New bans on unfair contract terms

Commercial | Print Article

November 2022

Recent changes to the Fair Trading Act 1986 will affect most New Zealand businesses. Now is the time for businesses to familiarise themselves with the new rules to ensure their contracts and processes are compliant.

Unfair contract terms

The ban on unfair contract terms apply to standard form business-to-business contracts where the parties have a trading relationship with an annual value of less than $250,000. These include standard form contracts and terms of trade where there is no effective negotiation with the business you are contracting with, that is, the contract is provided on a ‘take it or leave it’ basis. These changes build on existing bans on unfair contract terms in standard form consumer contracts, which are dealt with separately in the Act.

A contract term is considered unfair if it:

  • would cause significant imbalance in the rights of your business and the rights of the business you are contracting with;
  • would cause detriment to the other party if applied or enforced; and
  • is not reasonably necessary to protect your business interests.

In effect, an unfair contract term is one that significantly benefits your business in an unfair way to the disadvantage of the business you are contracting with.

Unfair contract terms may include the right to terminate or vary a contract where the other party does not have the same rights, unreasonable fees or penalties, unreasonable exclusions or limitations of liability, and the right to assign a contract to someone else where the other party cannot do the same.

Those managing businesses should turn their minds to whether the terms in their contracts are justified, reasonably necessary to protect their interests, and drafted so they are easy to understand.

Unconscionable conduct in trade

A new ban on unconscionable conduct in trade also applies. When deciding whether conduct is unconscionable, courts may consider the relative bargaining power of the parties (that is, the business and the person who is disadvantaged, or likely disadvantaged, by the business’s conduct), the extent to which the parties acted in good faith, and whether the affected person was able to understand documents provided to them by the business.

Ability to require uninvited direct sellers to leave

Members of the public are now able to direct anyone who has entered, or is about to enter, their property for the purpose of negotiating an uninvited direct sale agreement (that is, door-to-door salespersons) to either not enter the property, or to leave the property as soon as possible. People can choose to provide a general standing direction (such as a notice on your gate or front door) or a specific direction (directed at the particular salesperson). If a specific direction is given to a salesperson, the salesperson must not enter or re-enter the property within two years after the direction is given.

Where to from here?

There are many reasons for ensuring your business’s contracts and terms of trade are compliant with these new requirements. Where a court finds that a standard form contract includes an unfair contract term, you will not be able to apply or enforce it, so it is better to include potentially less advantageous terms that you know you can rely on. Practically, it also makes good business sense to be contracting with your customers in a fair and balanced way.

Your lawyer can help check your contracts and terms of trade and recommend any updates that may be needed to ensure they do not include potentially unfair contract terms. This is also an ideal opportunity to review your contracts to make sure they are still fit for purpose in the ever-changing business environment.