New Zealand Law Society - Unfair contract law not working

Unfair contract law not working

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The unfair contract terms law “is clearly not working,” says Associate Professor Alexandra Sims, head of commercial law at Auckland University Business School.

Associate Professor Sims was study lead of a research project that put under the spotlight the 2015 amendment to the Fair Trading Act, which was meant to make consumer contracts fair.

Under the amendment, contract terms are considered unfair in a contract between a business and a consumer when they would cause significant imbalance in the two parties’ rights and obligations, are not necessary to protect a legitimate business interest and would cause detriment to the consumer.

Researchers analysed 114 retail contracts over the summer of 2014/2015, and then revisited them in the summer of 2015/2016, nine months after the law change came into effect. They found:

  • Before the law change, all the contracts contained unfair contract terms – 1,225 unfair terms in total (with the exception of four contracts that were more like delivery terms).
  • After the law change, only 33% of contracts had been changed to try to comply with the new law. All contracts still contained at least one unfair term – 1,086 unfair terms in total.
  • Large companies were more likely to have made changes (39%) compared to small companies (27%).
  • 56% of contracts gave businesses the freedom to vary prices and/or the provision of goods and services at any point, but still compelled consumers to pay termination fees and charges if they wanted out following the changes – an unfair term. Only 9% of businesses allowed the consumer to cancel the contract without paying fees or charges.
  • Some companies still state that they’re not liable for any loss or damage arising from their goods or services – another unfair term and also a breach of the Consumer Guarantees Act and the Fair Trading Act.

“The unfair contract terms law is clearly not working,” Associate Professor Sims says.

“What’s more worrying, is that consumers cannot challenge unfair contract terms – only the Commerce Commission can. And unless an unfair term also breaches another part of the Fair Trading Act or the Consumer Guarantees Act, courts and tribunals are actually obliged to enforce an unfair term against the consumer.”

The Commerce Commission has an ongoing project to review standard consumer contracts in various industries for unfair terms. The two reviews completed so far, on telecommunications and energy retailers, found significant numbers of unfair terms in contracts.

“The worst term I’ve seen comes out of the energy retailer review,” says Professor Sims. “One of the companies made customers who purchased a property with an existing electricity installation liable to pay outstanding charges from the previous occupant in order to continue their connection. That’s simply outrageous.”

The Commerce Commission has said that following its review energy retailers have, or will soon, amend their contracts. But it shouldn’t take a review to make contracts fair, Associate Professor Sims says.

“These are some of New Zealand’s largest businesses and should be complying with the law and not waiting until the regulator comes calling to suddenly act on their desires to follow the law!”

Associate Professor Sims says the New Zealand law needs to be fully brought in line with Australian law.

In Australia, unlike New Zealand, both consumers and regulators can challenge unfair contract terms, and consumers can do so in the Australian equivalent of the Disputes Tribunals.

Another major difference is that in Australia, but not New Zealand, fees and charges can be complained about.

“The Commerce Commission’s reviews are welcomed and the Commission is doing a really good job, but it simply does not have the resources to effectively police the Unfair Contract Terms Law. Even the reviews only look at a subset of companies in the sectors reviewed – fewer than half in the telco one,” she says.

“The law must be changed to allow consumers to challenge unfair contract terms in both the Disputes Tribunal and the courts, and to challenge fees and charges – as is the case in Australia.”

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