1 May 2015

Fair Trading Amendment Act update: Section 26A – unfair contract terms

Almost one year after the introduction of the Fair Trading Amendment Act 2013, section 26A, which relates to unfair contract terms in standard form consumer contracts, came into force on 17 March 2015.

The purpose of the ten month delay between the introduction of the Act and the enactment of section 26A was to allow businesses enough time to ensure that all standard form consumer contracts comply with the new laws.  The Commerce Commission has stated that there will be no ‘grace period’ for businesses now that this section has come into effect.

If a consumer believes a contract term is unfair, the consumer is able to make a complaint to the Commerce Commission.  Section 26A allows the Court, on application by the Commerce Commission, to declare a term in a standard form consumer contract to be unfair.  A term that is found to be unfair cannot be enforced across all contracts of that business.

Section 26A applies to all contracts entered into from 17 March 2015.  It will also apply to any pre-17 March 2015 contract that is varied or renewed after the enactment date, even if the variation or amendment is a minor one.

A business or trader that breaches section 26A could be liable to a fine of up to $200,000 for an individual or up to $600,000 for a body corporate.  The business or trader may also be required to make a Court enforceable undertaking, prohibiting the use of the term in future contracts.

Section 26A can only apply to standard form consumer contracts.

A standard form consumer contract is a contract that has not been subject to “effective negotiation” by the parties.  Gym contracts, telephone/mobile phone contracts and hire purchase agreements are all examples of standard form contracts likely to fall into this category.

If the Commerce Commission alleges a standard form contract exists, the onus is on the defendant business to prove otherwise.

Terms that define the main subject matter of the contract or which transparently set the upfront price of the goods or services are exempt under the section and may not be declared unfair contract terms.  This encourages clarity and certainty in trade and business.

What is an ‘unfair’ term?

For a term to be found to be ‘unfair’, the Court must be satisfied:

• That the term causes significant imbalance to a party’s rights or obligations.  In determining this, the Court will consider the contract as whole, and whether the unfair term in question is balanced by other, more favourable, terms in the contract.  For example, the high early cancellation cost in a gym membership contract may be balanced by the cheaper membership price initially paid by the consumer.
• That the term is not reasonably necessary to protect the legitimate interests of the party that is advantaged by the term.  The onus is on the business to prove that the unfair term is ‘reasonably necessary’ to protect the interest of that business.  For a clause to be reasonably necessary, it must be shown that the interest of the business cannot be reasonably protected by any fairer means.

  An example of where such a term may be necessary is in a Sale and Purchase Agreement for a mortgagee sale, where a bank has excluded the usual vendor warranties. This may cause an imbalance prejudicial to the purchaser as the purchaser does not have the protection of the vendor’s warranties, however it is necessary to exclude these terms to protect the bank.  The bank will not have day-to-day knowledge of the property and cannot give these warranties.

• That the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.  The threshold for showing detriment to a party is not high.  In the Australian case of ACCC v ByteCard it was found that temporary loss of internet and access to emails was detrimental to consumers.  It is likely that the New Zealand Commission will take a similar approach.

Tips for businesses and traders

It is important for a business to be able to identify potentially problematic terms.  Be aware of ‘grey list’ terms, review the guidelines published by the Commerce Commission and keep up to date with Commerce Commission decisions.

When drafting or reviewing contracts:

• Aim for mutuality of clauses (for example, when considering termination rights).  Is a potentially unfair term balanced by a more favourable term?
• Ensure you can justify the use of the term and show that is it is reasonably necessary to protect a legitimate commercial interest.  Be prepared to identify the reason for any potentially unfair term, and keep any evidence that helps show that the term may be reasonable.
• Avoid using clauses that overreach.  Any penalty or liquidated damages clauses should reflect actual costs that would arise from a breach of contract.
• Consider whether contracting out of the Fair Trading Act 1986 is an appropriate option in business-to-business transactions.
• Make sure any surprising, unusual or particularly onerous contractual provisions are clear and visible.  Consider including these in a prominent position, such as in the definitions or interpretation sections of the contract.

It is important that all businesses review their standard form consumer contracts to ensure that they comply with the new consumer protection laws.

If you would like further information please contact Laura Monahan on 07 958 7479.