How lawful are your business terms?

Posted on September 27, 2016 in Commercial (Tags: Building Business, Commercial Law, Consumer Law, Consumer Rights, Contracts) Commercial.jpg

Changes to the Fair Trading law in 2015 rendered standard form consumer contracts used regularly by many small businesses in New Zealand to be unlawful due to the nature of terms which the law now deems to be unfair. The key component of a standard form consumer contract are:

  • The terms have not been subject to effective negotiation between the parties and are offered on a “take it or leave it” basis.
  • The goods or services are supplied in trade, and are of a kind ordinarily acquired for personal, domestic or household use or consumption. Under the particular contract, they are not acquired for commercial purposes.

Examples of standard form consumer contracts are gym memberships, hire purchase agreements, motor vehicle sales contracts, online and mobile apps and software, residential construction contracts, retirement village contracts and utilities contracts.

Only the Commerce Commission can enforce the law relating to unfair contract terms. However, members of the public can complain to the Commerce Commission and seek to have a matter investigated.  A consumer contract can include a contract for goods which are to be used for both personal and commercial use.  For example, a contract whereby a small business acquires a refrigerator for use in the tea room can still be a consumer contract despite the fact that the purchaser is in business because it does not intend to resell the fridge or use it in the course of production or manufacture.

What sorts of terms might be regarded as unfair?

Examples of terms that are unfair because they might cause a significant imbalance between the parties’ rights and obligations include:

  • A term that shifts the risks to a consumer where the business is better placed to manage it.
  • A term penalising one party for a breach of contract, but not the other.
  • Penalty terms purporting to create mutual penalties under the contract where it is improbable that the supplier is ever likely to suffer a penalty and very plausible that the consumer may.

For example, a term in a tradesperson’s contract that says the customer will have no claim against the tradesman for any damage done by the tradesman to the customer’s property, including through the tradesperson’s negligence would shift a considerable risk onto the customer that the tradesperson should be better placed to manage and would be regarded as unfair.

Another example would be for a standard delivery contract for a piece of furniture, which requires the purchaser to check the condition of the goods before accepting delivery. If delivery is made to the customer’s home and the customer is at work and has no opportunity to inspect the goods, this shifts the risk of the furniture being damaged onto the customer where it should rest with the company delivering the furniture.

Terms may also be unfair because they are not reasonably necessary to protect legitimate business interests. One example given by the Commerce Commission is where a bank which is conducting a mortgagee sale of a house excludes the standard vendor warranties.  The bank would have to show that the clause is reasonably necessary to protect the bank’s legitimate business interests, such as where the bank has had no opportunity to inspect the property.

Typically, the clauses which are likely to be regarded as unfair are clauses that allow a business to make changes to the contract or to what they are supplying without an equivalent right being provided to the other party. For example, standard terms of trade frequently state that the business can vary the terms at any time by notice to the other party or by uploading them onto their website.

Researchers from the Auckland University Business School have recently found that only 33% of contracts reviewed which had unfair terms in 2015 have been changed to try to comply with the new law. All of the 114 contracts still contained at least one unfair term – 1,086 unfair terms in total.  They found that 56% of contracts gave businesses the freedom to vary prices and/or the provision of goods and services at any point, but still compelled consumers to pay termination fees and charges if they wanted to terminate following the changes. Only 9% of businesses allowed the consumer to cancel the contract without paying fees or charges.  Many companies still state that they are not liable for loss or damage arising from their goods or services.  These are all unfair contract terms.

Businesses who provide their goods and services under standard form contracts to consumers should have those contracts reviewed in order to ensure that they are compliant with the new law.

Sally Peart