Recent changes to the Fair Trading Act are a game changer for New Zealand’s small businesses. Franchise and commercial law expert Stewart Germann outlines what SMEs need to know about the extended protections against unfair contract terms – and the risks of ignoring them.
Standard form small trade contracts have long been a feature of doing business in New Zealand. These are the templated agreements many businesses rely on for transactions with other commercial parties. But for years, some of these contracts have included clauses that unfairly favoured one party. To address this, the Government extended existing protections in the Fair Trading Act to cover small business contracts – not just consumer ones.
The Fair Trading Amendment Act 2021 broadens the scope of the law by prohibiting unfair contract terms in standard form small trade contracts worth under $250,000 per annum (including GST). This is a significant step toward levelling the playing field for small businesses.
What’s covered?
A standard form small trade contract is one that meets the following criteria:
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Both parties are engaged in trade (i.e. business-to-business);
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The contract is not between a business and a consumer;
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The total value of goods, services or interest in land exchanged does not exceed $250,000 (including GST) per annum when the business relationship begins.
Previously, protections around unfair terms only applied to contracts between consumers and businesses, for example, gym memberships. Now, small business owners have similar recourse when facing unreasonable contract terms from other businesses.
What makes a contract term ‘unfair’?
When assessing whether a contract term is unfair, the following factors are considered:
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Does it cause a significant imbalance in the rights and obligations of the parties?
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Is it reasonably necessary to protect the legitimate interests of the party advantaged by the term?
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Would enforcing the term cause detriment – financial or otherwise – to the disadvantaged party?
Importantly, the legislation excludes the following from being challenged:
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The main subject matter of the contract;
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The upfront price payable, as long as it’s clear and unambiguous;
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Any term required or expressly permitted by legislation.
The clarity of the term and the overall context of the contract are also considered. However, businesses with legitimate interests won’t be penalised, provided the terms are genuinely necessary to protect those interests.
Role of the Commerce Commission
The Commerce Commission enforces fair trading laws in New Zealand. If you believe a term in your contract is unfair and attempts to resolve the matter directly fail, a complaint can be lodged with the Commission.
The Commission can then apply to the courts for a declaration that the term is unfair. If the court agrees, the term must be removed, amended with court approval, or cannot be relied upon. The consequences for breaching this ruling can be severe:
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Fines of up to $200,000 for individuals;
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Fines of up to $600,000 for companies;
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Court orders preventing further use or enforcement of the term;
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Orders for refunds or payment of damages.
Standard form small trade contracts are everywhere in New Zealand business. Great care must be taken when drafting and reviewing these documents. The days of one-sided contracts going unchallenged are numbered – and that’s a good thing for small business owners seeking fairness in their commercial relationships.
