Do You Know About Unfair Contract Terms?

Standard T&Cs are essential for businesses in New Zealand.

Having robust T&Cs with your customers ensures you secure a favourable deal every time, including aspects such as payment terms, a clear description of the goods or services you’re providing, and limiting your liability if things don’t go as planned.

If you’re running a business, it’s always a prudent move to have standard business terms and conditions in place.

But are they beneficial for your customers? And does that impact your business? Consider your own experiences as a customer:

How often do you agree to terms and conditions without reading them?

If you’re like most people (and not a legal enthusiast like us!), it’s probably quite often.

While we would advise against accepting T&Cs without reading them, we understand. They can be lengthy, tedious, and complex.

Plus, sometimes you feel like you don’t really have a choice.

Every time your preferred app updates its T&Cs, do you ever think – “What difference does it make if I agree? I still need to use this app!”

The reality is, as mundane and insignificant as T&Cs may appear, they form a real, legally enforceable agreement.

So it doesn’t matter if you read them or not. If you accept them, you are legally bound by them.

Doesn’t seem quite fair, does it? That’s why the law offers protection to consumers against unfair contract terms. And as a business, you need to be aware of these because if your standard T&Cs contain unfair contract terms, you might not be able to enforce them!

Therefore, it’s crucial to understand unfair contract terms and their implications for your business.

What Is An Unfair Contract Term?

In New Zealand, consumer protection is a significant aspect of the law, primarily governed by the Fair Trading Act and the Consumer Guarantees Act.

These laws are designed to safeguard the average consumer – that is, the person who doesn’t meticulously scrutinise standard terms and conditions.

As such, under these acts, certain provisions apply to standard form contracts concerning unfair contract terms.

So, we’ve established that rules regarding unfair contract terms apply to standard form contracts. The next question is…

…What Is A Standard Form Contract?

A standard form contract is typically a pre-prepared contract by one party that is not open to negotiation.

Essentially, it’s a contract offered on a ‘take it or leave it’ basis.

Industries that commonly use standard form contracts include:

• Telecommunications
• Finance
• Construction
• Fitness centres
• Vehicle rentals
• Travel
• Utilities

The laws around unfair contract terms apply to standard form contracts between businesses and individual consumers.

These laws also extend protections to small businesses from unfair contract terms. This is particularly relevant for contracts that are for the supply of goods or services or for the sale or grant of an interest in land, where at least one party is a small business employing fewer than 20 people, and the upfront price is within a certain threshold.

What Makes A Contract Term ‘Unfair’?

For a contract term to be deemed ‘unfair’, it must meet all three of the following criteria:

• Create a significant imbalance in the parties’ rights and obligations arising under the contract
• Not be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
• Cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon

A term could also be unfair if it permits one party to do something that the other party cannot.

For instance, a term that allows one party (but not the other) to:

• Avoid or limit their obligations under the contract
• Terminate the contract
• Alter the terms of the contract

Another example is a term that penalises one party for breaching or terminating the contract, but not the other party.

Overall, the laws around unfair contract terms protect consumers and small businesses in situations where they have little or no chance to negotiate with more powerful businesses.

Are There Any Exceptions?

Yes, there are exceptions.

Certain contracts and terms are exempt from the unfair contract terms provisions.

Contracts that are not covered by these laws include:

• Contracts for the carriage of goods by ship
• Constitutions of companies, managed investment schemes, or other types of entities
• Most insurance contracts

Terms that are not covered by these laws include:

• Terms that define the main subject matter of the contract, e.g., the goods or services being supplied
• Terms that set the upfront price payable under the contract
• Terms that are required or expressly permitted by law
• Terms that have been genuinely negotiated between the parties

In other words, terms that fall into these categories are not considered unfair and are allowed by law.

What Happens If You Have An Unfair Term In Your Contract?

Ultimately, it’s up to the court to determine if a contract term is unfair.

If a court rules a contract term ‘unfair’, the term will be void and unenforceable. This doesn’t necessarily invalidate the entire contract – it depends on the contract’s specific wording.

However, the court can also impose penalties for including unfair terms in your standard form contracts. As a business, you want to avoid this situation at all costs.

The most reliable way to ensure your contracts are enforceable is to make sure they contain no unfair terms. This often means having your contract professionally drafted by a lawyer who understands the nuances of New Zealand law.

How To Tell If You Have Unfair Terms In Your Contracts?

The court will consider various factors when assessing if a contract term is unfair.

And let’s be honest, the last thing your business needs is a legal dispute!

It’s better to be proactive and eliminate the risk before it becomes an issue.

The simplest way to avoid having an unfair term in your contract is to seek legal advice during the contract’s initial drafting.

If you suspect your contract may contain an unfair term, consider the following questions:

1. Does my contract term create an imbalance in my rights and obligations compared to the other party?
2. Is the contract term essential to protect my business’s legitimate interests?
3. Would the term cause detriment to the other party if enforced?

Another critical aspect to consider is the term’s transparency.

Are you using small print, or complex and technical language that your customer is unlikely to comprehend?

If so, this could increase the likelihood of having an unfair contract term.

A term is transparent if it is expressed in plain language, legible, presented clearly, and readily available to all parties affected by the term.

The less transparent a term is, the more probable it is to be considered unfair.

Unfair Contract Term Example

Imagine you run an IT service company and you enter into a two-year contract with a small business, including a clause that allows you to change your service fees at any time without notice to the small business.

The contract’s termination clause also states that the small business has no right to end the contract within the two years.

These terms are likely to be viewed as unfair because they create a significant imbalance between the rights of your business and the rights of the other party.

What To Take Away…

The bottom line is that having unfair terms in your standard customer contracts is not beneficial for your business or your customers.

There are many types of terms that you may not even realise are unfair to the other party, especially if you lack legal expertise.

If you’re using one standard contract repeatedly with your customers, you want to ensure it’s legally robust. The last thing you want is to discover that your standard contract contains an unenforceable term, leading to potential refunds or damages.

The best course of action is to engage a qualified business lawyer who is well-versed with New Zealand’s consumer protection laws to draft it for you.

If you need assistance with your standard terms and conditions – or you think your customer contracts may contain unfair terms – feel free to get in touch with us at Sprintlaw on 0800 002 184 and we’d be delighted to assist you!

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