Unfair Contract Terms

Business to business contract terms now subject to unfair contract terms regime

The application of the existing unfair contract terms (UCT) regime which applies to standard form contracts between businesses and consumers has been extended to apply to standard form "small trade contracts" pursuant to the Fair Trading Amendment Act 2021 (the Act) which came into force on 16 August 2022.

The New Zealand Government has recognised that there are many small businesses (including one-man band operations) that do not have access to as many resources as some bigger businesses. The intention is to extend certain protections currently offered to consumers to smaller business.

Unfair contract terms law can only be enforced by the Commerce Commission. Customers cannot bring an action themselves. However, businesses should respond to these changes by reviewing their contracts and updating them to avoid customer complaints as well as investigation by the Commerce Commission.

Applicability to "small trade contract"

Under the new rules, a small trade contract is a standard form contract (being one where there is little or no opportunity for the parties to negotiate i.e. provided on a take it or leave it basis) between parties in trade that does not exceed an annual value threshold of $250,000 when the relationship first arises. Examples of such standard form contracts could include franchise agreements, subcontractor agreements, supply agreements, and retail leases. 

What terms are unfair?

A business should consider whether a term in their standard business contract is "unfair" by asking whether the term: 

• Would cause a significant imbalance in the parties/rights and obligations?

• Is not reasonably necessary in order to protect the party's legitimate interests?

• Would cause a detriment to the other party if it were applied, enforced, or relied on?

Examples of unfair contract terms

There is limited guidance in New Zealand and Australia (which operates in a similar regulatory landscape) on the respective UCT regimes. However, the following types of terms are at greater risk of being declared unfair:

• Unclear automatic renewal clauses;

• Complicated termination clauses;

• Termination rights for non-material breaches;

• Unilateral rights to amend terms (including, for example, the nature of services to be provided, or an ability to increase pricing) without the other party's ability to terminate;

• Broad exclusions of liability, and wide indemnity clauses; and

• Liquidated damages or early termination clauses.

Steps for businesses to take

1. Ascertain what contracts you have in place with your business customers and suppliers.

2. Evaluate whether your business-to-business contracts are captured by the changes, i.e. are they a "small trade contract".

3. Review and update terms where they may be deemed unfair under the new regime.

Unconscionable conduct

The Act also introduces a new prohibition on "unconscionable conduct" from businesses. This is not defined, but has been described as "serious misconduct that goes far beyond being commercially necessary or appropriate". Misconduct of this kind requires something more than just hard commercial bargaining, it must be clearly unfair and unreasonable. This seems to suggest a high threshold, but traders who engage in such conduct can be fined up to $600,000 (for a business) or $200,000 (for an individual). The prohibition will apply to conduct in business to business and business to consumer relationships.

In determining whether there has been any unconscionable conduct, the Act provides the court with a list of circumstance it may consider when assessing whether certain conduct is unconscionable. These include:

• The relative bargaining strength of the parties;

• Whether the parties acted in good faith;

• Whether the affected party was capable of protecting their own interests given their characteristics and circumstances;

• Whether the affected party understood the documents provided to them by the trader;

• Whether the trader used undue influence, pressure or unfair tactics when dealing with the affected party; and

• Whether the trader disclosed to the affected person any actions that might adversely impact the affected person's interests or create an unforeseeable risk for them.

Next steps?

These changes came into effect on 16 August 2022. Regardless of whether any changes are required in your business, these updates serve as a good opportunity to refresh existing terms for your client's clarity and ease of understanding.

If you have any questions in relation to the Fair Trading Amendment Act 2021 and the applicability of the changes brought about by it to your business, get in touch with one of our specialists. We are here to help.