Read the fine print!

Changes to the Fair Trading Act prohibiting the inclusion of unfair contract terms are now in effect. As such, you need to be mindful of any fine print incorporated into standard-form consumer contracts and understand what the changes mean for your business

Most people involved in the building industry should now be familiar with the requirements for written contracts to be provided for residential building work costing $30,000 or more (GST included). Contractors must also provide checklists and disclose certain information when requested.

Although the new requirements provide default clauses that will apply automatically if a written contract doesn’t include the minimum content required, businesses should be mindful of any fine print incorporated into such contracts.

In one of the biggest changes to consumer protection law in recent times, a new regime applies under the Fair Trading Act 1986, as of 17 March. The changes prohibit including unfair terms in standard-form consumer contracts, including written contracts for residential building work.

These changes are equally important to both consumers and businesses.

 Who is affected?

The prohibition of unfair contract terms will apply to any industry that uses a ‘standard-form consumer contract’, when providing goods or services of a kind that are ordinarily acquired for personal, domestic or household use or consumption.

What is a standard-form consumer contract?

Standard-form consumer contracts are contracts that are not usually negotiated between parties, and where one party (generally the business), would give consumers a pre-prepared contract to sign before the goods or services are provided. These contracts are generally offered on a ‘take it or leave it’ basis; typically, the same contract would be used for all of the businesses’ customers. Any pre-prepared contract or standard terms of trade are likely to be standard-form consumer contracts.

How will the prohibition on unfair contract terms apply?

The way in which the prohibition on unfair contract terms will work is that it allows a consumer to make a complaint to the Commerce Commission, alleging that a contract’s terms are unfair. It will then be up to the Commerce Commission to investigate and, if considered appropriate, apply to a court for a declaration that
a particular term, or terms, used in a standard-form consumer contract are ‘unfair’.

“The prohibition on unfair contract terms will apply to any industry, which uses a ‘standard form consumer contract’, when providing a service or product to a consumer

What are unfair contract terms?

Providing a definitive answer to what might be considered an unfair contract term is beyond the scope of this article; however, there are three factors a court will consider in determining whether a term or terms of a contract are unfair. These are:

1. The term causes ‘significant imbalance’ in the rights and obligations of the parties arising under the contract.
2. The term is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by it.
3. The term would cause detriment (financial or otherwise) to a party if it were applied, enforced or relied upon.

A court can also consider any matter that it thinks relevant, but must take into account the contract as a whole and the extent to which the term is “transparent”.

It is also important to note that some terms of a contract cannot be declared unfair. These include the main subject matter (ie the goods or services being provided), the upfront price or any term expressly permitted by law.

What should I look out for?

If you have, or are currently using, a standard-form written contract for residential building work, you may wish to review it. The Act provides a list of things to look out for, including clauses that allow or have the effect of permitting one party to unilaterally:

• Vary the terms of the contract.
• Avoid or limit performance of the contract.
• Terminate the contract.
• Penalise another party for breaching or ending the contract.
• Renew or not renew the contract.
• Vary the price payable under the contract without the right of another party to terminate the contract.
• Vary the characteristics of the goods or services to be supplied under the contract.
• Determine whether the contract has been breached, or interpret its meaning.

If in doubt, seek advice.

Why is this relevant to me?

If you use a standard-form consumer contract to provide residential building work, you will need to keep abreast of the legislation for ‘unfair’ contractual terms. You may also need to conduct a periodic review of your contracts. There are plenty of commercial incentives to get your contracting process and terms right. Potential fines are up to $600,000 for companies and $200,000 for individuals, if a party continues to use or enforce an unfair contract term.

If you have any questions relating to this article, please contact Andrew Tetzlaff at andrew.tetzlaff@simpsongrierson.com or on (09) 977 5179.

The information in this article is intended as a general guide only and is not intended to be legal advice. Detailed legal advice should be obtained to cover a specific situation.