This week, the High Court issued its first Unfair Contract terms (UCT) declaration under the Fair Trading Act 1986 (the Act). The Court declared that Home Direct Limited (Home Direct) operated a consumer loyalty scheme that contained UCTs. We detail below the helpful guidance from this Judgment.
What is an unfair contract term?
The Act provides protection for consumers against unfair terms within Standard form consumer contracts. These are “take it or leave it” contracts that have not been subject to effective negotiation between the parties. A term is then considered unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations; and
- is not reasonably necessary to protect the legitimate interests of the advantaged party; and
- would cause detriment to a party if it were applied, enforced, or relied on.
In determining whether a term is unfair, the Court must also consider the extent to which the term is transparent, and consider the clause against the contract as a whole. If a Court declares the term to be unfair, the term must not be included in the contract, nor applied, enforced or relied on.
Commerce Commission v Home Direct Limited [2019] NZHC 2943
Home Direct sells consumer goods online, over the phone and via mobile shops. It also offers a credit facility, called a ‘Lifestyle Account’, for buying goods on credit. The facility provides for regular weekly or fortnightly debits from a consumer’s bank account and customers are charged interest and ongoing account management fees.
Home Direct operated a ‘Voucher Entitlement Scheme’ (the Scheme). The Scheme allowed Home Direct to debit regular amounts from the customer’s bank account even after the Lifestyle Account customer had repaid amounts owing for previous purchases. Payments under the Scheme were converted into a separate ‘voucher entitlement’, that customers could use to make future purchases.
The Scheme contained two terms:
- customers could not have their voucher entitlements refunded or exchanged for cash (the No Refunds Term); and
- the voucher entitlements expired after 12 months (the 12-month Expiry Term).
(together, the Terms)
Further, the customer’s account could be debited indefinitely.
The Court made some useful broad observations on the circumstances where a term may be unfair:
- when assessing if there is a significant imbalance, it is useful to compare the contract with the term at issue and without the term to see the effect that it has,
- a significant imbalance requires a comparison between the defendant’s rights and obligations and the consumer’s rights and obligations,
- there is less likely to be a “significant” imbalance if there is a meaningful relationship between the term and the protection of a party, and that relationship was reasonably foreseeable at the time of contracting,
- the Court said close analysis will be required when it is asserted that an impugned term provides a benefit to consumers. The Court referred to an Australian case[1] regarding Chrisco Hampers where consumers continued to make payments to Chrisco after the customer had paid in full for existing orders. A credit balance could be used to pay for future orders but no interest was received by the customer on that amount in the meantime. It was argued that the right to purchase more goods in the future using those funds held on account was a benefit. The Court in Chrisco said that this was no right at all as customers could do that anyway without participation in the Chrisco payment regime. The Court also rejected the argument that this was a compulsory saving scheme for customers as the Chrisco accounts were not interest bearing,
- an imbalance is not necessarily negated by the fact small sums are involved, and
- the extent to which the term is ‘transparent’ may influence whether a balance is significant. An imbalance in rights might be exacerbated in cases where the term giving rise to the imbalance is also difficult to understand, ambiguous, or the consumer may not know how the term affects their position until the trader attempts to rely on it. This involves an assessment of whether the term is expressed in plain language, clearly presented (in terms of readability, language used, cross-references to other provisions and layout) and readily available to the client.
Decision on Home Direct
The Court found that the terms were unfair:
- There was a significant imbalance: because the terms conferred significant benefits on Home Direct to the disadvantage of customers. Home Direct benefited from guaranteed future income and interest free use of the funds until a purchase was made, as well as a potential windfall in relation to unused vouchers. On the other hand, customers did not receive any discount on subsequent purchases, nor did the vouchers earn interest. Considering the time value of money, customers in fact paid more for their purchasers under the Scheme.
- The terms would cause detriment if applied, enforced or relied on: The terms caused significant detriment to customers. Customers were denied the ability to use their savings more efficiently. The expiry of vouchers pressured customers into purchases they may or may not have needed.
- It was not reasonably necessary to protect legitimate interests: Home Direct agreed that the Terms were unfair and it did not argue that there was a legitimate interest.
- Considerations of transparency and the contract as a whole: Due to the unclear language and the way the contract was presented, many customers would not have been aware of the full implications of their decision. The key elements of the scheme were found across different documents, and certain essential information, such as the prospect of indefinite debiting, was missing. Key information was also presented in small font in a condensed box towards the bottom of the page. The Court found that the contract as a whole did not counterbalance the unfair terms.
Our view
We recommend that businesses revisit their contracts to identify any terms that may create a significant imbalance and assess whether these clauses protect a legitimate interest and that if the clause is to remain, it is unambiguously and clearly explained.
It is particularly important that not only consumer-facing businesses pay attention to this as the Government plans to extend UCTs to small business contracts below $250,000. The Government is also looking to create a stronger enforcement regime that may result in private parties (not just the Commerce Commission) being able to assert that a term is an unfair contract term. See our recent update.
