Recent changes to the Fair Trading Act – unfair contracts and unconscionable conduct

Changes to the Fair Trading Act came into force last month concerning unfair contract terms for standard form small trade contracts, and unconscionable business conduct. Previously unfair contracts didn’t apply to business-to-business contracts, but importantly, this has now changed.

Unfair contract terms

The amendments impose a prohibition on unfair contract terms which apply to “standard form small trade contracts” (note there are some exceptions for insurance contracts). A standard form contract is usually regarded as a ‘take-it-or-leave-it’ contract where the terms are not negotiated. 

Business contracts which have an expected or actual total value of up to $250,000 within a 12-month period are covered by the new laws.

If a party to a standard form small trade contract considers a contractual term unfair, they can apply to the Court to have that term declared unfair.  If the action succeeds, that contractual term will not be binding.

In deciding whether a contractual term is unfair, the Court will need to be satisfied that:

• The term would cause a significant imbalance in the parties’ rights and obligations arising under the contract,
• The term is not reasonably necessary to protect the legitimate interests of the party that would be advantaged by the term, and
• The term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

The Court will also consider the contract as a whole.

Unconscionable conduct

The amendments also prohibit “unconscionable conduct”. Unconscionable conduct, as described by the Commerce Commission, is business activity which is a substantial departure from our generally accepted or expected standards of business conduct, and good commercial conscience.

Unconscionable conduct could include acting dishonestly, unfairly, deceptively, or asserting unfair pressure which goes beyond hard commercial bargaining.  It can be present in a contract between a business and a consumer, or it might be present in one-off activity or patterns of activity.  An individual does not need to be identified or disadvantaged for conduct to be unconscionable.

The Courts can impose a penalty of up to $600,000 for businesses found guilty of unconscionable conduct, and up to $200,000 for individuals.

Time frame

These changes only apply to contracts signed (which can include renewals of contracts) after 16 August 2022.  You won’t therefore be able to retrospectively try to have a term declared unfair for an earlier contract you have signed.

It pays for all business owners to be aware of these rules, whether you are the one presenting the contract for signing, or whether someone is seeking to have your business sign up to their terms.  It is a good time for businesses to review their standard contracts to see if their own contract terms may be at risk of being deemed unfair.