Skip to content

Consumer Contract Terms - Unfair Means Unenforceable

The High Court has recently made its first declaration regarding unfair contract terms. The terms in question were found within a standard form consumer contract used by Home Direct.

The unfair contract term provisions of the Fair Trading Act came into force in 2015 and allow the Commerce Commission to apply to the court for a declaration that a term in a standard form consumer contract is unfair.

Currently, the Act only applies to standard form consumer contracts (contracts for the supply of goods or services from a business to a consumer). The Act does not yet apply to business-to-business contracts, but it is expected that it will be expanded to also include these contracts in time.

Under the Act, a term in a standard form consumer contract 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 to protect the legitimate interests of the party who would be advantaged by the term; and
  3. The term would cause detriment, whether financial or otherwise, to a party if it were enforced or relied on.

If the court declares a term to be unfair, that term will be deemed unenforceable and any business relying on or enforcing that term can be fined up to $600,000.

In Commerce Commission v Home Direct Limited[1], the High Court declared that several terms in Home Direct’s consumer contracts which related to a “voucher entitlement scheme” were unfair and unenforceable.

Home Direct sells goods to consumers on deferred payment terms. As part of opening an account with Home Direct, customers could opt into the voucher scheme by selecting a checkbox on the form.

If customers opted into the scheme, Home Direct continued to debit their customers’ bank accounts after they had paid off their goods. Home Direct converted those payments into “entitlement vouchers”, which could only be used towards purchasing more goods from Home Direct.

The checkbox to opt into the scheme referred to terms and conditions which were available online. Under those terms:

  • The vouchers could not be refunded or exchanged for cash; and
  • The vouchers would expire (with Home Direct retaining the money) if not redeemed within 12 months.

The Judge applied the three-step test set out in the Act and was satisfied that each step had been met. The Judge noted that the scheme gave rise to a significant imbalance in the parties’ rights and obligations, as Home Direct had interest-free use of the customers’ money pending purchase, and, if no purchase was made before the expiry, the vouchers were forfeited and the money retained by Home Direct.  No corresponding benefits were given to the customers, such as a discount on the purchase price of the goods.

The Judge also looked at the contract as a whole and noted a general lack of transparency.  One of the reasons for this was that the checkbox to opt into the scheme was in a small font and towards the end of the page, and followed closely after other boxes the customer was required to initial or tick. The checkbox also referred to “important information” set out on the back of the form, but this was detailed in small font at the end of the page and, importantly, made no mention of the expiry date.  The expiry provision was contained in the terms and conditions available online, which were lengthy, and considered by the Judge to be “insufficiently clear”.

Ultimately, the Judge found that many customers who opted into the scheme would have done so without understanding the key terms of the scheme, including the information about expiry and refunds. The court granted the declaration sought by the Commerce Commission, and Home Direct was ordered to refund the payments to its affected customers.

This decision has lessons for all consumer-facing businesses which use standard-form contracts.  In particular, the Judgment demonstrates that even in situations where a customer has agreed to be bound by specific terms, those terms may still be unenforceable. This case should act as a reminder for businesses to review their standard-form consumer contracts to ensure their terms are fair and sufficiently transparent, and to anticipate the likely expansion of the unfair contract term provisions to capture certain business-to-business contracts.

[1] [2019] NZHC 2943


This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Greg Thomas - Harkness Henry Associate

Greg Thomas

Back To Top