Unfair Contract Terms guidelines for credit contracts

Thursday 5 March 2015

Authors: Laura Littlewood, Murray King, Rachel Paris and Himmy Lui

​The Commerce Commission has published its final Unfair Contract Terms Guidelines which set out the approach the Commerce Commission will take to enforcing the new unfair contract terms provisions under the Fair Trading Act 1986. The new prohibition on unfair contract terms comes into force on 17 March 2015.

This update focuses on the application of the Guidelines and unfair contract terms provisions to credit contracts. It also sets out the key changes that the Commerce Commission has made to the initial draft version of the Guidelines that were released in July 2014.

Our earlier Update on the draft guidelines is available​ here.

Application to consumer credit contracts

The unfair contract terms provisions and the Guidelines apply to all standard form consumer contracts, including consumer credit contracts.

Commerce Commission chairman Dr Mark Berry has indicated that particular focus will be placed on loan contracts. In a recent article, Dr Berry stated:

“Loan contracts, including credit related contracts for the sale of goods or services, can be particularly harsh on vulnerable consumers so we intend to check a range of contracts to make sure they comply with the new law, and take appropriate steps if they don’t.”

A Commerce Commission spokesperson added that:

“We will be proactively checking a range of contracts in this industry as a priority when the new law takes effect.”

Some issues that lenders should be aware of include:

  • A term setting the up-front price payable under the contract is exempt from the unfair contract terms provisions. The “up-front price” will include interest payable under a credit arrangement. However, if the interest payable is not transparent or a penalty it may nonetheless be declared unfair.

  • If a contract is varied or renewed on or after 17 March 2015, the whole contract becomes subject to the unfair contract terms provisions, regardless of the importance or extent of the variation. This would include even minor changes. However, it is not clear from the Guidelines whether the unfair contract terms provisions are triggered if a term of a contract is varied by a lender pursuant to a contractual right, such as an interest rate variation in accordance with the terms of the contract. 

  • The new lender responsibility principles under the Credit Contracts and Consumer Finance Amendment Act 2014 (CCCFA) (which come into force in June) include an obligation on lenders to meet all their legal obligations to borrowers, including “the prohibitions on false or misleading representations and unfair contract terms under the Fair Trading Act 1986”. Accordingly, an unfair contract term in a standard form consumer credit contract may constitute a breach of both the FTA and the CCCFA.

Key changes in the final version of the Guidelines

The initial draft Guidelines have been updated following submissions by approximately 30 stakeholders. Key changes in final version of the Guidelines, include:

  • The Commerce Commission makes it clear that it will apply for court declarations in suitable cases that meet its enforcement criteria, and in cases that present the opportunity to develop case law on important points.

  • A term means all or part of a term, clause or provision. If a term addresses multiple matters, each matter will be subject to its own assessment under the unfair contract terms provisions.

  • In making a declaration of unfairness, a court may describe the context or conditions that make the use of that term unfair.

  • A declaration will apply directly to the term in the contract the court has scrutinised. If a supplier has used the same contract multiple times, then it is likely that the declaration of unfairness will extend to all of the same terms contained in those other 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.

  • The Commerce Commission will publish any decision it obtains. Other traders should carefully consider the court’s findings and exercise caution before incorporating terms in their contracts that have been declared unfair when used by other traders. A term that was unfair in one context may not necessarily be unfair in another. However, businesses that wish to rely on such a term should ensure that the inclusion of that term in their contract would not be unfair, having regard to the tests prescribed in the Fair Trading Act, including the nature of the contract as a whole.

  • If it is found that a term causes significant imbalance between the parties’ rights and obligations under the contract, a court will consider the contract as a whole to see if there are other terms that might reasonably be seen as counterbalancing the effect of the relevant term.

  • If a business argues a term is reasonably necessary to protect its legitimate business interests, it will need to prove this on the balance of probabilities (ie a civil standard of proof).

  • More clarification has been provided as to the definition of a ‘consumer’ in the Act. The guidelines note that it is a matter of fact and degree whether goods can be said to be of a kind ordinarily acquired for private use. The fact that a good or service is often acquired for commercial use does not prevent it also from being ‘ordinarily acquired’ for private use.

The final version of the Guidelines also includes additional statements which reiterate that:

  • Parties to a standard form consumer contract cannot contract out of the unfair contract terms provisions, and any attempt to do so may breach the Fair Trading Act.

  • In order for a term to be declared unfair, the term must cause significant imbalance in the parties’ rights, create detriment to the consumer, and not be reasonably necessary to protect the legitimate business interests of the supplier. All three elements must be present in order for a term to be unfair.

  • If a term is declared unfair, the supplier against whom the declaration was made may not use or enforce that term unless it is included in a contract in a way that complies with the terms of a court’s decision.

Next steps

The unfair contract terms provisions come into force on 17 March 2015 and apply to all standard form consumer contracts which are entered into, or varied or renewed, on or after 17 March 2015.

Given the Commerce Commission has stated that it will focus on consumer finance documentation and seek early court declarations on unfair contract terms, reviewing and updating standard form consumer credit contracts should be a priority for all lenders.


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
  • Laura Littlewood

    Partner Auckland
  • Murray King

    Partner Auckland
Related areas of expertise
  • Banking and finance