Parliament recently passed an amendment to the Fair Trading Act 1986 (“the Act”). The Act is an important piece of law which impacts how businesses in New Zealand operate. The upcoming law changes are particularly interesting as they go beyond standard consumer protections to affect dealings between businesses.
Consumers are already protected from unfair terms in standard form consumer contracts (see our previous article on this here). These unfair contract terms provisions are now being expanded to apply to small trade contracts between businesses.
What is a small trade contract?
A small trade contract is one where the parties are engaged in trade, the contract is not a consumer contract (i.e. the contract is between two businesses), and the trading relationship between the parties does not exceed $250,000 per annum when the relationship first arises.
A standard form small trade contract is a small trade contract that has not been subject to effective negotiation and it is therefore in a “standard form”. This will usually occur when the contract was prepared by one party and that party has more power than the other, or when the contract was offered on a “take it or leave it” basis and not open for negotiation.
The extension of the unfair contract terms regime to business to business relationships takes effect on 16 August 2022.
What is an unfair contract term?
- the term causes a significant imbalance between the parties;
- the term is not reasonably necessary to protect the legitimate business interests of the
business which the term favours; and
- if the business was to enforce the term, the other party would suffer detriment (financial or other detriment).
Allegations of unfair terms may cause the Commerce Commission to investigate. If the High Court finds that a term is unfair, that term cannot be applied, enforced, or relied upon. Therefore to avoid scrutiny from the Commerce Commission (which is also responsible for enforcing other laws relating to competition, fair trading, and consumer credit contracts) and the possibility of the High Court declaring a term unfair, it is advisable to steer clear of terms which could be unfair.Examples of unfair contract terms include:
- A term that allows one party to end the contract but not the other.
- A term that allows one party to change the terms of the contract, but not the other.
- A term that allows one party to change the price payable under the contract, but not the other.
Tips for businesses
It is important that businesses review their business contracts to ensure they are prepared for the law change and do not contain unfair terms. Businesses should use the time prior to 16 August 2022 to understand their obligations and update and improve their business practices.
Unfair contract terms are unlikely to occur if the contracts are well prepared and businesses engage with other businesses (such as their suppliers, retailers, cleaners, contractors, etc) in a meaningful way and negotiate the terms on which they do business with each other. Beyond complying with the law, engaging in negotiations is good for business! It’s a crucial opportunity to build relationships, understand who you’re in business with, and better meet each other’s needs.
For more information about this article, please contact the author Rochelle Farmer or our Commercial Law Team on 06 768 - 3752.
About the author:
Rochelle's work focuses on commercial matters and company and partnership law. She undertakes commercial property transactions, drafting and reviewing commercial agreements, selling and purchasing businesses, and other matters.
Rochelle’s broad experience in commercial transactions, employment law, privacy, and health and safety gives her a unique overview from which to provide thorough and pragmatic advice.