Lessons from case on unfair contract terms

Trying to distil rules of general application from a case involving a bottom feeder that prays on vulnerable people is no easy task.

So it is with the recent High Court decision declaring terms to be unfair in the context of the Fair Trading Act unfair contract terms regime. 

I won’t dwell on the facts relating to the successful action by the Commerce Commission against the eponymously named Ace Marketing.  The contract terms in question were those from a consumer contract.  The reason why the case is noteworthy is the Court’s findings about what constitutes terms that are ‘unfair’ is of direct relevance to B2B transactions as a result of the Fair Trading Act changes that came into force in August – as the apply to ‘standard form small trade contracts’ (bringing them into the unfair contract terms regime).

Business model – unenforceable

Ace Marketing was a cellar-dweller, a mobile trader selling at high prices on deferred payment plans, with the goods only being delivered after a specified number of payments had been made.  Its contract terms included a penalty, in the form of delaying delivery even further, if a payment was missed.   The Court found that these provisions gave rise to a significant imbalance in rights (to the customer’s detriment).  The Court also found that the length of the deferral periods was out of proportion to the impact on the seller of the missed payment and wasn’t reasonably necessary to protect its legitimate business interests.

Not surprisingly, the Court considered that the risk of delay to the delivery date was a key risk for customers.  Therefore, the provisions should have been clearly highlighted and brought to the attention of customers.  Instead, they were neither clearly highlighted nor properly explained – in part because the reader had to get to page 10 of the contract to find them.  This was a breach of the seller’s obligation to ensure information is not presented in a manner that is, or is likely to be, misleading, deceptive or confusing.

As a result, the Court concluded that both the inclusion of the deferral (penalty) and failing to make it clear how the contract terms worked to the vulnerable people on whom it preyed, meant that it had included an unfair contract term in its standard terms and conditions – which was declared unenforceable.

Other criticisms

The judge also criticised the drafting and layout of the standard t’s and c’s because the offending provisions were:

• hard to find, inconsistent, and buried in, literally, the fine print (small font, narrowly-spaced and printed in a dual-column layout);
• not set out logically and difficult to follow; and
• not highlighted or given the necessary prominence.

Unfair contract terms – for consumer contracts

The Commerce Commission claim was brought under the unfair contract terms regime in the Fair Trading Act that regulates standard form consumer contracts.  However, since August, this regime also applies to standard form small trade contracts.

The regime enables the Commerce Commission to seek a declaration (from the High Court) that a term included in a standard form contract is an ‘unfair contract term’.  The impact of such a declaration is that it must not:

• be included in a standard form contract; or
• applied or enforced.

The grounds for which a (Court) declaration of unfairness are that the term:

• would cause a significant imbalance in the parties’ rights and obligations under the contract; and
• is not reasonably necessary to protect the legitimate interests of the party who benefits from the term; and
• would cause detriment to a party if enforced or relied on.

Importantly, there are no other penalties for including an unfair contract term in a standard form – prior to being declared unfair. 

Review standard contract terms

The expansion of the unfair contracts regime to standard form small trade (B2B) contracts points to the need to review standard terms and conditions and consider the risk of being declared unfair – and therefore enforceable.

In particular, some care should be taken to ensure that standard terms and conditions:

• Plain English:  Some care should be taken to use wording that is in plain, transparent, language.  They key terms should be expressed clearly and logically (and consistently).  The absence of use of hidden meanings (or unexplained legal or technical terms) will aid against a declaration of unfairness.
• Avoid complexity:  The High Court had little difficult in finding Ace Marketing’s deferred payment plan to be complex and unusual.  Whilst the target audience were vulnerable consumers, there is a lesson her for B2B contracts too – that complexity is not helpful in engendering comfort on the part of the user or the Commerce Commission – should it come knocking.  And clearly does not impress a High Court judge.
• Explain the commercial rationale:  Where a contract term is important in the scheme of the contractual relationship, it should be explained.  Often, these will be the ‘what do I get’ terms.  But they will also be those which re-allocate or limit risk.  The key point here is that a contractual term that is accompanied by an explanation or which can be backstopped by a (sound) commercial driver for its inclusion is much less likely to be found to be ‘unfair’ if it is reasonably necessary to protect the legitimate business interests of the author.

And while the unfair contracts regime in the Fair Trading Act only applies to ‘standard form contracts’, many of the factors that are relevant in a determination as to whether a term is unfair can have a broader relevance.  The inclusion of terms in any type of contract that are manifestly unfair or that are unclear can impact negotiations, and those which cause confusion or nasty surprises such as unexpected offloading of risk, can underline the commercial relationship.

Further information

For more information, including information about the extension of the unfair contract terms regime to small B2B contracts (standard form contracts with an expected annual value of less than $250k) – please contact me.