This is an updated article of April 2024.
Any business in New Zealand will be familiar with consumer contracts. These contracts govern how your business sells, supplies and distributes goods and services to your customers. Contracts act to set out the rights and obligations of the parties. Further, contracts provide remedies where one party to the contract does not comply with their legal obligations. For your consumer contracts to be enforceable, your business must avoid including any unfair contract terms within their contracts. This article will explain what unfair contract terms are, why you should avoid them, and the impact they may have on your consumer contract.
What is a Consumer Contract?
Parties often enter into a consumer contract when they buy and sell goods or services. Contracts do not necessarily have to be in writing. Moreover, parties can form contracts verbally. However, several elements must be met for a contract to be legally binding. If your contract does not satisfy these elements, your contract may not be legally enforceable.
What Are Unfair Contract Terms?
Courts can deem contractual terms to be unfair on three grounds. These grounds include that the term:
- would cause a significant imbalance in the party's rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party whom the term would advantage; and
- would cause detriment (whether financial or otherwise) to a party if the court applied, relied on or enforced the term.
If the contract does not meet any of these criteria, the court will not consider the contract unfair. Therefore, it will be enforceable against either party.
What Does Each Criterion Mean?
Significant Imbalance
A term that causes a significant imbalance means something that either significantly advantages or disadvantages either party. This is part of the criteria as contracts should provide relatively equal benefits to both parties. The Commerce Commission takes a dim view of contracts that cause an imbalance between the business and the consumer.
For example, a term of a contract that may cause a significant imbalance is a unilateral termination right. This right grants one party the right to end a contract for any reason and without prior notice. As such, this right may create significant uncertainty and substantially disadvantage your customers.
Not Reasonably Necessary to Protect the Interest of a Party
A term must also be reasonably necessary to protect the interest of a party. If your contract can do without the term and still protect your interests, it should be removed.
For example, it is common for businesses to charge a cancellation fee to their customers. You are only entitled to charge the customer a cancellation fee where this fee is reasonable. Further, this fee must be for the purpose of protecting your legitimate business interests.
For example, suppose you run a restaurant and a patron cancels with seven day's notice/ In this instance, it would be unreasonable for you to charge a cancellation free. This is because you have not incurred any costs or losses as a result of the cancellation. Moreover, seven days is sufficient notice to secure a replacement booking.
However, where your customer cancels with 30 minutes notice, it would be reasonable to charge a cancellation fee.
The onus is on the party arguing for the term to prove that it is reasonably necessary for them to include it in the contract.
A Term That Would Cause Detriment
This means that one party may be harmed if the court were to include this term in the contract. Indeed, the courts do not limit detriment to financial detriment. Courts recognise that detriment can include delays and emotional detriment as well.
For example, a term that limits a business's liability for any risk (including risk resulting from the businesses own fault and/or negligence) may leave the consumer unfairly exposed. Further, this term may cause detriment to the consumer if a dispute were to arise.
Terms That Are Exempt From Being Unfair
Some terms cannot be considered unfair. These are terms that:
- define the main subject of the contract;
- set the upfront price of the contract; or
- are expressly permitted by law.
Key Takeaways
Unfair contract terms are not legally enforceable if they meet the criteria outlined in this article. These terms often exist in consumer contracts between customers and businesses. For the court to consider a contract unfair, it must cause a significant power imbalance between the parties. It must also be unnecessary to protect the party's interests, and it would be detrimental to the consumer if relied upon. If all three of these criteria are met, then the term is considered unfair, and the courts will deem the term unenforceable. The courts will also look at the transparency of the term and the contract as a whole to determine if a contract term is unfair.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.