Are Your Contract Terms Unfair?
The Commerce Commission of New Zealand continues to work with the Australian Competition and Consumer Commission in the provision of comparable consumer protection laws. The Commission has produced draft guidelines on its intended approach to enforcing the new provisions of the Fair Trading Amendment Act 2013, relating to unfair contract terms.
An unfair contract term is generally a pre-written term in a standard form contract which puts one party (usually a consumer) at a disadvantage while allowing the relevant business a broad scope in which to operate its rights and obligations under the contract. The consumer is basically put in the position of “take it or leave it”.
As regulator, the Commission has the legal standing to seek a declaration that a term in a standard form consumer contract is unfair, and it will usually do so if it receives notice of the existence of the terms usually via consumer complaints. The courts will look at the contract as a whole and consider the term unfair if such term is not reasonably necessary to protect legitimate interests, would cause a significant imbalance, and would cause detriment if applied.
The court will, however, consider whether a possibly unfair term can be offset by consumer benefits such as a lower price and the extent to which the term is transparent to the average reasonable consumer. It is for the business to show that the legitimate interest cannot reasonably be protected by another fairer means. If the court finds the term unfair then that particular term is rendered unenforceable, but the remainder of the contract will continue to bind the parties.
Parties who continue to use or try to enforce terms which have been declared unfair by a court, may be liable to fines under the Fair Trading Act, and ordered to pay damages or facilitate refunds.
Potentially unfair areas
The Act identifies particular terms that may potentially be considered unfair - these occupy the “grey list”. One-sided provisions in the grey list often include:
termination or renewal rights for one party only
assignment of the contract rights to the detriment of the other party
avoidance or limitation in respect of performance of the contract
unilateral rights to decide whether the contract has been breached
penalties for one party if that party breaches the contract in any way, and no corresponding penalty for breaches committed by the other party
variation rights for important terms such as the characteristics of the goods or services provided
the right to limit liability for one party while failing to make similar provisions for the other party.
Also included are those terms that impose an evidential burden on one party in proceedings relating to the contract. These grey list terms give particular cause for concern and it is usual to find at least one of them in most standard form consumer contracts. The regulator will consider them to be unfair unless the consumer is offered some benefit in compensation for the term, such as a reduced price. Other offers which may balance the effect of an unfair term include an ability to terminate, reasonable notice periods, or reciprocal rights.
The effects of the use of unfair terms in standard form contracts has been to grant the business as much freedom as possible and exclude liability to the consumer, while ensuring that the consumer sticks rigidly to the contract with no room for manoeuvre.
Terms which are not unfair
Certain terms cannot be classed as unfair. A term will not be unfair if:
the law expressly permits it
it explains the main subject matter of the agreement, or
it sets the up-front price payable, to the extent that it is transparent
Price may be considered an unfair penalty if the amount is not proportionate to any cost or loss. It is important for businesses to ensure that all price terms are clear and expressed in plain language that a reasonable consumer can understand. The business should also be prepared to explain how the price was calculated and how the payment obligations are triggered.
Which industries are affected?
The thirteen industries identified in the guidelines include; finance, residential construction, retirement villages, residential tenancy, real estate, travel (air fares and rental cars), telecommunications, utilities, gyms, online apps and software, pay TV, hire purchase and motor vehicle sales. The guidelines do not cover standard form contracts in the insurance industry that were entered into before 17 March 2015, even if renewed or varied after that date.
The unfair terms in standard form contracts currently affects consumers only. It has been proposed that the unfair contract term protections be expanded to cover small businesses, however this proposal is currently under consultation by the Australian Treasury on behalf of Consumer Affairs Australia and New Zealand.
What should I do next?
The new regime will come into effect on 17 March 2015. Contact us to review your standard form contracts and identify any terms that could possibly be considered unfair under the new system. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.