Beware of Unfair Contract Terms - Contract Lawyer Auckland – Dukesons Business Law

August 2017

This Blog isn't legal advice – if you need legal advice on any contract law or consumer law issue or any other business law or commercial law issue, please contact me. I'm a lawyer in Auckland who provides advice on a range of business law or commercial law issues.

The recent review by the Commerce Commission of gym contracts under the unfair contract terms regime should sound a warning to all businesses that have standard contracts with consumers (who can include business customers). Any standard form contracts (contracts that aren’t really negotiable) that are with consumers are subject to the regime, including Terms of Trade, finance contracts, equipment leases, car hire, etc.

Businesses that haven’t had their contracts reviewed are taking the risk that:

  • some terms will be unenforceable if they're unfair;
  • significant fines can be imposed for having unfair terms;
  • adverse publicity could result if a business is investigated or prosecuted for having unfair terms.

It’s hard to know what it takes to get businesses to review their contracts with these risks in mind. Attempts by contract lawyers and consumer lawyers to encourage this have fallen on many deaf ears.

Under the Fair Trading Act, a contract term in a standard from contract will be unfair where it:

  • would cause significant imbalance in the parties rights and obligations under the contract, and
  • isn’t reasonably necessary to protect the legitimate interests of the party who inserted it; and
  • would cause detriment to the other party if relied on.

Gym contracts are service contracts, which obviously provide for ongoing services. Clauses that came under scrutiny included:

  • clauses requiring members to give lengthy notice of cancellation e.g. 30 days, when a much shorter period would have been fairer and more reasonable;
  • clauses requiring payment of early termination fees - payment of any termination fee would need to be justified as being fair and reasonable having regard to all of the circumstances and in particular, shouldn’t exceed the likely costs or losses caused by the termination;
  • clauses allowing the gyms to unilaterally vary their services and even the location, without giving members the right to cancel without cost;
  • clauses allowing gyms to vary prices, including under fixed term contracts, without giving members the right to cancel without cost;
  • clauses excluding or limiting the liability of gyms when this contravened legislation e.g. the Consumer Guarantees Act, or when this would otherwise be unfair or unreasonable;
  • clauses stating that the agreement was the entire agreement with a view to excluding liability for representations and statements that were made to customers before they signed up.

The Commerce Commission previously undertook investigations into telco and energy company contracts with consumers and concluded that the contracts contained a considerable number of potentially unfair clauses.

Consumers may include businesses, so some B2B contracts can be caught by the unfair contract terms regime and by the Consumer Guarantees Act. The legislation applies equally to business consumers and non-business consumers where the consumer acquires goods or services of a kind ordinarily acquired for personal domestic or household use or consumption (even though the goods might also be ordinarily acquired for business purposes e.g. computers, motor vehicles, etc).

A business won’t be deemed to be a consumer in certain cases e.g. if they’re acquiring the goods or services to resupply them in trade e.g. the business acquires goods as a retailer (the goods are inventory). Also, if it’s fair and reasonable to do so, it’s possible to contract out of the Consumer Guarantees Act where the consumer is a trader. However, the unfair contract terms regime can’t be contracted out of.

It doesn’t matter whether a trader is large or small, or whether they are providing goods or services. Any standard form contract where there's a dealing with consumers will be caught by the unfair contract terms regime and any supply of goods or services to a consumer will be caught by the Consumer Guarantees Act unless the consumer is in trade and it’s fair and reasonable to contract out of that Act. If fines are imposed for having included unfair terms, they could dwarf any legal costs that would be involved in having a good contract lawyer or consumer lawyer prepare or review the contracts in the first place.


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