Unfair Contract Terms

What you need to know - and do

Since 2015, the Fair Trading Act has included protections for consumers against the inclusion of unfair contract terms in standard form consumer contracts (UCT Regime).

In August, Parliament extended this UCT Regime to include standard form contracts between businesses operating in trade, where the expectation is that the value of the contract will be $250,000 or less in any 12 month period.

These contracts are referred to as Small Trade Contracts in the legislation, and from 16 August 2022, any unfair contract terms in these contracts may be declared to be unfair, and be unenforceable.

In this article, we

• provide a brief overview of the UCT regime;

• discuss the contracts that will be affected;

• look at what types of clauses are unfair; and

• offer guidance on what your family business needs to do to comply.

What is the UCT regime?

If you deal with consumer contracts, you will likely be familiar with the existing UCT Regime. For simplicity, Parliament has decided to apply this existing framework to Small Trade Contracts (for now, at least).

The UCT Regime allows the Commerce Commission to apply to the Courts to have terms in standard form contracts declared to be ‘unfair’, and therefore unenforceable.

The test for unfairness is 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.

This causes two main concerns for businesses:

• terms being set aside; and

• adverse publicity.

MBIE has signalled that it expects to strengthen the enforcement of the UCT Regime in the future, through a further set of amendments to the Fair Trading Act. Australia is also currently in the process of strengthening its own enforcement regime in relation to unfair contract terms, with proposed reforms which will (if enacted) make it unlawful to enter into a contract with an unfair contract term, and expose the party relying on the unfair contract term to serious civil penalties.

What contracts will be affected?

If you use standard form contracts in the course of your business, you will need to review whether they will come within the scope of the UCT Regime. In setting the threshold of $250,000 (including GST) in a 12 month period for Small Trade Contracts, Parliament has cast the net relatively wide, with the aim of “tightening the screws on unfair and dishonest business activity” (David Clark, Minister of Commerce and Consumer Affairs).

A wide range of contracts will fall into the definition of Small Trade Contracts, including supply and procurement contracts, franchise agreements, and independent contractor agreements – provided they meet the key criteria below:

What types of clauses are unfair?

The Fair Trading Act specifies that the following terms cannot be unfair:

• a term that defines the main subject matter of the contract;

• a term that sets the upfront price payable under the contract; and

• a term that is expressly permitted by law.

The Fair Trading Act also includes a ‘grey list’ of terms that might be unfair. This list, and experience from Australia, indicates that the key types of clauses that might be unfair include terms that:

• allow one party to unilaterally vary the contract;

• place risk on a party for events outside of their control;

• penalise one party (but not the other) for a breach of the contract;

• allow termination for non-material breaches (or complicated termination provisions)

• limit a party’s ability to terminate the contract (for example, by imposing high termination fees); and

• allow one party to vary the upfront price payable under the contract, without giving the other party the right to terminate.

The above list includes examples only – whether or not a term is unfair will need to be determined in the context of each contract. In addition to the above, having a contract that is written in clear, understandable language will become increasingly important.

When will the UCT regime apply to small trade contracts?

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.

What should your business do?

As stated above, we consider that many standard form agreements used day to day by family businesses will fall within the net cast by the UCT Regime.

We recommend that you:

For further help?

Jackson Russell will continue to monitor any guidance issued by the Commerce Commission over the next few months, and will update our website with guidance material to help your business prepare. To ensure you don’t miss an update, you can sign up for email notifications here.

If you would like specific advice relevant to the impact of the UCT Regime on your contracts, or you have any questions, please get in touch with the contacts below.

Disclaimer: The information contained in this document is a general overview and is not legal advice. It is important that you seek legal advice that is specific to your circumstances.

Disclaimer

The views expressed in this content are those of the author, who is also responsible for any errors and omissions. Family Business Association provides this article for your information only. The content of the article should not be taken as advice. If you wish to explore this topic, please consult an advisor who you consider to have the expertise to provide specific advice in relation to your family business.