Time to put the three elements of unfairness to the test

POSTED BY Andrew Wallace
12 May 2013

posted in Business | Legislation | Consumer Law | Contract Law



Does your business contract with your customers on a set of standard terms? Or are you looking at putting a set of standard terms in place? If so, you need to be aware that proposed new rules against unfair contract terms look destined to become law later this year. A recent tweak has meant that the new rules will probably have a longer introduction period than originally proposed (15 months instead of six), however it's a good time to start thinking about the rules and what they may mean for you.

The new rules will form part of the Fair Trading Act, and will apply to standard form consumer contracts. A court would be required to take into account a number of factors in determining whether a contract is a standard form contract, including the relative bargaining power of the parties and the extent to which the parties had an effective opportunity to negotiate the terms of the contract. These types of contracts are everywhere in business. Obvious examples are the telecommunications, airline, fitness and car rental industries.

So when is something in a contract "unfair”? This will be determined by reference to three elements. A term could be held to be unfair if it:

  • Would cause a significant imbalance in the parties' rights and obligations, and
  • Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
  • Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.

Examples of danger areas are:

  • Terms that allow you (but not your customer) to terminate the contract,
  • Terms that have the effect of penalising your customer for breaching or terminating the contract,
  • Terms that allow you (but not your customer) to vary the terms of the contract, and
  • Terms that allow you to vary the goods or services to be supplied, without your customer's approval.
  • If a court was to decide that one of your contract terms was unfair, you wouldn't be allowed to apply, enforce or rely on the term. If you did, you could face, among other things, substantial penalties (proposed to be increased from up to $60,000 to up to $200,000 for individuals, and from up to $200,000 - $600,000 for companies).

Often there are legitimate commercial reasons for structuring standard terms in a particular way, so in each case it's a matter of carefully analysing any potentially offending terms so you can decide whether they would stand up to scrutiny if tested in court. If it's close to the line, you may be able to change the term and still achieve the same commercial objective.

In Australia, the ACCC (their equivalent of New Zealand's Commerce Commission) recently reported back on an extensive industry review on compliance with their unfair contract terms rules. In doing so, the ACCC put all businesses on notice that it's moving to an enforcement response to deal with the outstanding issues it identified. It's not waiting around either: just a few weeks after releasing its report, the ACCC instituted proceedings against an ISP alleging that terms in its standard form contract dealing with price variations, liability and termination rights were unfair and in breach of their rules. We can expect our Commerce Commission to be equally hot on this issue once the rules come into force over here.

This article was first published in the Your Law column in the Sunday Star Times on 12 May 2013.

POSTED BY Andrew Wallace
12 May 2013

posted in BusinessLegislationConsumer LawContract Law



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