In the course of your business, you may enter into contracts with your clients or customers, as well as other businesses. While contracts are intended to establish clear expectations for all parties involved, there are instances where certain clauses can place unreasonable obligations or penalties on one party. These are ‘unfair contract terms’. 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 certain clauses that are more likely to be deemed ‘unfair.’ This article will examine key examples of unfair contract terms that every business owner should be aware of, along with practical insights on how to navigate them effectively.
What is an Unfair Contract Term?
An unfair contract term is a provision within a contract that is unreasonably one-sided or causes a significant imbalance in the rights and obligations of the contracting parties.
A term of a contract may also be deemed unfair if it:
- is unclear, hidden, or difficult to understand;
- is not reasonably necessary to protect the interests of the parties that the term advantages; and
- would cause detriment (this can be financial or otherwise) to a party if it was enforced or relied upon.
What Types of Contracts May Contain Unfair Contract Terms?
A court will make a declaration that a contract term is unfair if it is satisfied that:
- the contract is a consumer contract (meaning the contract is between a business and a consumer) or a small trade contract (meaning each party is operating as a business, and the total value of the contract does not exceed an annual value threshold of $250,000 (including GST) when the trading relationship first arises); and
- it is a standard form contract where the contract has not been negotiated;
- the term does not relate to the main subject matter of the contract; and
- the term is ‘unfair’.
What Are Some Examples of Unfair Contract Terms?
1. Unilateral Variation Clauses
A variation clause allows a party to vary the terms of the contract, such as by increasing the price payable or by adjusting the goods or services to be provided under the contract. A unilateral variation clause allows one party to alter the terms of the contract without the prior written consent of the other party.
Unilateral variation clauses can be considerably unfair, particularly where they allow a business to change the terms of the contract without providing consumers a way to terminate or exit the agreement if they reject these changes.
Variation clauses are relatively standard, especially in industries where circumstances and costs are quick to change. However, it is typical to require the parties to agree to any variations before they take effect.
2. Excessive Early Termination Fees/Cancellation Fees
As a business owner, you may decide to charge a cancellation fee to your client or customer. You may also opt to charge your customers a penalty if they terminate your contract before the end of the contract term. These fees can deter customers from breaching or preemptively exiting the contract.
For example, where you operate a nail salon, and your client cancels an appointment with seven days’ notice, it may be unreasonable to charge a cancellation fee. This is because you have not incurred any costs or losses as a result of the cancellation, and seven days is sufficient notice to secure a replacement booking.
However, where your client cancels with 30 minutes’ notice, it would be reasonable to charge a cancellation fee.
Any cancellation fees or early termination fees should be reasonable and set out clearly in your contracts.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
3. Unreasonable Limitation of Liability
Contracts often include clauses that limit one party’s liability for damages arising from breaches or negligence. However, when these limitations are deemed unreasonable, they can leave the other party unfairly exposed to risks.
For instance, clauses that absolve one party of all liability or cap damages at an unreasonably low amount may be unfair under New Zealand law.
Therefore, as a business owner, you should carefully assess liability clauses and seek legal advice to ensure they strike a balance between protecting their interests and maintaining fairness.
4. Unilateral Termination Rights
Termination clauses set out a clear process for the end of a contract. This includes the reasons a contract can be terminated and the amount of notice required. Broad unilateral termination rights may grant one party the right to end a contract:
- for any reason;
- at their discretion; and
- without prior notice.
Depending on the nature of the contract and the goods or services your business provides, this may create significant uncertainty and imbalance for your consumers. Therefore, such clauses may be challenged as unfair, especially if they lack a valid reason or fail to provide adequate notice.
How Do I Avoid Unfair Contract Terms?
Some strategies include:
- ensuring that your contracts are reasonable and balanced;
- including clauses which are mutual and apply to both parties;
- communicating your terms clearly and transparently; and
- seeking legal advice if you are unsure about a specific term in your contract.
Key Takeaways
A contract will be unfair if it contains a term that an NZ court has declared as ‘unfair.’ These terms typically tend to be provisions that allocate some privilege to one contracting party but not the other. By familiarising yourself with key examples of unfair contract terms and seeking legal guidance when needed, you can protect the interests of your business while mitigating potential risks.
If you are drafting a contract, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
To determine if a term is unfair, you can consider whether it is clear, necessary, and balanced. A term will be unfair if it is not necessary for the contract and advantages one party over the other. Seeking legal advice can provide clarity and help ensure your contracts are fair and compliant with NZ law.
Ensure that any terms which grant rights or impose obligations do so fairly for all parties involved. Including mutual clauses, seeking legal advice when drafting or reviewing contracts, and regularly updating your contracts to comply with current laws are essential practices.
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