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Any business in New Zealand will be familiar with consumer contracts. These contracts govern how businesses sell, supply and distribute goods and services. Indeed, contracts make sure each party upholds their obligations and know their rights. If either party to a consumer contract does not uphold their obligations, the other party will get compensation through the courts. This could be an order requiring the other party to perform a certain obligation, or it could be monetary. When you draft a commercial contract, the most important consideration is to avoid mistakes, as these could make the contract void. For example, one of the main mistakes businesses make is including unfair contract terms in a consumer contract. This article will explain why you should avoid unfair contract terms and what it means for your consumer contract.

What Is a Consumer Contract?

arties often use a consumer contract when they buy and sell goods or services. Contracts do not necessarily have to be in writing and parties can form them verbally. However, several elements must be met for a contract to be legally binding, and if these are not met, the contract is not legally enforceable.

Why You Should Avoid Mistakes

You should avoid mistakes in contracts as it could mean the contract is unenforceable. For example, suppose a consumer contract lists the wrong product. The supplier could argue that they are not required to supply the product, as the contract did not actually state it. This can cause problems for consumers who are under the impression that they will receive a particular product. 

What Are Unfair Contract Terms?

Contractual terms need to satisfy three criteria for a court to consider them unfair. These are that the term:

  • would cause a significant imbalance in the party’s rights and obligations arising under the contract; and
  • is not reasonably necessary to protect the legitimate interests of the party who the term would advantage; and
  • would cause detriment (whether financial or otherwise) to a party if the court applied, relied on or enforced the term.

If the contract does not meet any of these criteria, the court will not consider the contract unfair. Therefore, it will be enforceable against either party.

What Does Each Criterion Mean?

Significant Imbalance

A term that causes a significant imbalance means something that either significantly advantages or disadvantages either party. This is part of the criteria as contracts should provide benefits to either party. Therefore, this criteria mitigates any of the power imbalances.

Not Reasonably Necessary to Protect the Interest of a Party

A term must also not be reasonably necessary to protect the interest of a party for it to be considered unfair. This means that if the contract could do without the term whilst still protecting the interest of a party, then it should be removed. The onus is on the party arguing for the term to prove that it is reasonably necessary for them to include it in the contract. If they cannot prove this, then this will meet this criterion.

A Term That Would Cause Detriment

This means that one party may be harmed if the court were to include this term in the contract. Indeed, the courts do not limit detriment to financial detriment, as it can include delays and emotional detriment too. 

Are There Any Terms That Are Exempt From Being Unfair?

Some terms cannot be considered unfair. These are terms that:

  • define the main subject of the contract;
  • set the upfront price of the contract; or
  • are expressly permitted by law.

Key Takeaways

Mistakes can often appear in contracts and can cause a contract to be legally void. One of the main mistakes that businesses will make is including unfair contract terms. Unfair contract terms are not legally enforceable if they meet the criteria outlined in this article. These terms often exist in consumer contracts between customers and retailers. For the court to consider a contract unfair, it must cause a significant power imbalance between the parties. It must also not be necessary to protect the party’s interests, and it cannot be detrimental. If all three of these criteria are met, then the term is considered unfair, and the courts cannot enforce it. The courts will also look at the transparency of the term and the contract as a whole to determine if a contract term is unfair. 

If you need any legal assistance with unfair contract terms, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do unfair contract terms apply to any contract?

Yes, any contract can have unfair contract terms, although consumer contracts are most likely to have them.

Can a significant imbalance occur between two parties who are equal competitors?

Yes, the significant imbalance refers to each party’s rights and obligations rather than the parties themselves. Although the courts may take into account the power imbalance between the two parties. 

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