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A new offence prohibiting ‘unconscionable’ conduct will be introduced in early 2020 – ©123RF.com

If it’s not fair, it’s not allowed – new legal protections for businesses

Many New Zealand businesses and consumers regularly confront what they see as unfair commercial practices. The government believes that these practices may undermine its attempts to build a more productive, sustainable and inclusive economy.

Over the last few months, there have been some significant moves by the NZ government and by regulators to combat that unfairness. Protections against ‘unfair’ conduct are usually confined to consumers, but the government plans to extend those protections to cover business-to-business conduct. 

In this article, we summarise the developments. Be aware – ‘all’s fair in business’ is no longer the case.

The current law

A range of legislative protections against unfair commercial practices already exist. These include the Fair Trading Act’s prohibitions against harassment, coercion, and misleading and deceptive conduct, and the Commerce Act’s prohibition of anti-competitive agreements (including cartel conduct – more on that below), mergers, and taking advantage of market power. 

In addition, amendments were made to the Fair Trading Act in 2015 to enable the Commerce Commission to seek a court declaration that a term in a standard form consumer contract is unfair (and therefore unenforceable).

However, outside competition law, there are currently no legislative protections which specifically address unfair contract terms in dealings between businesses. Following feedback to a discussion paper released in early 2019, the existing laws which address conduct are considered by the government to be inadequate.

Unfair standard form business contracts

A term in a standard form consumer contract (i.e. where the terms have not been subject to negotiation and are presented on a ‘take it or leave it’ basis) can be declared unfair if the court is satisfied that the term:

  • • Would cause a significant imbalance in the parties’ rights and obligations arising under the contract
  • • Is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term
  • • Would cause detriment (either financial or otherwise) to a party if it were applied, enforced, or relied on.
Terms which define the main subject matter of the contract or set the upfront price cannot be declared unfair.

The government is now proposing to extend the above regime to standard form business contracts with a value below $250,000 (in total or in any year). That’s a lot of contracts, so will impact many FTD readers. 

Ministers Faafoi and Nash have said: “We heard about a range of potentially unfair contract terms, including extended payment terms, one-sided contract terms, and businesses being locked-in to contracts for long periods of time. We also heard that some businesses aren’t complying with the terms of existing contracts, making excessive demands, and blacklisting and bullying their suppliers.”

For context, in the four-and-a-half years since the unfair contract terms regime was introduced for consumer contracts, the Commerce Commission has sought such declarations only

  • • Against Home Direct regarding the terms of its ‘voucher entitlement scheme’ (where direct debit payments by purchasers of goods continued after goods were paid off and were converted into vouchers) because the vouchers could not be refunded or exchanged for cash and expired after 12 or 24 months, with proceeds forfeited to Home Direct
  • • Against Viagogo because its contract includes a term stating that all disputes brought by a consumer must be heard in Swiss courts under Swiss law, but Viagogo can choose to take court action against consumers in the consumer’s own country.

Judgment has yet to be issued in the Viagogo matter, but in mid-November the High Court issued its first ever declaration that Home Direct’s voucher entitlement terms and conditions were unfair and unenforceable, meaning that Home Direct is required to refund any customers who had vouchers forfeited from 17 March 2015 when the unfair contract terms provisions became law. 

The Commerce Commission has filed proceedings against the International Racehorse Transport New Zealand Partnership for alleged price fixing in the provision of services for equine air freight

The court noted that in addition to the relevant provisions displaying the three required hallmarks of unfairness (significant imbalance, not reasonably necessary, and detrimental), “the absence of transparency adds a further layer of unfairness to the overall analysis” and there were no countervailing obligations on Home Direct. “It was in that sense ‘one-way traffic’,” the court said.

Australia has had similar law for much longer and we are again following their lead (business-to-business contracts were made subject to their unfair contract term regime in 2016) so Australian examples are relevant. Indeed, the High Court expressly said as much in the Home Direct case. 

In October, the Federal Court found hair loss business Ashley & Martin’s terms in its standard form contracts were void because they were unfair. Customers were typically signed up to a 12-month programme and the unfair terms required the customer to pay for all the treatment before they received, or could properly consider, medical advice – even if that medical advice was against the treatment or if customers developed adverse side-effects.

Unfair conduct

The second announced change is to introduce a new offence prohibiting conduct that is ‘unconscionable’ (to consumers or businesses). The government does not intend to define what is ‘unconscionable’, but Minister Faafoi has described it as “serious misconduct that goes far beyond being commercially necessary or appropriate”. 

The Cabinet paper says that the new ban is intended to act as a ‘safety net’ to capture relatively rare cases of particularly serious conduct. Examples might include: the use of pressure tactics, harassment or coercion; making demands over and above the agreed terms; not complying with the agreed terms (such as making late payments); or refusing to supply or purchase a good or a service.

Penalties of $600,000 for businesses and $200,000 for individuals are proposed, and unlike the unfair contract terms regime which can only be enforced by the Commerce Commission, consumers and businesses will also have the option to take action themselves.

The prohibition is intended to reflect the Australian approach. There, the courts have found that conduct is unconscionable if it is ‘against conscience by reference to the norms of society’ – i.e. acting honestly, fairly, and without deception or unfair pressure. But there have been only two successful prosecutions of unconscionable conduct in Australia, with recent criticism that the provisions have been interpreted too narrowly by their courts. Will our courts take a broader approach?

Both the extension of the unfair contract terms to business contracts and the new unfair conduct offence are expected to be introduced through a Fair Trading Amendment Bill by early 2020. Separately, the government is also ‘looking at other ways to improve business-to-business payment practices’.

Cartel conduct 

In October 2019, the Commerce Commission filed proceedings against the International Racehorse Transport New Zealand Partnership for alleged price fixing in the provision of services for equine air freight. The commission alleges that a joint venture agreement entered into with a competitor provided for the fixing, controlling and maintaining of the retail prices to be quoted and charged, and the size of discounts that could be given, for equine air freight services.

It is timely then for a quick reminder of the prohibitions on cartel conduct introduced into the Commerce Act in 2017, particularly since the potential penalties will soon (from April 2021) include up to seven years’ imprisonment (in addition to the existing penalties of a $500,000 fine for individuals and the greater of $10 million or three times the commercial gain or 10% of group turnover for companies). 

A ‘cartel provision’ is a provision in a contract, arrangement or understanding between competitors that has the purpose or (likely) effect of ‘price fixing’, ‘restricting output’, or ‘market allocating’.

Price fixing occurs when parties enter into or give effect to an agreement fixing, controlling or maintaining the price of goods and services, or any discount, allowance, rebate or credit of goods and services, that two or more of the parties to the agreement supply or acquire in competition with each other.

Restricting output occurs when two or more competitors arrange to prevent, restrict or limit their supply or production (or likely supply or production) of goods or services, or acquisition (or likely acquisition) of goods or services. 

Market allocation occurs when two or more competitors arrange to allocate between themselves the customers or suppliers to whom, or the geographic area in which, each will supply or acquire their goods or services.

There are defences for collaborative activities, vertical supply contracts, joint buying or promotion agreements, and specified international shipping activities (such as vessel-sharing agreements), but the scope of these defences remains untested. 

Summing up

The government appears committed to putting in place a regulatory ‘tool box’ to protect small businesses from what it perceives as an abuse of power, restricting competition and, with it, productivity and innovation. The unfair contract and unfair conduct changes noted above are significant. Many businesses and contracts will be affected.

The Commerce Commission has shown that it is prepared to use the existing tools in the box, so it is imperative that businesses understand and prepare for the changes – including by reviewing any standard form contracts to ensure that they are fair and balanced.

Chris Dann heads the transport and logistics team for law firm Anthony Harper, one of the few in New Zealand with strength and experience along all facets of the supply chain; for further information, visit www.anthonyharper.co.nz or contact Chris at chris.dann@ah.co.nz

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