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Unfair business practices on borrowed time

Monday 10th December 2018

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Business owners who use unfair trading and contract terms in their dealings look likely to face a stiffer range of rules and penalties following a government review of unfair commercial practices.

Commerce and Consumer Affairs Minister Kris Faafoi and Small Business Minister Stuart Nash published a discussion document today outlining four possible packages of reforms to strengthen existing prohibitions on poor corporate behaviour, the most impactful of which would also create new uncertainties about what constitutes unfair practice or contractual terms.

In a survey of mainly small business owners, the Ministry of Business, Innovation and Employment found 45 percent felt that they had been offered unfair contract terms in the past year and 47 percent felt that they had otherwise been treated unfairly. 

Unfair contract terms included limiting the ability of the customer to make a claim or placing risk on their business, extended payment terms, limiting the ability to enforce contract terms or to terminate a contract, and unilateral terms allowing the customer or supplier to determine when a contract breach had occurred.

"There is both theory and evidence to suggest that businesses (particularly small ones) are vulnerable to unfair contract terms in a range of circumstances," says the discussion document, which is open for public submissions until Feb. 25 next year. 

However, the ministry said "it could be argued that there are stronger justifications for protecting businesses against unfair conduct than unfair contracts".

"Unfair conduct seemingly has the ability to distort market outcomes and undermine free and informed decision-making by businesses more than unfair terms within the contract itself".

That had prompted investigations into whether protections against unfair business-to-business conduct should be extended.

Nash highlighted concerns about the impact on small businesses of unfair commercial practices relating to payment.

“Small businesses can face significant cash flow issues as a result of other businesses not paying them on time as per contract terms," he said. “The government wants to build a more productive, sustainable and inclusive economy, but we won’t get there with these types of practices in the marketplace.

“At the same time, we need to strike a balance to ensure any changes are proportional to the problem. We want honest businesses to continue to compete effectively, negotiate firmly, and freely enter into contracts."

Of the four options proposed to deal with either some or all of a combination of both contract and conduct issues, the two with the greatest beneficial impact for businesses and consumers would also create the greatest uncertainty for businesses engaging in conduct that might be acceptable and competitive rather than unfair, the discussion document says. It discusses whether only "egregious" unfair conduct should be covered.

Based on experience with consumer contracts in New Zealand and business contracts in Australia, many standard form business-to-business contracts are likely to contain unfair contract terms or UCTs, the paper says.

"As such, many businesses are likely to face one-off costs reviewing and amending their contracts to eliminate any UCTs."

It was estimated it might cost New Zealand businesses $13 million to make those checks.

Uncertainties about what constitutes a UCT could be reduced by reference to existing case-law and by inclusion of a grey-list against which proposed conduct or contract terms could be judged.

"We think that most businesses, if they are acting fairly and reasonably, ... are unlikely to be in breach of any prohibition," the document says.

The chief executive of the Food and Grocery Council, Katherine Rich, welcomed the discussion paper, saying its proposal would complement the Commerce Commission’s new powers to accept enforceable undertakings and to undertake competition studies, and could lead to reduced costs for businesses, especially small businesses.

“Crucially, the proposed prohibitions should capture only particularly egregious conduct – most typical business behaviour should not be affected,” she said in a statement.

“Some unfair commercial practices that would be illegal overseas currently go unpunished in New Zealand. Australian consumer law, for example, has included some form of prohibition on ‘unconscionable conduct’ since 1986, and their ‘Unfair Contract Terms’ regime was expanded in 2016 to protect small businesses.

“It’s worthwhile considering the single economic market benefits for New Zealand having law that is more consistent with Australia's," said Rich.


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