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“No grace period”: The Commission declares an active approach to Unfair Contract Terms

Home Insights “No grace period”: The Commission declares an active approach to Unfair Contract Terms

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Contributed by: Sarah Keene, Troy Pilkington and Sam Holmes

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Published on: February 27, 2015

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On 25 February 2015, the Commerce Commission (Commission) released the final version of its Unfair Contract Terms Guidelines.1 In releasing the Guidelines, the Commission has declared it will “actively enforce” the new regime from day one, giving businesses less than a month from now to ensure they are prepared for one of the most substantial changes to New Zealand’s consumer laws.

But has the Commission already started a process of “regulatory creep”, following a path that has been criticised in the USA, by stating that it will prioritise enforcement by reference to effects on competition?

The “hit list”

The Commission has also laid down a marker by announcing the businesses that it plans to focus on first, namely, telcos, rental car companies, gyms, airlines, online traders and consumer finance companies.2 This “hit list” represents industries that the Commission has received complaints about in the past and industries that have fallen foul of equivalent prohibitions overseas.  

What is the Unfair Contract Term prohibition?

The prohibition, introduced through amendments to the Fair Trading Act 1986, will operate so that consumers who consider a term in a standard form contract to be unfair can complain to the Commission. If the Commission agrees, it can go to Court to seek a declaration that the term is unfair.

The Court may declare a term to be unfair if the term causes a “significant imbalance” in the parties’ rights and obligations, is not reasonably necessary to protect the “legitimate interests” of the advantaged party (usually the business), and would cause detriment to the other party (usually the consumer) if enforced.

If a Court declares a term to be unfair it will then be illegal for the business to enforce that term. The consequences for a business enforcing a term that has been declared unfair include fines of up to $600,000 for a company or $200,000 for an individual.

The types of terms that have been found or alleged to be unfair overseas include:

  • terms that enabled an internet service provider to vary the price of the internet service without the consumer being able to end the contract;
  • terms that enabled a Christmas hamper company to continue to take payments by direct debit after the consumer has fully paid for their lay-by agreement unless the consumer specifically opted out from having further payments deducted; and
  • terms that required consumers to pay a “Damage Liability Fee” (of several thousand dollars) to a rental car company if the rental car was damaged or stolen, even if the consumer was not at fault.

What should businesses do?

The Commission’s declaration of active enforcement from day one emphasises the importance for businesses, particularly in the nominated industries, of reviewing their T&Cs for compliance before 17 March. The starting point will be for businesses to consider their T&Cs against the indicative “grey list” of terms that are likely to be unfair and the Commission’s finalised Guidelines.

The finalised Guidelines

For businesses that have already reviewed their T&Cs against the Commission’s previous draft Guidelines, the finalised Guidelines do not signal a significant change in approach. Rather, the Commission has done a commendable job in further enhancing the user-friendly nature of the Guidelines by clarifying the definition of “consumer”, adding examples, and minimising the use of jargon and legalistic language.

That said, the one amendment of particular note is that the Commission has clarified that in its view where a business has used the same contract multiple times (which is inevitable for a standard form contract), any declaration of unfairness in respect of one contract with one consumer will likely “extend to all of the same terms contained in all of those contracts” with other consumers. 

This emphasises the potentially serious and wide-reaching implications for a business once a term is declared unfair, and the importance of drafting T&Cs that are compliant. For example, say a business has a term requiring a consumer to pay $1,000 upon early termination of a contract, which the Court then declares is unfair, but in making that declaration the Court notes that a $200 payment would have been fair. Because all of the business’s equivalent contracts with other consumers provide for a $1,000 payment (and the Court cannot vary the business’s existing contracts to make them “fair”), adopting the Commission’s approach the business will find that it has no enforceable payment clause for early termination with any of its other customers. That could potentially be very damaging for a business that has provided upfront equipment subsidies, or offered lower weekly subscription fees, in exchange for a long-term relationship with its customers. 

Creeping into competition

In releasing the finalised Guidelines, the Commission has signalled an intention to expand its enforcement of the unfair contract terms regime to tackle behaviour the Commission believes hinders competition. 

The Commission’s media release accompanying the Guidelines quoted Commission Chair, Dr Mark Berry, as saying that the Commission will “pay particular attention to terms that limit competition”. Dr Berry said that “the types of terms that concern us include those that have the effect of limiting competition, such as automatic ‘rollover’ or renewal terms and terms that lock consumers into contracts that they wish to exit, preventing them switching to a competitor.”

While the Commission must of course prioritise its enforcement resources as it sees fit and consistent with its statutory mandate, it is possible that prioritising enforcement by reference to impact on competition is confusing two separate regimes. While the Fair Trading Act’s purpose statement includes reference to enabling businesses to compete effectively,3 the unfair contract terms regime itself focuses on contractual fairness between a business and a consumer.  Effect on competition is not an element of unfairness – at least not as the regime has been discussed publicly to date. 

The introduction of a reference to effects on competition is new and so it is possible the Commission may be signalling an intention to use these new powers for the purpose of filing gaps that, in its view, are not being adequately addressed by the Commerce Act.

A similar debate has run for many years in the USA where, despite the Sherman Act and the Clayton Act being the primary competition statutes containing prohibitions on anticompetitive conduct, the Federal Trade Commission (FTC) has used a prohibition in another statute, namely the FTC Act’s section 5 prohibition on “unfair or deceptive acts or practices in or affecting commerce”,4 to take steps against misuse of market power or oligopoly conduct that would not be caught under the Sherman Act and the Clayton Act.5

However, there is an important difference between s 5 of the FTC Act and the unfair contract terms regime. That is that s 5 is expressly designed to target unfair competition between competing enterprises, whereas the unfair contract terms regime is focussed on unfairness to consumers. It is therefore hoped that, in practice, the Commission’s approach in enforcing the unfair contract terms regime will reflect the ambit and purpose of the new prohibition as it was understood to be through the passage of its enactment.

Next steps

With the new unfair contract terms regime imminent, and the Commission’s declaration that there will be “no grace period”, businesses should be reviewing their consumer T&Cs now to ensure they are compliant. If you have any questions on how the regime will impact upon your business, please contact one of the contributors below.


FOOTNOTES
  1. The final Guidelines are available here.
  2. The Commission's media release announcing the publication of the final Guidelines is available here.
  3. Fair Trading Act 1986, s 1A.
  4. (FTC Act) (15 USC 45)
  5. See for example, E.I. du Pont de Nemours & Co. v. F.T.C., 729 F.2d 128, 130, 137 (2d Cir. 1984) cited in Mayer Brown Spring Review 2014 p 29. Also James Campbell Cooper, Working Paper No. 13-20, The Perils of Excessive Discretion, The Elusive Meaning of Unfairness in Section 5 of the FTC Act (November 2013), available here.  

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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