Business Contracts Under Review

Posted on February 25, 2019 in Commercial (Tags: Small businesses protection, Fair Trading Act, Standard terms of trade) Commercial image.PNG

Should Businesses be Protected from Unfair Practices?

 

How much should the law protect small businesses in business-to-business contracts? New Zealand has had a comprehensive range of provisions which broadly protect consumers, and in some cases businesses, from misleading and deceptive conduct and anti-competitive business practices.  In particular, the Fair Trading Act 1986 and the Commerce Act 1986 create a series of obligations and remedies for unfair or unlawful practices.

 

Legislation like the Consumer Guarantees Act is targeted at consumers rather than businesses.  However, New Zealand is a nation of small businesses and many of those businesses find themselves on the receiving end of what may be perceived as unfair practices, particularly where there is an inequality of bargaining power between larger and smaller businesses.  A Government survey of small businesses in New Zealand in 2018 found that nearly half of the participants were offered unfair contract terms on standard form consumer contracts (45%) or felt that they were treated unfairly (47%).

 

Much of our day-to-day business is conducted on the basis of standard form terms of trade.  These are often printed in fine print on the back of an invoice or set out on a supplier’s website or initial credit application.  They become particularly important when the business offering the goods or services needs to enforce its obligations, whether it is because of non-payment or some other dispute.

 

In many cases, a supplier of goods or services will attempt to minimise its liability as much as possible and the small business who has purchased those goods or services may find themselves with very limited or no remedy even where the supplier has failed to perform.  The Government is currently considering a range of options to address unfair conduct across the economy including unfair business-to-business contracts.  There is a separate review being undertaken of the Fair Trading Act which would address business to consumer contracts. 

 

The Government is considering a high level protection against unfair conduct as one option to address perceived unfair conduct by businesses.  This could be a prohibition against “unconscionable conduct” which could mirror provisions already in place in Australia or, alternatively, could prohibit “oppressive conduct” which would reflect current provisions in New Zealand seen in consumer credit law.  A further option is to prohibit “unfair practices” which would be based on a much broader concept seen in European law.  These concepts could apply to the conduct of the parties in negotiating and entering into contracts or even to the substance of the contract such as the subject matter or price.  The matter would be a significant departure from the current approach of allowing businesses to determine their own contracts based on the principles of freedom of contract.

 

The Government is also looking at protections for businesses from unfair contract terms and standard form contracts such as terms of trade.  These might result in a prohibition on terms which cause a significant imbalance in the party’s rights and obligations or are not considered to be reasonably necessary or which cause detriment if enforced.  These two options under consideration can be contrasted on the basis that option 1 would look at the overall fairness of the contract whereas option 2 would focus on individual terms.

 

Whatever the outcome of the consultation, it is important for businesses to constantly review their standard terms of trade to ensure that they address the likely risks for the supplier of goods and services and are clear as to the extent of warranties given and remedies available.  It is also important to address issues of security where goods are supplied on credit and specify payment terms and consequences of non-payment by the customer.

 

 

 

Sally Peart