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Brief Counsel

Commerce Commission test drives new unfair contract terms regime

26 February 2016

​The Commerce Commission’s recently released telecommunications contract review provides a first look at the implementation approach it is taking to the unfair contract terms regime that came into effect in March last year.

Next in the gun are standard form consumer contracts in the electricity retail, credit and gym sectors, reports on which will be completed this year.

Although most of the telcos conducted their own reviews in advance of the Fair Trading Act reforms, the Commission still uncovered a number of issues in the contracts it examined.

The Commission reviewed the standard form contracts of seven telcos, making up more than 94% of the fixed-line retail market and nearly 100% of the mobile retail market. The report identified 66 potentially unfair terms in the 19 contracts it reviewed.

Where the Commission had an issue, it engaged with the telco concerned to determine whether the terms were "reasonably necessary in order to protect the legitimate business interests" of the company.  In some cases, the Commission was persuaded that the term was reasonably necessary.  In all others, the telco amended or agreed to amend the terms in question.

It is worth noting that 34 of the potentially unfair terms were from one company that told the Commission it had been focusing on developing its newly-established business and had “overlooked” the impact of the law changes.  It has since reviewed its standard form contract.

Common problem clauses identified

Four common contract terms were found to be potentially unfair despite the possible "legitimate business interests" justification.

  • Limitation of liability clauses – the Commission acknowledged that these clauses exist to protect the business interests of the supplier, given the supplier’s limited ability to quantify the loss that a customer may cause to it.  However, the Commission considers that these clauses are still potentially unfair where a similar limitation does not apply to the customer.  The Commission’s concerns were addressed by suppliers who amended the clause to limit the customer’s liability to a similar amount.
  • Ability to unilaterally vary the contract –  the Commission’s view is that these clauses are potentially unfair where they allow variation without legitimate reason or where the consumer doesn’t have an unconstrained right to terminate the contract.  The Commission acknowledged that a unilateral variation of a contract may be necessary in some circumstances and that it is not always practical to agree variations with each party.  Suppliers addressed the Commission’s concerns by clarifying in the contract that a customer can terminate without penalty where a contract variation causes detriment. 
  • Customer responsible for unauthorised charges – the Commission disagreed that consumers should always bear the risk of unauthorised use of the service for which they have contracted.  The Commission’s view is that the better approach is to assess each case on its merits, by allowing customers to notify the supplier where they have been charged for unauthorised use.
  • No liability for consequential loss – the Commission was concerned that these clauses may limit a consumer’s rights under the Consumer Guarantees Act or the Fair Trading Act.  The telcos confirmed to the Commission that these clauses were not intended to exclude liability under consumer legislation and agreed to amend the clauses to ensure the consumer has the full protection of both Acts.

Chapman Tripp comments

The review findings demonstrate that even if a term is intended to protect the legitimate business interests of the supplier, the Commission has a strong focus on providing the consumer with a substantively fair and balanced outcome.

Of particular note is the Commission’s apparent emphasis on ensuring that liability caps are reciprocal, and set at a level where the supplier’s liability is “sufficient to cover any reasonably foreseeable loss that may arise under the contract”. 

In our view, making limitations of liability reciprocal will not always be the right answer, particularly for limitations designed to address risks faced by the supplier where there is no equivalent risk faced by the consumer.  If a business does wish to make its limitations reciprocal, it will need to think carefully about the specific types of loss that a consumer may cause.  For example, in cases of deliberate wrongdoing by a consumer (e.g. hacking) or deliberate infringement of intellectual property, the potential loss to the business may vary greatly, making it difficult to choose a sensible cap.  In that case it may be best to exclude certain specific types of loss from the scope of the cap, provided that each exception is either reciprocal, or otherwise justifiable as reasonably necessary to protect the business’ legitimate interests.

The Commission’s focus on ensuring that liability limitations do not preclude the recovery of reasonably foreseeable losses reflects the position that suppliers cannot contract out of their liability to consumers under the Consumer Guarantees Act (CGA) and Fair Trading Act (FTA), including for loss or damage that was reasonably foreseeable as likely to result from the breach. 

Suppliers should think about clarifying that any limitations of liability are not intended to apply to a consumer’s rights to recover from the supplier under the CGA and FTA.. Putting those protected liabilities to one side, businesses may still want to limit their exposure to other claims in contract and tort, and claims from business customers who might purchase goods or services under the same standard form contract as consumers.1   In each case the supplier will need to be able to show that the limitation is reasonably necessary to protect its legitimate interests, for example, by allowing the supplier to offer a lower price without needing to price-in liabilities that may be difficult to predict, or losses that customers can protect against themselves.

The Commission’s approach does emphasise that businesses will need a very clear rationale and supporting information to justify liability caps of any kind, especially where they are not reciprocal.

Our thanks to Tom Jemson for writing this Brief Counsel.  For further information, please contact the lawyers featured.

Footnote:

1    Business customers may still qualify as “consumers” under the FTA and CGA when purchasing goods or services “of a kind ordinarily 

      acquired for personal, domestic, or household use or consumption”, but both the FTA and CGA permit suppliers to contract out of 

      their statutory obligations to such business customers, provided certain conditions are met.

 

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