In case you missed our communications on this to date, the Government has decided that unfair contract terms are – well – unfair and should be banned from many standard contracts. The Fair Trading Act’s “unfair contract terms” regime is being extended to many B2B contracts from 16 August 2022. It is important that you and your team are aware of the new rules and that you update your contracts before 16 August. Here are ten key points you need to be aware of:
1. WHAT IS THE UNFAIR CONTRACT REGIME?
If you contract with consumers, you will likely be familiar with the existing “UCT Regime”. For simplicity, Parliament has decided to apply this existing framework to small trade contracts. The UCT Regime allows the Commerce Commission to apply to the Courts to have terms in standard form contracts declared to be ‘unfair’, and therefore unenforceable.
2.OK, SO WHAT IS A SMALL TRADE CONTRACT?
A wide range of contracts will be small trade contracts, including supply and procurement contracts, franchise agreements, and independent contractor agreements. You will have a small trade contract if:
you use a standard form contract with your business customers, or you are required to sign one with another business; and
you have a trading relationship that, at the time the relationship is formed, is expected to have a value of $250,000 (incl. GST) or less in any 12 month period.
3. WHAT DOES UNFAIR MEAN?
A term is unfair if the term:
1. would cause significant imbalance in the parties’ rights and obligations;
2. is not reasonably necessary to protect the legitimate interests of the party who benefits from it; and
3. would cause detriment to the other party.
FYI, just because a term is unfair for a consumer does not necessarily mean it will also be unfair for a business. B2B contracts and the parties’ interests are different than apply for B2C contracts.
CLEAR AS MUD - CAN YOU GIVE ME SOME EXAMPLES?
Key clauses that might be unfair include terms that:
allow one party to unilaterally vary the agreement;
place risk on a party for events outside their control;
penalise one party (but not the other) for breach;
allow termination for non-material breaches (or have complicated termination provisions);
limit a party’s ability to terminate the agreement (for example, by imposing high termination fees);
allow one party to vary the price payable under the agreement, without giving the other party the right to terminate; and
give a party too much discretion to the detriment of the other party.
5.BUT WE RUN A FAIR BUSINESS, SURELY THIS DOESN'T APPLY TO US?
We know you embrace fair and ethical business practices but businesses want protection from risk and standard form contracts are always drafted in favour of the party drafting it. We would be shocked if there are any standard form B2B contracts that do not have any terms that are “unfair” under the UCT Regime.
6.WHAT'S THE TIMING?
The UCT Regime will apply:
to all new small trade contracts entered into from 16 August 2022; and
to small trade contracts entered into before 16 August 2022, only when they are next varied or extended after that date.
7. WHAT CAN HAPPEN?
The main concerns for businesses are:
having to answer to the Commerce Commission if you don’t deal with this, including the potential for litigation being brought against you by the Commerce Commission; and
contract terms being set aside – but only after the Commerce Commission wins at court; andadverse publicity from Commerce Commission “naming and shaming” and/or litigation.
8.WHAT DO I NEED TO DO?
9. ANYTHING ELSE I NEED TO KNOW?
Reforms are proposed to strengthen the UCT Regime and make it illegal to include unfair terms in small trade contracts so it would pay to take this seriously.
10. how do i get help?
We know that dealing with the fine print of contracts is not fun for you. Luckily we love drafting contracts and we can help you to comply. We also have a more detailed guide and a “UCT warrant of fitness” as part of our client resources if you would like further information. Please reach out to your usual JR adviser or one of the JR team listed below.
Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.