Are your standard contract terms fair?

In October 2019, the Government announced its plan to strengthen the existing unfair contract terms legislation such that the scope of protection extends beyond consumers to also include small businesses. See our article here.

At the end of 2019, following a prosecution by the Commerce Commission, the High Court (in the first decision of its kind) declared the terms of a company’s standard form contract to be “unfair” such that they could not be relied on.  If you have not had your terms of trade reviewed for compliance with this legislation, then there is no better time than now to do so.

What was “unfair”?

The recent High Court case involved Home Direct Limited (Home Direct). Home Direct operated a voucher entitlement scheme which meant that customers continued their direct debit payments even after they had paid off the debt they had accrued from past purchases. This gave them a voucher entitlement for future purchases. The terms which, in combination, were declared unfair were primarily that:

  • Customers could not have their voucher entitlements refunded or exchanged for cash; and
  • The voucher entitlements expired after 12 months.

In practice, this meant that amounts were continued to be debited from customer bank accounts after all debts to Home Direct had been paid. If such amounts not used to purchase goods from Home Direct within 12 months, they were then forfeited to Home Direct. Although there was a maximum “voucher” amount that could be accrued, given the ongoing expiry and forfeiture process, there was an ability for direct debits to be taken perpetually. An amount of $644,000 was forfeited to Home Direct over the time the scheme was in operation.

The High Court found that these contract terms conferred significant benefits to Home Direct. The amounts could only be spent on Home Direct products or forfeited, and this gave it guaranteed income, interest free use of customer money and ultimately a windfall benefit for vouchers not spent. There was no corresponding benefit to the customer. The High Court also found that these contract terms were not reasonably necessary to protect Home Direct’s legitimate interests and would cause detriment to customers if applied. The High Court also showed concern that the terms of the “voucher” scheme were not sufficiently transparent to customers nor presented in a clear manner to ensure customers understood what they were signing up for.

Once the terms were declared “unfair”, the company could no longer apply, enforce or rely upon the terms and could no longer use them going forward. Home Direct agreed to refund any customers who had vouchers forfeited from March 2015 (when the unfair contract terms regime became law) until the scheme concluded in July 2018.

What does this mean for your business?

If you are a business that transacts with consumers (generally people acquiring goods or services for personal, domestic or household use or consumption) and you use a standard form contract (being contract terms that are generally put to the customer with little or no room for negotiation – such as your standard terms of trade), then you are already subject to the unfair contracts legislation. If you enter into business to business contracts that have a value of $250,000 or less, and these are also on standard terms, then these will soon also become subject to the unfair contract terms legislation.

The recent High Court decision shows us that the Commerce Commission is taking these laws seriously and will prosecute where they see unfair commercial practices in action.

If you have not had the terms of your standard form contracts or terms of trade reviewed under the new legislation, then now is the time to do so. If you would like assistance with this process, then please get in touch with the Lane Neave Business Law Team.

Business Law team

Gerard DaleClaire EvansGraeme CrombieEvelyn JonesAnna RyanJoelle Grace,  Peter OrpinEllen SewellMatt TolanCarlo WanKristina SutherlandJacob NuttWhitney MooreAlex StoneBen Cooper

Also in this edition:

Business Law Newsletter:

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