News & Thinking
Fair Trading Act changes – time for tech companies to review their standard terms
Recent changes to the Fair Trading Act 1986 (FTA) extend protections for contracting parties by adding ‘standard form small trade contracts’ to the FTA’s existing ‘unfair contract terms’ regime. Many New Zealand businesses including tech companies will be affected by the changes and should now be reviewing their standard terms.
Unfair contract terms regime
The unfair contract terms regime now applies to both ‘standard form consumer contracts’ and (from 16 August 2022) ‘standard form small trade contracts’.
Under the regime the New Zealand Commerce Commission can (on its own accord or at the request of the other party to the contract) seek a declaration from a Court that a term in one of these contracts is unfair. If the Court grants the application, you then cannot rely on or enforce the term and cannot include the term in any further standard form small trade contracts.
The regime seeks to address a perceived imbalance of power between parties which have prepared their own standard terms and supplier or customers which are required to accept those terms largely as is.
What counts as a standard form consumer or small trade contract?
Consumer contracts are basically contracts for the supply of goods (including software) or services ordinarily acquired for personal, domestic or household use or consumption. Think business-to-consumer (or B2C) contracts.
Small trade contracts are other contracts where both parties are acting in trade and the contract forms part of a trading relationship of NZ$250,000 or less per annum when the relationship first arises. Think business-to-business (or B2B) contracts for $250,000 or less per annum.
In each case, the contract needs to be a standard form contract for the regime to apply.
A standard form contract is one where the terms have not been subject to effective negotiation between the parties. A Court will consider various factors in determining whether there has been effective negotiation. Online or ‘click-wrap’ terms and conditions – which are commonly used for SaaS products and EULAs – will invariably be standard form as the customer has little-to-no scope to negotiate or change the terms.
What counts as an unfair contract term?
An unfair term is one that:
- would cause a significant imbalance in the parties’ rights and obligations; and
- is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
- would cause detriment to a party if applied, enforced or relied on.
When considering this test, a Court is required to taken into account the extent to which the term is transparent and the contract as a whole.
The FTA includes a non-exhaustive list of terms that may be unfair. It also lists some clauses that cannot be declared unfair, such as terms which set the upfront price payable under the contract.
For tech companies, some relatively common types of clauses that could be vulnerable to challenges on unfairness grounds are:
- terms which give the tech company the right to unilaterally vary the terms of the contract; and
- terms which limit or exclude the tech company’s liability.
It is still possible to include these types of terms in a contract; it just needs to be done in a way that ensures they do not cross the ‘unfairness line’. For example, a unilateral right to vary the contract terms could still be fair if the customer is, in response to a unilateral variation, able to terminate the contract without cost and claim a refund for any amounts (such as subscription fees) paid in advance.
What about existing contracts before the recent FTA changes took effect?
The FTA changes do not apply retrospectively to contracts entered into before 16 August 2022. However, any relevant contracts which are varied or amended after this date will be subject to the regime.
Time to review your standard terms?
Absent a Court declaration, merely having an unfair term in a standard form small trade or consumer contract is not an offence on its own.
However, doing so risks important aspects of a contract being declared unenforceable. For example, the last thing you would want is to go to the trouble of including a limitation of liability in your contract, only for it to get subsequently ruled out at the very time you want it to protect you. Unfair terms also have the potential to put you on the regulator’s radar. We expect aggrieved customers or suppliers will (in certain cases) look to refer potentially unfair contract terms to the Commerce Commission when a dispute arises.
With these changes, now is a sensible time to review your standard terms. Many businesses have taken this as an opportunity to undertake a periodic review and refresh of their terms, both from an unfair contract terms and general/wider perspective.
Article co-written with Sam Lester, Solicitor, Anthony Harper.