New unconscionability and unfair contract terms protections for consumers and businesses

The Government has recently announced its intention to amend the Fair Trading Act (the Act) to provide better protection for both consumers and businesses against unfair commercial practices by:

(a)  introducing a prohibition against unconscionable conduct, and

(b)  extending the existing protections against unfair contract terms currently applying to standard form consumer contracts to standard form business contracts with a value below $250,000.

Details of the discussion paper are available as well as the cabinet paper.

Unconscionable Conduct

Although current legislation prohibits certain unfair practices such as misleading and deceptive conduct, MBIE has identified gaps that it considers would be filled by a prohibition on unconscionable conduct.  The unconscionable conduct provision is intended to act as a ‘safety net’ to capture relatively rare cases of particularly serious conduct.[1]

The Government does not plan to define ‘unconscionability', but has said that the intention is for the prohibition to address similar conduct as in Australia.[2]  Australian law requires a relatively high threshold to be met before a breach can be proven and mere inequality of bargaining power that results in one party being disadvantaged, is not sufficient.  The Australian courts have found that conduct is unconscionable if it is ‘against conscience by reference to the norms of society’ and that this can include acting dishonestly, unfairly, deceiving others or imposing unfair pressure.[3]  The Commerce and Consumer Affairs Minister, Mr Faafoi, described unconscionable conduct as that which goes far beyond being commercially necessary or appropriate.

What will the legislation provide?

The prohibition against unconscionable conduct will apply to the supply (or possible supply) and acquisition (or possible acquisition) of goods or services.[4]  The legislation will include a list of factors for the court to consider in determining whether conduct is unconscionable:[5]

(a)  the relative bargaining strength of the parties

(b)  whether one party was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party

(c)  whether there was any undue influence, pressure, or any unfair tactics, and

(d)  the extent to which the supplier and the customer acted in good faith.

The prohibition would apply to conduct towards all consumers and businesses with maximum penalties of $600,000 for businesses and $200,000 for individuals.

Unfair Contract Terms

The Act currently provides protection for consumers against unfair contract terms in standard form consumer contracts.  If a term is declared to be unfair, the term cannot be enforced.  The Government’s proposal would extend this to business contracts with a value below $250,000 in a given year.

The legislation will outline factors to be considered as to whether the value cap of $250,000 has been reached. The court will have discretion to look at the substance of the relationship between the parties in deciding whether the new protections apply.[6]

The Government proposes to retain the same test, that is,[7] a term is unfair if the term:

(a)  is in a standard form contract, which is a contract where the terms have not been subject to effective negotiation between the parties

(b)  would cause a significant imbalance in the parties’ rights and obligations arising under the contract

(c)  is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term, and

(d)  would cause detriment (either financial or otherwise) to a party if it were applied, enforced, or relied on.

Unfair contract terms do not apply to the subject matter of the contract or the upfront price.

Stronger enforcement regime?

Under the current unfair contract regime, civil remedies are only available if the Commerce Commission has successfully obtained a declaration from the court that the term is unfair. It is not currently possible for a private party to seek a declaration.

The Government wants a stronger enforcement regime to enhance incentives to remove unfair contract terms. However, given there is a current broader review of the Act in progress, including a review into the enforcement of consumer unfair contract terms, the Government has decided to temporarily extend the current enforcement regime to business contracts under $250,000.  Once the broader review of the Act is complete, the Government proposes to amend the enforcement regime for unfair contract terms for both consumer and business.[8]

What’s next and our view

The Government plans to introduce the proposed amendments through a Fair Trading Amendment Bill in early 2020.

In our view, the likely effectiveness of the unconscionability regime remains to be seen.  In the 10 years since the legislation was enacted in Australia, there have been only two successful prosecutions of unconscionable conduct. In a recent Australian government report some submitters stated that the current provision prohibiting unconscionable conduct is failing to have the effect intended due to the courts’ narrow interpretation of the provision.[9]  It remains to be seen whether the New Zealand courts would take a broader approach influenced by the view that there are gaps in New Zealand law to be filled.

To date, there have been few unfair contract terms cases because the Commerce Commission is the only entity which can seek a declaration that a term is unfair.  However, this is set to change with the Government’s upcoming review of the enforcement regime for unfair contract terms.  Those dealing with consumers and businesses with contracts below $250,000 in value, should review their standard form agreements to check if any terms could be unfair.  This is particularly the case for larger businesses negotiating with smaller businesses as relative bargaining power is a relevant consideration.

Footnotes

[1] Cabinet Paper “Unfair commercial practices: release of discussion document” (23 November 2018) at [18].

[2] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [21].

[3]Australian Competition and Consumer Commission v Lux Distributors Pt Ltd [2013] FCAFC 90 at [23].

[4] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [19].

[5] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [24].

[6] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [32].

[7] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [29].

[8] Cabinet Paper “Unfair Commercial Practices: Policy Decisions” (19 August 2019) at [34].

[9] Standing Committee on Economics “The need, scope and content of a definition of unconscionable conduct for the purposes of Part IVA of the Trade Practices Act 1974” (3 December 2008) at [3.1]–[3.6].

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