The Fair Trading Amendment Act 2021 places new significant obligations on businesses and provides new protections for consumers and small businesses. There are at least two significant new protections, which come into effect on 16 August 2022:
- Extension of existing protections against unfair contract terms in standard form consumer contracts to also apply to ‘small trade contracts’, if the value of the ‘trading relationship’ at the time the relationship first arises is less than NZ$250,000 (including GST if applicable) per year
- Prohibiting unconscionable conduct in trade.
It is important that businesses understand the implications of these changes before 16 August 2022.
Unfair contract terms provisions to cover small trade contracts
Unfair contract terms provisions currently only apply to standard form consumer contracts and will extend to include standard form small trade contracts. A contract is a ‘small trade contract’ if:
- Each party is engaged in trade
- It is not a consumer contract i.e. a contract with a consumer for goods or services normally acquired for personal or domestic use
- It does not comprise or form part of a ‘trading relationship’ that exceeds NZ$250,000 per year.
A contract will be excluded from the definition of a ‘small trade contract’ if there are other contracts in place meaning that the trading relationship exceeds the NZ$250,000 threshold.
A ’trading relationship’ means a relationship consisting of that contract and any other contract (whether current or prospective) between the same parties on the same terms, up to the NZ$250,000 threshold. It appears that if the relationship is expected to exceed NZ$250,000 from the outset, it will not be captured by the Amendment Act i.e. it will not apply to the first NZ$250,000 in a trading relationship of greater value.
The test for when a term is ‘unfair’ has not changed i.e. if the Court is satisfied that the term:
- Would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
If a Court declares a term unfair, it will be an offence for a person to include, apply, enforce, or rely on the term in a small trade contract. The offence attracts a fine of up to NZ$200,000 for an individual or NZ$600,000 for a body corporate, and civil remedies will also apply.
Applying the above to construction contracts, if a subcontractor works for the same contractor across a number of sites with an overall value of greater than NZ$250,000, those contracts are not likely to be caught by the Amendment Act, but smaller contractors or engagements may be caught.
It is not yet clear how the Courts in NZ will deal with common onerous provisions in construction contracts like liquidated damages and indemnities in this context so is something to keep a watch out for.
If your business uses standard form contracts for the sale of goods or services to other businesses and those contracts are likely to come in under the Amendment Act threshold, we recommend you seek legal advice about your contracts now.
Unconscionable conduct in trade prohibited
Conduct can be unconscionable regardless of whether there is a system or pattern of unconscionable conduct, a particular individual is identified as disadvantaged or there is a contract or not.
The Amendment Act provides a non-exhaustive list of factors that the Court can consider when assessing whether a trader has acted unconscionably, which includes:
- Relative bargaining power of trader and other party disadvantaged or likely to be disadvantaged by the conduct
- Characteristics and circumstances of affected person
- Whether affected person was able to understand any documents provided by the trader
- Any unfair pressure or tactics
- If there is a contract, the circumstances, terms and form of the contract.
This may impact construction contracts and projects, including the process for dealing with variations and extensions of time and the manner and extent to which a contract is carried out. Principals and head contractors will need to apply this lens when reviewing claims and administering the contract.
Traders that engage in unconscionable conduct can be fined up to NZ$600,000 for a business and NZ$200,000 for an individual.