Changes to the Fair Trading Act

In Legal Lines, October 20226 MinutesBy Danielle BestonNovember 4, 2022

New provisions came into effect on 16 August 2022, strengthening protections for businesses and consumers and tackling unfair business practices in New Zealand.

New provisions came into effect on 16 August 2022 strengthening protections for businesses and consumers and tacking unfair business practices in New Zealand. It is important that businesses and consumers understand the implications of these changes and in particular I want to focus on the prohibition on unconscionable conduct and unfair terms in small trade contracts. All businesses should review and adjust their current practices to ensure that they are compliant with the new laws and steer clear of any conduct which may breach these new requirements.

Unconscionable conduct is prohibited

Unconscionable conduct is business activity that substantially departs from New Zealand’s generally accepted or expected standards of business conduct, such as commercial conduct that goes against good conscience. Commerce Commission Chair Anna Rawlings explains “good business conscience is measured against the values and norms of modern society and expectation of what is right and proper according to those values and norms”. She goes on to say that “those values and norms can include acting honestly, fairly and without deception or unfair pressure. This is conduct that is more than just hard commercial bargaining, but is clearly unfair and unreasonable”.

Unconscionable conduct can take many forms. It can include a contract between a business and a customer, but it does not have to. It can also involve one off activity or a system or pattern of conduct. No individual needs to be identified as disadvantaged or likely to be disadvantaged by the conduct for it to be considered unconscionable. However, this may often be the case with the most serious cases of unconscionable conduct.

The courts may consider a range of factors in assessing whether certain conduct is unconscionable and some of these factors are listed in section 8(1) of the Fair Trading Act 1986 (“the Act). In summary, these are:

• the relative bargaining strength of the parties

• the extent to which the parties acted in good faith

• whether the affected party could protect their own interests given their characteristics and circumstances

• whether the affected party could understand documents provided to them

• the use of undue influence, pressure or unfair tactics by the business

• whether the business made clear to the affected person anything the business might do that would adversely impact the affected person’s interests or create a risk for them.

The court can also have regard to any other circumstances that indicate that the business has acted unconscionably, in addition to the factors listed. If parties have entered into a contract, the courts may also consider matters under section 8(2) of the Act such as the circumstances at the time the contract was entered into, including whether there was an opportunity for effective negotiation and legal advice, whether the terms of the contract are reasonable and the conduct of the business after the contract was entered into.

Unfair terms in small trade contracts

Businesses are also protected from unfair terms in standard form small trade contracts. These are ‘take it or leave it’ contracts such as many power or phone service agreements. Many standard commercial supply agreements may also be standard form small trade agreements. Terms in these types of contracts can be assessed as unfair under the new law if, at the time the contract is entered into, it forms part of a trading relationship with an actual or expected annual value of less than $250,000.

Remember that contracts are legal agreements and it’s important that you read the whole contract through carefully. Check that you understand what is expected of you and of the other business or party to the contract. Ask questions and seek independent advice if there is anything you are unsure about or do not understand. If a business gives you an explanation of terms or words in a contract, ask for the explanation to be put in writing and attach it to the contract.

The Commerce Commission can take action to stop a business from using an unfair term in a standard form consumer contract by applying to the Court for a declaration that it is unfair. If the Court declares that a term is unfair, it is an offence under the Act to apply, enforce or rely on it and the business could be prosecuted.

Generally a term in a standard form consumer contract will be unfair if it puts customers at an unfair disadvantage by creating a significant imbalance in the rights and obligations between the business and its customers, if it would cause detriment to the customer if it was relied upon, and if it is not reasonably necessary to protect the legitimate interests of the business.