Small trade contracts to be subject to the unfair contract terms regime
On 16 August 2021 the Fair Trading Amendment Bill received Royal Assent. Now the Fair Trading Amendment Act 2021 (Amendment Act), it makes significant changes to the Fair Trading Act 1986 (FTA) including, among other things, extending the existing unfair contract term regime imposed by FTA.
Previously only applying to standard form consumer contracts (i.e. standard form contracts between a business and an individual), from 16 August 2022 the unfair contract terms regime will also apply to small trade contracts – that is business-to-business contracts with an annual value of less than $250,000 (to be judged at the time when the relationship first arises). The purpose of the extension of the regime is to protect small businesses from unfair contract terms found in fixed, non-negotiable, effectively “take it or leave it” standard form contracts.
What is considered ‘unfair’?
Under the FTA, a term in a standard form contract is considered “unfair” if:
- it puts a customer at a disadvantage by creating a significant imbalance in the rights and obligations between the trader and the customers;
- would cause the customers’ detriment if the trader enforced it; and
- is not reasonably necessary to protect the trader’s legitimate business needs (and if challenged, the trader would need to prove this).
The Court will also take into account the transparency of the term, as well as the contract as a whole, considering things such as the size of the font, whether attention is drawn to important clauses, and legalistic language. Standard form contract terms must be sufficiently transparent and presented in a clear manner to ensure that customers understand what they are signing up for.
Section 46M of the FTA also gives examples of terms that may be considered “unfair”, including:
- a term that permits one party (but not another party) to avoid or limit performance of the contract;
- a term that permits one party (but not another party) to terminate the contract;
- a term that permits one party (but not another party) to vary the terms of the contract; and
- a term that penalises one party (but not another party) for a breach or termination of the contract.
If the Commerce Commission considers that a term is unfair, it can apply to the Court for a declaration to that effect. If the Court declares a term is unfair, that term cannot be applied, enforced or relied upon and the trader is potentially liable for fines of up to a maximum of $600,000 for a body corporate, and $200,000 for an individual. For discussion regarding past enforcement from the Commerce Commission see here.
As noted above, the provisions of the Amendment Act relating to unfair contract terms will come into force on 16 August 2022.
Prior to this date, we recommend that all businesses that use standard form contracts to transact business of a value less than $250,000 per annum review their agreements for compliance with the unfair contract terms regime.
For assistance with reviewing standard form contracts for compliance with the FTA, please contact a member of Lane Neave’s Corporate Team.