Businesses should be aware of the new laws coming into force that prohibit unfair contract terms (UCTs) in business to business “small trade contracts”. It is time to check that your business’ standard form contracts do not breach the new legislation.
Sections of the Fair Trading Amendment Act 2021 dealing with business UCTs will come into force on 16 August 2022. This will extend the scope of the existing consumer UCT rules to certain business contracts.
Current UCT rules for consumer contracts
The purpose of the Fair Trading Act (FTA) is to contribute to a trading environment in which the interests of consumers are protected; businesses compete effectively; and consumers and businesses participate confidently. The FTA prohibits certain unfair conduct in trade. Amendments to the FTA in 2013 extended the reach of unfair conduct to capture UCTs in standard form consumer contracts.
The prohibition against UCT provisions apply, subject to some exceptions, to all standard form consumer contracts entered into or varied after 17 March 2015. UCT provisions cannot be contracted out of. An attempt to contract out of a UCT is a breach of the FTA.
The Commerce Commission, the watchdog for New Zealand’s competition, fair trading and consumer credit contract laws, is responsible for enforcing the FTA. The Commission has the ability to apply to the Court on the basis that a term in a standard form consumer contract is an unfair term. The Commission can apply to the Court on its own initiative or at the request of a party to the contract.
The statutory test for unfairness is met if the Court is satisfied that the contract term:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if the term were applied, relied on or enforced.
When determining whether a term is fair or not, the Court can take into consideration a wide range of matters – but the extent to which the term is transparent, and the contract as a whole are deemed mandatory considerations.
New UCT rules for business contracts
The Fair Trading Amendment Act 2021 extends the current protections against UCTs in consumer contracts to “small trade contracts”.
Small trade contracts are, broadly, non-negotiable contracts between businesses that form part of trading relationships which have an actual or expected total value of less than $250,000 within a 12 month period.
Terms of trade and standard form contracts should be checked to see if they are caught by the definition of “small trade contracts” in the FTA.
Once a business has determined if it uses small trade contracts, these should be checked to ensure that they do not contain UCTs, using the test for unfairness set out above.
As the legislation is new, we do not yet have concrete examples of what constitutes UCTs in business contracts. We expect UCTs would include: unilateral rights to change the contract terms or price, termination for non-material causes, unreasonable fees, complicated automatic renewals, unnecessary exclusivity clauses, unreasonable exclusion of liability and one-sided risk allocation clauses.
If your business is found to have UCTs, you or your business may face:
- a fine of up to $200,000 or $600,000 in the case of a company
- an injunction restraining you or your business from including, applying, enforcing or relying on the UCT
- further orders directing you or your business to refund money or pay damages.
Now is the time to undertake a comprehensive review of your business’ standard form contracts, and perhaps more broadly, your customer handling processes and practices, to ensure that the contractual agreements you have in place are consistent with the new UCT provisions.
If you require more information about how the FTA applies to standard form contracts, please contact the head of the Competition and Consumer team, Anna Ryan, or another member of Lane Neave’s Corporate team.
