Fair Trading (Oppressive Contracts) Amendment Bill

A private members’ Bill proposing to redress the power imbalance inherent in ‘standard form’ contracts was drawn from the ballot last month.

Introduced to the House by former Lane Neave partner and first term MP for Christchurch Central, Dr Duncan Webb, the Fair Trading (Oppressive Contracts) Amendment Bill looks to overhaul the ‘unfair contract terms’ regime that came into effect under the Fair Trading Act in March 2015.

The current ‘unfair contract terms’ regime

Under New Zealand’s current ‘unfair contract terms’ regime, the Commerce Commission may obtain a declaration from the District Court or the High Court that a provision in a standard form consumer contract is ‘unfair’, if the Commission satisfies the court that the provision:

• Creates a significant imbalance in the two parties’ rights and obligations;
• Is not necessary to protect a legitimate business interest; and
• Would cause detriment to the consumer, were it to be enforced.

If the court declares a term to be ’unfair’, then the Act prohibits the business from:

• Including the term it its standard form contract going forward; or
• Applying, enforcing or relying on the term.

If the business continues to use or enforce the term, it may face conviction and a fine of up to $600,000, and may also be ordered to refund money or pay damages to affected consumers.

Parameters of the current regime

While the introduction of the current ‘unfair contract term’ regime under the Fair Trading Act represented a very significant step forward for New Zealand’s consumer protection law, the regime, which conferred similar protections to those implemented in Australia in 2010, is considerably narrower in scope than its Australian counterpart.  Most notably, under the New Zealand regime, consumers cannot challenge unfair contract terms; this right is reserved exclusively to the Commerce Commission.  By contrast, in Australia consumers can apply to the court for a declaration that a term in a standard form contract is unfair, and, in some instances, may be able to resolve an unfair contract term dispute through the Australian equivalent of the Disputes Tribunal.

In October 2016, the head of commercial law at Auckland University, Associate Professor Alexandra Sim, described the fact that consumers could not challenge unfair contract terms in New Zealand as ‘worrying’ and called for the regime to be brought fully in line with Australian law.  Associate Professor Sim was the research lead on a study project which found that nine months after the introduction of New Zealand’s ‘unfair contract terms’ regime, only 33% of the 114 contracts reviewed as part of the study had been amended in an attempt to comply with the new law, and all of the contracts reviewed still contained at least one unfair contract term.  Commenting on the study’s findings, Associate Professor Sim said that “The unfair contract terms legislation is clearly not working…The Commerce Commission…simply does not have the resources to effectively police unfair contract terms…The law must be changed to allow consumers to challenge unfair contract terms in both the Disputes Tribunal and the courts – as is the case in Australia”.

Since the release of the findings of the study headed by Associate Professor Sim in 2016, New Zealand regime has become even more out of step with Australian law, following amendments to the Australian regime in November 2016.  These amendments extended the protection afforded under the Australian regime to ‘small businesses’ (being businesses employing less than 20 people), in circumstances where the upfront price of the relevant standard form contract is no more than $300,000 (or $1 million if the contract runs for more than 12 months).  By contrast, the New Zealand regime still only regulates standard form contracts entered into between businesses and individual consumers.

Amendments proposed under the Fair Trading (Oppressive Contracts) Amendment Bill

Representing a bold departure from both current New Zealand and Australian law, the Fair Trading (Oppressive Contracts) Amendment Bill proposes significant amendments to New Zealand’s ‘unfair contract terms’ regime in an effort to redress the power imbalance in transactions where consumers have no opportunity to negotiate the relevant contract terms.  The Explanatory Note to the Bill notes that:

• Many standard form contracts have onerous and unexpected terms (such as hefty and unjustified cancellation fees) or include extreme powers (such as the ability to sell goods in storage without notice).
• Consumers are often unaware of the importance of limitation periods and businesses can rely on them unexpectedly and in an oppressive manner.

The Bill proposes to address these matters by:

• Removing all references to ‘unfair contract terms’ from the Fair Trading Act.
• Introducing the concept of an ‘oppressive contract term’, being a term that is oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice. This definition is taken directly from the Credit Contracts and Consumer Finance Act 2003.
• Prohibiting businesses from including an ‘oppressive contract term’ in a ‘standard form contract’, or applying, enforcing or relying on the term. This proposed amendment is particularly significant for two reasons.  Firstly, ‘standard form contract’ is defined simply as a contract where the relevant terms have not been subject to effective negotiation between the parties.  This suggests that both consumer and non-consumer (i.e. business to business) contracts would be covered by the new legislation.  Secondly, there is no requirement under the new legislation for the Commission or a party to the contract to seek a declaration from the court that a term is ‘oppressive’.  Instead, the question of whether a term is oppressive or not (and therefore in breach of the Fair Trading Act) will simply turn on whether the term is ‘oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice’.   If an oppressive term is included in a standard form contract, this will automatically constitute a breach of the Act.
• Prohibiting businesses from enforcing a standard form contract term if to do so would, in the circumstances, be oppressive to a party to the contract who is a consumer. This provision of the Bill appears to be aimed at situations where a clause in a standard form contract may not be an ‘oppressive contract term’, but nevertheless to enforce the relevant clause against the consumer would be oppressive in the circumstances.  We note that there appears to be some misalignment between the protection offered under this provision, and the protection proposed elsewhere in the Bill and under the Credit Contracts and Consumer Finance Act.  This provision only protects consumers, while the prohibition on ‘oppressive contract terms’ discussed above extends to standard form contracts entered into between businesses.  The Credit Contracts and Consumer Finance Act also permits businesses who borrow money to obtain relief from ‘oppressive’ terms in credit contracts.
• Limiting the operation of the Limitation Act 2010, by removing a business’ right to rely on the limitation defence in civil proceedings that relate to consumer contracts, unless the business gives the consumer adequate notice that the end of the limitation period is approaching.

While no date has yet been set for the Bill’s First Reading in the House, we intend to make submissions on the Bill if it passes its first reading and goes to Select Committee.  If you would like to have input into these submissions, or make your own submissions, please do not hesitate to get in touch with either Anna Ryan at anna.ryan@laneneave.co.nz or Evelyn Jones at evelyn.jones@laneneave.co.nz.

Business Law team

If you need any assistance with the sale or purchase of your business, do not hesitate to get in touch with the Business Law team at Lane Neave.

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace,  Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto