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UNFAIR CONTRACTS

From 17 March this year, amendments to the Fair Trading Act came into effect which provided for a remedy in respect of unfair contract terms in respect of standard form contracts.

The range of businesses that use “standard form” contracts are extensive.

Under the new provisions of the Fair Trading Act, the Commerce Commission can apply to the Court for a declaration that a term in the standard form consumer contract is unfair.  If the Court makes that declaration, the business will be prohibited from including that term in their standard contract or from applying, enforcing or relying on such a term.

Businesses using standard form contracts need to review those standard terms in light of the new rules.   The Commerce Commission published guidelines last year which provide general information relating to unfair contract term provisions and guidance on the Commerce Commission’s approach in assessing whether a contract term is unfair.   Those guidelines are available on the commission’s website.

If a business continues to use or enforce unfair terms after a declaration is made, then the business can be convicted and fined up to $600,000.00 in the case of a company, or $200,000.00 in the case of an individual.

The law effects all contracts entered into by consumers after 17 March 2015.

Examples of the kinds of terms that might be deemed unfair are set out in Section 46M of the Fair Trading Act.

These include terms that allow one party, but not the other party, to do the following types of action:

  • terminate the contract,
  • avoid or limit performance of the contract,
  • vary or renew the terms of the contract,
  • penalise for breach

Unfair terms can also be terms which limit a party’s rights to enforce a contract including limitations to the right to sue, to determine a breach or to refuse an assignment.

It is important to remember that the examples are guidance only and should not be considered as unfair in all circumstances.  Whether or not a term is unfair will depend upon a number of factors including the bargaining power of the parties, and the extent to which the other party was required to accept those terms.

A term will be unfair if it would cause significant imbalance in the rights and obligations of the parties, if the term is not reasonably necessary to protect the legitimate interests of a party and would cause detriment if applied or relied upon.

The Court also needs to take into account the “transparency of the term” and the contract as a whole.  The term transparency is a new term and that relates to the extent to which a party involved in the contract can reasonably identify that term.  Whether it is expressed in plain language, is legible and accessible.

This will be an area to watch with interest.

In the meantime, standard term contracts should be reviewed to ensure that potentially unfair provisions are identified and considered.