Commerce Commission releases third industry review on unfair contract terms

Monday 28 August 2017

Authors: Laura Littlewood and Elizabeth Vincent

​​​​The Commerce Commission has released a report which details the findings of its third industry review of "unfair contract terms". Although the review is focused on gym membership contracts, it highlights a number of issues that all suppliers of consumer goods and services should be aware of, including:

  • the scope of 'entire agreement' clauses,
  • the importance of writing contracts in "plain English", and
  • the application of the prohibition on "unfair contract terms" to Privacy Statements and incorporated documents. 

The report is summarised below and a copy is available here.

Examples of terms the Commission found to be "unfair"

The report covered a review of specific standard form consumer contracts from a sample of 10 gym providers nationwide. This sample included small and large national and local franchises, as well as corporate-owned clubs and a company that manages gym memberships on behalf of gyms.

The report focuses in particular on terms that relate to:

  • duration of the membership period, specifically minimum periods and automatic renewals,
  • cancellation of memberships, including (among other factors) requirements for the gym to acknowledge cancellation before being treated as effective, length of notice periods and termination fees,
  • variation of the contracts, where certain changes may be made unilaterally by gyms, including price increases and changes to the services provided, without notice or a right to terminate,
  • liability, specifically where terms limit gyms' liability for breach of contract or civil wrong, and terms which appeared to contract out of the Consumer Guarantees Act or the Fair Trading Act, and
  • entire agreement, specifically where terms purport to preclude the parties from relying on any pre-contractual negotiations, discussions or previous agreements that are not reflected in the contract.

'Entire agreement' clauses

The Commerce Commission's approach to 'entire agreement' clauses is consistent with similar guidance released by the ACCC in Australia. An 'entire agreement' clause is common in many consumer contracts and the Commerce Commission's report highlights the importance of goods and services providers considering whether this term is "unfair" in the overall context of their contracting process. For example, the Commerce Commission considered the following 'entire agreement' clause, found in one sample gym's membership contract, to be "unfair" on the basis it is likely that consumers would have had conversations with gym staff prior to entering into the contract, which may have involved pre-contractual representations leading the consumer to enter into the agreement:

"You acknowledge that neither [the gym] nor any other party has made any representations or promises upon which you have relied when entering this agreement. This document contains the entire agreement between you and [the gym] and replaces any oral or other agreement…"

Importance of 'plain English' contracts

The degree of "transparency" of a term is a relevant factor in the assessment of its "fairness". The report highlights that, to assist with transparency, it is important to eliminate complex language or legal jargon from standard form consumer contracts. The Commerce Commission emphasised that consumers come from a range of ages and educational backgrounds and need to be able to easily comprehend the content of the agreements they are signing. In light of this, the Commerce Commission recommended that standard form consumer contracts contain plain language and accessible formatting, including, where appropriate, numbered terms and highlighted key areas.

Incorporation of Privacy Statements

The report confirms the Commerce Commission's view that, where standard form terms and conditions incorporate other documents (such as a Privacy Statement) those documents are also subject to the prohibition on "unfair contract terms". However, the report does not include any specific examples of terms of Privacy Statements or other documents that the Commerce Commission concluded were unfair.

Cancellation rights

In respect of cancellation terms, the report notes that:

  • following the Commerce Commission's engagement with gyms, many gyms proposed to reduce their notice periods for cancellation from 30 days to between 7 and 14 days, and
  • ultimately, the fairness of early termination fees will depend on "the size of the fee, the way it is calculated and the business model of the particular gym concerned".

Other industry reviews

Since the introduction of the prohibition on "unfair contract terms" in March 2015, the Commerce Commission has also published reports on its reviews of the Telecommunications​ and Energy Retail sectors​.

If you need any further information on matters covered in this update, please contact your usual Bell Gully adviser. ​


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.

For more information
  • Sophie East

    Partner Auckland
  • Laura Littlewood

    Senior Associate Auckland
  • Susannah Shaw

    Senior Associate Wellington
Related areas of expertise
  • Consumer law
  • Commercial
  • Privacy and data protection