Impact of the Fair Trading Amendment Act 2022

Businesses need to be aware of the impact of the Fair Trading Amendment Act 2022, which comes into force on 16 August 2022.

The Amendment Act prevents the use of unfair contract terms in standard form small trade contracts. Businesses need to ensure that their business-to-business contracts are compliant with the new rules. If they do not do so, they risk contract terms being unenforceable and having to pay a fine.

Unfair Contract Terms

The Amendment Act forbids the use of unfair terms in small trade contracts that are in a standard form. To be compliant, businesses will need to review their standard form business-to-business contracts and, before entering into any small trade contracts on or after 16 August 2022, update those contracts to remove any unfair terms. Contracts entered into before 16 August 2022 only become subject to the Amendment Act if they are renewed or varied after 16 August.

Contracts affected

A contract is subject to the unfair contract terms regime if it is:

• in a standard form;

A standard form contract is one where the parties have not negotiated the terms of the contract in a substantial way. This includes template-based contracts.

• a trade contract;

A trade contract is a business-to-business contract where both parties are involved in trade.

• a small contract.

A contract is a small contract where the trading relationship has an annual value of less than NZD$250,000 including GST at the time the trading relationship began.

The types of contracts that may be captured by the Amendment Act include terms of trade and independent contractor agreements.

Unfair Contract Term definition

An unfair contract term is a term that:

• creates an imbalance between the rights and the obligations of the parties;
• is unnecessary to protect the legitimate interests of the party who would benefit from the term; and
• causes detriment to one of the parties if applied, enforced or relied upon.

A Court cannot determine a term to be unfair if the term:

• defines the main subject matter of the contract;
• sets the upfront price payable under the contract; or
• is required or expressly permitted by any Act.

A Court must consider the transparency of a term and the contract as a whole when deciding if a term is unfair, along with any additional factors the Court considers relevant.

If a Court declares a term to be unfair, it must either be remedied or removed. It cannot be applied, enforced or relied upon. If a business does not address the unfair contract term, it may face a fine of up to $200,000 for an individual or $600,000 for a body corporate.

Commerce Commission Guidance

The Commerce Commission will be issuing guidance in June 2022 to assist businesses with the interpretation and application of the unfair contract term regime.

Australian examples

The Amendment Act is based on Australia’s unfair contract terms regime, so it is useful to consider how the legislation has been applied in Australia. Their Courts have considered unfair contract terms in a variety of sectors, such as independent contracting, commercial leasing, construction, waste and agriculture.

Australia’s regulator has determined the following terms to be unfair contract terms:

• a term that effectively permits one party (but not the other party) to avoid or limit performance of the contract;
• a term that allows one party to terminate the contract;
• a term that penalises one party for breach or termination of the contract;
• a term that allows one party to vary the terms of the contract;
• a term that allows one party to renew or not renew the contract;
• a term that allows one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
• a term that allows one party unilaterally to vary the characteristics of the goods or service to be supplied, or the interest in land to be sold or granted, or the financial goods or services to be supplied under the contract;
• a term that allows one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
• a term that limits one party’s vicarious liability for its agents;
• a term that allows one party to assign the contract to the detriment of another party without that party’s consent;
• a term that limits one party’s right to sue another party;
• a term that limits the evidence one party can present if taking legal action; and
• a term that imposes the burden of proof on one party.

Each of these terms was held to be unfair in the context of the contract and trade relationship that existed between the parties in each case. New Zealand Courts will assess whether a specific term is unfair by examining the particular fact situation.

Summary

Businesses that use standard form small trade contracts will be affected by the upcoming changes to the Fair Trading Act. They need to ensure those standard form contracts are compliant by 16 August 2022. Anderson Lloyd is able to assist with reviewing and updating your standard form small trade contracts.

Unconscionable Conduct

The Amendment Act also prohibits traders from behaving unconscionably, whether as a one off event or a sustained pattern of behaviour. ‘Unconscionable conduct’ is not defined, but includes the following non-exhaustive factors:

• the bargaining power of the trader;
• whether the parties acted in good faith;
• whether the affected person was reasonably able to protect their own interest; or
• whether there was undue influence.

If a company is found to have acted unconscionably it could face a fine of up to $600,000, or $200,000 for an individual.

Uninvited Direct Sellers

A person can now advise uninvited direct sellers to leave or not enter their property. If an uninvited direct seller fails to comply, they could face a fine of $10,000 for an individual, or $30,000 for a body corporate.

Want to know more?

If you have any questions about how the Fair Trading Amendment Act 2022 may affect your business, or need help reviewing any standard form small trade contracts, please contact Sarah Simmers or Josh Williams.

PDF version: here.