Background

As previously reported here, changes to the Act have been passed into law, introducing a new era of “unfair contract term” (or UCT) restrictions for “small trade contracts” that are template or “standard form”.

This means that businesses are expected to remove or amend any “unfair contract terms” from their standard form small trade contracts by 16 August 2022. While contracts entered into before this date remain unaffected, such contracts will be subject to the UCT regime once they have been varied or renewed.

This FYI clarifies the kinds of contracts that may be affected and outlines the characteristics of terms that could be considered UCT in order to help businesses identify and address such terms.

Which contracts are affected?

In order to be caught by the law changes, the contracts need to be:

1. “standard form”;
2. “trade contracts”; and
3. “small”.

Broadly speaking, a contract is “standard form” if its terms are not the subject of an effective negotiation by the parties. This would include many template form “take it or leave it” type contracts.

“Trade contracts” are those where the contracting parties are both engaged in trade. Most B2C contracts are excluded (but covered under the existing UCT regime).

“Small” contracts are those that comprise (or form part of) a trading relationship that does not exceed an annual value of NZ$250,000 (including GST if any) when the trading relationship first arises.

Given this broad definition, many template contracts used in trade for the supply of goods or services may soon be subject to the UCT regime. Some common examples are:

1. Terms of trade;
2. Terms of service;
3. Independent contractor contracts;
4. Telecommunication services contracts; and
5. Small franchising contracts.

What is an “unfair contract term”?

Definition

A Court can declare a term an “unfair contract term” if it is satisfied that the term:

1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

A Court cannot declare a term an “unfair contract term” if it:

1. defines the main subject matter of the contract; or
2. sets the upfront price payable under the contract; or
3. is a term required or expressly permitted by any enactment.

In determining whether a term is an “unfair contract term” the Court may also take into account any matters it thinks relevant, but must take into account:

1. the extent to which the term is transparent; and
2. the contract as a whole.

Consequences

Once a term has been declared an unfair contract term by the Court, that term must not be included in the contract (unless it is amended for compliance) or must not be applied, enforced or relied on. Failure to comply with such a declaration is an offence and could result in a fine not exceeding NZ$600,000 (for body corporates) upon conviction (among other things).

Australian guidance

The novelty of these changes in a B2B context require us to look to overseas decisions to determine the types of terms that may be considered “unfair contract terms” under the updated Act. In particular, Australia has an equivalent regime that prohibits “unfair contract terms” in their small business contracts.

Industries that the Australian regulator has focused on include advertising, telecommunications, retail leasing, independent contracting, franchising, waste management, agriculture, transportation, and construction.

The terms considered to be “unfair” by the Australian regulator across these industries have included:

• terms that allow one party to unilaterally vary aspects of the contract ie to vary product offering or price, without prior notice or any opportunity to terminate;
• terms that allow parties to terminate for any breach of contract whatsoever;
• automatic renewal clauses that are not adequately disclosed ie no notice is provided, the cut-off date for cancellation can be changed, or a party will incur early termination charges if they cancel after an automatic renewal;
• broad and overarching limited liability clauses that purport to exclude consumer’s statutory rights;
• overly broad indemnity clauses that appear to indemnify one party even where that party may have caused or contributed to any loss;
• incorrect or misleading statements about a party’s rights at law ie that the other party cannot rely on any previous agreements, undertakings and communications;
• restraint of trade clauses that contain cascading values for the restraint period and restraint area ie specify multiple distances from a site that a party cannot operate within after exiting the contract, if the first is struck out the next will then apply;
• terms that charge customers for services not rendered even when caused by reasons beyond the customers’ control; and
• terms that allow for late or variable pricing of a product.

As always, the devil is in the detail and whether a particular term will be considered “unfair” in New Zealand will be down to the term itself as well as the circumstances surrounding the operation of the term.

What should you do?

For many businesses, the introduction of the prohibition on unfair contract terms in small trade contracts may represent an appropriate time to review and consider the basis on which they contract with many of their suppliers and customers and whether their standard form contracts accurately and fairly allocate the risk and in a manner that is reasonably necessary.

If any business believes that their standard form small trade contract may contain unfair contract terms, advice should be obtained on specific terms and possible alternatives to these terms that would mitigate the risk of them being considered “unfair” and/or the business should consider whether such terms should be removed or amended.

Get in touch

If you have any questions about the updated Act, or need help reviewing any template small trade contracts for compliance with the updated Act, please get in touch with one of our experts.

Special thanks to Laura Mikkelsen and Nicole Ashby for their assistance in writing this article.