UNFAIR CONTRACT TERMS AND
  FRANCHISORS

March 2022

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 franchise documentation and your template B2B contracts before 16 August. Here are ten key points you need to be aware of:

1.  WHAT IS THE UNFAIR CONTRACT TERMS 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 some standard form contracts declared to be ‘unfair’, and therefore unenforceable.

2.  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 customers or franchisees, 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 relationships are different from B2C relationships.
Given the nature of the franchise relationship and the degree of prescription in most franchise systems, franchise agreements contain detailed – and often unbalanced – terms. Some of these may be considered to be “unfair” under the UCT Regime. 

4.

WHAT ARE SOME EXAMPLES?

Franchise agreements are by their nature weighted in favour of the franchisor.  Potentially unfair terms include:

• Franchisor rights to unilaterally vary the agreement (in particular fees), including by variation of the manual
• terms that permit the franchisor to avoid or limit performance of the agreement
• franchisor rights to terminate the agreement for trivial breaches
• terms that give the franchisor a wide discretion to renew or not renew the agreement
• broad indemnity clauses in favour of the franchisor
• terms that limit a franchisee’s right to sue the franchisor
• uncapped obligations to make changes to fitout etc.

5. HOW IS YOUR FRANCHISE SYSTEM AFFECTED?

Franchise documentation: Franchise agreements will be small trade contracts unless the annual value exceeds $250,000 (incl. GST) per year. Other agreements with franchisees and prospective franchisees, and related documentation also likely to be affected.

Supply terms: Standard form B2B contracts / terms for sale or purchase of goods or services may also be affected.

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;
• Contract terms being set aside – but only after the Commerce Commission wins at court; and 
• adverse publicity from Commerce Commission “naming and shaming” and/or litigation.

8. WHAT DO I NEED TO DO?

9. ANYTHING ELSE I NEED TO KNOW ABOUT?

The law changes also introduce a prohibition against unconscionable conduct in trade. Consumer Affairs Minister, Minister Faafoi, has described unconscionable conduct as “… effectively serious misconduct that goes far beyond what is commercially necessary or appropriate” (see https://www.beehive.govt.nz/release/legislation-stamp-out-unfair-business-practices-introduced).  A breach of the prohibition against unconscionable conduct could result in a maximum penalty of $600,000 for businesses and $200,000 for the individuals involved.

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 franchise agreements and other 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.