The Government has recently announced that significant change is coming to the Fair Trading Act to combat “unfair” commercial practices.
The Government believes that these practices may undermine its attempts to build a more productive, sustainable and inclusive economy. In this article, we outline proposed new law which will extend prohibitions on unfair contracts to a business-to-business context as well as introduce a new ban on unfair conduct. These developments will of wide application and will likely require changes to both standard form contracts and common practices.
Unfair terms – the current law
Under the Fair Trading Act 1986 (the “Act”), a term of a contract is unfair if it:
- is in a standard form consumer contract (i.e. standard trading terms which are not negotiated);
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term; and
- would cause detriment (either financial or otherwise) to a party if it were applied, enforced, or relied on.
Currently, only the Commerce Commission (“Commission”) can apply to the High Court for a declaration that a term is unfair. Consumers can only complain to the Commission, which then decides whether to take the matter further. The Commission can also send a warning letter to the ‘offending’ organisation, alerting them that a particular term is, in their opinion, unfair. To put things in context, in the four and a half years since the unfair contract term regime was introduced into the Act, the Commission has only twice sought a declaration from the courts. The Commission has instead focussed on targeted education and encouraging voluntary compliance – it has issued a number of industry reports following a review of consumer contracts in that industry, resulting in the majority of businesses targeted by the Commission either justifying or amending terms the Commission considered potentially unfair.
However, outside competition law, there are currently no legislative protections which specifically address unfair contract terms in dealings between businesses. Submissions to a Discussion Paper released earlier this year by the Ministry of Business, Innovation and Employment revealed that unfair contracts can have a wide range of impacts on a business, including “sudden unexpected costs, wasted supply, negative cash flow, stress, business interruption, and reduced profitability”. The severity of the issue was highlighted when MBIE ran a survey in 2018 and found that half of the respondents indicated that they had experienced unfair “business-to-business” practices in the past year. This feedback has led the Government to conclude that the current law is inadequate.
Unfair business contracts
The prohibitions on unfair terms currently apply only to standard form consumer contracts. The Government is looking to extend the regime to include standard form business contracts with a value of up to $250,000 (or a value below $250,000 in a given year in some cases where the arrangement spans more than one year). This new law will apply to a very wide range of contracts and potentially affect a host of what would today be considered to be fairly standard terms. We say that because the current law has a “grey list” of potentially unfair terms which is proposed to apply equally in a business to business context. For example:
- terms that permit one party but not the other to vary, terminate, renew or assign the contract; and
- terms that limit one party’s liability.
Ministers Faafoi and Nash explained their decision to widen the ambit of the law, saying:
“We heard about a range of potentially unfair contract terms, including extended payment terms, one-sided contract terms, and businesses being locked-in to contracts for long periods of time. We also heard that some businesses aren’t complying with the terms of existing contracts, making excessive demands, and blacklisting and bullying their suppliers.”
The Government is also considering allowing both consumers and business to go directly to the courts to enforce the unfair terms prohibition. Currently, as mentioned, all affected by unfair terms must go through the Commission who may or may not seek a declaration from the Courts.
So called “unconscionable” conduct is also proposed to be banned, whether the conduct be directed at consumers or businesses. The Government will not define what is “unconscionable” but Minister Faafoi described it as “serious misconduct that goes far beyond being commercially necessary or appropriate”. Examples of qualifying behaviour set out in the Cabinet paper include: the use of pressure tactics, harassment or coercion; making demands over and above the agreed terms; not complying with agreed terms; or refusing to supply or purchase a good or a service. With a potential penalty of $600,000 for businesses and $200,000 for individuals, care (and good behaviour) will be needed.
These changes will be ushered in through a Fair Trading Amendment Bill expected to be introduced in early 2020.
The Amendment Bill will not affect insurance contracts, and at this stage, the unfair contract exemptions that apply to consumer insurance contracts will also apply to business insurance contracts. That’s because a separate review process has been underway to “ensure New Zealand’s insurance contract law is facilitating insurance markets that work well and enable individuals and businesses to effectively protect themselves against risk”. This month, the Government announced a package of reforms to insurance contract law, including strengthening protections for consumers against unfair terms in insurance contracts. You can read more about these insurance contract reforms here.
The Government is also continuing to consider “other ways to improve” activities in “business to business payment practices”. Indeed, on 2 December, Minister Nash announced that the Government would support recommendations made by the Small Business Council, and lead the charge in “prompt payment practices” by setting a target for government departments to pay 95 per cent of domestic invoices in 10 business days by June 2020. Regulation for the private sector could follow if the Government takes the lead of other countries. In June, the UK Government tabled proposals for mandatory reporting/disclosure of payment terms and practices and financial penalties as well as moving responsibility for the existing voluntary “Prompt Payment Code” to their Small Business Commissioner. Similarly, change is afoot in Australia following the end of a year long consultation process on a new “Payment Times Reporting Framework” which will require large businesses with over $100 million in annual turnover (including NZ and other foreign companies) to publish payment information.
Change, change and more change, making for a shifting landscape for the supply of goods and services – both to consumers and businesses. The ambit of the current proposals is very wide and represents a significant limitation on freedom of contract. We will follow the reform process closely and we recommend that all businesses review their standard form contracts and their standard practices when dealing with consumers and small businesses and consider whether changes need to be made to ensure that everything is “fair”.
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