The Commerce Commission has secured a court victory regarding the inclusion of certain terms that have been declared to be ‘unfair’, in the context of the Fair Trading Act’s unfair contract terms regime, with the ‘reasons’ judgment of Robinson J in the Commission’s case against Ace Marketing Limited (‘Ace’) having been recently released.

While the decision relates to the declaration of an unfair contract term in a standard form consumer contract, the court’s assessment of what constitutes an ‘unfair’ term is also of interest to any businesses operating in New Zealand on the basis of ‘standard form small trade contracts’, which (since 16 August this year) are now also the subject of the unfair contract terms regime.

Although the proceedings were ostensibly brought due to the inherent ‘unfairness’ of a number of key contractual terms, the decision highlights the need for:

• transparent, plain language;
• documented business reasons for the inclusion of provisions that look to reallocate risk beyond where it would ‘naturally’ fall, especially where consumers or small businesses are involved.

Advantage, Commerce Commission

The business model of Ace, a mobile trader, relied on it selling consumer goods at higher prices than usual, with an emphasis on ‘convenience’ and ‘immediate access to credit’. Ace’s customers were particularly vulnerable: its customer base was described by Ace as being ‘sub-prime and like bad credit history people’.

Ace sold goods to consumers on deferred payment plans, where delivery of the goods would take place only after a set number of payments were made. Ace’s terms and conditions penalised customers for missing a payment, by further delaying the delivery of the goods by a period that the court considered was not at all commensurate with the impact on Ace of the missed payment.

By both including the ‘unfair’ deferred payment plan, and failing to make it clear to its customers how the plan worked, Ace effectively committed a ‘double fault’:

• first, Ace was found to have included an unfair contract term in its standard terms and conditions (which the court declared Ace can no longer rely on, enforce, or include in any future agreements with its customers);
• second, Ace was also liable for breaching the responsible lending code (in relation to the credit it provided), by failing to assist its customers to reach an informed decision as to whether or not to enter into an agreement based on its terms, and ensuring that its customers were ‘reasonably aware’ of the full implications of doing so.

Break point

Among other things, the judge criticised the drafting and presentation of the offending terms with a couple of backhand volleys. The relevant clauses were described as:

• ‘hard to find, inconsistent, and hidden in the fine print’
• ‘buried in text that has a dual-column layout’
• ‘with the text in a small font size (8pt) and narrow line spacing’
• ‘not set out in a logical order that is easy to follow’
• ‘not highlighted or given any prominence in the contract’

The baseline

The unfair contract terms regime in the Fair Trading Act regulates the inclusion of ‘unfair contract terms’ in ‘standard form consumer contracts’ and, since 16 August this year, ‘standard form small trade contracts’. The regime establishes a framework under which the Commerce Commission may seek a court declaration that a term included in a standard form contract of that nature is an ‘unfair contract term’.

If the court declares that to be the case, a person must not:

• include the unfair contract term in a standard form contract; or
• apply, enforce, or rely on the unfair contract term in a standard form contract.

The court may declare that a term is unfair if it:

• would cause a significant imbalance in the parties' rights and obligations under the contract; and
• is not reasonably necessary to protect the legitimate interests of the party who benefits from the term; and
• would cause detriment to a party if enforced or relied on.

While there are no direct penalties for including a term in a standard form contract prior to the term being declared unfair, the declaration that a term is unfair can have significant implications for a business – especially if reliance on that term formed a key part of the business’s strategy. Businesses must also be wary of breaching any other consumer protection legislation with respect to how their terms are presented: for example, any additional requirements applicable in the context of responsible lending (as was the case with Ace), and general prohibitions on misleading and deceptive conduct.

Avoid an unforced error – what businesses should do

The decision against Ace and the recent expansion of the unfair contracts regime to standard form small trade contracts present an opportune time for businesses operating in New Zealand to take a fresh look at their standard terms and conditions, and reassess their suitability and risk of being declared unenforceable.

And while the unfair contracts regime in the Fair Trading Act only applies to ‘standard form contracts’, many of the factors that are relevant in a determination as to whether a term is unfair can have a broader relevance. The inclusion of terms in any type of agreement that are manifestly unfair or that are not clearly articulated can significantly impede the negotiation process, and can result in confusion between the parties, or an unexpected assumption of risk.

With that in mind, all businesses should consider the following when developing their standard terms and conditions and template agreements:

• Use plain language: There is very rarely any ‘magic dust’ that needs to be applied to normal language to make it work legally in a contract. Businesses should endeavour to use language that is as ‘natural’ as possible, so that the key commercial and legal concepts are expressed clearly, logically, and consistently. The more transparent the language used, the more likely it is that a court will uphold its original intention.
• Consider avoiding overly complex arrangements: One of the issues with Ace’s ‘deferred payment plan’ was that it was a fairly complex, unorthodox arrangement. Especially in the case of consumer-facing contracts, businesses should generally seek to avoid complex arrangements which are difficult to draft clearly and/or explain the effects of to customers. While businesses shouldn’t shy away from novel or innovative approaches to offering their products and services, the more complexity that is introduced to the equation, the less likely it is that the court will find that the arrangements were suitably transparent and clear to the customer.
• Document why your clauses matter: Terms and conditions are important to a business: they effectively reallocate risk from one party to another. Often they do so for good reason. Businesses should document those reasons – the court will be reluctant to find that a term is an ‘unfair contract term’ if the term is reasonably necessary to protect the legitimate interests of the party having proposed it. The more evidence that party has that the term is a justified, the more likely it is to be upheld.

Start a conversation

Talk to the experts. Our commercial law specialists, Campbell Featherstone, Hayley Miller and their team are on hand to assist. They have extensive experience advising on the application of the Fair Trading Act and other New Zealand consumer laws, and are frequently engaged to draft clear, concise terms and conditions and other forms of legal agreement for businesses operating in, or looking to launch in, New Zealand