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As a business, you enter into many contracts with each of your clients or customers. 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 with your clients. In New Zealand, there are specific criteria a contract must have to be deemed ‘unfair’.

This article will outline what this criterion is and provide insight into what happens when a contract is declared unfair. 

What Is an Unfair Contract?

A contract is unfair if it contains an unfair term. An unfair term is a provision that causes a significant imbalance in the contracting parties’ rights and obligations.

A contract term will be declared unfair by either the High Court or the District Court. 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 who can make an application to the courts on your behalf.

A court will make such a declaration if it can be satisfied that:

  • the contract is a consumer contract;
  • it is a standard form contract;
  • a relevant term does not relate to certain matters; and
  • it is ‘unfair.’

Consumer Contract

A consumer contract is any contract relating to goods or services made between a supplier in trade (these are usually businesses) and a consumer. A gym membership or an electricity plan are classic examples of a consumer contract. 

Standard Form Contract 

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. 

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.

‘Unfair’

A term of a contract will be unfair if it:

  • would cause a significant imbalance in the contracting parties’ rights and obligations;
  • 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. 

A court will consider any matters it thinks relevant when determining whether a term of the contract is unfair. It is required to take into account the transparency of the term and the contract as a whole. 

Examples of unfair terms are those that would allow one party, but not the other, to:

  • terminate the contract;
  • avoid having to perform their contractual responsibilities; or
  • vary the terms of the contract. 

What if a Contract Term Is Declared Unfair?

If an application is successful and a court does declare a contract term unfair, you and your business must not include that term in your business contract. An unfair term cannot be enforced or relied upon, 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.

Key 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 part 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;
  • 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, contact LegalVision’s contract lawyers on 0800 005 570 or complete the form on this page.

FAQs

What is an unfair contract?

The NZ courts will declare a contract as unfair if it contains an unfair term.

What makes a term of a contract unfair?

To deem a contract term unfair, it has to cause a significant imbalance in the contracting parties’ rights and obligations. Likewise, an unfair contract term may cause a detriment to a party if it was enforced or relied upon, and will not necessarily protect the interests of the party advantaged by the term.

What is a standard form consumer contract?

A standard form consumer contract will tend to be a contract between you (as a supplier in trade) and your customer. These types of contracts provide little to no opportunity for your customer to negotiate the contract’s terms.

What is an example of an unfair contract?

An example of an unfair contract would be a gym membership where the gym was entitled to cancel the contract at any point, but the client was not entitled to do so.

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