Burying it in the small print
A common belief is that once you’ve signed a contract every term is binding, even if it seems harsh or one-sided. But under the Fair Trading Act 1986 (“FTA”) not every provision in a signed contract will be lawful and therefore enforceable if deemed an unfair contract term (“UCT”).
In 2015 the FTA was updated to prohibit unfair terms in standard-form consumer contracts. In 2022 this protection was extended to small business contracts.
A term is unfair if it:
While the above laws came into effect in 2015 and 2022 respectively, if a contract that was entered into prior to these dates is subsequently varied or renewed then the contract will be subject to the UCT regime.
The Commerce Commission (“CC”) is responsible for investigating complaints about UCTs. Where it considers a term to be unfair, the CC can apply to the District Court or High Court for a declaration that the term be set aside or amended.
When assessing whether a term is unfair, the CC and the Court will consider factors such as the relative bargaining power of the parties, whether the contract was presented on a “take it or leave it” basis, and the extent to which there was an opportunity to negotiate.
Clauses that grant one party unilateral rights are particularly likely to be scrutinised, for example unilateral termination rights, variation of terms, penalty and price variation clauses.
Recent law changes in Australia provide some insight into how New Zealand’s position on UTCs may evolve.
Australia previously introduced similar protections to New Zealand but went further in November 2023. It is now illegal to propose, include or rely on unfair terms in standard-form contracts, with penalties of up to AUD $50,00,000.00 for companies or $2,500,000.00 for individuals.
Regulators have pursued corporations such as JJ Richards, Bank of Queensland, Fujifilm and PayPal. In each case, terms that looked official and were freely signed were ruled unfair and rendered unenforceable.
If New Zealand follows Australia’s lead, penalties could be introduced and compliance measures will increase.
The UCT regime operates alongside other laws that automatically render certain terms void or illegal, regardless of whether they are considered “unfair.” For example, parties cannot contract out of obligations under the Consumer Guarantees Act, employment legislation, or health and safety laws. Any clause that seeks to exclude these statutory rights is unenforceable from the outset and, in some cases, may expose the party relying on it to penalties.
Businesses should ensure that their standard-form and small business contracts contain terms that are transparent, proportionate and reasonably necessary. If certain terms are held to be unenforceable this could have serious implications on the application of the contract, and potentially invalidate the contract in its entirety. By proactively identifying and removing unfair terms, businesses can reduce the risk of investigation and help minimise the likelihood of stricter regulation.
This article is for general informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy of the information, readers should not rely on this article as a substitute for professional legal advice.