Good Business: Are your Contract Terms Unfair?

Are your Contract Terms Unfair?

Businesses that use standard form contracts need to be aware of the recent law changes which came into effect on 16 August 2022 under the Fair Trading Amendment Act 2021.  Pursuant to the new laws, contract terms that are ‘unfair’ may now be unenforceable.  A similar law already applied in relation to business to consumer contracts, but this new law now captures business to business contracts.

What Is ‘Unfair’?

Generally a contract term will be considered ‘unfair’ if it:

  • would cause a significant imbalance in the parties’ rights and obligations; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • causes detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

Some examples of terms that could be considered unfair include terms that:

  • allow one party to unilaterally vary the terms of the contract;
  • allow one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • allow one party to vary the characteristics of the goods or services to be supplied;
  • allow one party to determine whether the contract has been breached or to interpret its meaning; or
  • limit one party’s right to sue another party.

Does This Impact Your Contracts?

A contract is subject to these new laws if it is:

  1. A standard form contract: For example, a template type of contract which is not subject to negotiation.
  2. An ‘In Trade’ contract: A business to business contract, where the parties are in trade.
  3. A ‘Small Contract’: A contract in which the trading relationship has an anticipated annual value of less than NZD$250,000 (including) GST at the time the trading relationship began.

Penalties

If a contract term is held to be ‘unfair’, a Court can order a number of remedies, including:

  • Removing the unfair term from the contract (i.e. the term becomes unenforceable).
  • Issuing a fine of up to $200,000 for an individual or $600,000 for a company.

In light of the new laws, businesses are recommended to review their standard form contracts to ensure that they comply with the new requirements and to avoid the penalties of non-compliance.

If you have any questions, please contact us on T: 06 3490090 or email timo@horsleychristie.co.nz.

 

Tim Oliver LLB(Hons) BProp

ASSOCIATE

 

Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.