As discussed in Buddle Findlay's July 2013 business law reform update, a new Supplementary Order Paper (SOP) to the Consumer Law Reform Bill has been released (SOP 273 – replacing SOP 207 released in April). The Bill includes changes to the Fair Trading Act 1986 and the Consumer Guarantees Act 1993 and could become law by the end of the year.
While the new SOP contains largely the same proposals as the previous SOP, there are also a few substantive changes; principally addressing the application of the proposed unfair contract terms provisions and specific provisions relating to insurance contracts.
Proposed unfair contract term provisions
The SOP clarifies that:
- If a court has declared a term in a standard form contract to be "unfair", the term can nevertheless subsequently be included in a standard form contract if included in such a way that complies with the terms (if any) set out in the court's decision (this change is carried over from SOP 207)
- The prohibitions on unfair contract terms in the Bill will not apply to contracts entered into before the provisions of the Bill come into force, but if a contract entered into before those provisions come into force is then varied or renewed on or after the provisions are in force, the contract will be treated as a new contract for the purposes of the unfair contract terms provisions. This does not apply to contracts of insurance (explained below).
Contracts of insurance
If a standard form contract is a contract of insurance (as defined in the Insurance (Prudential Supervision) Act 2010), a variation or renewal of the contract (including new contracts that in effect are renewals) will not be subject to the unfair contract term provisions.
In response to submissions about the unique nature of insurance contracts, the SOP also amends the Bill to provide that certain terms in contracts of insurance will not be subject to the unfair contract term provisions included in the Bill. These are terms that:
- Identify the uncertain event or otherwise specify the subject matter insured or the risk insured against
- Specify the sum or sums insured
- Exclude or limit the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances
- Describe the basis on which claims may be settled or that specify any contributory sum due from, or amount to be borne by, an insured in the event of a claim under the contract of insurance
- Provide for the payment of the premium
- Relate to the duty of utmost good faith that applies to parties to a contract of insurance
- Specify requirements for disclosure, or relate to the effect of non-disclosure or misrepresentation, by the insured.
Terms of the nature listed above are to be taken "to be terms that are reasonably necessary in order to protect the legitimate interests of insurers". This means that such terms cannot be declared to be "unfair", even if other aspects of the test for unfairness are met (for example, that the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on). For all other terms in a contract of insurance that are not on the list, each of those terms must still be assessed for compliance with the provisions proposed in the Bill.
Some of the terms listed above are arguably not unique or intrinsically linked to contracts of insurance and are found in standard form contracts in other industries. The success of the insurance industry in securing support for the changes demonstrates how effective engagement with the legislative process can yield results.