The new amendments to the Fair Trading Act 1986 (FTA) are fast approaching with the changes coming into force on 16 August 2022. The Fair Trading Amendment Act 2021 (Amendment Act) seeks to combat unfair commercial practices by extending the current unfair contract terms regime to also apply to standard form small trade contracts and introducing a prohibition against unconscionable conduct in trade. These changes have the potential to drastically impact the way businesses negotiate and contract, so now is the time to ensure your standard form contracts and business practices comply when the new regime is in force.

Unfair contract terms

An unfair contract term is a term that would cause a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect the legitimate interests of the advantaged party, and would cause detriment to a party. Unfair contract terms cannot be used, enforced or relied upon. The protection from unfair contract terms has previously only applied to standard form consumer contracts; however, the Amendment Act will extend the protection to standard form small trade contracts. The changes are intended to protect smaller businesses which may find themselves in a situation where they have little or no opportunity or resources to negotiate terms of trade, and recognise that in practice, it is not just consumers who require protection, but businesses can also be vulnerable to unfair contract terms.

A ‘standard form’ contract is one that has not been subject to effective negotiation between the parties, and usually leads to a ‘take it or leave it’ situation. A ‘small trade’ contract is a business to business contract with an annual value of less than NZ$250,000.

The Amendment Act provides a list of examples that may constitute unfair terms. While these terms are not binding on the court, it sets out the types of terms that businesses should consider avoiding in their standard contracts. The examples include:

1. Where one party has a unilateral right to:

• vary the terms of the contract;
• avoid or limit performance of the contract;
• terminate the contract;
• penalise another party for breaching or ending the contract;
• renew or not renew the contract;
• vary the upfront price payable under the contract without the right of another party to terminate the contract; and
• vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; and

2. Where a party can limit:

• one party’s legal liability for its agents;
• one party’s right to sue another party; and
• the evidence one party can present in proceedings relating to the contract.

In terms of enforcement, the Commerce Commission (‘Commission’) is the only entity that can bring an action to declare a contract term unfair. Upon the request of a party to a contract, the Commission may investigate the terms, and if appropriate, bring proceedings for a declaration. It is likely that the Commission will only take court action on the most serious complaints, leading to a low number of decisions: however, the reputational risk that is involved in an investigation will in itself be undesirable. Regardless of the outcome, the company’s reputation may have already suffered.

Businesses should review their contracts and standard terms that may fall within the wider ambit of unfair contractual terms to ensure terms:

• do not cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• to the extent that they do cause such imbalance, are nonetheless reasonably necessary in order to protect their legitimate interests.

Unconscionable behaviour

The Amendment Act introduces a prohibition against unconscionable conduct in trade.

The term ‘unconscionable conduct’ does not have a set definition within the Amendment Act but, like the framework in Australia (upon which the Amendment Act in relation to unconscionable conduct is based), it is intended to be developed on a case by case basis by the courts over time. For now, think of its literal meaning - conduct which is so harsh that it goes against good conscience, such as the use of pressure tactics, predatory lending practices, and taking advantage of the community’s most vulnerable (e.g. sick, elderly, those with difficulty understanding English, or who do not understand their legal rights).

Examples of conduct deemed unconscionable in Australia include:

• An online business directory misleading businesses into entering contracts, and refusing to cancel contracts that customers did not want, and did not intend to enter into, using high pressure sales tactics and harassing staff by chasing debts that didn’t exist – calling one customer 993 times over a nine month period.
• A cleaning franchisor making false or misleading representations concerning the income that the two prospective franchisees would earn, and failing to pay the franchisees for the work they had completed, while continuing to demand payment for the initial franchising fee.
• A company handling complaints about quality issues with cars, telling customers that their concerns were a result of their driving style and refused to provide refunds or replacements, despite knowing that there were quality issues with the vehicles in question.
• A supermarket failing to pay agreed prices to its suppliers, making persistent demands for additional payments, imposing penalties that were not previously negotiated, and threatening to remove products from shelves.

The penalties for unconscionable conduct in trade include committing an offence, and being liable for a fine not exceeding NZ$200,000 for an individual or a fine not exceeding NZ$600,000 for a company. In addition, the current civil remedies contained in the FTA will also apply to unconscionable conduct, such as injunctions, damages, refunds and having contract terms altered or declared void.

It is likely that the new unconscionable conduct regime will increase the number of complaints the Commission will receive, leading to heightened compliance risk for businesses. In addition, the reliance on Australian case law due to the lack of statutory definition may create uncertainty, as well as an extra layer of subjectivity into our commercial law framework. To combat this, businesses should:

• make sure contracts are thorough, easy to understand, not too lengthy and do not include harsh, unfair or oppressive terms;
• give customers the opportunity to seek advice about the contract before they sign it;
• not reward staff for unfair, pressure-based selling; and
• invest in training to ensure team members understand the new changes and the implications that may arise in the event of non-compliance.

Next steps

The time is ticking to ensure that your contract terms and business practices are in order, and that your business has policies and procedures in place to ensure sustainable compliance.

If you have any questions regarding your standard contract terms, policies, procedures, customer service scripts or any other business operation in relation to unfair contract terms or unconscionable conduct, please contact Gunes Haksever or Hayley Miller.