LEGAL
ARE YOUR STANDARD HIRE TERMS FAIR? By Andrew Skinner of Auckland law firm Martelli McKegg
On 16 August 2021 changes were passed to the Fair Trading Act 1986 (Act), which will extend the existing protections against unfair contract terms in standard consumer contracts to also apply to small trade contracts.
T
his change will be relevant for all hire companies who engage with other businesses on their standard rental terms and conditions. This article examines the background to the law and explains why it will be important for all hire companies to review the standard terms prior to the new law coming into effect in August 2022.
Background to extending the unfair contract term regime The unfair contract term regime came into force in 2015 and the purpose of the regime was to provide protections to consumers when entering into standard form contracts by prohibiting unfair contract terms. Since then, questions have been raised about whether this regime will extend to business contracts as the existing legislation had significant gaps in the protections for small businesses against unfair contract terms. In order to alleviate the negative impacts for individual businesses as well as broader economic impacts such as lower levels of competition, innovation and productivity, the regime has now been extended to include business contracts with effect from August 2022. Determining whether the unfair contract term provisions apply There are certain prerequisites that need to met before the unfair contract terms provisions will apply to business contracts. First, the contract PAGE 18
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must be a standard form contract. Secondly, the contract must be characterised as a small trade contract. Are hire contracts considered Standard Form Contracts? A number of factors must be considered before deciding whether a contract is a standard form contract. These include: • whether one party has most or all of the bargaining power • whether the contract was prepared prior to any contractual discussions • the extent to which parties are able to negotiate terms; or • whether the contract is presented as part of a “take it or leave it” situation. Having regard to these factors, it seems fairly clear that many contracts for the hire and rental of goods will be considered standard form contracts. The contracts are often prepared by the rental company with little negotiation between the parties. To the extent that a hire company rents goods to a consumer, the unfair contract term regime will already apply. The next question becomes, what business customers will now be covered by the regime? Small trade contracts Having decided that your terms qualify as a standard form contract, the unfair contract terms regime will apply to consumers and certain business customers if it is also a “small trade contract”.
A small trade contract is where: • the parties are engaged in trade; • it is not a consumer contract; and • it does not comprise or form part of a trading relationship that exceeds an annual value threshold of $250,000 (to be assessed when the relationship first arises). So the new regime will apply to many contracts with businesses in the hire industry if the trading relationship is valued at less than $250,000 per year. As you can see from these factors, it doesn’t matter how big the customer is but rather the likely annual sales revenue. By way of example, if you rented some perimeter fencing to a large construction company for 6 months for $50,000, the regime would apply. What is an “unfair contract term”? A term in standard terms will be considered unfair if it: • would cause significant imbalance in the contractual parties’ right and obligations arising under the contract; • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and • would cause detriment to a party if it were applied, enforced or relied on. It is worth noting that certain key terms which describe the subject matter of the contract, set the upfront price payable under the contract, or are required or expressly permitted
