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New unfair conduct rules extended to businesses

September 25, 2019

Contacts

Partners Anne Callinan, James Caird, James Craig, Ben Upton, Simon Vannini
Senior Associates Laurette Barnard, Sarah Lee

Consumer law Unfair contract terms

The Government has just announced proposed amendments to the Fair Trading Act to provide further protection to both consumers and small business from unfair commercial practices.

Summary - What you need to know

The Government is proposing two main changes, namely:

  1. introducing a new prohibition against unconscionable conduct relating to the supply or acquisition of goods or services; and

  2. extending the existing protections against unfair contract terms to apply also to standard form business contracts with a transaction value of below $250,000. 

The Government intends to introduce the amendments in early 2020. It has to be expected that these proposed amendments could be passed into law prior to the end of this Government’s current term (ie late 2020).

New protections against unfair commercial practices

Following a three-month consultation process run by the Ministry of Business, Innovation and Employment (MBIE), the Government has decided to:

  1. Introduce a prohibition against unconscionable conduct relating to the supply or acquisition of goods or services. This prohibition will be enforced by the Commerce Commission and breach will result in financial penalties of up to $600,000 for bodies corporate and $200,000 for individuals.

  2. Extend the existing protections against unfair contract terms in standard form consumer contract terms to also apply to standard form business contracts with a transaction value below $250,000.

These changes will be modelled on the approach taken in Australia. This means New Zealand will be able to take advantage of the Australian experience and the guidance provided by the Australian Courts on what constitutes unconscionable conduct.

In its impact statement, MBIE defined unconscionable conduct with reference to the definition developed by the Australian Courts, namely:[1]

Conduct that is against conscience by reference to the norms of society with such norms including honesty and fairness.

This is broader than the existing concept of unconscionability or oppressive conduct that is already an established part of New Zealand law. Examples of conduct found to be unconscionable in Australia have included:

  1. Conduct by a supermarket in relation to its suppliers, including failure to pay agreed prices to suppliers, making persistent demands for additional payments from suppliers, imposing penalties that were not previously negotiated, and threatening to remove products from shelves.

  2. A car company telling customers that their concerns about the quality of cars purchased were a result of their driving style and refusing to provide refunds or replacements, despite knowing that there were quality issues with the vehicles in question.

  3. The sale of diploma courses through door-to-door sales tactics which deliberately targeted vulnerable and disadvantaged communities, who in many cases were not aware that they were signing up to anything, and were misled into believing the course was free.

  4. An online business directory which entered into contracts, and refused to cancel contracts which customers did not want and did not intend to enter into, using high pressure sales tactics and harassing staff by chasing debts that didn’t exist - one customer was called 993 times over a nine month period.

  5. A cleaning franchisor, having made false or misleading representations concerning the income that the two prospective franchisees would earn, failed to pay the franchisees for the work they had completed, while continuing to demand payment for the initial franchising fee.

The changes will otherwise extend the current unfair contract terms regime in New Zealand, which presently only applies to standard form consumer (as opposed to business) contracts.

Despite there being a number of protections in the existing Fair Trading Act and Commerce Act, the Government considered that further protections were needed for both consumers and small business to protect against:

  1. Exploitative business practices that take advantage of a consumer or small business’s vulnerabilities.

  2. Businesses taking advantage of a consumer or smaller business’s lack of bargaining power.

  3. Conduct that may be within a business’s legal rights, but which goes well beyond what is commercially necessary or justifiable.

A number of key details still need to be resolved before the proposed Bill can be passed into law. For example, unfair contract terms protections will now apply to standard form business contracts with a ‘transaction value of $250,000’. Whether $250,000 is the correct level to cap the protections and how one calculates whether a particular contract has exceeded the transaction value cap are likely to be two issues submitters will have strong views on as the proposed Bill goes through the Select Committee process. MBIE itself says that it advocated for a lower ($100,000) cap.

As they stand, however, the proposed reforms are wide-ranging, particularly in the area of standard form business contracts. Many contracts not covered by the existing consumer protection rules could well now fall within this proposed broader unfair contract terms regime (eg small business loans, dependent contractor arrangements and the like).

You can read more about the proposed changes and the outcomes of the consultation process here.

Next steps

The Government is currently drafting a Fair Trading Amendment Bill to implement these changes, and intends to introduce this Bill to Parliament by early 2020. This could mean that the proposed new provisions could be passed into law in late 2020, prior to the next election.

Before the Bill is passed into law, it will go through the Select Committee process. Stakeholders will be given an opportunity to make submissions on any issues or concerns they have in relation to the proposed amendment.

Please contact us if you would like help in drafting submissions.

 

[1]           Ministry of Business, Innovation and Employment, Impact Statement: Protecting business and consumers from unfair commercial practices at p2.

Contributors sam.comber@simpsongrierson.com