As of today, major changes to the Fair Trading Act 1986 (FTA) are now in force. The two key changes are:
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the expansion of the unfair contract terms (UCT) regime for standard form consumer contracts to standard form "small trade" contracts (i.e. contracts with an annual value of less than $250,000); and
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a ban on unconscionable conduct in trade.
Commission's Guidance
Given today's milestone, the Commerce Commission (Commission) has this morning released guidance on these changes, together with further guidance on uninvited direct sales (available here.)
The UCT guidance for small trade contracts largely reflects the statutory provisions and examples given during the passage of the Bill, including largely repeating the specific statutory examples of when a contract will be a "small trade" contract, rather than providing further insight into the Commission's likely approach. We consider this to be a missed opportunity for the Commission to shed light on an area of potential confusion for businesses.
In relation to unconscionable conduct, there is some indication in the Commission's guidance that unconscionable conduct will be reserved for exceptional circumstances of very serious misconduct. However, it remains a “wait and see” approach as to how it develops in New Zealand, with cases from Australia demonstrating that the standard can change over time (that said, cases from Australia are likely to be a helpful source for businesses seeking to understand what is likely to be captured).
Recapping the major changes
Extending the UCT regime to small trade contracts
Many will be familiar with the existing UCT regime for standard form consumer contracts. We have previously written about that here. Our thoughts on the extension of this regime to small trade contracts are available here.
The Commission has indicated in its guidance that it will be paying particular interest to certain terms from what is known as the "Grey List" (reflected in the FTA here) and we expect that the Commission will take particular notice of termination clauses, limitation of liability clauses, automatic renewal clauses, unilateral variation clauses and indemnity clauses. The context of the clause in the entire agreement will continue to be critical.
For a term to be declared unfair, the Commission must obtain a declaration from the Court. Only once a declaration has been obtained can a business no longer enforce, apply or rely on the term in question. This provides businesses with opportunities to make changes to potential UCTs before any proceedings are issued or a declaration issued. That said, businesses should be aware that whether terms are potentially UCTs will be a factor in considering whether conduct in unconscionable.
Unconscionable conduct
The FTA now bans conduct in trade that is "unconscionable". The ban applies to conduct against either consumers or other businesses. We have previously reflected on what this might mean for New Zealand here, particularly canvassing that the FTA regime is wider than the equitable doctrine of unconscionability.
Notably, unconscionable conduct can be found where (1) there is no contract; (2) it relates to a single instance or a system or pattern of conduct; and (3) where there is no disadvantage to the affected consumer or business. This means it has potentially broad application. That said, the Commission’s guidance expects that this is conduct that should rarely occur given the level of misconduct required.
The FTA sets out key factors helping to assess whether conduct is unconscionable. These are available here.
There are also additional factors where contracts are involved. The key takeaway is that the assessment is a fact specific inquiry.
In addition to the Commission bringing proceedings (and in comparison to UCTs)[1], consumers and businesses can bring legal action if they consider that they are subject to unconscionable conduct. A full range of remedies is available.
Where are we likely to see unconscionable conduct arise?
The Commission has highlighted some specific examples of where conduct may be unconscionable.[2] We also note the following Australian examples of unconscionable conduct:
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Knowingly charging fees without contractual entitlement and failing to properly remediate customers in a timely way |
Deliberately influencing markets for gain (even where short of market manipulation or rigging) |
Failing to appropriately assess client appetite for risk and appropriateness of products for the client |
Requiring small vulnerable suppliers to close profit shortfalls where no contractual right existed and using commercial threats |
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Threatening franchisees over performance, requiring inputs irrespective of needs and unfairly penalising franchisees without reference to their specific situations |
Misrepresenting rights and remedies available to consumers for defective goods and services and failing to explain risks not foreseeable to the consumer |
Deliberately exploiting vulnerable consumers by signing financially illiterate indigenous customers up to expensive mobile plans knowing they did not understand the plans and could not afford them |
Not explaining terms of contracts correctly and using coercive tactics and misleading statements to induce consumers into purchasing services |
What does it mean for your business?
Businesses will need to ensure their contractual practices align to the widened UCT regime and that their conduct (and contracts) do not fall significantly short of accepted commercial standards from today.
Some key things businesses should ensure they do are:
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assessing whether terms in standard form contracts are “fair”, particularly by stress testing whether the parties’ rights and obligations are balanced and whether there are legitimate reasons for businesses to have terms that might be unfair;
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carefully drafting agreements so that potentially unfair terms can be divided out of the contract easily without affecting the entire contract;
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documenting why certain terms are reasonably necessary to protect the business' legitimate interests;
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testing whether conduct and contractual terms align to generally accepted industry standards and codes;
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identifying business relationships with significant imbalances in bargaining position; and
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reviewing sales approaches and tactics, whether contractual arrangements and risks taken on by the other party are adequately explained to customers during the sales process, and whether the use of commissions or incentives for sales staff is appropriate.
Finally, any businesses engaging in door-to-door sales activities need to be aware of the changes to the amended uninvited direct sales provisions.
If you are interested in finding out more about the changes and how they could affect your business, please reach out.