Unfair Contract Terms

A recent decision in the High Court of New Zealand has provided the first instance of the Courts using the Fair Trading Act 1986 ("FTA") to declare specific terms in a standard form consumer contract unfair, and therefore unenforceable. The decision in Commerce Commission v Home Direct Limited1 was made pursuant to sections in the FTA which were introduced in 2013 and give the Commerce Commission power to apply to the District Court or High Court for a declaration that a term in a standard form consumer contract is unfair.  

What is a Standard Form Consumer Contract?

A standard form contract is a contract where one party sets out the terms without any effective negotiation from the other party. Such contracts are presented on a "take it or leave it" basis.

A consumer contract involves a person acquiring goods or services that are ordinarily used for personal, domestic or household use. These goods must be supplied in trade by a supplier, and they must not be acquired for the purposes of resupplying them in trade; in the process of production and manufacture; or repairing or treating, in trade, other goods.

What Happened in Home Direct?

Home Direct was running a repayment scheme for customers that entitled Home Direct to continue withdrawing regular amounts from customers bank accounts even after they had repaid the purchase price and interest owing on goods they had purchased. This money was held by Home Direct as credit, called "voucher entitlements", which the customers could use to purchase further goods from Home Direct. Under the terms of this scheme the customers could not have these voucher entitlements refunded or exchanged for cash. If not used within 12 months, the entitlements were to expire and be forfeited to Home Direct.

The Court made their decision by reference to the following provisions in the FTA:

46L When term in consumer contract is unfair

1.    A term in a contract is unfair if the Court is satisfied that the term:

(a) would cause a significant imbalance in the parties' rights and obligations arising under the contract; and

(b) is not reasonably necessary in order to protect the legitimate interests of the party who would be disadvantaged by the term; and

(c) would cause detriment to a party if it were applied, enforced, or relied on.

When assessing any potential imbalance in the parties' rights and obligations, the Judge emphasised that the 12-month Expiry and No Refund terms meant that Home Direct received significant benefits of guaranteed future income and interest free use of the money. The consumers did not gain any corresponding benefit they would otherwise have had, as they made no interest on the money and were not entitled to any discount on future products that they bought with the "vouchers." This lack of corresponding benefits was deemed to have created a significant imbalance in the contract.

Importantly, the Court noted that the onus is on the party who would be advantaged by the impugned terms to justify that the terms are reasonably necessary to protect their legitimate interests. There was no possible argument in this case that Home Direct had any legitimate interest in holding customers' funds interest free against potential future purchases with no option for them to be refunded.

In regard to detriment caused, the terms locked the purchasers into purchasing goods from Home Direct in the future with no potential to earn any interest on the money held. Further detriment would occur in the event that no new purchases were made within 12 months, leading the credit to be forfeited.

The FTA also demands that the Court consider both the extent to which the terms are transparent and the contract as a whole. While the Judge was of the opinion that this agreement was far from transparent and that the way it was designed was likely to mislead, he upheld that this was not a decisive factor. Unfairness may well have been found notwithstanding better drafting and transparency.

What to Take Away From This Case?

1. The starting point to any finding that a term is unfair is that the impugned terms must create a significant imbalance in the parties' rights and obligations under the contract. To assess whether this has occurred, judges will weigh up the benefits and detriments that the terms bring to the parties. A significant benefit to one party with no corresponding benefit to the other will be a basis for finding significant imbalance in the contract.  In this case, emphasis was placed on the one-sided nature of the benefits.

Courts will assess this by looking at a number of things, including:

(a) whether the parties rights and obligations are broadly equivalent;

(b) the effect of the contract with the terms and the effect it would have without;

(c) whether purported benefits are actually beneficial to the purchaser.

2. It will be presumed that the terms are not necessary to protect the legitimate interests of the advantaged party, and the onus will be on them to prove that they are necessary.

3. The transparency of the terms must be considered, and can be an important factor, but will not be decisive. Unfairness may well arise notwithstanding plain language and drafting.

Furthermore, the Government has recently announced plans to extend these unfair terms provisions in the FTA to cover standard form business contracts with a value below $250,000.00. This means that contracts between businesses will also come under scrutiny by the Commerce Commission and may have terms deemed unenforceable because of unfairness. The Government will also bring in new prohibitions against uncontainable conduct – being harsh and oppressive conduct that goes against socially accepted standards of good conscience. The Government is intending to introduce an amendment bill in early 2020 that will contain these changes.  

All suppliers who do business by way of standard form contracts should review the terms of these contracts to ensure they are not unfair. Check if there are terms in these contracts that impart no corresponding benefits to balance out the detriment that they may cause to the other party. If there are, make sure that you can prove they are necessary to protect your legitimate interests.

For enquiries or requests for assistance related to the subject matter of this article, or more general corporate/commercial law enquiries, please contact:    

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz)

This article was co-authored by Ranginui Moore.

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