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Small Business Contracts and Unfair Terms - It's Time to Review Your Contracts!

Small Business Contracts and Unfair Terms - It's Time to Review Your Contracts!

Overview

The Fair Trading Amendment Act 2021 ("Amendment Act") has made recent amendments of the Fair Trading Act 1986 with some terms being extended to small business contracts that will come into force on 16 August 2022.

The Amendment Act was designed to provide additional protection to consumers and small businesses to address unfair commercial or trading practices, including pressure tactics, deception, and one-sided, exploitative terms in standard form contracts. These standard form contracts have long been used by businesses to reduce the transaction costs of drafting a specific contract for every customer. However, given the length and complexity of these contracts, they are considered to impose significant challenges on voluntary consent to contract terms due to potential inequality of bargaining power or information between the parties involved or an inability for the customer to negotiate terms.

The Amendment Act has been passed to address concerns that "standard form contacts" have negatively impacted the economy and prevented markets from functioning properly. They are seen to create an inability to negotiate contract terms on a fair and reasonable basis which gives rise to unfair contract terms. Furthermore, there was some concern that some businesses would not enter certain contracts where they could not negotiate, thereby reducing commercial activity and potentially limiting competition.

As a result of these concerns, the Act has introduced many significant changes, one of which is to extend the scope of the unfair contract term regime in the Fair Trading Act to capture business-to-business ("B2B") or small trade contracts with a value below NZ$250,000.00 that form part of a trading relationship. This change is designed to provide small businesses with more opportunity and power to negotiate terms of contracts that are offered on a "take-it or leave-it" basis, such as franchise agreements, supply agreements, equipment lease agreements and terms of trade, to ensure business practices in New Zealand ("NZ") are conducted fairly and reasonably.

Consequence of a declaration that a term is unfair

The High Court or the District Court may, on the application by the Commerce Commission ("Commission"), declare a term in a standard form contract an unfair contract term. Failure to review your contracts properly to align with the new unfair contract regime may attract a fine of up to $200,000.00 for an individual or $600,000.00 for a body corporate.

In addition, the Court may grant an injunction restraining you or your business from including, applying, enforcing or relying on the unfair contract term and/or make further orders directing you or your business to refund the money or pay damages. More importantly, there may also be the risk of negative publicity or reputational damage arising from a Commission investigation or proceeding.

What should your business do?

Given the far-reaching impact the new unfair contract regime has on business conduct in NZ, your business must understand its implications and your new obligations. You should take the initiative to carry out due diligence on high-value, strategic contracts by carefully reviewing and aligning your current practices, standard form contracts and small contracts with the new regime to ensure they do not contain unfair contract terms. This includes making a judgment call on whether to retain terms that could be deemed UCT's despite the commercial benefits they offer and considering whether the terms are reasonably necessary to protect your business' legitimate interests.

A structured and comprehensive review will put your business in the best position to defend, amend, or delete the terms of the contracts on a considered risk assessment and avoid complaints under the new UCT regime and scrutiny from the Commission. Furthermore, you should also consider your customer handling processes and practices regarding how your business engages with your customers, including how standard contracts are reviewed and negotiated.  

Conclusion

Although making the necessary amendments may be cumbersome, it is essential to avoid the potentially quite severe criminal and civil liabilities that might be imposed by the Commission if it reaches the view you have UCT's in your contracts. While the previous regime that confined the unfair contract regime to only standard consumer contracts involved only consumers who may not be well-resourced to bring a claim against your business, the stake is much higher when it consists of another party capable of entering into a contract of up to NZ$250,000.00. There is a much higher chance of the business you contract with asking the Commission to apply to a Court for a declaration of UCT.

If you have any questions about this new regime and how it impacts your business or need guidance on compliance, please get in touch with and direct any enquiries to:

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz); or

Linda Packer on (09) 915 2575 (lpacker@mcveaghfleming.co.nz)

Links to Previous Articles:

Unfair Contract Terms

Amendments to the Fair Trading Act for Small Trade Contracts

See our Expertise pages

Commercial Contracts

Consumer & Fair Trading Claims

Written by Andrew Knight and Linda Packer

© McVeagh Fleming 2022

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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