Businesses will need to ensure that any small trade contracts comply with the changes outlined in the Fair Trading Amendment Act 2021.
On 16 August 2022 changes to the unfair contract term provisions under the Fair Trading Act 1986 (Act) come into effect. The existing unfair contract term provisions will be extended from standard form consumer contracts so there are protections for contracts between businesses also. The new prohibition on unfair contract terms in small trade contracts are an attempt to protect small businesses from contracts that generally allow for little to no negotiation.
Does my business have a small trade contract?
You may have a business contract that is a small trade contract if:
- each party to it is engaged in trade; and
- it is not a consumer contract; and
- it does not comprise or form part of a trading relationship that exceeds $250,000 (including GST, if applicable) per annum when the relationship first arises.
How do I know if a term in my small trade contract is unfair?
A term is unfair if after considering the extent to which the term is transparent and the contract as a whole the High Court is satisfied that the term:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- is not reasonably necessary in order to protect the legitimate business interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
What does an unfair contract term look like?
The Act provides a list of examples of unfair terms. These are generally terms which allow one party to do something, but not the other. For example, termination rights for only one party, cost adjustments made by only one party, variation of the terms of the contract by only one party, or the restriction on one party to sue the other party. Other examples of terms which are likely to be unfair are automatic renewals, hidden costs, and unreasonable penalties.
What happens if you have an unfair contract term?
The Commerce Commission is responsible for enforcing this regime. If a contract term is alleged to be unfair, the Commerce Commission may investigate and issue a warning. The Commerce Commission can also apply to the High Court for a declaration that the term is unfair.
If the High Court determines a contract term is unfair, it will be an offence for a person to include, apply, enforce, or rely on the term in a small trade contract. The offence is punishable by a fine of up to $200,000 for an individual or up to $600,000 for a body corporate. The High Court may also issue an injunction to restrain a person from applying, enforcing, or relying on the unfair contract term.
In addition, the Commerce Commission often publicises its decisions and any enforcement action taken. Therefore, unfair terms constitute a significant reputational risk for a business.
We recommend businesses ensure their contracts comply with the Act from the outset. This is particularly important for businesses who use standard form contracts across multiple business relationships and may not obtain specific legal advice for each contract.
Remember that unfair contract terms are also prohibited in standard form contracts with consumers (see our previous article on this here), so these contracts should also comply.
Keeping terms in your contracts that are of high risk of being found to be unfair may result in complaints to the Commerce Commission and associated negative publicity or reputational damage.
Contact a member of our Corporate and Commercial Team if you wish to discuss these changes or to review your standard terms and contracts used in your business.
About the authors:
Cam’s experience in corporate and commercial areas includes company start-ups, energy, corporate governance and advisory, mergers and acquisitions, commercial leasing and commercial contracts.
Cam prides himself on his attention to detail and his ability to convert complex legal issues into pragmatic advice.
Associate | Corporate and Commercial Team
Rochelle's work focuses on commercial structures and relationships, company law, joint ventures, corporate advisory, and governance advice. She advises on commercial agreements, shareholder agreements, company constitutions, and other contractual matters. She also regularly acts in the sale and purchase of shares, the sale and purchase of businesses, and assists in resolving shareholder disputes.
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.