What Are Unfair Contract Terms and Why You Shouldn’t Use Them?

If you want to make sure an agreement is legally binding, you should always form a contract. A contract allows you to seek damages in a court of law if the other party breaches your agreement. It is essential when you draft up a contract that you make sure the terms are foolproof. This way, you can prove to the court the other party has breached the contract. However, you mustn’t use unfair contract terms. This article will outline what unfair contract terms are and why you shouldn’t use them.

What Are Unfair Contract Terms?

Using unfair contract terms in a consumer contract is banned under New Zealand law. A consumer contract is a contract for goods or services that are used for domestic use. One way to identify unfair contract terms is if there is no room for negotiation with the vendor when the good or service is purchased. 

Defining Unfair Contract Terms

To be considered unfair, terms may:

• cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• not be reasonably necessary to protect the legitimate interests of the party who the term would advantage; and 
• cause detriment to a party if they were to be applied, relied on or enforced.

Significant Imbalance

To consider a term unfair, it must cause a significant imbalance between the parties. This includes terms that cause one party’s rights or obligations to be much more than the other party. A court may identify terms that shift any significant risk from one party to another as being unfair. Another way these terms are recognised is if the terms convey a benefit unlikely to come to fruition. This is unfair as this illusory benefit would usually come at the expense of an obligation. Therefore, these terms are unfair as the rights and obligations of each party to the contract are not equal. 

The Term Is Not Necessary

A contract can only contain terms that are reasonably necessary to uphold the rights and obligations of each party. If the court were to hear the case, then the party who the term would advantage must prove that the term is reasonable. For this to happen, they must prove that it:

• is a legitimate interest requiring protection; and 
• cannot reasonably be protected by fairer means.

For example, the advantaged party might have to provide evidence that the term is there to provide compensation in the case of a breach of contract.

A Term That Causes Detriment

The court considers a term unfair if it causes detriment of any kind. However, this goes beyond financial detriment. Detriment is some sort of loss that puts a party in a worse off position. The court usually judges detriment by looking at the fairness of the situation.

Other Factors

The courts may also look at transparency. This is how precise the term is to the reasonable person. A court is more likely to judge a term as fair if it is transparent. They will also look at the contract to see if the language and context suggest that one party is trying to take advantage of the other. 

Terms The Court Cannot Consider Unfair

There are also specific terms that cannot be considered unfair. These include:

• anything that refers to the subject matter of the contract;
• a term that contains the upfront price; or
• a term required by law.

Why Shouldn’t You Use Them?

If you end up using an unfair contract term, then you could be liable. The Commerce Commission may seek a declaration that a contractual term is unfair. The court must then decide if the term is indeed unfair. If it found to be unfair, the court can stop the business from using that term in any contract or similar term. If the business still decides to use the term, they could be liable to:

• a fine;
• a conviction; or
• an injunction.

Key Takeaways

Contracts are enforceable agreements to make sure that each party upholds their obligations. If an obligation is not upheld, then this can be enforced by a court of law. However, there may be an issue if a term in the contract is considered unfair. Unfair contract terms are not enforceable. A term is unfair if it is disadvantageous to one party, is unnecessary and causes detriment. It is good to avoid unfair contract terms as the Commerce Commission can stop you from using these terms. You can also be criminally liable if you keep using them after being necessary cannot use them. 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.

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