Unfair Contract Terms Small Trade Contracts – Dukesons Business Law – Contract Lawyer – Business Lawyer

August 2021

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 (commercial lawyer) who provides advice on a wide range of business law or commercial law issues.

If your contracts, agreements, terms of trade etc will be deemed to be “standard form small trade contracts”, the unfair contract terms regime (UCTR) under the Fair Trading Act will apply to all new contracts from about mid-August 2022 and to any existing standard form small trade contracts if they are varied after that time.

The UCTR will inject some uncertainty, as to whether a term is unfair, so some guess work will be involved. The “good news’ is that businesses have a year to have their contracts revised.

The regime is essentially the same regime that applies now to standard form consumer contracts, which has been covered by a number of previous blogs,and which are still published on the Dukesons Business Law website. Contract lawyers and business lawyers have published many blogs on the matter over the last couple of years.

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 that the possibility that the CC will seek a declaration from the court.

A new prohibition on unconscionable conduct will be introduced, which will also inject some uncertainty, as to what conduct is unconscionable. However, in this blog, I want to focus on the UCTR in relation to standard form small trade contracts. There is at least one previous blog on this topic on the Dukesons Business Law website.

The UCTR

First, it’s important to note that the UCTR can’t be contracted out of – if the regime applies, there’s no escape.

The UCTR applies to standard form small trade contracts. It doesn’t matter whether you are supplier or a customer of a supplier – if the contract is on your form of contract, and the contract is a standard form small trade contract, the regime will apply.

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 one 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.

You can see that particularly relevant is the question of how negotiable the form of contract is – the less negotiable, the higher the risk that it will be deemed to be a standard form contract.

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 at the time that it’s entered into is up to $250K (unless the contract forms part of a trading relationship as defined in the Act, that exceeds $250K pa).

It follows that if the value of the contract increases over time to more than $250K pa, it will remain subject to the UCTR, because it was originally less than $250K pa.

As noted above, the UCTR won’t apply where the contract forms part of a trading relationship that exceeds $250K pa. 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.

If the contract is a standard form small trade contract, the key issue is whether any term of the contract is unfair. A term can be declared to be unfair if it:

  • 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.

Relevant to those matters is a consideration of the whole contract (an apparently unfair term might be justifiable when read in the context of all of the terms of the contract) and how transparent terms are.

Many common contract terms have the potential to be unfair in a standard form consumer or small trade contract e.g. a right in a party to vary terms unilaterally (especially if the other party doesn’t have a right to cancel without penalty), wide exclusion and limitation of liability clauses (including as to representations made by agents), and automatic renewal clauses (it’s important to note that a number of other examples could be given).

On the other hand, terms expressly permitted by other legislation can’t be unfair contract terms e.g. some limitations of liability on the part of couriers.

The Commerce Commission has released guidelines on the UCTR (in so far as it currently applies to standard form consumer contracts), which can be downloaded from the CC website. New guidelines may be issued as result of the extension of the regime to standard form small trade contracts.

B2B Standard form Consumer Contracts and Standard form Small Trade Contracts

As noted above, the UCTR currently applies to standard form consumer contracts, which can include B2B contracts e.g. where a supplier supplies goods or services that are ordinarily acquired for personal household or domestic use to a business, even though the goods or services are also ordinarily acquired for business purposes e.g. non-commercial fridges, computers, etc, UNLESS, for example, the business customer acquires the goods or services for re-supply e.g. the customer is a retailer. Despite prompts from contract lawyers and business lawyers, many businesses have ignored the UCTR, often deliberately opting not to have their contracts reviewed. Now, businesses also have to think about standard form small trade contracts.

Where the UCTR may apply, businesses should have their forms of contract reviewed to eliminate, as far as possible, terms that are likely to be deemed to be unfair terms. In relation to both consumer contracts and small trade contracts, a business might decide to have a specific form of contract, as well as having their “normal” where the contract would be outside the UCTR.

What is the consequence of a term being deemed to be unfair under the UCTR?

Not only would an unfair contract term not be enforceable, but the party whose contact the term is in can be liable to a fine (up to $200K if the business is an individual, and up to $600K if the business is a body corporate), and be liable to refund money or pay damages, if it continues to use the term once it has been declared to be unfair.

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