This week the Commerce Commission (Commission) released its report into unfair contract terms (UCTs) in consumer contracts in the gym and fitness industry. In this update we highlight the common UCTs identified by the Commission. While the findings in the Commission's report are aimed specifically at the gym and fitness sector, the report highlights a number of terms that may be found in standard form consumer contracts in other sectors. A key theme highlighted is the need for terms in standard form contracts to be expressed transparently, and in plain English. This is something all businesses should be striving to achieve.
UCTs - a refresher
Standard form consumer contracts are contracts relating to goods and services that are usually for personal use, which contain terms offered to consumers on a 'take it or leave it' basis.
Following amendments made to the Fair Trading Act 1986, that came into force in March 2015, terms in such standard form consumer contracts may be deemed by the courts to be unfair where the term:
- Would cause a significant imbalance in the parties’ rights and obligations arising under the contract
- Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it
- Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on
The Commission's role in monitoring UCTs
The Commission has previously released reports on specific sectors that it believed required review in regard to UCT compliance, including the telecommunications and retail energy sectors.
In conducting its review into the gym and fitness industry, the Commission engaged ten gyms/fitness clubs of various sizes and locations, identified a number of potential UCTs and gave each of the gyms/fitness clubs an opportunity to amend their contracts or justify any UCTs.
Common UCTs identified by the Commission
Duration: Terms that received particular criticism by the Commission included the use of the description 'no contract' by some gyms (in relation to memberships without a fixed term), and terms regarding automatic renewal. A representation that there is 'no contract' for memberships that have no fixed minimum period and advertised at a weekly price (which are generally higher than minimum-term memberships) may be misleading when a consumer is required to provide notice beyond their current payment period.
The report identifies that many New Zealanders do not understand how automatically-renewing memberships work. The Commission felt that terms may be unfair where the contract does not give a member the choice as to whether the contract will automatically renew, renewal is not transparent, or there is not sufficient notice to allow a member to cancel prior to renewal.
Cancellation: Cancellation notice periods varied from two to 30 days across the gyms reviewed. The justifications received from the gyms that required 30 days' notice were geared largely towards the notice period being necessary to allow for processing of the termination and to compensate for cash flow loss. Several of the larger gyms reviewed operate with shorter notice periods. On this basis it was not clear to the Commission that a 30 day notice period was reasonably necessary to undertake the administrative tasks to cancel membership and any direct debit arrangements. All but one of the gyms engaged have since reduced their notice periods to between 7 and 14 days.
One of the key issues addressed by the report related to early termination fees. Termination fees may be unfair where a gym is recovering more than it needs to recover in order to protect its legitimate business interests. The Commission found that 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. However, a gym cannot charge a fee so high that it amounts to a penalty or where the fee would exceed the unpaid balance of the membership. At the conclusion of its review (and following revisions made by some gyms to their contracts), the Commission was persuaded that the early termination fees reviewed were not disproportionate to the likely losses of the relevant gyms, and that it would not take further action on this point at this time.
Unilateral variation: Terms were identified that allowed gyms to significantly vary services (including location), and amend prices (including under fixed term contracts) without giving a member the right to terminate the contract. Such unanticipated changes that members are forced to accept are likely to be unfair. While unilateral variation may be legitimate in some circumstances, the Commission has advised that gyms can ensure that variations are not unfair by giving clear notice of the change, and the ability for a member to terminate without cost if they are not satisfied with the change. The Commission has also advised that price increase provisions in a fixed term contract should seldom be necessary as a gym should be able to price its fixed term memberships to include a possibility of increased costs arising during the term of the contract.
Liability: Lastly, the review identified potential UCTs relating to gyms' liability to members, with a number of contracts containing broadly-worded exclusions, indemnities or limitations of liability. These terms are seen to be unbalanced as they do not limit in any way the liability of members. The report contains examples of terms that completely exclude loss or damage to property that the Commission believes are likely to be unfair. While it may be reasonable to limit liability for losses caused by third parties (ie theft or damage), it is not reasonable to limit liability where the gym's staff or contractors are responsible for loss or damages.
A number of clauses were identified in the gym contacts reviewed that limited liability in a way that conflicts with statutory requirements under the Fair Trading Act 1986 and the Consumer Guarantees Act 1993. Consumers are provided a number of protections under these Acts including entitlement to recover compensation for consequential loss arising from breach of the Acts. The Commission's view is that limitations of liability containing wording like 'to the maximum extent permitted by law' are not satisfactory for use in standard form consumer contracts. These expressions are confusing for consumers, and the Commission has recommended that contracts make it clear that consumers have statutory protections that cannot be excluded or limited. Contracts should state what those consumer rights are, and make it clear that any limitations or exclusion of liability do not affect those rights.
Many businesses updated their standard form consumer contracts prior to the UCT provisions coming into effect. The report serves as a reminder that such contracts should be tested and reviewed regularly for their warrant of fairness. If you have any questions or require further information regarding any aspect of this update please contact one of our experts.
Click here for our previous update on unfair contract terms.