Vector Limited, an Auckland based electricity and gas distribution company, received compliance advice from the New Zealand Commerce Commission (NZCC) following its investigation into potential unfair contract terms in its standard form electricity connection contracts. 

NZCC prepares compliance advice when it considers conduct to be a breach of law, but does not consider the breach to be a priority to take further at the time the compliance advice is issued. 

Terms that were unfair in the Vector contracts

After having established Vector’s Customer Works Agreements and Simple Connection Terms and Conditions were standard form contracts within the scope of the unfair contract terms (UCT) regime under the Fair Trading Act 1986 (FTA), NZCC identified several terms that were likely to be unfair. These include:

• requiring full upfront payment with no commitment to a start date;
• exclusion of liability for delay even for reasons within Vector’s control;
• broad unilateral variation rights (including to price);
• recovery of costs by Vector on termination (including where termination is for a breach of contract by Vector); 
• asymmetrical liability and indemnity clauses; and
• terms attempting to contract out of the FTA or exclude reliance on representations.

Our thoughts

Entire agreement/No reliance/Contracting out of FTA

The terms that have been flagged by NZCC from the Vector contracts were the usual culprits, with most of them already listed as examples of unfair terms in the legislation. That said, it was our first time seeing NZCC question the fairness of a term seeking to contract out of the FTA with its business customers (with respect to sections 9, 12A, 13 and 14(1)). While the FTA permits contracting out of the Act between parties in trade in relation to these key provisions, it must be fair and reasonable to do so. NZCC considered, as a starting point, it would be not be reasonable to contract out of the Act in the context of a standard form contract where there is an inherent power imbalance between the parties and no ability for customers to negotiate terms. Given Vector’s failure to establish it had legitimate interests in the term, NZCC considered this term to be unfair. 

Similarly, NZCC was also concerned about what are commonly known as “entire agreement” terms and “no reliance on the other party” terms in Vector’s contract. In NZCC’s view, these terms would have the same effect as a term contracting out of the FTA. NZCC’s primary concern was that these terms mean in practice that customers cannot rely on any information or representations provided by Vector in circumstances where customers rely on Vector’s expertise. These terms could also be used to exclude evidence that customers could adduce in court proceedings on any disputes. 

Industry-standard terms are not immune 

In its defence, Vector noted generally that the terms in its contracts were consistent with industry practice in construction and infrastructure works. However, NZCC made it clear that what appears to be standard industry practice may still be considered unfair under the UCT regime. 

Next steps for businesses using standard form contracts

This case is a reminder to businesses that use standard form T&Cs with their consumer or business customers that industry standard or conventional commercial contract terms can still be unfair. 

Businesses should establish whether their standard form contract falls within the ambit of the UCT regime (see our previous article for further information), and:

• review terms: identify clauses that may be unfair to the customer, particularly around liability caps, variation rights, payment terms, or disclaimers of responsibility. See section 46M of the FTA for statutory examples;
• not rely on boilerplate exclusions: entire agreement or non-reliance clauses may be treated as attempts to contract out of the FTA and unfair, especially where there is a power imbalance;
• apply caution when contracting out: while parties in trade may contract out of certain provisions of the FTA, this must be fair and reasonable, and the threshold may be high for standard form contracts where the parties’ negotiating powers are not balanced;
• use precise, specific language: ensure the drafting of the contract accurately captures its intention. In the Vector case, NZCC has criticised “broad” and “non-precise” drafting that contributed to the term (and its effect) being unfair.  

NZCC’s compliance advice to Vector includes a table setting out its analysis of the terms that were considered unfair in the relevant contracts. Helpfully, this table includes Vector’s responses to NZCC’s concerns, including its legitimate interest arguments. A copy of this advice is available from NZCC’s website.  

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Special thanks to Georgia Kellow for her assistance in writing this article.