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Risks in relation to Unfair Contract Terms

December 20, 2019

You’re at risk if you’re in business and using a standard form of contract, you supply goods or services:

  • to non business customers or
  • to business customers and the goods or services are of the kind ordinarily bought for personal household or domestic use (unless the business customers are buying as retailers or manufacturers or repairers)

if you haven’t had your form of contract (including Terms of Trade) reviewed to ensure that you won’t fall foul of the unfair contract terms regime (UCTR), as an important new case demonstrates - Commerce Commission v Home Direct Limited.

I would say that many traders have ignored this risk to date and have been reluctant to have their contracts reviewed. It’s time to get your contracts reviewed if you haven’t done this.

The case concerned a type of business that isn’t typical and a blatantly unfair system. But the lessons from the case are important.

Home Direct operated a “Voucher Entitlement Scheme." it continued to debit amounts from customers even after they had repaid what they owed on credit sales.Da Each amount was converted into a “voucher entitlement". Customers could only use voucher entitlements to make future purchases from Home Direct. Entitlements couldn’t be refunded or exchanged for cash. Moreover, they would expire after 12 months.

The court had no doubt that the terms of the scheme were unfair, so they weren’t enforceable.

The UCTR regime, which is encompassed in the Fair Trading Act (FTA), allows the Commission to seek a declaration from the court that a term in a standard form consumer contract is “unfair".

A term is unfair if:

  • the term would cause a significant imbalance in the parties' contractual rights and obligations and
  • the term isn’t reasonably necessary to protect the legitimate interests of the party for whose benefit the terms has been inserted and
  • the term would cause detriment (whether financial or otherwise) to against whom it applies.

The court made some helpful comments on how these issues should be determined, though there remain some questions in relation to some aspects of the UCTR.

A key point, which is obvious given the purpose of the regime, is that the fact that a customer signs up to an unfair term won’t prevent the court from declaring that the term is unfair and that the customer isn’t bound by it. It seems likely that even if a term is fully and clearly and prominently explained, if it’s unfair, it will be unenforceable – but time will tell whether that assumption proves to be correct.

Where the UCTR applies, it can’t be contracted out of.

But wait, there’s more. MBIE proposes to:

  • extend the UCTR to B2B contracts with a value below $250,000 and
  • introduce a concept of unconscionability, which will mean more uncertainty.

As to the $250K value, the present proposal is that the UCTR will apply to the provision of goods or services with a value of less than $250K (or less than $250K over a 12 month period if the arrangement is for more than a year). More detail is intended to be provided.