Unfair contracts between businesses – New Zealand set to follow the Australian example

Monday, July 5, 2021

Extension of the unfair contracts regime

In 2015 New Zealand introduced an unfair contracts regime under the Fair Trading Act (FTA). This however, was limited to unfair standard form contracts between businesses and consumers.

Now, the Government through the Fair Trading Amendment Bill (the Bill) is extending this regime to include “small trade contracts”. Generally speaking, to fall within the unfair contract terms regime, a small trade contract must have the following characteristics:

  1. Each party is engaged in trade;
  2. There is an imbalance of power;
  3. The contract is in a standard form; and
  4. The value of the trading relationship between the parties does not exceed $250,000.

These changes are intended to better protect small businesses, which may have little to no opportunity to negotiate the terms of a trade contract (for example, where the contract is offered on a “take it or leave it basis”).

The Bill had its first Parliamentary reading in February 2020 and was referred to the Economic Development, Science and Innovation Committee (Select Committee). More than 50 submissions were received. In a significant departure from standard protocol, the Bill was discharged from the Select Committee before a report had been made. Rather than refer the Bill back to the Select Committee after the election, it proceeded directly to its second reading. The Bill now appears ready to pass its third reading, with only minor changes having been made.

As we anticipated back in 2015, the components of the Bill relating to the unfair contract terms regime draw significant inspiration from the Australian equivalent, introduced in November 2016. As we examine below, an understanding of what happened in Australia may be helpful for New Zealand businesses in determining their next steps. With 97% of all New Zealand businesses classified as small or medium enterprises, we suspect that these changes are going to have an impact on many.

The Australian experience

The Australian regime is somewhat of a double-edged sword for businesses. While it is true that small businesses now enjoy the protection of the updated unfair clause regime, they also now are subject to, and must comply with, the unfair contracts provisions if they themselves use standard form contracts.

Robert Neely, Partner at Lander & Rogers in Sydney, a member of the TerraLex legal network (of which Duncan Cotterill is also a member) has provided some insight into the Australian experience. In his view, the extension of the unfair contracts regime to small business contracts has not had a dramatic effect in Australia. Although many companies have undertaken reviews and made amendments to their standard form agreements and terms and conditions, there hasn’t been a rash of cases being argued in the courts. He noted that these unfair contract claims tend to be secondary to other causes of action.

Although the Australian experience has been relatively positive, the two main complaints out of Australia are that:

  1. an unfair contract term can be declared void by a court (and the person affected may seek an order for compensation for loss suffered) but there is no prohibition on such a term being included in a contract in the first place; and
  2. there is often uncertainty when applying the financial thresholds to determine if a contract is a 'small business contract'.

As the Bill stands at the moment, New Zealand will likely have to deal with the same concerns.

The Australian experience also demonstrates that a commercially one-sided contract, in itself, may not necessarily be ‘unfair’. The Federal Court in Australia has assessed several ‘unfair terms’ cases and it should be noted that it has only been provisions of contracts that are very obviously one-sided and potentially onerous in effect that the Australian Courts have found to be unfair rather than terms that reflect a commercial advantage, for example provisions that provide:

  • unreasonable limitation clauses (e.g. one party has little to no liability to the other party for breach of the contract);
  • unilateral rights to determine or vary pricing; and/or
  • automatic renewal clauses.

Implications for New Zealand

The first obvious difference between the New Zealand and Australian legislation is the proposed thresholds for “small trade contracts”. New Zealand has set a threshold of $250,000 (inclusive of GST) in any 12-month period. Australia introduced much higher thresholds, potentially capturing more business transactions, although given the smaller size of New Zealand business the effect may be similar or even more extensive.

New Zealand has left that value comparatively low in order to promote businesses doing their due diligence and seeking legal advice before entering into significant contracts. Time will tell whether New Zealand moves in the direction of Australia and increases those thresholds. A number of businesses making submissions on the Bill (including those within the horticulture and transport industries) expressed the view that the threshold should be increased to better protect smaller businesses.

We also note in Australia that one of the parties to an unfair contract must be a “small business”, which is a business having no more than 20 employees. New Zealand has not adopted this approach, meaning that even a contract between large corporations could be deemed unfair if there is a clear imbalance of power in being able to negotiate the terms of the contract.

In practice, much of the decision-making under the unfair contract regime will fall to the Commerce Commission, which has the sole power to take enforcement action. We would expect the Commission and the Courts to draw on Australian precedent.

Taking the Australian experience as a guide, enforcement of the new Bill is likely to be problematic. The Commerce Commission will likely only be able to take action in relation to the most serious complaints it receives and there is nothing stopping parties from including unfair terms in their Agreements as a starting point. This enforcement approach doesn’t provide much incentive for businesses to remove unfair terms from their contracts, although in order to avoid complaints businesses should review their terms to remove any terms that are clearly unfair.

The approach to contracting with overseas entities, or if you are an overseas entity looking to contract in New Zealand will be interesting to watch going by the Australian experience. The new unfair contracts regime will apply to all small trade contracts with businesses in New Zealand relating to the supply of goods or services in New Zealand, regardless of the law the contract purports to apply.

What’s next?

The Bill will now proceed to its third reading in Parliament, before becoming law. The key changes in the Bill will take effect one year after the Bill is passed.

Drawing on the Australian example, we recommend:

  1. in anticipation of these changes becoming law, businesses seek advice and review their standard form contracts and terms and conditions of trade to minimise the risk of a complaint being made under the unfair contract terms regime.
  2. businesses should consider how they engage with their customers, including the extent to which standard form contracts are reviewed and negotiated.

For more information or specialist advice, please contact a member of our 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.

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