The Commerce Commission has begun court proceedings involving mobile trader Home Direct over what it says were unfair customer contracts.
The regulator is asking the High Court to make a declaration that the contract terms for Home Direct's "voucher entitlement scheme" were unfair.
This is the first such action the commission has taken since unfair contracts terms provisions were introduced as part of the Fair Trading Act in March 2015.
If the court decides a term is unfair, businesses cannot use it, and if they do they are liable for prosecution.
Home Direct says the action is unnecessary and notes it has already ceased the scheme
The commission says that Home Direct's customers were invited to opt-in to the scheme when they bought goods, but direct debit payments did not stop after the goods were paid off. Instead they were converted every week into "voucher entitlements" which could be used towards purchasing more goods from Home Direct.
The regulator alleges that the terms of the scheme were unfair because the entitlements could not be refunded or exchanged for cash. They also expired after 12 or 24 months depending on when the customer joined the scheme, with the proceeds being forfeited to Home Direct.
"The commission seeks a declaration that these terms are unfair. In our view they create a significant imbalance in the rights and obligations of the parties and they are not reasonably necessary to protect the legitimate interests of Home Direct," said commissioner Anna Rawlings.
A spokesperson for the commission said that once a court has made a declaration that a contract term is unfair, it becomes a criminal offence to use, enforce or rely on the term. The maximum penalty for each breach is $600,000.
"Despite the fact that Home Direct have said they have closed the scheme we are still seeking a declaration from the court that the terms are unfair as it may clarify aspects of the law, and we are asking the court to declare that Home Direct cannot rely on the no refund term and the expiry terms if someone were to seek a refund once the declaration is made," the spokesperson said.
In a statement, Home Direct said it was "disappointed" with the legal action which it says is "unnecessary in terms of cost and time."
The company cooperated with the commission's investigation into the contract terms and the scheme was well-intentioned, managing director Michael Wright said. The company has since stopped offering it due to high compliance costs.
"We are hardly the first retailer to issue vouchers with a 'no refund' clause. Many other retailers have similar clauses in their gift voucher terms," Wright said.
"Unlike other retailers, our voucher scheme was not a gift card scheme. It was an optional prepay model that was supported by thousands of customers over a decade. Importantly, it offered people a method of saving for the product they wanted, interest-free, to help manage their budgets without incurring additional costs."