The Fair Trading Amendment Act 2021 (“Amendment Act”) introduced changes to fair trading laws on 16 August 2022 in order to protect businesses and consumers from “unfair” trade practices. Key changes include:
- Laws prohibiting unfair contract terms (“UCT Laws”) have been extended to standard form “small trade contracts”;
- “Unconscionable conduct” is now prohibited in trade; and
- People can direct uninvited direct sellers to leave (or not enter) their property.
We discuss these changes further below.
1. Extension of unfair contract terms to small trade contracts
In 2015, New Zealand introduced UCT Laws under the Fair Trading Act 1986 (“Fair Trading Act”) for standard form contracts between businesses and individuals. Standard form contracts are usually contracts that are offered on a ‘take it or leave it’ basis or are not subject to negotiation.
However, the Amendment Act now extends UCT Laws to cover standard form “small trade contracts”. A contract is considered a “small trade contract” if:
- Each party is engaged in trade; and
- The trading relationship between the parties has an annual value of less than $250,000 (including GST) at the time the trading relationship began. This threshold is high and therefore most business to business (“B2B”) contracts will be captured by the Amendment Act. For example, terms of trade, independent contractor agreements, franchise agreements, telecommunications contracts, retail leases, and supply agreements.
What is an “unfair” contract term?
The test for whether a term is “unfair" remains unchanged by the Amendment Act i.e. a term can be declared unfair if the court is satisfied that the following three criteria are met:
- The term would cause a “significant imbalance” in the parties’ rights and obligations arising under the contract;
- The term is not “reasonably necessary” to protect the legitimate interests of the party who would be advantaged by the term; and
- The term would cause detriment (whether financial or otherwise) to a party if the term were applied, relied on or enforced.
Terms describing the main subject matter of the contract and setting the price (provided the terms are clear and displayed prominently) are exempt from the "fairness test". There is also an exemption for terms which are required or expressly permitted by law.
How will the Amendment Act be interpreted by New Zealand courts?
The Amendment Act brings New Zealand’s position on UCT Laws closer to Australia’s, which introduced similar restrictions on B2B unfair terms in 2016 (although different thresholds apply). It is therefore likely that New Zealand courts will look to Australia for examples of B2B Terms that might be considered to be “unfair.”
When assessing whether contracts have “unfair” terms, Australian courts have focused on terms which are obviously one-sided and onerous in effect rather than terms that reflect a commercial advantage. Australian courts have found the following terms to be “unfair”:
- Unreasonable limitation clauses (e.g. one party has little or no liability to another party for breach or termination of the contract);
- Unilateral rights for one party to determine or vary pricing without also providing another party with a right to terminate;
- Unilateral rights to terminate the contract at any time without cause or reason; and
- Automatic renewal clauses.
Importantly, the terms were held to be unfair in the context of the specific trade relationship that existed between the parties in each case. New Zealand courts will similarly assess whether a term is unfair by examining the particular fact situation.
Consequences of unfair contract terms
Parties cannot contract out of UCT Laws. However, the Amendment Act does not apply to B2B contracts entered into before 16 August 2022 (unless renewed or varied on or after that date) or insurance contracts entered into before 1 April 2025.
If a court declares that a term is unfair, then that term may not be applied, enforced or relied on. Other contracts containing that term will also be unable to enforce that term. If a business continues to apply or enforce the unfair term, it can face fines of up to $600,000.
It is therefore important that businesses review and update their standard form B2B contracts and terms of trade, to ensure they do not contain any unfair contract terms.
2. Unconscionable conduct in trade
The Amendment Act prohibits persons engaging in “unconscionable conduct” in trade.
The term “unconscionable conduct” is not defined, although the Act identifies several factors to consider when assessing whether conduct is ‘unconscionable’, including:
- The relative bargaining power of the parties involved (including any other person that is, or is likely to be, disadvantaged by the conduct);
- Whether the parties were acting in good faith;
- Whether the trader exerted unfair pressure or tactics, or unduly influenced an affected person; and
- Whether an affected person was able to understand any documents provided by the trader.
The Commerce Commission defines “unconscionable conduct” as business activity that substantially departs from “New Zealand’s generally accepted or expected standards of business conduct”. It is conduct of a type that “departs from what is to be expected from those acting in good commercial conscience”.
What does this mean?
Unconscionable conduct can arise in a wide range of situations, including:
- Not explaining a contract properly to a customer that does not speak English well or has a learning disability;
- The use of undue influence, pressure or unfair tactics to induce someone to sign a blank or highly unfavourable contract;
- Making false claims about the real cost of a product; and
- Failing to explain key contractual terms.
The Commerce Commission can seek to penalise parties engaging in unconscionable conduct. If a person engages in “unconscionable conduct” in trade, they could face a fine of up to $200,000 for an individual and up to $600,000 for a business.
3. Uninvited direct sellers
Under the Fair Trading Act, door-to-door sales are usually considered “uninvited direct sales.” This includes all uninvited salespeople who approach customers, regardless of whether they do so face-to-face or through a phone call. Specifically, an uninvited direct sale is when:
- You approach or call customers uninvited to offer goods or services; and
- You sell them goods or services valued above $100 or for an unspecified price at the time of sale.
The law also classifies these scenarios as uninvited direct sales, if you sell goods or services when a consumer has:
- Given you their contact details for another purpose, such as for a competition entry;
- Called you back after an unsuccessful attempt to contact them; or
- Begun negotiations with you after you have sent them an unsolicited quote or estimate.
Uninvited direct sales do not include renewal agreements, where a customer has an existing contractual relationship with the business. If you continue this relationship by contacting them without prompting, this is not an uninvited direct sale. An example of this is calling existing customers to ask if they want to renew your supply agreement with them.
Under section 36L of the Fair Trading Act, any door-to-door agreement must comply with certain requirements, including giving the purchaser a notice of cancellation and statement of rights to cancel the agreement. If these requirements are not satisfied, the vendor cannot enforce the agreement.
Under the Amendment Act, consumers can direct 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 business.
Clendons has considerable experience advising on fair trading issues, and can assist New Zealand businesses with their obligations on these issues, including assisting with reviewing and updating standard form small trade contracts.
This article is provided to assist clients to identify legal issues on which they should seek legal advice, and by its nature cannot be comprehensive and cannot be relied on as advice. Please consult the professional staff of Clendons for advice specific to your situation.