Small Trade Contracts & Unfair Contract Terms – Dukesons Business Law – Contract Lawyer – Business Lawyer - Commercial Lawyer

January 2020

This Blog isn't legal advice – if you need legal advice on any contract law or any other business law or commercial law issue, please contact me. I'm a business lawyer or commercial lawyer who provides advice on a wide range of business law or commercial law issues.

IF YOU USE OR PREPARE YOUR OWN FORM OF CONTRACT AND CONTRACT WITH SMALL BUSINESSES, YOU NEED TO READ THIS BLOG.

Draft Legislation

Draft legislation has been introduced (first reading) to extend the unfair contract terms regime (UCTR) to standard form small trade contracts. The extension of the UCTR to standard form small trade contracts won’t apply to existing contracts but will apply if they are varied.

Technically, the UCTR only applies in relation to a term that the court has declared to be an unfair term but businesses need to be aware of the potential for a disgruntled customer/client to complain to the Commerce Commission and the possibility that the CC will seek a declaration from the court.

See prior blogs on the UCTR:https://www.dukesons.co.nz/blog/beware-unfair-contract-terms-contract-lawyer-auckland-dukesons-business-law; https://www.dukesons.co.nz/blog/risks-relation-unfair-contract-terms-dukesons-business-law-contract-lawyer-business-lawyer

Important Definitions

Small trade contracts are contracts:

  • between parties who are in trade (basically B2B contracts), provided that they aren’t consumer contracts (contracts involving goods or services that are ordinarily acquired for personal household or domestic use) i.e. the contracts must relate to goods or services that are of a kind that aren’t ordinarily acquired for personal etc use,
  • where the annual price/income/rental etc for the goods or services under that contract is up to $250K (unless the contract forms part of a trading relationship as defined in the Act that exceeds $250K pa).

Paraphrasing the legislation, whether a contract is a standard form contract depends on:

  • whether one of the parties has all or most of the bargaining power relating to the transaction:
  • whether the contract was prepared by one or more parties before any discussion relating to the transaction occurred with the other party or parties:
  • whether 1 or more of the parties was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented:
  • the extent to which the parties had an effective opportunity to negotiate the terms of the contract:
  • the extent to which the terms of the contract take into account the specific characteristics of any party to the contract.

As is the case at present, a term can be declared to be unfair if it:

  • is in a standard form contract (a contract where the terms have not been subject to effective negotiation between the parties) and
  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract and
  • isn’t reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term, and
  • would cause detriment (either financial or otherwise) to a party if it were applied, enforced, or relied on.

So, the UCTR regime would apply to a B2B contract where:

  • existing position - the contract is a standard form consumer contract (provision of goods or services of a kind that are ordinarily acquired for personal household or domestic use, even if they are ordinarily acquired for business purposes, where the party acquiring them doesn’t do for resale or use in manufacture or the business of repair) OR
  • proposed - the contract is a standard form small trade contract (relates to any goods or services of a kind that aren’t ordinarily acquired for personal etc use e.g. sale or leases of goods that are clearly only for business/commercial use, provision of services that are clearly only for business/commercial). A wide range of business contracts may need to be reviewed e.g. contractor agreements, agency and distribution agreements, supply agreements, terms of trade, business loans, equipment leases and so on (these are just a few examples- think of any B2B contract where you submit a form of contract to the other party in relation to goods or services that are ordinarily and primarily supplied for business/commercial use).

Trading Relationship

As noted above, the UCTR won’t apply where the contract forms part of a trading relationship that exceeds $250K pa. Specifically, where a contract is for less than that $250K pa but there’s more than one contract between the parties on substantially the same terms, and the annual price/income/rental etc under the contracts is specified to be more than $250K or it’s likely when the first of those contracts was entered into that the annual price/income/rental etc under the contracts would exceed $250K pa, none of the contracts will be deemed to be small trade contracts - the UCTR won't apply.

Where to from here?

Businesses have some decisions to make. At present, in relation to standard form consumer contracts, a key issue is whether to have one form of contract for non business consumers and one for business consumers. (Other issues are relevant e.g. contracting out of Consumer Guarantees Act guarantees or certain provisions of the Fair Trading Act in relation to B2B contracts.)

In terms of what’s proposed in relation to small trade contracts, businesses will need to decide whether to have one form of contract for small trade contracts and one for larger contracts.

Some businesses may decide to ensure as far as they can that no terms could be declared to be unfair contract terms and use one form of contract. Conversely, some might decide to run the gauntlet and include whatever terms they want in one form of contract.

Decision making is complicated by the fact that if there's a trading relationship as defined in the Act, a business may have to consider how many contracts on substantially similar terms it has with a customer/client to determine whether there’s a trading relationship and whether it exceeds $250K pa. There may also be some issues in terms of defining what “substantially similar terms” means.

If a court declares a term to be unfair, it will be an offence to include, apply, enforce or rely on that term in a standard form contract. Fines can be very substantial (individuals up to $200,000, body corporates up to $600,000).

Unconscionable Conduct in Trade

The legislation also introduces a prohibition against unconscionable conduct in trade. Though there are guidelines in the legislation as to how it will be determined whether conduct is unconscionable, and there may be some useful Australian case law on this, there are bound to be grey areas.

Please:

  • don’t hesitate to contact me if I can help you with reviewing your form(s) of contract or with any contract law or other business law or commercial law issue;
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  • feel free to forward a link to this blog to anyone who would be interested
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