20.05.2020

Extension of unfair contract terms regime to small trade contracts

New Zealand’s Fair Trading Act (“FTA”) currently prohibits the inclusion or use of terms that have been declared to be an “unfair contract term” in standard form consumer contracts.  The Fair Trading Amendment Bill (“Bill”) proposes to extend the FTA’s unfair contract terms regime to “standard form small trade contracts”, being business-to-business contracts with an annual value not exceeding $250,000.  

The Bill is currently at the Select Committee stage and is unlikely to come into force before late 2021.  This gives businesses sufficient time to prepare for the proposed changes.  Read on for how they may impact your business.

Who do the proposed new provisions apply to?

The Bill proposes to extend the unfair contract terms regime to standard form small trade contracts.  Small trade contracts are defined in the Bill as contracts where each party is engaged in trade, the contract is not a consumer contract and does not form part of a ‘trading relationship’ which exceeds an annual value threshold of $250,000 when the relationship first arises. 

Whether or not a trading relationship exceeds the annual value threshold of $250,000 when it first arises involves an inquiry into whether, at the time the first contract of the relationship is entered into, $250,000 or more is “more likely than not to become payable under the relationship, in relation to any annual period”.

The application of the new provisions would only apply to standard form contracts, being contracts in which the terms have not been subject to effective negotiation between the parties.  By way of example, many businesses’ terms of trade would constitute a standard form small trade contract. 

When will a term in a standard form small trade contract be “unfair”?

The existing test for whether a term in a standard form consumer contract is “unfair” will also apply to standard form small trade contracts.  Accordingly, subject to certain exclusions, a term in a standard form small trade contract will be “unfair” where the court is satisfied that the term:

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

Some terms would be specifically exempt from being an unfair contract term, including those that define the main subject matter of the contract or clearly set the upfront price payable under the contract. 

Based on the proposed amendments to the FTA, terms in small trade contracts that allow a business to make changes to the contract, without an equivalent right being provided to the other party, may be regarded as unfair by a court.  This is because these kinds of terms create an inherent imbalance in parties’ rights and obligations.  Specific examples in the FTA in relation to consumer contracts, but which extend to small trade contracts under the Bill, are terms which:

  • allow one party to vary the terms of the contract;
  • penalise one party for breach or termination of the contract;
  • limit one party’s liability to sue the other; or
  • allow one party to renew or not renew the contract.

Practical implications for businesses

 In light of the proposed amendments, businesses using standard form small trade contracts should consider whether any of the terms in these contracts may be considered unfair.  Where this is the case, there is a risk that the business may not be able to enforce or rely on those term(s) in the future without penalty.  There is also the reputational risk associated with action by the Commerce Commission, the regulator that enforces New Zealand’s fair trading laws.  

Businesses should also consider whether an update to their standard terms for all customers or suppliers is necessary, or whether using separate terms for small trade contracts is a more appropriate approach. 

If you would like any further information on the proposed changes, or our assistance in reviewing your standard terms, please get in touch with our Business Advice Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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Contact the expert team at Hesketh Henry.
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Media contact - Kerry Browne
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