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Consumer Law Update: Unfair Contract Terms - November 2014

Written by Darryl King, PARTNER; Claire Godber, SENIOR ASSOCIATE on November 3rd, 2014.    

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Changes to the Fair Trading Act

We have briefly summarised the new provisions on unfair contract terms.   We recommend you speak with our Business Law Team to get specific legal advice on how these changes could affect you.

Does this affect me?

If you use standard form consumer contracts, this will apply to you.  The changes apply from 17 March 2015 to:

  • any new contracts; and

  • any existing contracts that are varied or renewed from this date (except insurance contracts).

The Commerce Commission is due to finalise the Unfair Contract Terms Guidelines by the end of November.

Who decides what is unfair?

Unfair terms are not unenforceable in themselves. A term will only be unenforceable as ‘unfair’ if it is declared so by the High Court or District Court.
The Commerce Commission can review your contracts and apply to Court to have terms in them declared ‘unfair’ and therefore unenforceable.
Only the Commerce Commission can apply to Court, but anyone can ask the Commerce Commission to apply in respect of a contract they are party to.

What is 'unfair'?

A term can only be declared to be an ‘unfair’ if:

  1. It is in a consumer contract; and

  2. The contract is a standard form contract; and

  3. It is not a term that may not be declared unfair.  That is a term which:

    1. defines the main subject matter of the contract; or

    2. sets the upfront price payable under the contract; or

    3. is allowed by legislation; and

  4. It is ‘unfair’ – this requires the Court to be satisfied that the term:

    1. would cause significant imbalance in the parties’ rights and obligations; and

    2. is not reasonably necessary to protect the legitimate interests of the party who benefits from it; and

    3. would cause detriment to a party.

The Court must take into account:

  • how transparent the term is; and

  • the contract as a whole.

For example, terms excluding liability may be deemed unfair if they allow one party to act unreasonably or negligently towards the other without any legal consequences. For instance, excluding liability for representations made to customers by a third-party agent of the business may be unfair.

Examples of unfair terms

The Commerce Commission will pay particular attention to contracts that include any of the example unfair terms set out in the Act. These include:

  • terms that permit one party (but not the other) to:

    • avoid or limit performance of the contract; o terminate or vary the terms the contract; o renew or not renew the contract;

    • vary the upfront price payable without the right of the other party to terminate;

    • unilaterally vary the characteristics of the goods or services to be supplied, or the land to be sold or granted;

  • terms that limit one party’s vicarious liability for its agents or its right to sue the other party;

  • terms that penalise one party (but not the other) for a breach or termination of the contract.

What are the consequences?

If a term in your contract is declared unfair, you will not be able to enforce that term. The rest of the contract will remain enforceable.
If you try to use or rely on any term declared unfair, you could receive an injunction requiring you to stop using the term, orders to pay damages or refunds, or the following fines:

  • companies – up to $600,000;

  • individuals – up to $200,000.

What should I do?

Ensure your standard form consumer contracts are easy to read and understand and fair to all parties. This may mean you need to re-write your contracts to:

  • use plain, simple English with no complex legalese;

  • draw attention to the important points e.g. by setting them out on the first page, using colour or graphics;

  • if online, use functions to ensure interactivity and not just press ‘accept’ to proceed.

B2B Contracting Out

If a standard form consumer contract for the purchase of consumer goods or services is between two businesses (i.e. parties in trade), the parties can agree in writing to contract out of certain provisions of the FTA if it is fair and reasonable to do so.

More Information

Jackson Russell can help you review your contracts and provide more detailed advice about how these changes may affect your business. Please contact us if you would like to discuss.

 

Disclaimer
The information contained in this publication is of a general nature and is not intended as legal advice.  It is important that you seek legal advice that is specific to your circumstances.
 
All rights reserved © Jackson Russell 2014
Key Contacts

Darryl King 167
Darryl King, PARTNER

Claire Godber 167
Claire Godber, SENIOR ASSOCIATE
 

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