a change, and doesn’t give consumers the right to cancel the contract without penalty if they are unhappy about the variation. This is especially true for price increases in fixed term contracts.

3. Complicated cancellation and notice provisions

The Commission's review also prompted some gyms to amend their cancellation regime and associated fees. Aspects of the cancellation process which were identified as being potentially unfair were:

  • lengthy notice periods (of up to 30 days) that could not be justified;
  • requiring consumers to fill in a specific form on-site to cancel the membership or otherwise requiring the consumer to follow a complicated process;
  • termination fees which go beyond recouping legitimate losses and instead penalise the consumer for cancelling; and
  • the gym being able to unilaterally cancel the membership with no requirement to act reasonably in doing so.

4. No liability provisions

The Commission reviewed the liability clauses included in many gym contracts and considered them to be potentially unfair to consumers. Specifically, these clauses limit the gym's liability for breach of contract and civil wrongs. This includes limitation of liability where the gym has been negligent or damage/theft has occurred to personal property.

The Commission's review shows that these liability provisions appear to contract out of the Consumer Guarantees Act 1993 and the Fair Trading Act 1986, both of which are designed to protect consumers - and neither of which can be contracted out of in the case of consumer contracts.

5. Complicated language and small print contracts

The Commission highlighted the need for contracts to be written in 'plain English', as some of those reviewed contained complex language or legal jargon and/or were in a small font with dense and closely formatted text. Features like these in contracts may prevent consumers from being able to easily understand them. The Commission recommended that all gyms and fitness providers review their contracts to ensure they are in plain English and are easy to read. This includes simple fixes such as numbering the terms and highlighting any really important terms.

6. The full work out

The Commission’s full report can be found here:

Your training programme - what to look out for?

If a court declares that a term is unfair, a business cannot enforce it and will be liable to prosecution if it continues to use it. In that case with potential fines of up to $600,000 for companies per breach, or $200,000 per breach for individuals, businesses should review these learnings now. Start by considering your own contracts and either remove potentially unfair contract terms or get some advice to ensure that you have sufficient justification to keep them.

Clauses to look out for are ones that allow you to:

  • vary the terms of the contract without the need for the consumer’s consent;
  • terminate the contract or penalise the consumer for breaching or ending the contract;
  • renew or not renew the contract, or vary pricing without the need for the consumer’s consent or giving the consumer the right to terminate the contract in that event;
  • 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.

If you are concerned about the terms in your standard form contracts we would be happy to help.

 

Contributors hana-rae.seifert@simpsongrierson.com