As a business, you enter into many contracts with each of your clients or customers, as well as other businesses. When entering into a business contract, it is desirable for the agreement to treat all parties fairly. However, this might not always be the case. You may unintentionally insert unfair terms in your contracts. In New Zealand, there are regulations in place to protect customers (and, in some circumstances, other businesses) against unfair terms in their contracts. There are specific criteria a contract must have to be deemed ‘unfair.’ This article will examine unfair contracts and discuss what happens when a court deems a contract as unfair.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
What is an Unfair Contract?
A contract is unfair if it contains an unfair term. An unfair term is a provision that is unreasonably one-sided or causes a significant imbalance in the contracting parties’ rights and obligations.
Either the High Court or the District Court will declare a contract term unfair. The Commerce Commission (New Zealand’s competition, consumer and regulatory agency) must apply a declaration of unfairness.
If you believe one of your contract terms is unfair, you can make a complaint to the Commerce Commission. They can then make an application to the courts on your behalf.
Consumer Contract
A consumer contract is any contract relating to goods or services between a supplier in trade (usually businesses) and a consumer. A gym membership or an electricity plan are classic examples of a consumer contract.
Consumer contracts do not have to be written and can be implied from the circumstances surrounding the arrangement.
Contracts between businesses in trade are not consumer contracts. However, contracts between businesses may be considered small trade contracts.
Small Trade Contracts
A contract is a small trade contract if:
- each party is a business engaged in trade;
- it is not a consumer contract; and
- It forms part of a trading relationship that does not exceed an annual value threshold of $250,000 (including GST) when the trading relationship first arises.
When you enter into a standard form small trade contract, you will be captured by the relevant regulations which protect businesses from unfair contract terms.
Standard Form Contract
A standard form contract is an agreement where one party (the business) has prepared the agreement with little to zero input from the other party regarding its terms. In determining whether an agreement is a standard form contract, the court must take into account:
- the bargaining power of the parties in the transaction, i.e. does one party have all of the bargaining power;
- whether a party prepared the contract before any discussion relating to the transaction occurred;
- whether one of the parties was required to either accept or reject the terms of the contract; and
- the extent to which the parties could negotiate the terms of the contract.
A classic example of a standard form contract is a gym membership. Your clients cannot negotiate the terms of the agreement – they either take it or leave it. However, unless your client disputes it, a court will assume that the contract in question is a standard form contract.
Where parties negotiate the terms of a contract, it is unlikely to be considered standard form.
Excluded Matters
A court will not declare that a term of a contract is unfair if it relates to:
- the main subject matter of the contract. For example, if it were a contract for a gym membership, then a key subject matter would be the branches of the gym your clients could attend;
- the upfront price (the consideration or thing of value) payable under the contract; or
- a provision that is either legally required or expressly permitted by any piece of New Zealand law,
provided that these terms are clear and displayed prominently.
‘Unfair’
A term of a contract will be unfair if it:
- would cause a significant imbalance in the contracting parties’ rights and obligations;
- is unclear, hidden, or difficult to understand;
- is not reasonably necessary to protect the interests of the parties who would be advantaged by the term; and
- would cause detriment (this can be financial or otherwise) to a party if it was enforced or relied upon.
Examples of unfair terms are those that would allow one party, but not the other, to:
- terminate the contract without notice and penalty;
- avoid having to perform their contractual responsibilities;
- be responsible for the other parties’ actions or omissions under the contract; or
- vary the terms of the contract.
What if a Contract Term is Declared Unfair?
If an application is successful and a court declares a contract term unfair, you and your business must not include that term in your business contract. Your business cannot enforce or rely on an unfair term, which means the term is void. If you or your business tries to enforce an unfair term, you will commit an offence under the Fair Trading Act 1986.
Continue reading this article below the formKey Takeaways
A contract will be unfair if it contains a term that a New Zealand court has declared as ‘unfair.’ These terms typically tend to be provisions that allocate some privilege to one contracting party but not the other. For example, giving only one party the right to cancel or vary the contract. However, to declare a term as unfair, a court will have to work through these specific criteria:
- the contract is a consumer contract or small trade contract;
- it is a standard form contract;
- a relevant term does not relate to certain matters; and
- it is ‘unfair’.
It is best practice to engage a lawyer when drafting your business contract. Without seeking professional advice, you risk unintentionally inserting unfair terms in your contracts with your clients.
If you require assistance in drafting your business contract, our experienced contract lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today 0800 005 570 or visit our membership page.
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