First “Unfair Contract Terms” declaration granted by the High Court

14 November 2019

​​​​​​Almost five years after the introduction of the Unfair Contract Terms (UCT) regime, the first declaration that a contract is “unfair" was issued earlier this week. In Commerce Commission v Home Direct Limited, the High Court provided welcome guidance on the scope of the UCT regime and the importance of transparency in assessing whether terms are “unfair".​


The terms in issue arose under consumer credit contracts offered by Home Direct, which operated a “Voucher Entitlement Scheme." Under the Scheme, Home Direct would continue to debit amounts from customers even after they had repaid what they owed on credit sales – with each such amount converted into a “voucher entitlement". Customers could only use their voucher entitlements to make future purchasers from Home Direct.

The terms provided that voucher entitlements (a) could not be refunded or exchanged for cash, and (b) would expire after 12 months. The Court found that these terms were unfair and granted the declarations sought.

Given the clearly prejudicial nature of the Scheme, it may have been seen as a fairly safe bet for the Commission's first application under the UCT regime. However, as discussed in detail below, it has relevant takeaways for all consumer-facing businesses, including in respect of the importance of transparency.​​

The “Voucher Entitlement Scheme"

Home Direct sold various consumer goods on credit, via its website and its mobile “truck shops." As summarised above, its Voucher Entitlement Scheme allowed it to continue to debit amounts from customers after they had repaid amounts due under the credit contracts. Those amounts were described in the terms as “voucher entitlements," and could only be used to purchase further goods from Home Direct.

Customers could opt into the Scheme by initialling a checkbox (as part of a series of boxes) on a standard form purchase agreement. The checkbox cross-referred to terms and conditions (which were available online). Those terms provided that:

  1. The voucher entitlements could not be refunded or exchanged for cash, and
  2. The voucher entitlements expired after 12 months.

The checkbox on the purchase agreement also cross-referred to “Important Information" set out on the back of the agreement. This explained that the entitlements could not be exchanged for cash, but was silent as to the expiry of the entitlements.

The Scheme participants regularly forfeited voucher entitlements (totalling approximately $644,000 over several years). The Commission investigated the Scheme and applied for a declaration that the terms regarding refunds and expiry were unfair.

The UCT regime

The UCT regime is set out in the Fair Trading Act (FTA), and allows the Commission to apply to the Court for a declaration that a term in a standard form consumer contract is “unfair". A term is unfair if the following three requirements are met:

  1. The term would cause a significant imbalance in the parties' contractual rights and obligations.
  2. The term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.
  3. The term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.

In weighing those factors, the Court must take into account the extent to which the challenged term is transparent, and the contract as a whole. If the Court declares a term to be unfair, that term cannot be applied, enforced or relied upon (and doing so carries a penalty of $600,000).

The FTA includes a “grey list" of terms which are potentially unfair (although interestingly, the terms at issue in Home Direct did not fall within those examples). For further detail on the UCT regime, see our earlier update here.

Application to the case

Justice Muir applied the three elements of the test above as follows:

  1. In respect of “significant imbalance", he found that Home Direct had significantly benefited because it had a “guaranteed future income." Customers could not obtain refunds and vouchers had to be spent on Home Direct products. It also obtained interest-free use of the money pending a purchase, and stood to receive a windfall if the “vouchers" were not spent within 12 months. Conversely, customers obtained no benefit: there was no discount for subsequent purchases nor interest on sums deposited. Therefore (after citing various principles from Australian cases under the equivalent regime), the Judge found that the “significant balance" was made out.
  2. Second, the Judge held that the terms were not reasonably necessary to protect Home Direct's legitimate interests. That was because Home Direct had no legitimate interest in holding its customers' funds interest-free against potential future purchases, with no option for them to be refunded.
  3. Third, the Judge found that the terms caused detriment: voucher entitlements were non-interest bearing, and customers were locked in to purchasing from Home Direct.

Much of the judgment focussed on the mandatory consideration of transparency. In particular, the Judge commented that:

  1. The term “Voucher Entitlement" suggested something tangible, not simply a non-interest bearing credit with Home Direct.​
  2. The purchase form was not clear. Even after various improvements to the checkbox in 2017 (after which the expiry and “no refund" terms were expressly mentioned), the Judge considered that customers would not have understood the Scheme. He noted that the checkbox was in small font and towards the bottom of the page, and that it “followed closely after other boxes the customer was required to initial or tick." The Judge found that customers might sign up without seeing the information about expiry and refunds.
  3. As for the “important information" set out on the back of the form, this too was in “very small font" and located at the foot of the page following other closely typed clauses. Importantly, it also did not refer to the 12-month expiry.
  4. The expiry provision was contained in the standard terms, although these were lengthy and “insufficiently clear". The relevant terms were presented on the ninth of twelve pages and no particular attention was drawn to them.

Ultimately, the Judge inferred from the above that many of those who opted into the Scheme would not have been aware of the full implications of their decision. The Court granted the declaration sought.

The Judge left open the question as to whether the terms could have been saved by a greater transparency, or whether (even if starkly presented to customers) the relevant terms would have been unfair. The interplay between transparency and substantive unfairness therefore remains to be refined in more balanced cases.

Summary and key takeaways

Even though the Home Direct scheme represented relatively “low-hanging fruit" for the Commission, the decision will have relevant takeaways for all consumer-facing entities that rely on standard form agreements. In particular, the judgment highlights that even in situations where a customer has expressly confirmed their consent to specific terms, those terms may still be found to be unfair and unenforceable.

In addition, MBIE has recently announced that the UCT regime will be expanded to capture certain business-to-business contracts with a value below $250,000, and to introduce a prohibition against unconscionable conduct. In view of that expansion in scope and the growing relevance of the UCT regime, the clarification provided in Home Direct is a timely reminder for businesses to:

  • carefully review their standard form contractual terms to ensure they are fair and transparently presented, and
  • front-foot the upcoming expansion of the UCT regime to some B2B contracts.

We are closely monitoring development of the UCT regime and its expansion to B2B contracts. If you would like to discuss any of the matters raised in this update, please contact Richard Massey or your usual Bell Gully advisor.​​

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.