Telcos in the gun under fair-trading proposals

Changes in contract law could see telcos and some computer suppliers forced to change the terms of their retail contracts

Telcos and some computer suppliers are likely to have to change the terms of some of their retail contracts and to tread carefully in enforcing other terms, owing to expected changes in contract law, the Consumer Guarantees Act and the Fair Trading Act, a lawyer prominent in the tele-comms field says.

Even the terms of business-to-business contracts may be affected.

These planned amendments are currently going through Parliament in the form of the Consumer Law Reform Bill, expected to come into force before the end of this year. Particularly pertinent in the ICT field are unilateral "take-it-or-leave it" contract terms, which the consumer is powerless to refuse or vary; contracts phrased in obscure and lengthy legalese and penalty charges to the customer for early termination of the contract.

A report published by lawyers Wigley & Company and written by senior partner Michael Wigley calls the reforms "one of the most radical contract law changes for years affecting all suppliers of goods and services".

The reforms closely parallel those enacted in 2010 in Australia, which were influenced by case studies concerning the telecomms industry.

The Australian Competition and Consumer Commission published a study in March this year, where it identified a number of telco contracts as containing terms and practices that could be illegal. Some of the companies identified have since changed their terms.

Similar consequences are likely under the changes proposed by the New Zealand law, Wigley says. In the forefront, and particularly common in telecommunications agreements are: "terms that allow the supplier to change the contract without [the customer's] consent, and contracts that lock in the customer for extended periods, while giving the supplier the right to pull the plug at any time."

Under the new law, "suppliers will need to have good reason to lock in customers," Wigley says.

Under the heading "examples of the kind of terms that, if in a consumer contract, may be unfair contract terms," the New Zealand Bill includes "a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract"; "a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract" and "a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract."

The issue will not be clear-cut in every case, the Bill suggests; the acceptability of the clause will depend on the context of the whole contract and on "the extent to which the term is transparent", that is "expressed in reasonably plain language; and legible; and presented clearly; and readily available to any party affected by the term."

The ACCC's case studies include one criticising an online service that had a 49-page list of terms and conditions of use with the vital question of the account-holder's culpability for a third party's unauthorised use of the service buried in the middle. A judge held that it would be "quite irrational" for the provider to assume the customer had read and understood the relevant clause and that therefore the provision was ineffective.

On the question of unilateral contract variation "a particularly topical example for NZ, where uncapped data is provided, is the ability to cancel or suspend services for 'excessive or unusual use'," Wigley says. "Telstra had such a clause in its Australian contracts. As a result of ACCC's review, Telstra amended the clause to provide a definition of 'excessive or unusual use', and also provided greater transparency about when Telstra's rights would be exercised."

Where business-to-business contracts are concerned, the parties, at the supplier's instigation, often agree to contract out of the provisions of the Fair Trading Act. The criteria for deciding whether this was "reasonable" will be considerably tightened under the new legislation.

In particular, if the contract would have contravened FTA terms such as those prohibiting unsubstantiated claims about the service were it not for the contracting-out, the terms of the contract may still be held not to be "reasonable" in spite of the contracting out, the Select Committee reviewing the Reform Bill suggests.

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