Further reform announced on unfair commercial practices and contract terms

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The Ministry of Business, Innovation and Employment recently announced its policy decisions regarding changes to the law on unfair commercial practices. 

This week the Ministry of Business, Innovation and Employment (MBIE) announced its policy decisions regarding changes to the law on unfair commercial practices. 

After receiving 44 submissions on the matters raised in the discussion paper issued in December 2018, MBIE has announced its intentions on:

(a) unfair contract terms – extend the existing protections under unfair contract terms in standard form consumer contract terms to also apply to standard form business contracts with a value below $250,000, and 1

(b) unconscionable conduct – introduce a prohibition against unconscionable conduct relating to the supply or acquisition of goods or services.

These changes follow the general trend in New Zealand and overseas of increased regulation for standard form contracts and commercial practices.

Issues for review

Existing legislative provisions (such as those in the Fair Trading Act 1986, Credit Contracts and Consumer Finance Act 2003 and the Commerce Act 1986) prohibit certain 'unfair' commercial practices in both business-to-consumer and business-to-business transactions, including prohibiting harassment and coercion, misleading and deceptive conduct, the inclusion of unfair terms in standard form consumer contracts, and anti-competitive conduct.

MBIE was concerned there were gaps in the protections provided for in current legislation, which could have the effect of allowing unfair practices which prevent markets from functioning effectively by decreasing trust, increasing search and transaction costs, and skewing the playing field in favour of businesses that act dishonestly.

In its review as to whether additional protections against unfair commercial practices were needed, the key issues MBIE considered were:

(a) whether the law should prohibit conduct that was “unconscionable" (based on Australian law), “oppressive" (based on consumer credit law), or “unfair" (based on European law),

(b) whether the protection against unfair contract terms in standard form contracts should cover all businesses, or only small businesses, and if the latter, what the threshold should be,

(c) whether the rules around unfair contract terms for business transactions should only apply to transactions below a certain monetary threshold,

(d) how any new penalties will be enforced, and

(e) what penalties should apply.

MBIE has announced in respect of (a) that the prohibition should apply to unconscionable conduct. In relation to unfair contract terms, the new protections will apply where the value of the contract is less than $250,000, regardless of the size of the businesses that are parties to the contract.

The policy announcement signalled that aspects of the enforcement regime concerning unfair contract terms need to be strengthened. This will be looked at in more detail through the upcoming broader review of the Fair Trading Act.

Extension of unfair contract terms protections to business contracts

Under the Fair Trading Act, the protections against unfair contract terms currently apply only to standard form consumer contracts. Extending these protections to standard form business-to-business contracts is a significant change, which is expected to impact a large number of businesses.

The new regime will retain the current test under the Fair Trading Act for determining whether a contract term is unfair. It is presently intended that the protections will only apply to arrangements where the goods or services provided have a value below $250,000 (or $250,000 over a 12-month period, where the arrangement spans more than a year) and that legislation will set out factors for determining what constitutes an 'arrangement', and when the transaction value cap will be met.

The proposed extension of the unfair contract term regime to business-to-business contracts is not anticipated to apply to the main subject matter of the contract, or the upfront price, or to terms that are reasonably necessary. Given these carve-outs, MBIE has stated it does not expect these changes will significantly inhibit businesses from entering into efficient and pro-competitive contracts.

New prohibition against unconscionable conduct

The statutory prohibition against unconscionable conduct is not expected to include an express definition of what “unconscionable" means. The prohibition is expected and intended to operate in line with the current approach adopted in Australia, where the courts have found that conduct is unconscionable if it is “against conscience by reference to the norms of society".

It is likely the legislation will include a grey list of factors for courts to consider in determining whether conduct is unconscionable, such as:

(a) the relative strength of the parties' bargaining positions,

(b) whether one party was required to comply with conditions that were not reasonably necessary to protect the other party's interests,

(c) the presence of undue influence or pressure, or unfair tactics, and

(d) the extent to which the parties acted in good faith.

MBIE has proposed maximum penalties of $600,000 for bodies corporate, and $200,000 for individuals, who engage in unconscionable conduct.

Timing and next steps

These changes will be implemented as part of the Fair Trading Amendment Bill, which is expected to be introduced to Parliament by early 2020.

The proposed changes will mean that businesses will need to carefully consider whether their standard form business-to-business contract terms could be seen to be unfair, in much the same way as businesses assessed their standard form consumer contracts when those protections were introduced in 2013. This will be particularly important if the mechanisms for enforcement under the Fair Trading Act are strengthened.

Most businesses will not need to change their conduct concerning the prohibitions on unconscionable conduct, provided they act fairly and reasonably in the course of their normal business dealings.

MBIE has stated it is conscious that these reforms should not prevent businesses from negotiating robustly with each other and acting competitively, and that this will be taken into account when the legislation is drafted, and ultimately interpreted.

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