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The urgent need to revise contracts with consumers

September 22, 2016

As a business lawyer, it seems to me that traders/suppliers are often reluctant to review their terms of trade and other supply contracts. Any contract lawyer will say that this is short sighted. Traders flout new consumer laws at their peril and there will be many terms of trade out there that don't comply with new consumer laws. It's also important that the terms of trade do what they're meant to do (whether for B2B or "true" consumer customers).

Godfreys (New Zealand Vacuum Cleaner Company Limited) is being prosecuted for the breach of the law relating to extended warranties, and has pleaded guilty to 10 charges brought by the Commerce Commission under the Fair Trading Act. This has implications for any form of supply contract with consumers, including terms of trade. Suppliers who haven't consulted a contract lawyer to have their contracts (including terms of trade) revised are at risk in the new age of increased consumer protection. Some B2B contracts are caught.

The risks aren't just financial. Clearly, ineffective or inappropriate terms of trade or supply contracts may mean liability or loss that could have been avoided, including penalties for breaching any relevant legislation. But particularly when dealing with new consumer laws, the risk of adverse publicity could be considerable.

Extended Warranties under the Fair Trading Act

Godfreys (New Zealand Vacuum Cleaner Company Limited) is being prosecuted for the breach of the law relating to extended warranties, and has pleaded guilty to 10 charges brought by the Commerce Commission under the Fair Trading Act.

The Fair Trading Act was amended in 2014 to require traders to explain extended warranties that they want to sell to consumers who buy goods or services. In particular, traders must make certain written disclosures to consumers, including advising how an extended warranty compares to what is already provided for in the Consumer Guarantees Act and that the consumer may cancel the warranty within 5 days of buying it. (The cancellation only relates to the warranty, not the goods or services.)

The Godfrey situation relates to retail sales generally and not terms of trade, but the issue is directly relevant to terms of trade and other contracts where consumer goods or services are supplied.

Consumer Guarantees - Unfair Contract Terms

Traders must realise that we now live in an era of comprehensive legal protection for consumers, where customers acquire goods or services of a kind that are ordinarily acquired for personal, domestic or household use (even if those goods or services might also ordinarily be bought for business purposes). Importantly, this can include some B2B deals, where business customers acquire those kinds of goods or services.

The Consumer Guarantees Act sets out various guarantees that can't be contracted out in relation to consumers (unless the consumer is in business and even then, only if it is reasonable to contract out); there are consumer provisions in the Fair trading that can't be contracted out of (unless the consumer is in business and even then, only if it is reasonable to contract out); and there is the new unfair contract terms regime of the Fair Trading Act, which can't be contracted out of at all, and which would catch many B2B deals where a business customer acquires goods or services of a kind that are ordinarily acquired for personal, domestic or household use.

The Commerce Commission is active in the areas of consumer lending and unfair contract terms. A complaint from one or more customers might set off a Commerce investigation into a particular trader's activity. Fines for breach of the consumer laws can be significant.

Responsible traders will already have had their contracts (including terms of trade) checked, to ensure that they comply with the law, and to ensure that they are effective. Those who haven't risk liability and adverse publicity, and should get their contracts and procedures reviewed without further delay by a competent contract lawyer.

Suppliers of goods or services should treat their terms of trade and supply contracts with the attention that they deserve. They're often the foundation of the key source of income and it's important that they reflect how business is done, are effective in terms of setting out the rights and obligations of the parties, and comply with the law. The costs of achieving that desirable outcome are insignificant when compared with the income that the terms of trade/supply contracts relate to and when compared with the risk of getting things wrong or not complying with the law.


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