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First Court ruling on unfair contract terms means refunds to customers

November 15, 2019

Contacts

Partners Anne Callinan, James Caird, James Craig, Simon Vannini, Ben Upton
Senior Associates Laurette Barnard, Sarah Lee

Consumer law

The High Court has made its first declaration under the provisions of the Fair Trading Act 1986 (FTA) that protect consumers from unfair contract terms in standard consumer contracts.

The ruling essentially confirmed the Commerce Commission’s position on unfair contract terms, and they have successfully pursued a declaration against mobile trader, Home Direct Ltd.

This outcome is a timely reminder for all businesses to take care in ensuring that their standard consumer contract terms are not unfair under the FTA. 

The decision - Commerce Commission v Home Direct Limited

Home Direct is New Zealand’s largest mobile trader, selling home goods online, over the phone and in mobile shops on deferred payment terms. Their credit facility, known as a “Lifestyle Account”, provided for regular debits from the consumer bank account for purchases.

Consumers, who entered into the “Voucher Entitlement Scheme”, continued to debit regular amounts to Home Direct through their Lifestyle Account once they had fully repaid the cost of their purchase. These further payments were then converted into voucher entitlements, which the consumer could use to make future purchases from Home Direct.

The Commerce Commission submitted that the terms of the Voucher Entitlement Scheme was unfair on two grounds:

  • Customers could not refund or exchange their voucher entitlements for cash; and

  • The voucher entitlements expired after twelve months.

Under this scheme, customers had forfeited a total of $644,000 to Home Direct through unused and expired vouchers.

The Court held that Home Direct could not rely on these terms in the event that a consumer sought to exchange or refund their vouchers, as the terms were unfair contract terms within the meaning of s 46L(1) of the FTA. These terms only provided benefit to Home Direct and was “one-way traffic”, the Court said.

The Commerce Commission will alert as many consumers as possible of their rights to seek refunds. Home Direct has already credited customers over $133,000 and has agreed to refund any customers who forfeited vouchers between 17 March 2015 and July 2018.

The law - when is a contract term unfair?

Many businesses use standard consumer contracts for services such as gym memberships, mobile phone plans, booking flights, car parking, apps and software. These contracts are presented on a “take or leave it” basis and do not offer the consumer an opportunity to negotiate the terms.

To protect consumers in these situations, the law prohibits businesses from including terms that are unfair. Under the FTA, a term is unfair if it:

  • Causes a significant imbalance of the parties rights and obligations;

  • Is not reasonably necessary to protect the legitimate interests of business; and

  • Causes detriment (financial or otherwise).

The Court must also consider whether the term is transparent and sufficiently clear. It will do so taking into account the contract as a whole. Certain terms, such as those defining what the contract is about and setting the upfront price payable under the contract, are exempt.

The Commerce Commission can investigate potentially unfair contract terms and seek a declaration from the Court that a term is unfair. A business cannot enforce, use or rely upon this term after a declaration and if it does, it may face prosecution by the Commerce Commission.

Where to from here?

This decision is particularly notable for both being the first Court declaration under the unfair contract terms regime, which was introduced in 2015. It essentially confirms the Commerce Commission’s position on unfair contract terms. Home Direct did not seek to challenge the Commerce Commission's arguments in court.

This success may encourage the Commission to bring more claims. We also expect to see more happening in this area given recent government proposal to extend the existing protections against unfair contract terms to standard form business to small business contracts.

Get in touch

Please get in touch with our contacts to discuss any aspect of this ruling and for advice on your standard consumer contract terms.

Contributors olivia.coughlan@simpsongrierson.com