Business / Commerical
Unfair Contract Terms Update under the FTA
If you’re operating a business in New Zealand, changes to the Fair Trading Act 1986 (“Act”) that came into force in August 2022 will likely affect you. The revised Act prohibits unfair terms in standard form small trade contracts. To help you understand what this means for your business and your contracts, we’ve outlined the types of trade relationships affected by the new provisions and explained contractual terms likely to be flagged as unfair.
What types of contracts are affected by the update?
Contracts affected by the new Unfair Contract Terms provisions are Standard Form Small Trade Contracts, as defined by the Act.
A Standard Form Contract is any contract in which the terms have not been subject to negotiation between the parties. Standard Form Contracts can also be known as “take it or leave it” contracts, featuring prescribed terms.
A Small Trade Contract is defined as a contract between parties engaged in trade (B2B contracts), where the Trading Relationship does not meet or exceed the Annual Value Threshold of $250,000 when the relationship first arises. A ‘Trading Relationship’ is a relationship consisting of that contract and any other contract between the same parties on the same or substantially similar terms. The value of the Trading Relationship is reassessed every year.
Note that if parties enter into an open-ended contract with no value ascribed, and the Trading Relationship is worth less than $250,000 in its first year however grows to meet or exceed $250,000 in future years, the agreement might stay fixed as a Small Trade Contract.
This depends on whether consideration worth $250,000 or more was “more likely than not” to become payable under the Trading Relationship in relation to an annual period for the goods, services or interest in land concerned. Guidance from the Commerce Commission provides that the “more likely than not” assessment is based on the parties’ expectations when entering the contract.
Standard Form Contracts between two large companies will fall within the definition of a Small Trade Contract when the Trading Relationship does not exceed the Annual Value Threshold. For example, a contract between a construction company and an engineering company for annual small-scale assessments and maintenance works.
The types of contracts that may be captured by the new Unfair Contract Terms rules also include terms of trade and independent contractor agreements.
What are the dates of enforcement?
The provisions apply to Standard Form Small Trade Contracts entered into, varied or renewed on or after 16 August 2022. The date of variation or renewal is considered the start date of the Trading Relationship, even if the relationship has existed for many years.
When is a contract term unfair?
The Act states that a contractual term is an Unfair Contract Term when the following three requirements are satisfied:
- The term creates an imbalance between the rights and obligations of the parties.
- The term is unnecessary to protect the legitimate interests of the party who would benefit from it.
- The term would cause a detriment to a party if it were enforced or relied upon. This isn’t restricted to financial detriment – it can be delay in receiving goods or distress suffered by a party due to the unfair term.
The Act provides examples of the kind of terms that may be deemed Unfair Contract Terms. Such terms are those that:
- permit one party to avoid or limit performance of the contract;
- permit one party to terminate the contract;
- penalise one party for a breach or termination of the contract;
- permit one party to vary the terms of the contract;
- permit one party to renew or not renew the contract;
- permit one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
- permit one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
- permit one party unilaterally to determine whether a contract has been breached or to interpret its meaning;
- limit one party’s vicarious liability for its agents;
- permit one party to assign the contract to the detriment of another party without that other party’s consent;
- limit one party’s right to sue another party;
- limit the evidence one party can adduce in proceedings relating to the contract; and
- impose the evidential burden on one party in proceedings relating to the contract.
We note that unlike some parts of the Act, the rules against Unfair Contract Terms cannot be contracted out of.
The new provisions align New Zealand’s position more closely with Australia, which introduced an Unfair Contract Terms regime in 2016. Australian courts have considered Unfair Contract Terms in a variety of sectors, including independent contracting, commercial leasing, construction, and waste and agriculture.
Investigation by the Commerce Commission
Only the Commerce Commission (“Commission”) can apply to the Court seeking a declaration that a contract term is unfair. Once determined unfair, a term cannot be enforced or relied upon.
To succeed in arguing that a contract term is unfair, it must be proven that the term creates an imbalance in power and that it would cause a detriment to a party if it were relied upon. If the party who is advantaged by the term persuades a Court that its term is reasonably necessary to protect its legitimate interests, this provides a defence to the claim.
A court must take into account two considerations when deciding if a term meets the threshold of unfairness: the extent to which the term is transparent, and the contract as a whole. Terms that are not transparent are far more likely to be unfair and these terms may also breach other provisions in the Act (for example, the rules against misleading or deceptive conduct).
A term cannot be determined to be unfair by the Court if it:
- defines the main subject matter of the contract;
- sets the upfront price payable under the contract; or
- is required or expressly permitted by any Act.
If you are a party to a Standard Form Contract and are concerned about the fairness of its terms, you should seek legal advice.
Consequences for unfair terms
If your contract is found to contain an Unfair Contract Term, the party at fault can be prosecuted and fined up to $600,000 for a company and up to $200,000 for an individual. The Unfair Contract Term must also be remedied or removed.
Another change introduced alongside the Unfair Contract Terms provisions is the rule against unconscionable conduct. Businesses cannot act unconscionably, either on a one-off occasion or in a pattern of behaviour.
Unconscionable conduct means conduct that is:
- abusing bargaining power
- failing to act in good faith, or
- using undue influence to pressure another party to enter into a contract.
If a company is found to be acting unconscionably, it could face a fine up to $600,000. Likewise an individual could face a fine up to $200,000.
If you’re wondering what these change could mean for your business, or need support with updating your standard form contracts, we’re here to help. Please get in touch with a member of our Commercial Law Team and we will arrange a time to chat.