Amendments to the Fair Trading Act: what does it mean for small businesses?

August 2022

The Fair Trading Amendment Act 2021 (as the name suggests) has the affect of making changes to the Fair Trading Act (FTA) and place new significant obligations on businesses, to protect both consumers and small businesses. Key changes include extending existing protections against unfair contract terms to now include small business contracts.

What is a small business contract?

From 16 August 2022, provisions within the FTA around unfair contract terms (previously only relevant to standard form consumer contracts) will also cover standard form small trade contracts. A small trade contract is where:

• both parties are engaged in trade;
• the contract is not a “consumer contract”; and
• does not comprise or form part of a trading relationship that exceeds the annual value threshold of $250,000.00.
  

If in doubt, the new assumption under the FTA is that a contract is a small trade contract unless a party to the contract proves otherwise.

What makes a contract term ‘unfair’?

A term in a contract will be considered unfair where:

• it could cause a significant imbalance in the parties’ rights and obligations under the contract;
• it is not necessary to reasonably protect the legitimate interests of the party; and
• it would cause detriment (financial or otherwise) to a party if relied on.

What happens if a contract term is unfair?

The High Court must determine whether a term is unfair or not. If the Court determines a term in a small trade contract is unfair, then it cannot be enforced or relied upon and if the term is enforced or relied upon, then it is a punishable offence attracting a fine of up to $200,000 for an individual or up to $600,000 for a body corporate (civil remedies may also apply). To state the obvious, this will likely be a sizeable fine for a small business.

How do I know if my contract terms are unfair?

Unfair terms are determined on a case-by-case basis. Generally speaking, we recommend the following steps be taken to avoid a claim for unfair contract terms:

• ensure plain, ordinary language is used;
• ensure all terms in a contract are entirely necessary and justifiable if called upon;
• allow for mutuality where possible;
• ensure that the contract is readily available to either party for review; and
• if a term is unfair, but seen as necessary, recognition of this should be provided so as to explain why it is necessary to aid transparency.

Need assistance?

If you are concerned about the terms of your contract, or ifyou need help with drafting a contact for your small business, talk to one of our Commercial specialists:

Matt Davidson - Senior Associate, Commercial
matt.davidson@tp.co.nz
021 841 231

Dominika Mitchell - Senior Associate, Commercial
dominika.mitchell@tp.co.nz
021 581 441

Aleisha Gosset - Solicitor, Commercial
aleisha.gosset@tp.co.nz
027 249 8244