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Government assessing new prohibitions on unfair conduct

Home Insights Government assessing new prohibitions on unfair conduct

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Contributed by: Troy Pilkington, Joe Edwards and Hamish Saunders

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Published on: December 10, 2018

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Consumer Law Update – 10 December 2018

Today the Government published a Discussion Paper canvassing options for the introduction of prohibitions on unfair contract terms in business-to-business dealings and unfair conduct.

If introduced, such prohibitions would represent a marked change to New Zealand's existing commercial law framework, and could have far-reaching impacts on the way that businesses contract with one another.  It will be important that any changes are carefully thought through to ensure they are appropriately targeted at any identified problems, and avoid unintended consequences. 

The motivation for this is said to be the result of a survey of small businesses that the Government conducted earlier in the year. The survey found that about half of small businesses had been offered unfair contract terms in the last year or felt they had been treated unfairly. For example, the Discussion Paper noted: "some businesses told us about the significant cashflow issues they have faced as a result of other businesses not paying them for several months such as not complying with the terms of a contract, placing significant risk onto the smaller business, and unilaterally increasing the price of goods or services under contract." The Discussion Paper is consistent with the Government's focus on ensuring that New Zealand's consumer laws are adequately protecting vulnerable consumers.

While noting what is "unfair" is highly subjective, the Government's view is that this indicates a gap in the protections available to businesses, particularly "those that are small and without effective bargaining power".

Options identified in the Government's Discussion Paper to fill that gap include:

  • Option 1: The introduction of a high-level protection against unfair conduct, such as:
    • a prohibition on ‘unconscionable’ conduct (based on the existing Australian prohibition) – potentially prohibiting conduct that is "against conscience by reference to the norms of society";
    • a prohibition on ‘oppressive’ conduct (based on consumer credit law) – potentially prohibiting conduct that is “harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”; or
    • a prohibition on ‘unfair’ practices (based on European law) - potentially prohibiting practices that are "contrary to the requirements of professional diligence, and materially distort the economic behaviour of the average consumer".  
  • Option 2: The extension of the existing protections against unfair contract terms in standard form consumer contracts to give greater protection for businesses.

The Discussion Paper outlines that there are a number of different ways in which these protections could be combined, and seeks submissions on various combinations of these prohibitions.

The Discussion Paper also recognises that decisions would need to be made about:

  • who the protections apply to (e.g. consumers only, consumers and some small businesses, or consumers and all businesses). For example, in relation to the unfair contract terms regime the Discussion Paper says: "while small businesses may be vulnerable to UCTs, we do not see a strong case for protecting larger, better-resourced businesses from unfair terms without there also being an element of unfair conduct";
  • which transactions the protections apply to; and
  • how any new protections would be enforced (e.g. by affected businesses, the Commerce Commission, or both), and the penalties for breaching the law.

Such prohibitions would represent a marked change to New Zealand's existing commercial law framework, and could have far-reaching impacts. The Government is to be commended on engaging in a robust consultation process, as it will be important that any changes are carefully thought through to ensure they are appropriately targeted at any identified problems, and avoid unintended consequences.

Submissions are due with MBIE by 9am on 25 February 2019. MBIE has advised that this is intended to be a "one phase" issues/options paper, so a second phase of consultation is not anticipated. Interested parties should therefore, ensure that they engage in the current consultation process.

The Government's Discussion Document and two short summary documents are available here.

If you have any questions as to how the proposals under consideration may impact your business, please contact one of the authors below.

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