Recent amendments to the Fair Trading Act 1986 have introduced several changes affecting businesses, including a new prohibition against unconscionable conduct in trade and extending the existing unfair contracts regime (introduced in 2015 for standard form consumer contracts) to include business-to-business contracts.
These changes can be seen as part of a trend towards a more subjective assessment of an affected party’s specific characteristics and whether a trader’s dealings with them were unfair or unconscionable. However, the move towards this subjective view coupled with the lack of a clear definition of unconscionable conduct has left some wondering what business practices may be covered by these changes.
In this article we examine what these changes mean for businesses, and how to limit the risk of breaching these new provisions.
Protecting the interests of weaker parties
While the traditional view of freedom of contract assumes that parties entering into contracts are the best judges of what is necessary to protect their own interests, the law has also long recognised that where one party is in a weaker bargaining position than the other party then the bargains made with them should be viewed more critically.
The recent changes to the Fair Trading Act are concerned with the circumstances and characteristics of the specific affected party, and whether there is a significant imbalance in relative bargaining power or the rights and obligations of the parties. This is a departure from the objective assessment of whether a so-called “reasonable person” would be disadvantaged by a trader’s conduct, which is the lens through which claims of misrepresentation and misleading and deceptive conduct under the Fair Trading Act have generally been viewed.
In addition, while the Fair Trading Act does allow contracting out of certain provisions when the contract only involves commercial parties, this is subject to (among other things) whether it is “fair and reasonable” for the parties to agree to contract out. This requirement for contracting out to be fair and reasonable aims to protect parties in a weaker position from making an agreement where they lose their protections under the Fair Trading Act.
The Commerce Commission has in recent months targeted online sales practices and promotional claims that were likely to mislead shoppers, including unsubstantiated claims that other shoppers had made purchases and false claims about stock levels creating an impression of scarcity. While the Commerce Commission’s investigations into these practices pre-date the latest changes to the Fair Trading Act, the addition of the new prohibition against unconscionable conduct creates a new ground under which similar practices may be scrutinised.
So, what conduct is unconscionable?
Section 8 of the Fair Trading Act contains a list of factors a court may consider if asked to determine whether a trader’s conduct was unconscionable. However, the Fair Trading Act itself does not define what unconscionable business conduct is.
In Australia, which has a similar statutory prohibition against unconscionable business conduct, the courts have stated that determining whether conduct is unconscionable requires an assessment of whether the conduct is a “sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience”.
While it is likely to be some time before the courts in New Zealand consider the unconscionable conduct provisions in the Fair Trading Act, the Commerce Commission has issued recent guidance stating that unconscionable conduct is “business activity that is a substantial departure from Aotearoa New Zealand’s generally accepted or expected standards of business conduct”. However, this leaves it open to interpretation as to what these “generally accepted or expected standards of business conduct” are.
It is also worth noting that the prohibition against unconscionable conduct in the Fair Trading Act applies regardless of whether or not a particular individual is disadvantaged or likely to be disadvantaged. It remains to be seen what types of conduct could be said to be unconscionable, and yet not likely to disadvantage any particular individual.
What contract terms are considered unfair?
Compared to the amorphous definition of unconscionability, the Fair Trading Act provisions relating to unfair contract terms for standard form consumer and small trade contracts give a clearer guide as to what terms are considered unfair.
A term is unfair if the court considers 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 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.
Terms relating to the subject matter, price, and any terms required or permitted by law may not be declared unfair. There are also particular terms in insurance contracts that are excluded, as they are considered reasonably necessary to protect the insurer’s interests.
Some examples of unfair contract terms, listed in section 46M of the Fair Trading Act, are terms that allow one party but not the other party to:
- vary, terminate or limit performance of the contract;
- penalise another party for breaching or ending the contract;
- renew or not renew the contract;
- vary the price payable without the right of another party to terminate the contract;
- vary the characteristics of the goods or services to be supplied;
- determine whether a contract has been breached or to interpret its meaning;
- sue another party.
How to avoid engaging in unconscionable conduct
To avoid engaging in unconscionable conduct or creating unfair contract terms, ensure you are acting reasonably and in good faith when dealing with customers and other parties, taking into account both their circumstances and the circumstances of your dealings or contract.
If the other party has a limited ability to protect their interests, it’s important to ensure they understand what you are offering and make an informed decision. For example, a customer without technical expertise may not understand information containing a lot of jargon or industry-specific terminology, and a person whose first language is not English may benefit from having information presented to them in plain English. Ensure customers understand the terms of any contract, and clearly disclose any important or unusual terms or conditions that may affect them.
It may also be necessary to review your business operations and sales tactics. For example, offering gifts and rewards may cause a customer to make a purchase without considering if it is the right decision for them, and staff bonuses or incentives that reward pressure-based selling may result in sales staff acting unconscionably.
Special thanks to Solicitor Tariqa Satherley for preparing this article.To discuss how any of these changes to the Fair Trading Act may affect you, please contact a member of our Corporate & Commercial team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.