Many New Zealand businesses and consumers regularly confront what they see as unfair commercial practices. The Government believes that these practices may undermine its attempts to build a more productive, sustainable and inclusive economy.

Recently, the Ministry of Business, Innovation & Employment released a discussion document seeking submissions on whether our current laws strike the right balance between protecting businesses and consumers and ensuring their freedom to operate within the economy. The discussion documents also considers whether more protections are required to prohibit unfair conduct and unfair contracts.

What is unfair?

What is considered unfair varies from person to person (which is one of the problems with formulating a legislative ban) but the discussion document groups the kind of ‘unfair’ conduct the Government is concerned with into two categories:

1. Unfair contract terms – examples include contracts that are very one sided; that limit the liability of one party at the others risk; or that give one party unilateral ability to vary terms (including price). Interestingly, in a business to business context the discussion document also gives the example of extended payment terms (90 days or more) as potentially unfair.
2. Unfair conduct – this involves matters outside the contract terms, such as the way in which a contract is entered into or enforced (including the use of pressure tactics, harassment or coercion); making demands over and above the agreed terms; not complying with agreed terms (such as making late payments); or refusing to supply or purchase a good or a service.

Are there gaps in the current regime? Who is at risk?

A range of legislative protections already exist against unfair commercial practices. These include the Fair Trading Act’s prohibitions against harassment, coercion, and misleading and deceptive conduct and the Commerce Act 1986’s prohibition against anti-competitive agreements, mergers, and taking advantage of market power. In addition, the Fair Trading Act was amended in 2015 to enable the Commerce Commission to seek a court declaration that a term in a standard form consumer contract is unfair (and therefore unenforceable).

However, outside competition law, there are currently no legislative protections which specifically address unfair contract terms in contractual dealings between businesses. The discussion document suggests that small businesses, with fewer resources and less bargaining power, will be at greater risk of being subjected to unfair contracts. Similarly, anecdotal evidence suggests to MBIE that there may be areas where the existing protections for unfair business to consumer conduct are falling short. The problem of unfair business to business conduct and the need for change is less clear.

Options for additional protections

Following consideration of the nature and extent of these issues the discussion document considers what additional protections may be appropriate. The options discussed below are not mutually exclusive and there are a number of ways they could be packaged together.

Option 1: protection against unfair conduct

This option involves the introduction of a general statutory prohibition against unfair conduct. A number of approaches are being considered including banning “unconscionable” conduct (based on Australian law), banning “oppressive” conduct (based on consumer credit law) and banning “unfair” practices (based on European law).

Any ban would have a high threshold, targeting “relatively rare cases of particularly egregious conduct” and could be applied to:

1. business to consumer conduct; and/or
2. business to business conduct (whether all or just a subset of businesses (based for example on employee headcount, turnover or an imbalance of bargaining position)).

Option 2: extend existing protections against unfair contract terms to businesses

This option involves extending the existing protections for unfair contract terms in standard form consumer contracts to also protect businesses. Australia extended its unfair contract term regime to businesses in 2016 so we think that there is a good chance New Zealand will follow – either instead of, or in addition, to an “unfair conduct” ban as described in Option 1.

The discussion document recommends some extensions in a business to business context from the existing unfair consumer contract provisions, including allowing businesses (rather than merely the Commerce Commission) to apply to court directly for a declaration of unfairness and imposing penalties if an unfair contract term is included in a contract.

Again, the discussion document raises design questions for this option: All or just some businesses? All or just contracts below a certain transaction value threshold?

Conclusion

The period for submissions on the discussion paper has now closed (although the paper and related documents can be accessed here) and no timeframe for next steps has been provided. The review indicates a willingness by Government to make changes to the law in this area. Given that other jurisdictions have stricter regulation than New Zealand and that this Government has launched a raft of other related reviews (including a specific review of how to improve business-to-business payment practices and an evaluation of the efficacy of the existing unfair contract terms provisions for standard form consumer contracts), we think change is likely in the near future. We will follow developments closely.

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Partner, Chris Dann has extensive commercial experience and expertise. He and the wider corporate advisory team can help and assist you on a wide range of commercial matters.