Since March 2015 the Fair Trading Act (FTA) has prohibited the use of unfair contract terms (UCTs) in “standard form consumer contracts” (pro forma contracts that consumers have no real ability to negotiate).  UCTs apply to all new contracts entered into, and to contracts that are renewed/varied, on or after the date the UCT provisions came into force (there are special rules for insurance contracts).  The UCT provisions impact a wide range of retail businesses.  Cygnus Law can assist and can advise on amendments to help you to comply.  I consider UCT provisions below.

Who is a consumer?

The definition of “consumer” follows the Consumer Guarantees Act (CGA) definition.  A consumer will generally be anyone who acquires goods or services for personal use.  There are exceptions and in some cases goods & services provided to a business could be subject to the UCT provisions.

When is a contract term “unfair”?

What is “unfair” will very much depend on the context. Key considerations include:

  • The definition, which requires (among other matters) that the term would cause significant imbalance in the parties’ rights & obligations and is not reasonably necessary to protect the legitimate interests of the supplier.
  • The FTA lists three terms that can never be unfair, being terms that define the main subject matter of the contract, set the price payable and that are required by law.
  • The FTA includes examples of 13 terms that may be unfair (see section 46M). Those examples include terms permitting the supplier (but not the customer) to terminate the contract and that allow the supplier to unilaterally vary the characteristics of the goods or services to be provided.

While context is important, there are some terms that are likely to be unfair in most circumstances e.g. a term providing that a supplier is not liable when its goods or services do not meet acceptable standards.  Not only is this likely to be unfair under the FTA but the CGA already imposes minimum standards for goods & services provided to consumers and restricts the ability of suppliers to contract out of liability.

Who enforces unfair contract terms?

The Commerce Commission is the responsible regulator, including for financial services and products. The Commission has indicated that it will take a proactive approach to enforcement.

An unfair term under the FTA cannot be challenged directly by a customer (unless there are other grounds e.g. under the CGA). Rather, the Commission can seek a court declaration that a term is unfair. If made, a declaration will prohibit the use of that term (unless used in a way permitted under the declaration).

A term declared unfair cannot be applied or enforced (even if the contract predates the declaration) and a supplier can be convicted & fined (up to $600,000 for a company) for using it and can be ordered to pay damages and to refund money to customers.

What should you consider?

The Commission has published Unfair Contract Terms Guidelines, which describe the UCT regime and provide examples of circumstances the Commission considers may make terms unfair.  The Commission has reviewed, and reported on, UCT compliance in relation to energy retail contractstelecommunications contracts and gym contracts.  The reports provide examples of how the UCT provisions are applied in practice and include  industry responses.

You can’t contract out of the UCT provisions unless the supplier and purchaser are businesses.  So if the UCT provisions apply to you the only option is to comply.

If your business already has a strong focus on delivering quality products & services, and on being “fair” to customers on an on-going basis, then there’s a reasonable chance that you’re already compliant. However, be aware of terms that may be lurking in your contracts that could operate unfairly. As a rule of thumb think about whether you’d feel happy as a customer if a particular term was applied to you- if you wouldn’t then it might be unfair.

The UCT provisions are only one part of a wider body of law that includes consumer protection provisions. Examples include the CGA, Financial Markets Conduct Act, Financial Advisers Act, Building Act, Privacy Act and Credit Contracts & Consumer Finance Act. In many cases that law includes recent new and expanded consumer protection provisions. So any assessment of your customer contracts should take into account that law, where relevant to your business.

Please note that this blog entry is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.