The Fair Trading Act allows terms in standard form consumer contracts and small trade contracts to be declared unfair, with enforcement action available to the Commerce Commission.
Most businesses have not looked at their standard terms since they were drafted, and clauses that were unremarkable then may be vulnerable now.
What makes a term unfair
Three elements must be present. The term must:
- Cause a significant imbalance in the parties’ rights and obligations;
- Not be reasonably necessary to protect the legitimate interests of the party advantaged by it; and
- Cause detriment to a party if it were applied or relied on.
The transparency of the term and the contract as a whole is also considered. A harsh term buried in dense text is more vulnerable than the same term stated plainly.
What is a standard form small trade contract
Broadly, a contract between businesses that is not negotiated, where the trading relationship falls below an annual value threshold.
The key feature is that it is offered on a take-it-or-leave-it basis. A genuinely negotiated agreement is not standard form, which is one reason giving a counterparty a real opportunity to negotiate is worth doing.
The clauses most often vulnerable
- Unilateral variation. A term letting one party change price, terms or service without agreement or without a right for the other to exit.
- Automatic renewal with a narrow cancellation window. Particularly where notice must be given in a short period well before the renewal date.
- Broad liability exclusions that exclude liability for the supplier’s own failures while leaving the customer fully exposed.
- Asymmetric termination — one party can terminate at will, the other cannot or faces a penalty.
- One party determining whether a breach occurred, or determining the meaning of a term.
- Disproportionate penalties for the customer’s breach.
- Terms limiting the right to sue or imposing evidential burdens.
- Terms allowing assignment by one party without consent while prohibiting it for the other.
The overlap with unconscionable conduct
Unconscionable conduct is a current Commerce Commission enforcement priority, and the two provisions frequently arise together.
An unfair term imposed on a much smaller counterparty who had no opportunity to negotiate and no realistic ability to walk away is the fact pattern where both are engaged.
What you cannot exclude at all
Separate from the unfair terms provisions, some obligations cannot be contracted out of:
- Consumer Guarantees Act guarantees in consumer transactions. In business-to-business supply, contracting out requires both parties in trade, in writing, and it must be fair and reasonable — a genuine test rather than a formality.
- Construction Contracts Act payment provisions, which override contrary contractual arrangements.
- Fair Trading Act liability for misleading conduct.
Reviewing your terms
A practical review process:
- Find the current version. A surprising number of businesses have several in circulation.
- Check incorporation. Terms only apply if brought to the other party’s attention before or at the time of contracting. Terms on an invoice issued after the work was agreed are generally too late.
- Read each clause and ask the three questions — significant imbalance, reasonably necessary, detriment.
- Justify the ones you keep. If you cannot articulate the legitimate interest a clause protects, it is vulnerable.
- Improve transparency. Plain language and prominence help, and they reduce disputes generally.
The clauses worth keeping
This is not an argument for weak terms. Provisions that protect a genuine interest are defensible:
- Retention of title, registered on the PPSR to be effective against third parties.
- Interest and recovery costs on overdue accounts, without which recovering collection costs is difficult.
- Personal guarantees from directors of small company customers.
- Reasonable liability caps, proportionate to the transaction.
- Confidentiality and IP provisions.
The distinction is between protecting a legitimate interest and simply allocating everything to the other side.
The Commerce Commission publishes guidance on unfair contract terms and unconscionable conduct free at comcom.govt.nz, and business.govt.nz publishes contract guidance for small business.
General information only, not legal advice.
