Standard form small trade contracts: the imposition of a requirement for “fairness”

The Fair Trading Amendment Act 2021 (the Amendment Act) comes into force in August 2022 and makes a number of changes to NZ’s Fair Trading Act 1986. Most significantly, the Amendment Act extends the existing unfair contract term (UCT) regime to small trade contracts. The purpose of this extension is to protect small businesses from UCTs found in non-negotiable, “take it or leave it” arrangements. In practice, the upcoming changes mean that certain standard clauses commonly found in small trade terms, such as those extremely limiting or denying liability, may need to be reconsidered for compliance.

We summarise the new regime below and outline key matters businesses operating in this space should consider ahead of August 2022.

What is a standard form small trade contract?

To be caught by the new regime, a contract needs to be a “standard form,” “trade contract” that is “small”:

• A contract is “standard form” when there is little to no opportunity to negotiate its terms. This is a matter of assessment, but a common example is supply terms which are provided on a take or leave basis.
  
  
• A contract will be a “trade contract” where (i) it is not a consumer contract and (ii) the parties are both engaged in trade. This means business-to-consumer contracts are mostly excluded (but note these are already covered by the existing UCT regime).
  
  
• A contract is a small trade contract if it does not comprise or form part of a trading relationship that exceeds an annual value threshold of $250,000. Importantly, the value is measured when the relationship first arises. This means the regime will likely apply if the future trading relationship exceeds the annual value threshold and the contract terms have not been updated.

Importantly, for a term to be declared a UCT, an application must be brought by the Commerce Commission, rather than by an affected individual (although note such an individual is free to make a complaint to the Commission directly).

When will a term be deemed unfair?

The legal test for whether a term is a UCT remains unchanged, with the existing regime just being extended to also apply to small trade contracts, as above. Broadly, a term will be a UCT if the Court is satisfied:

• The term would cause a significant imbalance in the parties’ rights and obligations arising under the contract.
  
  
• The term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.
  
  
• The term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

Transparency and the contract as a whole are also relevant to this assessment.

Obvious examples of UCTs include heavily one-sided termination provisions, unilateral variation provisions and limitations and exclusions of liability. Terms that define the main subject matter of the contract, set up 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 are specifically exempt from the UCT regime.

Any terms that are declared to be UCTs must not be used or relied upon. If a trader continues to use such a term after it has been declared a UCT, it may face fines of up to $600,000 (or $200,000 in the case of an individual).

What does this mean for your business?

With only a few months until the new UCT regime comes into force, now is the time for businesses using standard form trade contracts to review their wording and consider whether any terms might be vulnerable to being declared unfair. Traders should keep an eye out for hidden, one-sided terms, such as those that extremely limit or deny liability, that give them the right to make final binding decisions, or that prevent customers from taking legal action, and consider whether they are genuinely necessary. If doubts arise, legal advice should be considered.

If you would like further information, or assistance with reviewing your standard form contracts, please get in touch.

Unconscionable conduct

The other key change proposed by the Amendment Act is the prohibition on unconscionable conduct. The introduction of this prohibition brings us more in line with Australian fair-trading law, and essentially restricts any person in trade from behaving unconscionably.

The Amendment Act does not define what conduct will be “unconscionable”. However, the Court may have regard to the following factors (inter alia):

• The relative bargaining power of the parties.
  
  
• The circumstances and characteristics of the affected party.
  
  
• Whether the trader used unfair pressure or tactics.
  
  
• If there is a contract, the terms, circumstances and form of such contract.

This provides another mechanism by which to stop traders from adopting misleading or deceptive trading practices, and we expect this will broadly restrict “shark” tactics, such as applying undue pressure or influence, using unfair business tactics, or not acting in good faith taking into account the relative bargaining strength of the parties. Jurisprudence from Australia is likely to be instrumental in navigating this new provision’s limits, particularly when it first comes into force.