On 16 August 2022, the Fair Trading Amendment Act 2021 (Amendment Act) comes into force and will extend the unfair contract terms (UCT) regime to include small trade contracts.
Many businesses regularly use standard form contracts which will fall within the UCT regime without necessarily realising it. For example, issuing trade terms with a quotation is an example of a standard form contract. It is therefore important to understand how the UCT might impact your business. Now is the right time to ensure that your contracts are compliant.
UCT regime
The Amendment Act is set to provide greater protection to small businesses who often have less bargaining power when negotiating the terms of a contract, particularly in the current economic climate. In addressing the Amendment Act, the Minister of Commerce and Consumer Affairs, David Clark, emphasised that “we are tightening the screws on unfair and dishonest business activity, which has no place at any point in time, but especially as our economy recovers from the impact of COVID-19.”
What contracts are covered?
Previously, the UCT regime only applied to standard form consumer contracts, those being contracts between a business and an individual. However, as of 16 August 2022, the UCT regime will extend to include certain small trade contracts (business to business contracts).
To fall within the UCT regime, a small trade contract must have the following characteristics:
• each party is engaged in a trade;
• the contract is in a standard form; and
• the contract has an annual value of less than $250,000 (including GST).
Whether a contract is a “standard form contact” depends on whether the parties have had the opportunity to negotiate the terms – essentially, a standard form contract will be one where it is offered on a “take it or leave it” basis.
The $250,000 threshold is based on when the first contract of the relationship was entered into. This means that contracts that later exceed the threshold may still be subject to the UCT regime.
When is a term unfair?
The Amendment Act does not change the test to determine whether a term is “unfair” under the Fair Trading Act 1986 (FTA). A term may be deemed to be “unfair” if the court is satisfied that the term:
• would cause significant imbalance in the parties’ rights and obligations under the contract; and
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment to a party if it were applied, enforced or relied on.
The court must also take into account the transparency of the term and the context of the contract as a whole.
However, it should be noted that there are terms that are exempt from the UCT regime, those being terms that:
• define the main subject matter of the contract;
• set the upfront price payable under the contract, to the extent that the price term is transparent; or
• are required, or expressly permitted, by an enactment.
Examples
The application of this test is likely to be guided by judgments in the context of consumer contracts; judgments from other jurisdictions with similar regimes, in particular the regime under Australian Consumer Law which the Amendment Act was largely inspired by; as well as the list of terms that may be deemed to be unfair provided under the FTA.
In Australia, the following contractual terms have been considered to be “unfair”, and similar findings might arise in New Zealand:
• A term which allows one party to charge the other for services it has not rendered for reasons beyond the other party’s control.
• A term that allows one party to unilaterally vary the terms of the contract.
• A term where one party is not able to terminate the contract without paying a significant fee, yet the other party is able to terminate at any stage.
• A term where the liability imposed for a breach of contract far outweighed the consequences of the breach. For example, in the context of a rental car contract, the following term was deemed to be an UCT because it removed the benefit of a liability cap (for which the customer had paid to have the benefit of) if the customer breached any term of the contract, no matter how trivial:
If you breach the contract there is no cover and you are liable for:
a) damage;
b) loss of the vehicle as a result of theft;
c) third party loss.
• A term that limits, or has the effect of limiting, one party’s right to sue the other party.
• In certain circumstances, entire agreement terms which seek to limit reliance on earlier agreements because they are not recorded in the standard form agreement – for example:
This Agreement constitutes the entire Agreement. The Agreement shall supersede any prior promises, agreement, representations or undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement.
Implications of the UCT regime
It is apparent from the Australian experience that terms in small trade contracts that are frequently referred to in litigation, such as limitation of liability terms or unilateral termination terms, are at risk of being declared “unfair” under the UCT regime.
However, what is key is that the term must cause a significant imbalance between the parties to the contract. If a term is regarded as being unfair, but the party relying on the term can demonstrate that the term is balanced by another, or is reasonably necessary to protect its legitimate interests, then it may not be “unfair”.
The Commerce Commission is solely responsible for seeking a court declaration that a contractual term is unfair. If a court determines that a term is unfair, it cannot be applied, enforced or relied upon. Should a party continue to use an UCT after it has been declared an UCT, it may face:
• fines of up to $600,000, or $200,000 in the case of an individual;
• an injunction restraining the person from including, applying, enforcing, or relying on the term; and/or
• orders directing a refund or payment of damages.
What do I do if I have a standard form contract?
The amendments come into force on 16 August 2022. If your business uses a standard form business to business contract, we recommend that you take the time to assess whether your trading relationships will fall under the $250,000 threshold.
If so, now is the time to seek a review of your contracts as a whole to determine whether any of the terms could be considered unfair. It is also worth considering whether you want to amend any terms in your standard form contracts that are at risk of being caught under the UCT regime in order to minimise the risk of a complaint being made against your business.