The new amendments to the Fair Trade Act 1986 (ALE) are fast approaching with the changes coming into effect on August 16, 2022. Fair Trade Amendment Act 2021 (Amendment Act) aims to tackle unfair commercial practices by extending the current unfair contract terms regime to also apply to small standard commercial contracts and introducing a prohibition on unreasonable commercial conduct. These changes can have a huge impact on how companies negotiate and enter into contracts. So now is the time to make sure your standard contracts and business practices are compliant when the new regime comes into effect.
Unfair contract terms
An unfair contract term is a term which would result in a significant imbalance in the rights and obligations of the parties, is not reasonably necessary to protect the legitimate interests of the advantaged party and harm a party. Unfair contract terms cannot be used, enforced or invoked. Protection against unfair contract terms previously only applied to standard consumer contracts; however, the amending law will extend protection to small standard commercial contracts. The changes aim to protect small businesses which may find themselves in a situation where they have little or no opportunity or resources to negotiate commercial terms, and recognize that in practice it is not only consumers who need protection, but businesses can also be vulnerable to unfair contract terms.
A “standard” contract is one that has not been effectively negotiated between the parties and generally leads to a “take it or leave it” situation. A “small business” contract is an inter-company contract with an annual value of less than NZ$250,000.
The amending law provides a list of examples which may constitute unfair terms. While these terms are not binding on the court, they do set out the types of terms companies should consider avoiding in their standard form contracts. Examples include:
1. Where a party has the unilateral right to:
- change the terms of the contract;
- avoid or limit the performance of the contract;
- end the contract;
- penalize another party for breach or termination of the contract;
- whether or not to renew the contract;
- change the original price payable under the contract without the right of another party to terminate the contract; and
- change the characteristics of the goods or services to be provided, or the interest in land to be sold or granted, under the contract; and
2. Where a party may limit:
- a party’s legal liability for its agents;
- the right of one party to sue another party; and
- evidence that a party may 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. At the request of a party to a contract, the Commission can investigate the clauses and, if necessary, take action for declaration. It is likely that the Commission will take only the most serious complaints to court, resulting in a low number of decisions: however, the reputational risk involved in an investigation will in itself be undesirable. Regardless of the outcome, the company’s reputation may already have suffered.
Businesses should review their contracts and terms and conditions that may fall under the broader scope of unfair contract terms to ensure that the terms:
- do not result in a significant imbalance in the rights and obligations of the parties arising from the contract; and
- insofar as they cause such an imbalance, are nevertheless reasonably necessary to protect their legitimate interests.
Unacceptable behavior
The amending law introduces a prohibition against unreasonable business conduct.
The term ‘unreasonable conduct’ does not have a fixed definition in the Amendment Act but, like the framework in Australia (on which the Unreasonable Conduct Amendment Act is based), it is intended to be developed in case by case. by the courts over time. For now, think about its literal meaning – conduct so harsh that it goes against good conscience, such as the use of job action, predatory loan practices and the exploitation of the most vulnerable members of the community (eg the sick, the elderly, people who have difficulty understanding English, or who do not understand their legal rights).
The following are examples of conduct deemed inadmissible in Australia:
- An online business directory tricks businesses into entering into contracts and refusing to cancel contracts that customers do not want and do not intend to enter into, using high-pressure sales tactics and harassing staff looking for debts that don’t exist – calling a customer 993 times over a nine-month period.
- A cleaning franchisor making false or misleading statements regarding the income the two potential franchisees would earn and failing to pay the franchisees for work they performed, while continuing to demand payment of the initial franchise fee.
- A company dealing with complaints about quality issues with cars, telling customers that their concerns were a result of their driving style, and refusing to provide refunds or replacements, despite knowing there were quality issues with the vehicles in question.
- A supermarket that fails to pay agreed prices to its suppliers, constantly demands additional payments, imposes penalties that were not previously negotiated, and threatens to pull products from the shelves.
Sanctions for unreasonable business conduct include commission of an offense and imposition of a fine not exceeding NZ$200,000 for an individual or a fine not exceeding NZ$600,000 Zealanders for a company. In addition, existing civil remedies contained in the FTA will also apply to impermissible conduct, such as injunctive relief, damages, refunds, and modification or cancellation of contract terms.
It is likely that the new inadmissible conduct regime will increase the number of complaints the Commission will receive, leading to an increased risk of non-compliance for businesses. Furthermore, reliance on Australian case law due to the lack of statutory definition can create uncertainty, as well as an additional layer of subjectivity in our commercial law framework. To combat this, companies should:
- ensure that contracts are complete, easy to understand, not too long and do not contain harsh, unfair or oppressive clauses;
- give customers the opportunity to be advised on the contract before signing it;
- not rewarding staff for unfair and pressure sales; and
- invest in training to ensure team members understand new changes and the implications that may arise from non-compliance.
Next steps
Time is running out to ensure that your contract terms and business practices are in order, and that your company has policies and procedures in place to ensure lasting compliance.
