More changes to the Fair Trading Act 1986

The government has recently announced changes to the Fair Trading Act 1986, which they believe will better protect business and consumers from unfair commercial practices.  They believe that its clear that small businesses are suffering because of poor commercial conduct, which in turn has a negative effect on the economy.

The three key changes are:

1. The prohibition of conduct that is “unconscionable” in relation to the supply (or possible supply) of goods and services – this is serious conduct which goes far beyond being commercial necessary or appropriate and is modelled on the approach currently taken in Australia.

The aim is to prevent the worst forms of conduct between business. The MBIE believes that this provision is unlikely to affect everyday interactions and transactions between businesses.  Examples of “unconscionable conduct” include; not complying with the terms of the contract, blacklisting and bullying suppliers, business being threatened or abused and blacklisted after asking for payment, and aggressive sales tactics. 

The government does not believe that this change will have a significant impact as the majority of businesses act fairly and reasonably on a day to day basis.  It is envisaged that a high threshold will be required to be met before any breach of unconscionable conduct provisions can be proved. 

In Australia, the courts have found that conduct is unconscionable if it goes “against conscience by reference to the norms of society” and that this can include acting dishonestly, unfairly, deceiving others or imposing unfair pressure.  In determining whether conduct is “unconscionable” the legislation will provide that the courts are to look at:

• • a. The relative bargaining strength of the parties;
  • b. Whether one party was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party;
  • c. Whether there was any undue influence, pressure or unfair tactics; and
  • d. The extent to which the supplier and the customer acted in good faith.

Maximum penalties of $600,000 will apply to businesses and $200,000 for individuals.

2. The extension of the current provisions against Unfair Contract Terms (UCTs) in standard form consumer contracts to business contracts which involve the supply of goods or services below $250,000 (or for longer term contract $250,000 per year) – this would mean that businesses would not be able to include or enforce terms in standard form contracts (being contracts on “take it or leave it” terms) which:
   • a. Would cause a significant imbalance in the party’s rights and obligations arising out under the contract;
   • b. Are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
   • c. Would cause a detriment if they were enforced.

Example of UCT’s include:  one-sided contract terms and terms which lock businesses into contracts for long periods of time, unilateral termination rights, limitation and exclusion of liability clauses and one sided indemnities.  This change has the potential to have a wide impact on many types of business contracts including franchise agreements, supply agreements, equipment lease agreements and terms of trade.  Businesses which have standard form contracts in their business will need to ensure that they review and amend their contracts so as not to breach the new provisions of the Fair Trading Act 1986.

The Commercial and Consumer Affairs Minister, Kris Faafoi has indicated that the Government expect to introduce the changes through a Fair Trading Amendment Bill early next year.

Stronger enforcement regime needed – at present action can only be taken in relation to the current UCT’s provisions in the Fair Trading Act 1986 if the Commerce Commission has first obtained a declaration from the court that a term is unfair.  The Government has signalled that it believes that there needs to be a strong incentive to remove UCT’s and wants to put in place a stronger enforcement regime - changes will made when the  broader review of the Act, which is currently underway, is completed.

We believe that the prohibition against unconscionable conduct will have very little impact however the prohibition against unfair terms in standard form business contracts, does have the potential to have far reaching effects of the way business is conducted in New Zealand and should have benefit to small business owners.  One of the biggest impacts is likely to be in the areas of franchise agreements which are notorious for being one sided agreements.  

Watch this space – we will keep you informed on the progress of the proposed changes to the Fair Trading Act 1986.