Unfair contract terms in small trade contracts and unconscionable conduct: Are you ready?
Last year, the Fair Trading Amendment Act 2021 (Amendment Act) was passed to extend the existing prohibition on unfair contract terms (UCTs) in standard form consumer contracts to small trade contracts, and to introduce a new statutory prohibition on unconscionable conduct. The new legislation will take effect on 16 August 2022. Now is the time to review your standard form contracts and business practices and policies to ensure that they comply when the new regime comes into force.
The extension of UCT to small trade contracts
Previously, the UCT regime only applied to standard form consumer contracts (standard form contracts between a business and an individual), however the regime will be extended to apply to small trade contracts from 16 August 2022. The purpose of the extension is to protect small businesses from unfair contract terms found in standard form contracts.
Which contracts are affected?
The regime will apply to standard form small trade contracts. Typically, these are standard terms and conditions that are presented to customers with little real opportunity for negotiation or consideration.
A standard form contract is a small trade contract if:
- each party is engaged in trade;
- it is not a consumer contract; and
- it does not comprise part of a ‘trading relationship’ that exceeds the ‘annual value threshold’ of NZD250,000 (including GST, if applicable) per annum for goods, services or an interest in land when the relationship first arises.
The new legislation does not apply to contracts entered into before 16 August 2022 (unless renewed or varied on or after that date) and also provides a carve out for insurance contracts in that it does not apply to insurance contracts entered into before 1 April 2025.
When is a term unfair?
A term can be declared to be unfair where:
- reliance on the term would cause a significant imbalance in rights between each of the parties;
- the term is not necessary to protect the legitimate interests of the party who is relying on it; and
- one party would suffer detriment (financial or otherwise) if the term was to be relied upon.
The extent to which the term is transparent and the context of the contract as a whole must also be taken into account.
Certain terms are exempt from the UCT regime. These are terms that:
- define the main subject matter of the contract;
- set the upfront price payable under the contract, to the extent that the price term is transparent; or
- are required or expressly permitted by any enactment.
The ‘Grey List’
The Fair Trading Act 1986 (FTA) includes a list of terms that may be unfair terms. These primarily relate to the ability of the one party to do certain things, but not the other party – for instance, avoiding or limiting performance, terminating the contract, varying the terms or imposing a penalty for breach. It may also be unfair for the business to limit its liability to the consumer, to limit the consumer’s right to sue under the contract, or to impose liability for certain events outside the consumer’s control.
Importantly, whether a term is ultimately “unfair” will depend on the context of the contract. The UCT regime will not operate to disadvantage a business that has a legitimate business interest and the term is necessary to protect that interest.
Certain industries may take comfort in the fact that a term that is expressly permitted by legislation will not be an unfair contract term. This carve out from the UCT regime is particularly relevant to financial service providers and insurers.
What happens if a term is unfair?
The Commerce Commission (NZCC) may apply to the Court for a declaration that a term in a contract is unfair. The NZCC may apply to the court of its own volition, or upon the request of a party to a contract.
If a Court makes a declaration that a term is unfair, from that time the business must not include the term (unless done in a way that complies with the Court’s decision) or attempt to apply, enforce or rely on the unfair term. If a business continues to use a term that has been declared as unfair, they may face:
- in the case of an individual, a fine not exceeding NZD200,000; and in the case of a body corporate, a fine not exceeding NZD600,000;
- an injunction restraining the person from including, applying, enforcing, or relying on the term; and/or
- orders directing a refund or payment of damages.
The Amendment Act also introduces a prohibition on unconscionable conduct in trade. This will also apply to all consumers and businesses from 16 August 2022. The unconscionable conduct prohibition has a broader application than the UCT regime under the FTA as it applies to all “conduct” and not only contractual terms.
In assessing whether a person’s conduct is unconscionable, the Amendment Act provides certain matters for the Court to consider:
- the relative bargaining power of the parties involved;
- the extent to which the parties acted in good faith;
- whether the affected person was reasonably able to protect their interests; and
- whether unfair pressure or tactics were used.
The prohibition will enable the NZCC to seek penalties against parties engaging in unconscionable conduct. Breaches are subject to the same penalties as other conduct under the FTA which carry a maximum penalty of NZD600,000 for a company per offence and NZD200,000 for an individual.
The NZCC could also choose to bring civil proceedings for breach of the unconscionable conduct prohibition at the same as, for example, seeking a declaration in relation to unfair contract terms. There are a range of civil remedies available for breach of the unconscionable conduct prohibition, including damages, injunctions and other orders.
Finding more information
To discuss the incoming regime or to line up a review of the standard terms and policies used in your business, contact our experts.