Fair Trading Amendment Act 2021 now in force
If you have customer contracts, inter-business contracts or contracts valued under $250,000, the Fair Trading Amendment Act 2021, that updated the Fair Trading Act 1986, should be on your radar. The changes came into effect on 16 August 2022.
Unfair terms, unconscionable behaviour and direct sales are all targeted in the updated legislation that includes an expansion on the regulation of ‘unfair terms’ impacting all consumer contracts and standard, trade and small contracts. This means all businesses should be reviewing these changes to ensure they comply with the 2021 Act to avoid penalties.
In this article, we focus on the ‘unfair’ contract term changes as these will impact almost all businesses.
What is an ‘unfair’ contract term?
Contract terms that are now considered ‘unfair’, and therefore unenforceable, are any terms that meet all of the following requirements:
- The contract or term causes a significant imbalance in the parties’ rights and obligations arising under the contract
- The term is not reasonably necessary to protect the legitimate interest of the party who is advantaged by it, and
- The term would cause detriment (financial or otherwise) to a party if it were applied, enforced or relied upon.
There are a few exemptions to the above requirements, including where the contract specifies a transparent price term, upfront price, defines the main subject matter of the contract or is expressly permitted by another law.
Examples that could be considered unfair include terms that:
- Refer to other hidden or ambiguous terms and conditions, such as committing your customer to ‘standard terms that will be provided with the supply of goods’
- Prevent someone from taking legal action
- Give one party a unilateral ‘final decision’ status
- Make your customer bear all the risk
- Restrict your customer from transferring their rights under the contract (i.e.: non-transferable), and
- Allow you to transfer your contract without their consent.
If it is unclear whether a term is ‘unfair’, the Commerce Commission can make that determination or ask the court to do so. In making its decision the Commission or court is required to consider any matter it considers relevant; the two most important matters are, however, the contract as a whole and the unfairness of the term.
Does this apply to your contracts?
This legislation applies to a vast number of contracts including consumer contracts, standard contracts, in trade contracts and small contracts. While most people understand that a consumer contract is one engaged between a business and a customer, to properly understand if any of the contracts you use in your business come under this legislation, it is important that three key terms – ‘standard’, ‘in trade’ and ‘small’ – are clarified.
A ‘standard contract’ is any contract in a templated form. This template is not subject to negotiation and is more of a ‘tick box’ of a contract. Most terms of trade and standard issued terms and conditions would be considered a ‘standard form contract’.
In trade contract
Using an ‘in trade contract’, you or your business must undertake any trade, business, industry, profession, occupation, activity of commerce or undertaking related to the supply of goods, services or interests in land.
‘Small contracts’ are contractual business relationships that result in less than $250,000 in anticipated value in the first 12 months of the relationship.
In addition, and importantly, almost all independent contractors will be caught up in these changes. Contractors should review their agreements to ensure they remain compliant with the legislation.
If your contract, or terms of trade, is considered unfair, a court may determine any number of remedies should be applied including:
- Removal of the clause
- Refunding money or pay damages
- Preventing the business from using the clause in any way, and
- Fines of up to $200,000 for an individual or $600,000 for a company or body corporate.
If a clause is considered unfair in a standard contract, there is a risk it could extend to all the contracts issued by your business and every consumer or business negatively impacted by that clause could be entitled to a remedy.
The new law reflects the reality that many small businesses are sole traders or small family-owned businesses that require more protection from unfair contractual terms than large corporations. On the flipside, it also means all businesses should take additional care to ensure their contractual terms are fair and reasonable, and comply with the legislation.
If you are uncertain if your contracts are compliant or would like to discuss this change, please contact us.
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Copyright, NZ LAW Limited, 2022. Editor: Adrienne Olsen. E-mail: [email protected]. Ph: 029 286 3650