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Changes to Unfair Contract Terms are a key consideration for all businesses
Changes being introduced to the Fair Trading Act in 2022 are designed to protect and give more power to small businesses when negotiating contracts and conducting business. Triggered by the Fair Trading Amendment Bill 2019 which was recently passed by Parliament, changes to the rules around unfair contract terms (UCT) will protect businesses that have a limited opportunity to negotiate the terms of a trade contract.
Under the Bill the UCT provisions will extend to business-to-business contracts (B2B Contracts) with an actual or expected annual value of up to $250,000. Currently the UCT provisions apply only to standard form consumer contracts.
To ensure compliance before the changes come into effect on 16 August 2022, businesses should conduct a careful review of their B2B Contracts.
A contract term is an UCT if it:
- Would cause a significant imbalance in the parties’ rights and obligations under the contract.
- Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it.
- Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
By way of a practical example, a term in a B2B Contract which allows one party to make unilateral changes to the contract (without the other party being provided a similar right) may be considered an UCT. Similarly, a term that enables only one party to renew, vary or terminate the contract, or a term that penalises one party only for breaches of the contract, could constitute an UCT.
If a term is declared an UCT, and is used again, the term will be void and the business may be liable for a penalty of up to $600,000.
Businesses also need to weigh up the resulting reputation damage amongst its customers and stakeholders that could result from a Commerce Commission investigation or proceedings. As such, in reviewing these contracts, businesses will likely need to make judgement calls on whether to retain terms that could be deemed UCTs, even if these terms offer commercial benefits.
When assessing and making changes to your B2B Contracts, there are some practical tips to consider which will help streamline the process and ensure the adjustments are effective:
- Terms should always be assessed against the UCT requirements.
- Terms should be written in “plain English” and presented clearly to all parties.
- Ensure that terms apply equally to the parties, where possible.
- If a term is required but there is a significant risk that it may be considered unfair, the term should be drafted separately from the other terms of the contract.
Making the necessary changes may seem time consuming, and for some businesses overwhelming. However, it is essential and will ultimately benefit businesses and how they operate.
Haigh Lyon can provide advice on reviewing business contracts, terms of trade, and business practices to ensure compliance with the new requirements by the August 16, 2022 deadline. Contact Melinda Whyte on [email protected] or Raj Gurusinghe on [email protected] or 09 306 0629.