What standard form contracts are and your rights if they contain unfair clauses.

A common type of contract

A standard form contract is an agreement offered on a take it or leave it basis – all or most of the terms can’t be negotiated separately. The terms can be on the back of tickets, quotes, terms of trade, invoices and so on.

Standard form contracts are common, eg rental car agreements, gym memberships, gas and electricity contracts, finance agreements and retirement home contracts.

Watch out for unfair contract terms

Sometimes these contracts contain unfair contracts terms (UCT) that may cause you to be disadvantaged, especially since you often can’t negotiate the terms. Possible unfair terms include terms that:

  • allow only the supplier to avoid or limit their performance of the contract
  • limit your ability to enforce your legal rights, eg claim for breach of contract
  • allow the supplier to vary the products or services provided under the contract without your agreement.

For standard form contracts for products or services entered into on or after 17 March 2015 or existing contracts that are varied or renewed after that date, the unfair contract terms law (UCTL) applies. UCTL gives you the right to apply to the Commerce Commission about any unfair terms. They can then apply to the District Court for an order that a term is unfair and can’t be used.

Before that date there is no specific law that covers standard form contracts.

Penalty clauses may not be valid

Any term of a standard form contract that specifies you need to pay an excessive amount for a breach of contract – an amount that is out of proportion to the loss that the supplier would suffer. Penalty clauses may not be valid or enforceable under contract law.

Know your rights

Since you’re often unable to negotiate the terms of a standard form contract, there is now a law to deal with possible unfairness, under the Fair Trading Act (FTA). This law only applies to standard form contracts to provide products or services for ordinary domestic use. It is up to the court to decide if the contract is in fact a standard form contract.

A penalty clause may be unfair if it’s purpose is to sanction you for breach of contract or prevent you from doing so.

An unfair contracts term (UCT) is specifically defined under the FTA and can be declared unfair if the term:

  • would cause a significant imbalance in your rights and obligations under the contract
  • is not reasonably necessary to protect the legitimate interests of the supplier
  • would cause detriment (financial or other losses) to you if it was applied or enforced.

Some terms can’t be reviewed under the UCT law. For example, if the term:

  • defines the main subject matter of the contract ie the products or services you are buying
  • sets the up-front price payable (this may include additional fees, but not penalty fees which may still be challenged as unfair)
  • is expressly allowed by another statute ie the law.

Unfair contract terms

The FTA gives examples of possible unfair contract terms. Mainly, unfair terms allow a business to make changes to the contract or changes to the products or services they supply without your consent. These include terms that allow the supplier to:

  • vary the terms of the contract
  • avoid or limit their performance of the contract
  • renew or not renew the contract
  • vary the upfront price without giving you the right to end the contract without your paying penalty
  • vary the products or services to be supplied.

Insurance contracts are treated differently under the unfair contracts terms law (UCTL) within the FTA, with a much longer list of terms that may not be challenged as unfair.

This UCT law allows you to apply to the Commerce Commission to have the particular terms challenged. However, only the Commerce Commission can apply to the District Court or High Court for a declaration that a term is unfair and therefore not enforceable.

Parties to a standard form consumer contract can’t contract out of the UCT provisions. This means they can’t try to get around the FTA or tell you that it doesn’t apply. Any attempt to do so may breach the FTA that the UCTL is part of.

Read the Commerce Commission’s Unfair Contract Terms Guidelines(external link) for more information.

If things go wrong

Contact the business first

If you think a term in your contract is unfair, go back to the business to discuss it first. Try to do this before you sign the contract. If you have already signed, you should still talk to them if a term seems unfair.

Read Resolve a problem to find out more.

Next steps

If you are unable to resolve your issue directly with the retailer, manufacturer or service provider, our Resolve It tool has information to help you take the next steps. These may include going to the Disputes Tribunal or District Court.

Resolve it: Contracts

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Contact us for more guidance.

Common situations

Standard form contracts

When Joe signs up for a new broadband package with a phone and internet company, he’ll receive a standard set of terms and conditions. Apart from choosing the level of data he’d like to receive, he probably can’t negotiate any of the other terms. This is a standard form contract.

Price not penalty

If you hire a DVD and a late return fee applies, this is likely to be part of the upfront price and not a penalty clause if it is based on a reasonable estimate of what the store would lose from the late return.

Unfair term

Ewa signs up to a two-year gym contract. It has a term which states the gym can terminate the contract immediately if Ewa breaches any of the terms. This is potentially an unfair contract term. Ewa can ask the Commerce Commission to review it.

Cancellation fee as a penalty

Margaret books a service for her car with the local garage. On the booking form it states that if she cancels on the day of the booking, she’ll be charged a $250 cancellation fee. Unless the garage can justify this cancellation fee as a reasonable estimate of the loss it would suffer for that cancellation, it is not enforceable as a penalty.