Opinion

Unfair Contract Terms in Standard Form Consumer Contracts

From 17 March 2015, a person must not, in trade, include, apply, enforce or rely on an unfair contract term in a standard form consumer contract.  Clauses declared to be unfair are unenforceable and businesses who continue to use unfair clauses in their standard form consumer contracts risk heavy fines for breaching the provisions of the Fair Trading Act 1986.  

The Commerce Commission has recently published Draft Guidelines setting out useful examples of contracts and contractual terms which may be considered unfair.  The guidelines also set out what factors are likely to be taken into account in determining whether a term is unfair.  

What are Standard Form Consumer Contracts?

Standard form consumer contracts are ‘take-it-or-leave-it/non-negotiable’ type contracts between a trader/supplier and a consumer.   Standard form consumer contracts commonly relate to goods/services like gym memberships, mobile phones, finance, utilities, hire purchase etc.  

Who is a Consumer

A consumer is anyone who purchases goods or services of a kind usually acquired for personal, domestic, or household use and not for resale or production/manufacture.  A consumer can include a business, if that business has purchased goods of a domestic nature (such as a television on hire purchase for a staff room).

What is an Unfair Contract Term?
A term will be an Unfair Contract Term if:

• the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• the term would cause detriment to a party if the term were applied, relied on or enforced.

An example of an unfair term would be a term that allows one party to a contract to do something (i.e. terminate /amend/ assign the contract) but not the other.

The unfair terms provisions apply to standard form consumer contracts entered into or varied from 17 March 2015.  Penalties for failure to comply will include fines of up to $200,000 for individuals and $600,000 for companies.

If you have not already done so, businesses should start reviewing their standard form consumer contracts now in order to identify potentially unfair terms and remove them before these new rules come into effect.  

For further information on how these rules might affect you or your business, or for assistance in the review process, please contact Richard Williams.