Further to our email on the Consumer Law Reform Bill last week, we provide an overview of the proposed change in relation to unfair contract terms.

The Consumer Law Reform Bill now contains a prohibition on including, relying on, or enforcing unfair contract terms in standard form consumer contracts. These provisions, if passed into legislation, will mean that your standard form consumer contracts will need to be reviewed to ensure your current terms are not "unfair".

What is an unfair contract term?

An unfair contract term is one which is declared by a court to be unfair. A court, on an application from the Commerce Commission, will consider any "standard form consumer contract". A standard form consumer contract essentially means a contract in which the terms have not been effectively negotiated between the parties. The court may then declare that the term is unfair if it:

  • would cause a significant imbalance in the parties' rights and obligations under the contract;
  • 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.

A court must also take into account the extent to which the term is transparent (for instance, whether it is readily available to any party affected by the term) and consider the contract as a whole (some terms that might seem quite unfair in one context may not be unfair in another). The good news is that the subject of the contract and the upfront price payable cannot be declared unfair.

Given the vague definition of "unfair", the Bill provides a list of contract terms that may possibly be declared unfair depending on the circumstances. These include:

  • a right for only one party to vary the terms of the contract;
  • a right for one party to unilaterally vary the price without giving the other party the right to terminate the contract;
  • a right for only one party to terminate or renew the contract; or
  • a right to unilaterally vary the characteristics of the goods or services supplied.

These types of terms are common in standard form contracts and do not provide a complete answer as to what exactly "unfair" means.

If a term is declared unfair, then it is not enforceable. Further, the Government proposes to triple penalties (up to $600,000 per breach for businesses) for breaches of the Fair Trading Act and that includes a breach of the provisions dealing with unfair contract terms.

How will the prohibition on unfair contract terms affect you?This prohibition will likely cause uncertainty for your business, as it is still not clear what "unfair" means. So, the extent to which standard form contracts will need to be changed is unclear. You may consider reviewing your standard consumer contracts now in order to identify potentially unfair terms.

Next Steps

Subject to the legislative process, the Consumer Law Reform Bill may become law in 2013. The current timeframe proposes that provisions on unfair contract terms would come into effect 6 months after the legislation is passed. We will keep you updated on this important change that will impact your consumer contracts.