Fair Call!

What extension of Fair Trading Act provisions means for small business contracts

The most recent changes to the Fair Trading Act help to protect both businesses and consumers from unfair commercial or trading practices such as deception, pressure tactics, and one-sided, exploitative terms in standard form contracts. 

These changes, brought about by the Fair Trading Amendment Act 2021 (Amendment Act), which extended the application of certain provisions to small business contracts, also address the inequality of bargaining power between parties and circumstances where one party is not given an opportunity to negotiate their terms.

What do these changes mean in practice?

The Fair Trading Act applies to standard form contracts, where there is an inequality of bargaining power between the parties or are provided in circumstances where one party is not given an opportunity to negotiate their terms. Think those long, boring, pre-prepared contracts like gym contracts or software licence agreements – contracts to which you effectively need to “agree” before you can enjoy the services your are contemplating. These sorts of contracts have been increasingly used by businesses to reduce the transaction costs of drafting a specific contract for every customer. However, given their length and complexity, they impose significant challenges on whether the consumer (or small business party) can truly voluntarily consent to their terms.

Why was the change made? 

The Amendment Act was intended to address concerns that standard form contacts have negatively impacted the economy and prevented markets from functioning properly.  It sought to address a party’s inability to negotiate contract terms on a fair and reasonable basis, giving rise to unfair contract terms (UCTs) that can be enforced against the more vulnerable party that had little choice but agree to them. There was also concern that some businesses would not enter certain contracts where they could not negotiate, thereby reducing commercial activity and potentially limiting competition.

UCTs scope extended

As a result of these concerns, the Act introduced many significant changes, one of which is to extend the scope of the UCT regime in the Fair Trading Act 1986 to capture business-to-business or small trade contracts with an annual value below NZ$250,000 that form part of a trading relationship. This change is designed to provide small businesses with more power to negotiate terms of contracts that are offered on a "take-it or leave-it" basis, (for example, supply agreements, equipment lease agreements, and licences of all kinds and terms of trade) to ensure business practices are conducted fairly and reasonably.

Consequence of a declaration that a term is unfair

The High Court or the District Court may, on the application by the Commerce Commission, declare that a term in a standard form contract is a UCT. Failure to review your contracts properly to align with the new unfair contract regime may attract conviction and a fine of up to $200,000 for an individual or $600,000 for a body corporate.

The Court may also grant an injunction restraining a business from including, applying, enforcing or relying on the UCT. It can also make orders directing a business to refund the money or pay damages. There may also be the risk of negative publicity or reputational damage arising from a Commerce Commission investigation or proceeding.

What should your business do?

Given the far-reaching impact the new UCT regime could have on business conduct in New Zealand, you should take the initiative to carry out due diligence on high-value, strategic contracts by carefully reviewing and aligning your current practices, standard form contracts and small contracts with the new regime to ensure they do not contain UCTs. This will include making a judgment call on whether to retain terms that could be deemed UCTs, despite the commercial benefits they offer. You should also consider whether the terms are reasonably necessary to protect the legitimate interests of your business.

Your business will be in the best position to defend or amend terms of the contracts if you undertake thorough review. Additionally, your lawyers can help you fully understand the legal implications of the wording of your contract and whether they fall within fair contract guidelines. If you fully understand how all your terms operate and have considered whether terms are reasonably necessary to conduct or protect your business, it will also mean you can make a considered risk assessment as to how you respond to any complaints you may receive under the new UCT regime and be able to respond appropriately if you attract scrutiny from the Commerce Commission. 

You should also consider your customer service processes and practices around contract formation, including how your business engages with your customers, how standard contracts are reviewed and – if relevant, negotiated – and how you deal with complaints.

Conclusion

Although undertaking a high-level review and making the necessary amendments can be time consuming, it is essential to avoid the severe penalties that could be imposed by the Commerce Commission if it reaches the view you have UCTs in your contracts. Under the previous regime, which only applied to standard consumer contracts, businesses could potentially escape liability because the potential complainants were only consumers who may not be well-resourced to bring a claim against your business. The stakes are now much higher as the regime now protects parties entering into contracts worth up to NZ$250,000 per year. There is therefore a much higher chance that the complaining party asks the Commission to apply to a Court for a declaration of UCT.

If you have any questions about the Fair Trading Act and how these changes impact your business, or you need guidance on compliance, please contact Anthony Kuran on 09 306 0611 or @email or Andrew Knight on 09 985 2531 or @email