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consumer

Unfair contract terms: What makes a standard form contract illegal?

Key Takeaway

In New Zealand, standard form consumer contracts can have terms declared unfair and therefore unenforceable under the Fair Trading Act 1986. This applies if a term causes a significant imbalance in rights and obligations, is not reasonably necessary, and causes detriment. The Consumer Guarantees Act 1993 also prevents businesses from contracting out of certain consumer rights.

Unfair Contract Terms in New Zealand Consumer Law

New Zealand consumer law aims to protect consumers from unfair practices and terms in contracts for goods and services. Two key pieces of legislation governing this area are the Fair Trading Act 1986 (FTA) and the Consumer Guarantees Act 1993 (CGA).

What is a Standard Form Contract?

A standard form contract is typically a pre-prepared contract offered on a 'take it or leave it' basis, where one party (often the business or supplier) has most of the bargaining power and the other party (the consumer) has little or no opportunity to negotiate the terms [Source: Fair Trading Act 1986, s 26A(2)]. In cases where a party alleges that a contract is a standard form contract, it is presumed to be so unless the other party proves otherwise [Source: Fair Trading Act 1986, s 26A(3)].

Unfair Contract Terms under the Fair Trading Act 1986

The Fair Trading Act 1986 addresses unfair contract terms in consumer contracts. A consumer contract is a contract for the supply of goods or services, or for the sale or grant of an interest in land, to an individual whose acquisition of the goods, services, or interest is principally for personal, domestic, or household use or consumption [Source: Fair Trading Act 1986, s 26A(1)].

A term in a standard form consumer contract may be declared unfair if the High Court is satisfied that all three of the following conditions are met [Source: Fair Trading Act 1986, s 26B(1)]:

  1. Significant Imbalance: The term causes a significant imbalance in the parties' rights and obligations arising under the contract [Source: Fair Trading Act 1986, s 26B(1)(a)].
  2. Not Reasonably Necessary: The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term [Source: Fair Trading Act 1986, s 26B(1)(b)]. When assessing this, the court must consider the extent to which the term is transparent [Source: Fair Trading Act 1986, s 26B(2)]. Transparency refers to a term being expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term [Source: Fair Trading Act 1986, s 26E]. The onus is on the party advantaged by the term to prove that it is reasonably necessary [Source: Fair Trading Act 1986, s 26F].
  3. Detriment: The term would cause detriment (whether financial or otherwise) to a party if it were applied or relied on [Source: Fair Trading Act 1986, s 26B(1)(c)].

Examples of terms that may be unfair, depending on the specific circumstances, include terms that [Source: Fair Trading Act 1986, s 26C, Schedule 2]:

  • Allow one party to unilaterally vary the terms of the contract without a valid reason specified in the contract.
  • Allow one party to avoid or limit their performance of the contract without allowing the consumer a corresponding right.
  • Require the consumer to pay a disproportionately high sum in damages for a breach of contract.
  • Allow the supplier to determine the price payable under the contract after it has been entered into without giving the consumer a right to terminate.

However, certain types of terms cannot be declared unfair. These include terms that [Source: Fair Trading Act 1986, s 26D]:

  • Define the main subject matter of the contract.
  • Set the upfront price payable under the contract.
  • Are required or expressly permitted by any Act or regulations.

If a term in a standard form consumer contract is declared unfair by the High Court, that term is unenforceable [Source: Fair Trading Act 1986, s 26G]. This means it cannot be legally applied or relied upon by any party. The Commerce Commission, or any other person, may apply to the High Court for a declaration that a term is unfair [Source: Fair Trading Act 1986, s 26H].

In addition to unfair contract terms, the Fair Trading Act 1986 also prohibits other forms of conduct, such as misleading and deceptive conduct in trade [Source: Fair Trading Act 1986, s 9] and unconscionable conduct [Source: Fair Trading Act 1986, s 7A]. Misleading or deceptive conduct refers to actions or statements that are likely to mislead or deceive consumers, while unconscionable conduct refers to conduct that is particularly harsh or oppressive.

Contracting Out of the Consumer Guarantees Act 1993

The Consumer Guarantees Act 1993 (CGA) provides a range of guarantees for goods and services supplied to consumers. A consumer is a person who acquires goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption, and not for the purpose of resupplying them in trade, consuming them in the course of a manufacturing or production process, or, in the case of goods, repairing or treating other goods or fixtures on land [Source: Consumer Guarantees Act 1993, s 2].

For consumer contracts, any term that attempts to contract out (i.e., exclude, restrict, or modify) the application of the CGA or any of its provisions is generally void and has no effect [Source: Consumer Guarantees Act 1993, s 43(1)]. This means that businesses cannot, in their standard form contracts, remove or diminish the rights consumers have under the CGA, such as the right to goods of acceptable quality or services carried out with reasonable care and skill.

There are limited exceptions, primarily for business-to-business transactions where both parties are in trade and agree in writing to contract out of the CGA [Source: Consumer Guarantees Act 1993, s 43(2)]. These exceptions do not apply to standard form consumer contracts.

When to Seek Independent Legal Advice

Navigating the specifics of contract terms and consumer rights can be complex. If there are concerns about the fairness of a contract term or a business's conduct, or if assistance is needed in understanding specific rights and obligations, obtaining independent legal advice is advisable. Community Law Centres offer free legal advice to those who qualify, and further information can be obtained from consumer protection agencies.

Key Resources