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PLAYING FAIR – THE COMMERCE COMMISSION ISSUES NEW GUIDELINES
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In March 2015 the Fair Trading Act 1986 was amended to include new provisions prohibiting unfair contract terms in standard form contracts. The amendments affect every standard form contract entered into between any business and any consumer, and particularly rollover contracts.

If identifying what constitutes an unfair term sounds straight-forward, it’s not. However, a new report issued by the Commerce Commission provides some useful insights into what terms might be unfair and what steps any business can take to avoid getting into trouble.
 
The report is the result of a comprehensive review of 30 standard form contracts from nine energy retail companies. The Commission says at the outset it identified energy retail contracts as ‘having a high potential for unfair terms and attendant consumer harms’. However, in what is a warning for other businesses, the Commission notes that the energy retail companies had made a genuine effort to comply with the new unfair contract term provisions, but in spite of that each had continued to rely on terms that the Commission considered potentially unfair.  
 
Section 46L of the Fair Trading Act defines the characteristics of an ‘unfair’ term:

  • it would cause a significant imbalance in the parties’ rights and obligations; and
  • it is not reasonably necessary in order to protect the legitimate business interests of the party advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on

The Fair Trading Act helpfully provides a list of 13 examples of the kind of contract terms that may be unfair. These are terms that permit (or effectively permit) one party, but not the other, to, for example, avoid or limit performance of the contract, terminate the contract or renew or not renew the contract. The list is not exhaustive.
 
In the energy retail standard form contracts, the Commission found 59 terms it deemed to be potentially unfair. Several are common terms used by a wide range of businesses in their standard form contract agreements. We set out some of the most commonly used terms below.

Automatic renewal clauses with a termination fee


Automatic renewal clauses are not unfair per se. But the Commission found that automatic renewal clauses, when accompanied by termination fees to exit the renewed contract are unfair. These clauses are unfair even when the terms are transparently disclosed or where customers are notified, before the renewal of the contract, of their ability to opt-out.
 
The Commission found these clauses grant the energy retailer a beneficial option to automatically extend the length of the contract on new, un-negotiated terms. This is a one-way advantage, since the customer has no right to automatically renew the contract. In contrast, the term disadvantages the consumer who, unless they opt out, must accept the revised terms or pay a termination fee to exit. There is no corresponding benefit to the consumer to balance the arrangement.
 
The Commission notes that automatic renewal clauses rely on customer inertia to lock customers in contracts they do not want or compel customers to pay a termination fee to exit the further term.
 
The Commission’s advice – if your standard form contract includes an automatic renewal clause make sure it does not impose termination fees.

Limiting the liability of the company


The Commission was critical of imbalanced liability clauses that seek to limit and/or exclude a company’s liability but provide customers with no corresponding limitation to their liability for any loss caused to the company. Most companies surveyed relied on these kinds of clauses. For example one company sought to limit its liability for any loss caused to customers to $10,000.
 
The Commission was unconvinced that this ‘boilerplate’ type of one way limitation on liability was fair, since it significantly disadvantages customers and is ‘invariably’ drafted only for the benefit of the company.
 
The Commission accepted, however, that limitation of liability clauses can be legitimate where:

  • the amount of the limitation is sufficient to ensure the customers are not left out of pocket when loss occurs; and
  • customers have the same or similar limitation to their liability as the company.

To be fair, the terms need to be ‘sufficiently balanced’.

Terms that allow the trader to unilaterally vary the price of the service in a fixed term contract


Many of the contracts reviewed included a clause allowing the company to unilaterally vary the price of service provided under fixed term contracts. The Commission was concerned these terms created a significant imbalance between parties’ rights and obligations since customers did not have a corresponding right either to vary the price of the services or cancel a fixed term contract without paying an early termination charge.
 
The Commission was not convinced these terms were necessary.

Terms that allow the trader to unilaterally vary the terms of the contract


There may be legitimate reasons why a company would need to unilaterally vary the terms of a contract and the Commission accepted this.
 
Many of the contracts reviewed contained such clauses, such as, for example, a clause allowing the business to amend the standard terms and conditions at any time with 30 days’ notice.
 
However, where these clauses are drafted broadly, or where they allow the company to vary the terms when there was no legitimate reason to do so the Commission warned they may be in breach of the unfair test.

What to avoid


In interpreting what constitutes an ‘unfair’ term in a standard form contract the Commission has looked for imbalance in the relationship between business and customer.

  • Several of the common terms that were potentially unfair were ‘boilerplate’ clauses that are very common across standard contracts and too broadly written for any specific circumstances.
  • Some clauses acted to mislead customers about the existence and extent of their statutory rights. Companies were advised that wording such as ‘as much as the law allows’ and ‘to the maximum extent permitted by the law’ could be interpreted by a reasonable customer to be claiming to limit consumer rights under the Consumer Guarantees Act and the Fair Trading Act.
  • Contracts must be clear that customers on fixed term contracts can exit without penalty where a contract variation causes detriment, except in certain circumstances where the business can justify a variation that should not result in a right to cancel. The right to charge a termination fee limits the ability of the business to vary the terms and price of the contract.

The Commission is now planning similar reviews of credit contracts and gym contracts.

If you have any queries on the Fair Trading Act’s unfair contract terms provisions or require help reviewing or creating a standard form contract to adhere to the unfair contract terms; contact Hayden Wilson or Linda Clark.

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Linda Clark2
Linda Clark

Special Counsel

Wellington

+64 4 915 0862

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