MBIE issues discussion paper on unfair commercial practices

The Ministry of Business, Innovation and Employment (MBIE) has published a discussion paper on proposals for protecting businesses from unfair commercial practices. The paper relates to concerns regarding treatment of vulnerable consumers and small businesses. A link to the paper is available here.

Submissions are sought by 25 February 2019.

Why has this paper been prepared?

In a recent MBIE survey of predominantly small businesses (with less than 20 employees), a significant proportion of those businesses surveyed reported experiencing unfair conduct (47%) or unfair contract terms (45%). MBIE notes that many of those businesses successfully took action against the unfair practices but MBIE considers there may be a gap in the protections available. In addition, MBIE refers to egregious conduct towards consumers by some businesses which is not easily addressed by existing consumer law.

What does the discussion paper cover?

The discussion paper focuses on two types of unfair activities:

  • Unfair contracts: This includes terms which shift risk from one party to another, make it difficult to terminate a contract, or are otherwise one-sided.
  • Unfair conduct outside the terms of the contract: This includes the use of pressure tactics, deceptive conduct or the way a contract is enforced.

Key concerns are that small businesses may not have robust risk management procedures in place and may be less able to absorb a detriment if an unfair term is enforced.  MBIE is also concerned about poorly drafted standard form contracts being duplicated and multiplied across entire industries as a result of competing businesses using the same terms.

The survey demonstrated that most of the unfair conduct reported by businesses is already prohibited to some extent. MBIE observes that this must mean that either businesses are not complying with the law and/or that the threshold for liability under the law might be too high. The paper recognises that caution needs to be taken to ensure that measures to protect businesses do not unduly inhibit competition or economic growth.

What options are proposed?

  • Option 1: Introduce high level protection against unfair conduct:This would involve prohibiting “unconscionable” conduct (based on Australian law), prohibiting “oppressive” conduct or prohibiting “unfair” practices. MBIE suggests that the “unconscionable” and “oppressive” standards would be a safety net for particularly egregious conduct but that prohibiting “unfair” practices could have a broader impact. MBIE anticipates that a breach of such a law would be an offence and subject to the full range of civil remedies under the Fair Trading Act 1986 (FTA).
  • Option 2: Extend current protections against unfair contract terms in standard consumer contract terms to protect businesses. This would mean businesses could not include in standard form contracts (ones that are not subject to effective negotiation) terms which would:

(a) cause a significant imbalance in the parties’ rights and obligations under the contract;

(b) are not reasonably necessary; and

(c) would cause detriment if they were enforced.

MBIE has stated that if Option 2 is chosen (i) businesses should be able to seek to have a contract term declared unfair rather than having to rely on the Commerce Commission to seek such a declaration and (ii) that penalties for breach should apply.

MBIE also seeks feedback on whether the options proposed should apply to all businesses or to a subset of businesses such as “small businesses”. It is suggested that the definition of “small” could be based on employee count (e.g. fewer than 20 employees), turnover (e.g. businesses with a turnover of less than $2m) or whether there is a material imbalance in negotiating power between the relevant businesses (determined on a case by case basis). MBIE also poses the question of whether there should be a contractual value threshold.

Our view

This discussion paper has arisen out of the concern to protect smaller businesses. However, MBIE is not yet ruling out whether protections should apply to all businesses. This reflects the approach set out in the Australian Consumer Law Review released in March 2017 which recommends extending protection for unconscionable conduct to all Australian businesses including publicly-listed companies.

Option 2 reflects the currently existing law under the FTA in New Zealand on unfair contract terms but extending those rules to cover business to business contracts. A similar regime to Option 2 is in place in Australia for small businesses (those which employ fewer than 20 people) and contracts involving the supply of goods or services or the sale of an interest in land and where the upfront price payable under the contract is no more than $300,000 or $1 million (if the contract is for longer than 12 months). MBIE’s suggestions on the definition of “small business” appear to be leaning towards this kind of formulation.

This discussion paper has come at a time when the law on unfair contract terms is still in its infancy in New Zealand having only applied to standard form consumer contracts since 2015. While the Commerce Commission has conducted three ‘industry sector’ reviews – Gyms (August 2017), Energy retail (August 2016) and Telecommunications (February 2016), there is no guidance from the New Zealand courts on how the unfair contract terms operate in context. This is set to change though as the Commerce Commission, which administers the unfair contract terms provisions under the FTA, has commenced proceedings against Home Direct Limited seeking its first declaration that a consumer contract contained an unfair term. This case should provide useful guidance on how our unfair contract terms regime operates.

MBIE is also currently evaluating the effectiveness of the unfair contract terms provisions applying to consumer contracts. That is a separate focus from this discussion document but any gaps identified could potentially feed into legislative changes to the FTA.

If you have any queries regarding the discussion paper or unfair contract terms please contact one of our experts.

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