6.2.1 Unfair Contract Terms
An unfair contract term is a term that causes a party to a contract (usually the consumer) to be at a disadvantage while the term is not reasonably necessary for the protection of the interests of the other party (usually a business). Typically, an unfair term is a pre-written term in a standard form contract.
A standard form contract is a contract created by the business in advance of an agreement being made, and it is not negotiated separately with each consumer. In comparison, a negotiated term is agreed upon by both the business and each individual consumer. The types of consumer contracts which are typically standard form contracts include rental car agreements, electricity and gas agreements, telephone line agreements, gym memberships and retirement home contracts.
Unfair contract terms have been identified in other jurisdictions as causing a significant imbalance in the parties' rights and obligations under contracts, to the detriment of consumers. A term that states that a business may change or alter other terms in a contract without consulting the consumer may be an example of an unfair contract term.
In the United Kingdom and Victoria, Australia, there have been in place for some time prohibitions related to unfair contract terms12. There is also the European Union directive 93/13/EEC 1993 on Unfair Terms in Consumer Contracts. This legislation was considered by the Australian Productivity Commission in its Review of Australia’s Consumer Policy Framework13. The Productivity Commission recommended that provisions addressing unfair contract terms along the lines of the provisions of the Victorian Fair Trading Act should be incorporated in the new national Australian Consumer Law. This recommendation was then endorsed by MCCA (which includes Commonwealth, State, Territory and New Zealand Ministers responsible for consumer affairs). The Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 passed in April 2010 includes new unfair contract terms provisions which come into effect on 1 July 201014.
Given Australia’s decision to include provisions dealing with unfair contract terms in the Australian Consumer Law, and laws in other international jurisdictions restricting unfair contract terms, it is appropriate to examine the possibility of including unfair contract terms provisions in the Fair Trading Act. The extent of concerns with unfair contract terms in practice in New Zealand is not known. Anecdotally, community agencies have advised the Ministry of Consumer Affairs of contracts that may include unfair terms. The Review of the Operation of the Credit Contracts and Consumer Finance Act 200315 noted that some credit contracts may not meet the high test for oppression under the Credit Contracts and Consumer Finance Act, but may include unfair contract terms.
The Australian Productivity Commission’s extensive examination of the possible inclusion of unfair contract terms provisions in the Australian Consumer Law was from the same position of not having a clear and obvious problem demanding a regulatory response. The similarity between the Australian and New Zealand markets enables New Zealand policy makers to take advantage of the Australian Productivity Commission’s analysis without having to repeat an identical analysis.
In summary, the Productivity Commission decided there are sound economic and ethical reasons for legislation dealing with unfair contract terms that cause consumer detriment. It noted that fairness is an ethical value in its own right, and it is a legitimate function of the law to protect consumers from being dealt with unfairly. There is also an economic value in consumers being able to trust suppliers they contract with, even if they use standard form contracts with fine print terms.
It noted there are also arguments that one-sided standard form contracts which consumers are obviously not intended to actually read are in fact efficient, and that suppliers will only rely on contract terms which might ostensibly be “unfair” in limited cases, especially where consumers might not be acting in good faith themselves. The argument is that consumers generally have nothing to fear from “unfair” contract terms because suppliers will generally treat their customers fairly in competitive markets, irrespective of the standard terms the consumers might notionally have agreed to.
The Productivity Commission concluded that there was persuasive evidence that notionally unfair contract terms are common in Australia, even though they are often dormant and not used by suppliers. The Commission accepted that the evidence of the detrimental use of unfair contract terms was of variable quality and often anecdotal, but that it was nevertheless significant. The United Kingdom experience also suggests there is a consumer benefit from their Unfair Terms in Consumer Contracts Regulations.
The Productivity Commission’s approach was to weigh the generally persuasive but uncertain evidence of consumer benefit against the likely costs of regulating unfair contract terms. The Commission relied on business in Victoria, the United Kingdom and Europe not having identified major problems or costs associated with the introduction of unfair contract terms laws. The Commission also relied on the assumption that any new unfair contract terms laws would be targeted specifically at non-negotiated (i.e. standard form) consumer contracts, and that the terms of the new law would be clear.
Features of the Australian Consumer Law provisions on unfair contract terms
The unfair contract terms provisions put in place by Australia are now discussed. The underlying issue is whether similar provisions could work for New Zealand.
The Australian Consumer Law provides that unfair terms in consumer contracts are void. It defines a “consumer contract” as a standard-form contract for a supply of goods or services or a sale or grant of interest in land which is wholly or predominantly for personal, domestic or household use or consumption.
As part of Australia’s consideration prior to the finalising of its unfair contract term provisions, there was some consideration given to also covering business to business contracts but this did not proceed.
Restricting the unfair contract term provisions to consumer contracts for the supply of goods or services which are wholly or predominantly for personal, domestic or household use or consumption deliberately limits the provisions to the problem area the Productivity Commission noted there was some evidence to support16. If New Zealand includes unfair contract term provisions in the Fair Trading Act, one question is whether this should be a general provision or similar to Australia where the provisions are limited to consumer contracts. The Australian consumer contract definition generally accords with the special protection given to business to consumer transactions under the Consumer Guarantees Act (and not business to business transactions).
The Australian Consumer Law says a term is “unfair” when it:
- causes a significant imbalance in the parties' rights and obligations arising under the contract, and
- is not reasonably necessary to protect the legitimate interests of the supplier, and
- causes financial or non-financial detriment to a party.
The Australian Consumer Law also provides that a court must have regard to the transparency of the term and the contract as a whole in determining whether a term is “unfair”. A term is considered to be transparent if it is in plain language, legible, clear and available to be read.
The Australian Consumer Law also provides that terms which relate to the main subject matter and up-front price of the contract are not able to be challenged under these provisions. However, payments made under a contract which are contingent on the occurrence or non-occurrence of an event are examinable under the unfair contract terms provisions.
The reference in the first part of the Australian Consumer Law definition of “unfair” to a significant imbalance in the parties’ rights and obligations is conventional. The United Kingdom and Victorian legislation, and the Productivity Commission recommendation, also include a “good faith” element in the test, but this was rejected for the Australian Consumer Law definition because it was considered to introduce too much uncertainty and subjectivity.
The alternative to “good faith” used in the Australian Act is to refer to a term which is “not reasonably necessary in order to protect the legitimate interests” of the supplier. This is more specific than a general “good faith” requirement. The Act says a term of a consumer contract is presumed not to be reasonably necessary to protect the legitimate interests of the supplier, unless that party proves otherwise (section 3(4)). This creates the opportunity for suppliers to justify contract terms which may on their face seem to create an imbalance between the parties or otherwise be “unfair”, although the rebuttable presumption in section 3(4) will create an initial advantage for consumers when the test is applied17.
A non-exhaustive, indicative “grey-list” of 14 examples of types of terms that may be unfair is also included in the Australian Act. These examples are subject to the unfair contract terms test and provide statutory guidance on issues of concern. They do not deem or presume particular types of terms to be unfair.
The effect of these examples is to provide the courts with a clear indication of the kinds of circumstances in which a contract term will be found to be unfair, while retaining scope for flexibility and the exercise of discretion by the courts. This is consistent with a principles-based approach to making new law.
The 14 examples of terms of consumer contracts which may be unfair are all cases where there is an imbalance between the parties, or the supplier is able to act on a one-sided or unilateral basis. The examples are not conclusive because it is possible that the supplier could justify the terms under the second part of the definition of “unfair” as being reasonably necessary to protect its legitimate interests in its particular case.
The 14 examples in the Australian Act are contract terms that:
a. permit one party to avoid or limit performance of the contract
b. permit one party to terminate the contract
c. penalise one party for a breach or termination of the contract
d. permit one party to vary the terms of the contract
e. permit one party to renew or not renew the contract
f. permit one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
g. permit one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract
h. permit one party unilaterally to determine whether the contract has been breached or to interpret its meaning
i. limit one party’s vicarious liability for its agents
j. permit one party to assign the contract to the detriment of another party without the other party’s consent
k. limit one party’s right to sue another party
l. limit the evidence one party can adduce in proceedings related to the contract
m. impose the evidential burden on one party in proceedings relating to the contract, and
n. are of a kind prescribed by the regulations18.
The examples are similar to the examples used in the Victorian legislation. They all refer to one-sided powers that might be exercisable under the contract, or one-sided protections that would limit the opportunity for the consumer to enforce a contract. The final “example” creates the opportunity for the government to fill any gaps by regulation, without needing to amend the Act.19
Standard form contract
Another feature of the principal provision dealing with unfair contract terms in the Australian Act is the definition of “standard form contract”. In principle, the reason for limiting the scope of the law dealing with unfair contract terms to standard form contracts is that standard form contracts tend to include unfair terms which consumers do not knowingly agree to. If consumers do knowingly agree to a term, then it will not be as likely to be unfair.
Under the Australian Act, if a consumer claims a contract is a standard form contract then it will be presumed to be so, unless the other party proves otherwise. The Act does not include a definition of a standard form contract as such, but the decision is for the court to make, and the Act includes the following factors which the court must take into account:
a. whether one of the parties has all or most of the bargaining power relating to the transaction
b. whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
c. whether another party was, in effect, required either to accept or reject the terms of the contract in the form that they were presented
d. whether another party was given an effective opportunity to negotiate the terms of the contract
e. whether the terms of the contract take into account the specific characteristics of another party or the particular transaction, and
f. any other matter prescribed by the regulations20.
The objective of targeting standard form contracts is to catch unfair contract terms which consumers do not knowingly agree to. There are some terms which consumers will have knowingly agreed to, even when a standard form contract is used. These terms include the main subject matter of the agreement (whatever is being bought and sold), and the price payable up-front by the consumer. The assumption is that consumers will always know what they are buying and how much they are paying (up-front at least), so these provisions are not eligible to be unfair contract terms under the Act. These provisions are also excluded from the factors the court must take into account in determining whether a contract is a standard form contract.
Including unfair contract terms provisions in the Fair Trading Act
Including unfair contract terms provisions in the Fair Trading Act along the lines of the Australian Consumer Law would mean the Fair Trading Act was in accord with international consumer law regulating unfair practices. It would also be consistent with harmonising consumer and business law as part of promotion of the SEM with Australia.
Protecting consumers from unfair contract terms is also consistent with the principles underpinning consumer law in New Zealand, which are referred to in the suggested purpose statement for the Fair Trading Act. The purpose statement refers to consumer well being, fostering effective competition, confident participation of consumers, and consumers and suppliers trading fairly and in good faith.
New Zealand is in a similar situation to Australia prior to it deciding to include unfair contract terms in its legislation. We do not have a clearly defined problem of unfair contract terms causing consumer detriment. The Australian Productivity Commission extensively examined possible regulation of unfair contract terms from the same situation in Australia and recommended including unfair contract terms provisions in Australia’s consumer law. The Productivity Commission’s analysis is relevant to New Zealand. The preferred option is to include unfair contract terms in the Fair Trading Act along the lines of the Australian unfair contract term provisions. The alternative option is the status quo and not to have regulation of unfair contract terms.
4. Do you support including unfair contract terms provisions in the Fair Trading Act along the lines of the Australian Consumer Law, and for what reasons?
5. Is it appropriate to include a "good faith" element in the definition of an unfair contract term (like the United Kingdom and Victorian legislation, and the Productivity Commission recommendation), or is the approach used in the Australian Consumer Law preferable?
6. Do you think the approach used in the Australian Consumer Law of providing examples of unfair contract terms would be appropriate for New Zealand law?
12. Unfair Terms in Consumer Contracts Regulations 1999, United Kingdom, and the Fair Trading Act 1999, Victoria.
13. Review of Australia’s Consumer Policy Framework, Productivity Commission Inquiry Report, No. 45, 30 April 2008 – http://www.pc.gov.au/projects/inquiry/consumer/docs/finalreport.
14. The Australian Securities and Investments Commission Act 2001 also includes identical unfair contract terms provisions. New Zealand’s Fair Trading Act applies to credit and other financial sector contracts and thus any consideration of unfair contract terms provisions will need to consider their applicability to financial services and products.
15. Ministry of Consumer Affairs, Review of the Operation of the Credit Contracts and Consumer Finance Act 2003 (September 2009) – http://www.consumeraffairs.govt.nz.
16. The Productivity Commission, at page 152 of Volume 2 of its Inquiry Report No. 45, noted there is quantitative evidence from Victoria and various countries that somewhere between 5 to 15% of consumers might be detrimentally affected by unfair terms.
17. Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010 Schedule 2 Part 2, section 3(4).
18. Ibid, section 4.
19. Using regulations to fill potential gaps in legislation may not be regarded as acceptable in New Zealand, although the fact that the “examples” are not legally binding may make the provision less objectionable in principle.
20.Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010 Schedule 2 Part 2, section 7(2).