No grace period for unfair contract terms law

by Hannah Norton02 Mar 2015
Businesses are being urged to treat standard form consumer contracts with care, as new unfair contract terms (UCT) laws take effect this month – with no grace period.

The Commerce Commission has released its final guidelines about its approach to enforcing new UCT provisions under the Fair Trading Act, as amended in 2013.

The Act stipulated a court may deem a contractual term unfair if it causes significant imbalance in the parties’ rights and obligations, it is not reasonably necessary to protect the interests of the advantaged party, and it would be detrimental to a party if applied, enforced or relied on.

The guidelines are intended to help businesses comply with the law, Commerce Commission chairman Dr Mark Berry said.

“Parliament delayed the introduction of these laws for 15 months to give businesses time to prepare for them.”

“It is important that businesses note that there will be no grace period. The Commission will be actively enforcing these new laws.”

While the guidelines themselves aren’t legally binding, the Commission’s intent in publishing them is to ensure businesses understand the new UCT provisions and are able to make the necessary changes to their contracts to ensure they won’t be potentially in breach of the law come 17 March, a Commerce Commission spokesperson said.

“For law firms, the guidelines provide a useful reference point when it comes to understanding our approach and what industries we are particularly concerned about,” he said.

“It is a reasonably comprehensive document and given it is freely available and these laws were well-signalled 15 months ago, we don’t consider any business has an excuse not to have their house in order.”

While the guidelines are useful, there are still a number of aspects of the new law that businesses need to be aware of, Bell Gully senior associate Laura Littlewood said.
One in particular was the fact the unfair terms provisions applied to business contracts, and could not be contracted out of - unlike in the Consumer Guarantees Act.

“The unfair contract terms law was born out of consumer protection legislation but in New Zealand applies to both consumer and business contracts.’”

She said Bell Gully - and the legal industry as a whole - had noticed a surge in businesses seeking advice about the guidelines; and prior to the establishment of case law the Commerce Commission had emphasized that lawyers take “a common-sense approach and rely on their gut feeling when analysing terms for fairness.”

Littlewood urged businesses to update their standard form consumer and business contracts.

“They should be particularly focusing on terms that are unilateral – ones that give a right to the supplier, that doesn’t extend to the customer.”

Other new legislation which needs to be taken into account, particularly for lenders and businesses involved in financial products and services, was the Credit Contracts and Consumer Finance Act and the Responsible Lending Code.

Lenders were one of the types of businesses which the Commission would initially focus on, Dr Berry said.

“To start with, we will focus our attention on industries and practices that have proven problematic overseas, or where we have received complaints in the past about potentially unfair contract terms. Industries commonly falling into these categories include telecommunications, rental cars, fitness, airline and online trading.”

“We will also concentrate on those contracts that are causing harm to vulnerable consumers in the consumer credit area.  Loan contracts, including credit related contracts for the sale of goods or services, can be particularly harsh on vulnerable consumers so we intend to check a range of contracts to make sure they comply with the new law, and take appropriate steps if they don’t.”

Lower-tier finance providers are of particular concern to the Commission as their customer base includes a large number of vulnerable consumers who often aren’t fully aware of what they have signed up to, a Commerce Commission spokesperson added.

“We will be proactively checking a range of contracts in this industry as a priority when the new law takes effect,” he said.

The types of terms that concern the Commission include those that have the effect of limiting competition, such as automatic ‘rollover’ or renewal terms or ones that lock consumers into contracts they wish to exit, preventing them from switching to a competitor, Dr Berry said.

“We will also look closely at any term that allows a business to increase the price it charges for goods or services without the customer being allowed to terminate the contract with no penalty.”

Consumers also need to understand the new provisions only apply to contracts signed after 16 March, he said.

“The new laws also apply to any existing contract (except insurance contracts) that is varied or renewed after 16 March.  Any earlier contract is not captured by the law.”