Are your standard terms fair? 4 questions to ask about the amended Fair Trading Act regime

In August 2022, a number of changes to the Fair Trading Act 1986 (FTA) come into force. If you provide goods or services to your customers on your own standard terms, now is a good time to ensure they comply with the FTA and the upcoming changes. In short, the FTA changes extend the existing unfair contract terms regime to standard business contracts up to a certain value, and introduce a new prohibition on “unconscionable” conduct. These changes matter because a conviction for a breach of the FTA may result in a significant fine of up to $600,000 for a business, or up to $200,000 for an individual.

Below, we have set out four questions you need to ask for your business:

1.     Does the unfair contract terms regime apply to me?

2.     What makes a term unfair?

3.     What else is new about the amended FTA?

4.     How do I comply with the new regime?

1. Does the unfair contract terms regime apply to me?

The unfair contract terms regime applies to you if you offer goods or services on your own non-negotiable standard terms (i.e. standard form contract) to:

• consumers (under existing law); or

• other businesses if the contract is a “small trade” contract (under the new changes). This is where the B2B trading relationship related to the contract is small (under a $250,000 threshold).[1]

This extension of the unfair contract terms regime to small trade contracts brings New Zealand in line with regimes implemented in Australia and the United Kingdom.

Examples of these standard form small trade contracts include online terms and conditions that customers must accept to proceed with an order, and an order form that refers to a non-negotiable fine print.  These are generally contracts that are provided to the other on a “take it or leave basis” or with little or no wriggle room to negotiate.

So, what if the regime applies? It does not automatically make your contract “unfair”. There’s a different legal test for that.

2. What makes a term unfair?

If the regime applies to your standard form contract, a term will become “unfair” only when the court declares them as such. The Commerce Commission, the regulatory body that enforces the FTA, needs to apply to the court for such a declaration. Even after a term is declared unfair by the court, you will only become liable to pay fines when you try enforce or rely on terms that have been declared unfair.

When will the courts declare a term to be “unfair”? The court will need to be satisfied that the term:

• causes a significant imbalance in the relationship between the party;

• is not something that is necessary to protect your legitimate interests; and

• your client would suffer a detriment (financial or otherwise) due to the term.

When making this assessment, the court will look at the contract as a whole as well as how transparent the problematic term is.

Here are some examples of terms that may be “unfair” under the FTA:[2]

• Unilateral right to terminate: a term that allows one party (but not the other party) to terminate the contract;

• Unilateral right to vary price: a term that permits one party to vary the price payable by the other party without the right of the other party to terminate the contract; and

• Unilateral right to vary term: a term that permits one party (but not the other) to vary the terms of the contract.

Although you will likely have opportunities to rectify your terms before you face any fines, you would still want to avoid complaints to the Commerce Commission or worse yet, the Commerce Commission taking action against you to avoid any associated reputational damage.

3. What else is new about the amended FTA?

Another important change that will be implemented in August 2022 is the prohibition on engaging in “unconscionable” conduct in trade. Unconscionable conduct is not defined in the FTA, but the law provides several factors that might be considered by the courts in assessing unconscionability, including:

• the relative bargaining power of the parties involved;

• whether an affected person was able to understand any documents provided by the other side;

• whether the parties acted in good faith; and

• whether the affected party was subject to any unfair pressure or tactics, or unduly influenced.

At this stage, the precise scope of this new prohibition is unclear. It is an extension of the existing prohibitions in the FTA, such as those on misleading and deceptive conduct, unsubstantiated representations and unfair trade practices (e.g. pyramid schemes). The Commerce Commission is due to publish guidance on unconscionable conduct in due course, which will give us a better idea on how the prohibition is likely to be enforced and operated in practice. It is likely that the Commerce Commission and the New Zealand courts will turn to Australian case law for guidance.[3]

4. How do I comply with the new regime?

If you use standard form agreements with your consumers or business customers, you should think about whether your terms breach the FTA.  Check whether any of your terms are unreasonably one-sided, hidden or limit or deny rights and/or liability. You should also review your practices to ensure you do not risk falling foul of the new and existing FTA prohibitions. Potential fines that arise from breaching the FTA are heavy, and there is also reputational risk associated with action by the Commerce Commission.

What next

If you have any questions about complying with the FTA regimes, or need assistance with reviewing your standard form contracts, get in touch with Samuel Choi.

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Disclaimer

This publication should not be construed as legal advice. It is necessarily brief and general in nature. Please seek professional advice before taking any action in relation to the matters discussed in this publication.

Notes

[1] See examples of trading relationships to which the regime applies here.

[2] See full list of examples of terms that may be considered to be “unfair” here. 

[3] See here for a summary of latest case law on “unconscionable conduct” in Australia. In short, the Federal Full Court held that to determine whether a conduct is unconscionable requires (a) a focus on the conduct, (b) an assessment whether the conduct is a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience, and (c) it is not necessary to demonstrate exploitation or taking advantage of vulnerability.