‘No refund’ cancellation clauses highlighted as potential Unfair Contract Terms under the Fair Trading Act 1986

The Commerce Commission has filed civil proceedings against Bachcare alleging that its holiday accommodation booking terms regarding cancellation, unavailability and refunds are unfair.

The Fair Trading Act 1986 (FTA) forbids the use of unfair contract terms in standard form small trade and consumer contracts. To be compliant, businesses need to ensure that their standard form contracts do not contain any terms that have been declared by a Court to be an unfair contract term under the FTA and must not seek to rely on any such term.

If the Commerce Commission considers a standard form contract term to be unfair, it can apply to the District or High Court for a declaration to that effect. The Commission can do this on its own initiative or at the request of an affected party.

Consumer NZ has previously called out Airbnb and Bachcare Limited (Bachcare) for having unfair cancellation terms after receiving several complaints from consumers nearly three years ago. Consumer NZ complained to the Commerce Commission and asked the Commerce Commission to seek a declaration that their cancellation policies are unfair contract terms under the FTA. The Commerce Commission appears to have listened and has applied to the High Court for a declaration that some of Bachcare’s terms regarding cancellation and unavailability are unfair, including terms that result in the guest losing up to 100% of the amount paid and/or service fees regardless of

• who cancelled;
• the reason for cancellation; or
• how far in advance cancellation was from the holiday date.

No proceedings are being filed against Airbnb but it appears to have updated its cancellation policy since the Consumer NZ complaints were made to no longer include the concerned clauses.

These proceedings highlight the importance of ensuring that standard contract terms are fair and do not contain harsh, one-sided cancellation terms or refund policies.

If the Commerce Commission’s case against Bachcare is successful, the declarations will prevent Bachcare from using these terms in any current or future bookings.  Other businesses should also take note and ensure that similar terms are not used by them (to avoid similar declarations being made against them) and that their standard contract terms do not contain any other potential unfair contract terms.

In the remainder of this article we provide a summary of the unfair contract terms (UCT) regime under the FTA to assist businesses with their review.

Contracts affected

A contract is subject to the UCT regime under the FTA if it is a “standard form” contract and either:

• a “small trade” contract entered into, varied or renewed after 16 August 2022; or
• a “consumer” contract entered into, varied or renewed after 17 March 2015,

with certain exceptions for small trade and consumer insurance contracts entered into before specified dates.

Standard form contract

A standard form contract is one where the parties have not negotiated the terms of the contract (other than exempt terms) in a substantial way. This includes template-based contracts and other contracts that are offered on a “take it or leave it” basis.

The Court will determine whether a contract is a standard form contract based on the particular circumstances of the case, and must take into account certain factors including whether one party had most of the bargaining power or had prepared the contract before any negotiation had taken place between the parties. In proceedings a contract will be presumed to be a standard form contract unless the other party proves otherwise.

Small trade contract

A small trade contract is a business-to-business contract where both parties are involved in trade and where the trading relationship has an annual value of less than NZD$250,000 including GST at the time the trading relationship began. The types of contracts that may be captured include terms of trade and independent contractor agreements.

Consumer contract

A consumer contract is a contract between a party involved in trade and a “consumer” in relation to goods or services that are normally acquired for personal, domestic or household use or consumption (consumer goods).  For the purposes of the FTA, any person (including any business) acquiring consumer goods can be a “consumer”, as long as they do not acquire the consumer goods (or indicate they are being acquired) for trade-related purposes.  Whether a person is a “consumer” under the FTA depends on the ordinary use of the relevant goods and services being acquired and their likely use. The UCT provisions apply to all consumer contracts, regardless of their value.

Unfair Contract Terms

An unfair contract term is a term that:

• creates an imbalance between the rights and the obligations of the parties;
• is unnecessary to protect the legitimate interests of the party who would benefit from the term; and
• causes detriment to one of the parties if applied, enforced or relied upon.

A Court cannot declare a term to be unfair if the term:

• defines the main subject matter of the contract;
• sets the upfront price payable under the contract; or
• is required or expressly permitted by any Act.

A Court must consider the transparency of a term and the contract as a whole (including other terms that may counterbalance any potential unfairness) when deciding if a term is unfair, along with any additional factors the Court considers relevant.

If a Court declares a term to be unfair, that term must either be remedied or removed. It cannot be applied, enforced or relied upon. If a business does not address the unfair contract term, it may face a fine of up to $200,000 for an individual or $600,000 for a body corporate.

A declaration of unfairness will apply directly to the term in the standard form consumer or small trade contract that the Court has scrutinised and not generally to other contracts. However, the Commerce Commission considers that, if the same contract has been used by a business multiple times, the declaration of unfairness is likely to extend to all of the same terms contained in all of those contracts. It may also extend to other kinds of contracts containing the same term, depending on the contract’s content and the terms of any Court declaration.  Before including a term that has previously been declared unfair in any of their contracts, businesses should satisfy themselves that the term’s inclusion in their contracts would not be unfair in the context of their contract as a whole because there are other counterbalancing terms that alleviate any potential unfairness.

Commerce Commission Guidelines

The Commerce Commission has issued Unfair Contract Term Guidelines to assist businesses to understand the UCT regime and the types of clauses they should avoid.

In general, clauses in a standard form contract that allow one party (and not the other) to vary terms, avoid or limit performance, terminate, penalise the other, renew or interpret the contract have been identified as potential unfair contract terms.

The Guidelines are available on the Commerce Commission’s website.

Summary

Businesses that use standard form contracts should ensure their standard form small trade and consumer contracts do not include any potential unfair contract terms, including any of the types of cancellation clauses identified in the current Bachcare case

Anderson Lloyd is able to assist with reviewing and updating your standard form contracts.

Want to know more?

If you have any questions about how the UCT regime may affect your business or need help reviewing or updating any of your standard form contracts, please contact Sophan Pearson, Sarah Simmers or Josh Williams.

PDF version: here.