The Government has announced two proposed changes to the Fair Trading Act 1986: introducing a prohibition against unconscionable conduct, and extending the unfair contract terms regime to business-to-business contracts under a value of $250,000. These changes could have significant impacts on your business.

On 24 September 2019, the Ministry of Business, Innovation and Employment ("MBIE") announced two proposed changes to the Fair Trading Act 1986 ("FTA"):

1. introducing a prohibition against unconscionable conduct; and
2. extending the unfair contract terms regime to certain standard form business contracts.¹

These new changes aim to provide additional protection for businesses and consumers from unfair commercial practices, and to bring the FTA more in line with prohibitions applying in Australia.

Unconscionable conduct

Unconscionable conduct is generally understood to mean conduct which is so harsh that it goes against good conscience. Think use of pressure tactics, predatory lending practices, and taking advantage of the community’s most vulnerable (e.g. sick, elderly, those with difficulty understanding English, or who do not understand their legal rights). As noted above, MBIE has proposed to model the prohibition against unconscionable conduct on the approach taken in Australia. So what is the state of play across the ditch?

Unconscionable conduct in Australia

Unconscionable conduct does not have a precise legal definition in the Australian Consumer Law ("ACL") but was intended to be developed on a case-by-case basis by courts over time.

One of the leading cases on the subject considered it to be conduct which is particularly harsh or oppressive, and against conscience as judged against the norms of society² (such as acting honestly, fairly and without deception or unfair pressure).

MBIE has also said the proposed bill will include a list of factors for a court to consider and apply in determining whether conduct is unconscionable, which again will be broadly consistent with Australian legislation. The ACL includes factors such as:

• the relative bargaining strength of the parties;
• the willingness of the stronger party to negotiate;
• whether the weaker party could understand the relevant documentation; and
• the use of undue influence and the extent to which the parties acted in good faith.

MBIE’s concern is that current legislation does not cover this type of behaviour, so the new prohibition is designed to act as a “safety net to target rare cases of particularly egregious conduct” and will have a high threshold.³

On that basis, we do not foresee at this time there being many claims brought in relation to unconscionable conduct. However, it will be an effective and necessary tool to protect those who need it the most, and penalise those who partake in such harsh or oppressive conduct.

Unfair contract terms ("UCT") regime

Contract terms are considered unfair, and therefore unenforceable, if:

• the term is in a "standard form contract" (a contract which has not been subject to effective negotiation);
• the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

Some examples of UCTs, or alleged UCTs, are:

• a clause which states that all claims brought by a consumer must be heard in a foreign jurisdiction (in this case Switzerland), but the other party can lodge proceedings anywhere in the world;⁴
• automatic renewal of a contract’s term for a further six years;⁵ and
• unilateral determination and variance of pricing.⁶

Currently, only standard form consumercontracts are covered under the UCT regime. Consumer contracts are those between a supplier of goods or services in trade (i.e. as a business) to a consumer. "Standard form" is not defined but instead determined by the courts. Generally speaking they are contracts that are offered on a "take it or leave it" basis, prepared by the seller, and likely to be the same as, or similar to, the contracts the seller offers to other buyers.⁷

Under the new proposals, the regime will be extended to apply to business-to-business contracts with a value of less than $250,000. The value cap was chosen to recognise that in practice, it is not just consumers who require protection. But businesses can also be vulnerable to unfair contract terms as they may not have the resources or bargaining power to conduct due diligence, seek legal advice, or negotiate low-value or routine contracts.

How will this impact you and your business?

Unconscionable Conduct

We generally agree with MBIE that inclusion of a prohibition against unconscionable conduct in the FTA should not have a significant impact on the vast majority of businesses that act fairly and reasonably on a day to day basis.

Nevertheless, some helpful tips for businesses to remember (other than the obvious "don’t exploit your customers") include:

• make sure your contracts are thorough, easy to understand, not too lengthy and do not include harsh, unfair or oppressive terms;
• give customers the opportunity to seek advice about the contract before they sign it; and
• do not reward your staff for unfair, pressure-based selling.

UCT Regime

The application of the FTA to business-to-business contracts with a value of less than $250,000 is likely to have a much more substantial impact. Businesses should take this opportunity to review their business-to-business contracts and pay particular attention to clauses in relation to:

• variation of terms, especially those around pricing;
• how loss, liability and damages are dealt with;
• indemnities; and
• termination of the contract or extension of the term.

Our view and next steps

Following Australia may prove to be a mistake in relation to unconscionable conduct as case law has not yet developed an agreed definition. A recent High Court judgement (the uppermost court in Australia) was split 4:3, demonstrating that even some of the country’s best legal minds do not agree upon its meaning. On the back of this there have been calls for "unconscionable" to be replaced with a different term such as "unfair" or "oppressive" in the hope of reducing uncertainty. This may nullify the Government’s intention of courts here being able to piggy back off Australian case law.

MBIE has already signalled that, for business contracts, a stronger enforcement regime will be needed to ensure that there are effective incentives to remove UCTs from contracts. There is currently a review taking place of the unfair contract terms regime and it is after this where the Government will consider such a stronger enforcement regime. This will be where the rubber hits the road.

The Government's intention is to introduce the bill to amend the FTA in early 2020. There will be a further opportunity for parties to make submissions through the select committee process early next year. You can read more about the Government’s plans in the discussion paper and cabinet paper.

We will be back with another alert once the bill has been drafted to see what it looks like. Watch this space!

This article was written by Chris Parke, Partner, Charles Thompson, Senior Associate and Andrea Lim, Law Graduate.

1. https://www.mbie.govt.nz/dmsdocument/6621-unfair-commercial-practices-policy-decisions-proactiverelease-pdf↩
2. ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 [which involved Lux Distributors Pty Ltd taking advantage of 3 elderly women by deceiving them, firstly as to the purpose of the respondent’s services and secondly, subjecting them to unfair sale techniques which pressured the women to purchase their products].↩
3. Unfair commercial practices: release of discussion document: cabinet paper published: 23 Nov 2018 at [18].↩
4. https://comcom.govt.nz/news-and-media/media-releases/2019/commission-wins-appeal-over-viagogo-injunction-case Recently, the Commerce Commission has successfully appealed against the High Court’s decision not to issue an interim injunction. The Commerce Commission’s application for an injunction is able to proceed and be heard. https://comcom.govt.nz/news-and-media/bulletin/first-court-actions-over-unfair-contract-terms.↩
5. https://www.accc.gov.au/media-release/cardtronics-to-amend-unfair-atm-contracts.↩
6. The Federal Court of Australia declared that certain terms of contract between Australia’s largest potato wholesaler, Mitolo Group Pty Ltd, and potato growers were unfair contract terms and therefore void. https://www.accc.gov.au/media-release/court-penalises-potato-wholesaler-for-breaching-the-horticulture-code-and-declares-unfair-contract-terms-void.↩
7. https://comcom.govt.nz/consumers/your-rights-as-a-consumer/unfair-contract-terms.↩