New Zealand - Unfair Contract Term Provisions for Standard Form Consumer Contracts

Now that the unfair contract term provisions of the Fair Trading Amendment Act 2013 (the Act) have been in operation for over six months, we thought it would be timely to provide a reminder of the key aspects of the provisions applicable to insurance contracts.

Unfair contract terms

Under the Act, the courts have the power, on application from the Commerce Commission, to make a declaration that a term within a standard form consumer contract is unfair and therefore cannot be applied, enforced, or relied upon.

A standard form consumer contract is a contract that contains terms that a court determines have not been subject to effective negotiation between the parties. Such determination is a prerequisite to the court’s declaration that a term within the standard form contract is unfair, although in practice this will be done as part of the same judgment.

A term in a standard form consumer contract may be declared unfair by a court if the term:

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

In determining whether a term is unfair, a court may take into account any matters it thinks relevant, but must take into account the transparency of the term and the contract as a whole.

The Act provides a list of terms that a court may regard as unfair. Examples are terms that allow one party, but not the other, to:

• vary the terms of the contract;
• avoid or limit performance of the contract; or
• terminate the contract.

The list of examples is not exhaustive.

Insurance-specific exemptions

The provisions only apply to insurance contracts entered into on or after 18 March 2015. For clarification, they do not apply to insurance contracts entered into before 18 March 2015, or variations or renewals of insurance contracts entered into before 18 March 2015 regardless of when the variation or renewal takes place.

The Act also introduces a list of insurance-specific terms that cannot be declared to be unfair. These are terms that are fundamental to insurance contracts and are therefore considered to be reasonably necessary in order to protect the legitimate interests of the insurer. It includes terms that:

• identify the subject matter or risk insured against;
• specify the sum insured;
• exclude or limit liability;
• describe the claims process or provide for an excess amount;
• provide for the payment of the premium;
• relate to the duty of utmost good faith; and
• relate to disclosure/misrepresentation.

Provisions in practice

Some terms have already been identified by the local industry as potentially causing concern, such as terms permitting insurers to arbitrarily cancel or vary contracts mid-term. However, until the Commerce Commission takes a view about certain terms, or brings an action seeking a declaration, there will continue to be uncertainty as to what may be considered “unfair”.

If insurers include terms which might cause significant imbalance/detriment and are not reasonably necessary to protect the specified legitimate interests, they run the risk of an adverse declaration.

Summary

Insurers will need to continue to ensure that any provisions in standard form consumer contracts, not relating to the insurance-specific exemptions, do not cause an unnecessary imbalance in the rights and obligations of the parties.