In Short
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Unfair contract terms, such as one‑sided clauses that cause a significant imbalance, are void and unenforceable under New Zealand law.
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Businesses and courts assess unfairness by checking if the term is necessary, transparent and not detrimental to the other party.
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Enforcement risks include commission intervention, voiding of terms, injunctions and financial penalties.
Tips for Businesses
Regularly audit your standard-form contracts. Remove unclear or one-sided clauses and allow negotiation of key terms where possible. Seek legal advice to make sure your terms comply with the law and won’t be challenged down the line.
As a business operating in New Zealand, it is important to consider the legal consequences of including unfair contract terms in your agreements. Whether you are drafting standard form contracts or revising existing terms, ignoring your obligations under the Fair Trading Act 1986 (‘FTA’) can put your business at risk. These rules are designed to protect consumers and small businesses from one-sided or exploitative contract clauses. Failing to comply can lead to serious legal and reputational consequences. This article outlines the essential steps you need to take to stay compliant and protect your reputation.
What Are Unfair Contract Terms?
Under New Zealand law, a contract term is considered unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the business advantaged by the term; and
- would cause detriment (financial or otherwise) to a party if it were applied or relied on.
Who Enforces This?
The Commerce Commission is responsible for enforcing the unfair contract terms regime. It has increased enforcement activity across multiple sectors and can:
- investigate businesses;
- issue compliance warnings;
- seek court declarations that a term is unfair; and
- publicly name non-compliant businesses.
Once a court declares a term to be unfair, it becomes unenforceable. This means you cannot rely on it, even if the contract was signed by both parties. Continuing to use or enforce an unfair term after a court ruling may result in penalties of up to:
- $600,000 for companies, per breach; and
- $200,000 for individuals, per breach.
Examples of Unfair Contract Terms
If your contract includes any of the following, you may be at risk:
- Unilateral Variation Clause: A term allowing you to change pricing, terms or specifications without agreement from the other party.
- Excessive Limitation of Liability: Clauses that exclude or disproportionately limit your responsibility, even in situations where your business is at fault.
- Termination for Convenience: A clause that gives you the right to cancel the contract at any time, without cause, while holding the other party to strict termination rules.
- Automatic Renewals Without Notice: A term that locks customers or small businesses into renewal periods without adequate notice or opt-out provisions.
- One-Sided Indemnities: A requirement that the other party indemnify your business in all situations, even those outside their control.
If your standard form contracts contain these types of clauses, you should review and amend them to ensure they do not fall under the unfair terms category. They must be reasonable and necessary for the agreement, and the onus is on you to prove that.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
What You Should Do Now
- Audit Your Standard Form Contracts: Engage a lawyer or legal team to identify any terms that could be challenged as unfair.
- Eliminate or Revise Questionable Clauses: Replace one-sided terms with fair, reciprocal provisions that reflect genuine commercial needs.
- Engage Proactively with Counterparties: Be willing to explain your contract terms and negotiate fairly with the other party. This particularly applies when dealing with small businesses.
- Keep Records: If you believe a term is necessary to protect your legitimate interests, document the reasoning and supporting evidence. You will need this if the term is ever challenged.
Key Takeaways
The rules around unfair contract terms in New Zealand represent a significant shift in how businesses must approach their contractual relationships. It is no longer acceptable to rely on standard form contracts that prioritise your interests at the expense of others, particularly small businesses and consumers. Complying with the FTA is not just about avoiding penalties, it is about building a reputation as a responsible and trustworthy business. By proactively reviewing and revising your contracts, you can mitigate legal risks and improve commercial relationships.
If you are drafting a contract, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
If your contract is offered on a “take it or leave it” basis with little or no opportunity for the other party to negotiate terms, it is likely a standard form contract.
Yes, but they must be reasonable and not create a significant imbalance. Broad exclusions or one-sided protections are likely to be challenged.
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