Unfair Contract Terms Guidelines

The Fair Trading Act 1986 has been amended with new provisions that apply to standard form consumer contracts entered into (or renewed or varied) on and from 17 March 2015.

A standard form consumer contract is one which relates to goods or services supplied in trade that are of a kind ordinarily acquired for personal, domestic or household use or consumption on terms that are not subject to effective negotiation between the parties.  This will apply in many situations including, for example:

• gym memberships,
• electricity or gas contracts for homes,
• car parking building usage,
• mobile phone deals,
• hire purchase agreements,
• motor vehicle sales,
• professional services,
• residential construction,
• retirement villages
• and some finance deals. 

If a consumer thinks a term is unfair in a standard form consumer contract then the consumer can complain to the Commerce Commission. If the Commerce Commission agrees that the term is unfair then the Commission can seek a declaration in the District Court or High Court that the term is unfair.  Only the Commission can apply to the Court for a declaration.  If successful, that term will be considered unfair in all similar contracts and will not be enforceable.

For a term to be unfair it must meet all three of the following requirements:

1. The term would cause a significant imbalance in the rights and obligations of each party under the contract; and
2. The term is not reasonably necessary to protect the legitimate interests of the party who is advantaged by it; and
3. The term would cause detriment (whether financial or otherwise) to a party if the term is applied, enforced or relied on.

Any determination of whether a term is unfair will take into account the contract as a whole and the extent to which the term is transparent (i.e. whether it is in reasonably plain language and not hidden in the fine print).

Terms which are likely to be considered unfair include:

• The right for one party to unilaterally change the terms of the contract without the other party having the right to terminate the contract;
• The right for one party but not the other to terminate the contract or a penalty for one party for breach or termination of the contract but not the other;
• The right for one party alone to determine whether a term has been breached or to interpret the meaning of a term;
• Clauses limiting legal liability for a party’s agents or limiting one party’s right to sue another party.

 This legislation is directed at standard terms and conditions that are produced on a “take it or leave it” basis to consumers.  We recommend that all businesses that are using standard terms and conditions seek advice from their business lawyer to ensure that any clauses that are potentially unfair are amended as soon as possible.

Note:  this article is a summary of certain aspects of the law change and is not a substitute for specific legal advice relevant to a party’s individual circumstances. 

For further information contact Lauren Hibberd (Partner).