Fair Trading Amendment Bill

Members, we now come to the committee stage of the Fair Trading Amendment Bill. This bill will be debated in parts. We come first to Part 1, the debate on clauses 4 to 20, the main amendments in the principal Act. The question is that Part 1 stand part.

It’s a real pleasure to bring proceedings on Part 1 of the Fair Trading Amendment Bill. It does provide new protections against unfair practices which unfairly harm, potentially, businesses and consumers.

Some of the key features of Part 1 I’d like to just quickly speak about at the beginning of my contribution. Clause 6 introduces a new prohibition on unconscionable conduct. Now, that mirrors largely what’s already in law for unconscionable conduct with respect to consumers but makes it also for businesses as well.

Clause 7 extends prohibitions against unfair contract terms to small trade contracts, and clause 9 empowers consumers to direct uninvited sellers to leave their property—the do-not-knock stuff, fundamentally. At the moment it’s true that these don’t have any legal effect. Members of this House will be pleased to know that politicians are carved out of that, as are charities. So that’s really intended for people who are unfairly harassing folks who choose to put do-not-knock stickers at their gateway, clear messages that they don’t wish to be harassed or sold items through pressure sales.

There is a Supplementary Order Paper (SOP) which makes a number of small important changes to slightly adjust the threshold for businesses covered by the unfair contract terms protections to allow more businesses to benefit from these protections. There’s some technical matters also that are covered in that SOP to clarify things, to avoid any ambiguity in the law and the interpretation thereof. Essentially, the bill prohibits unfair contract terms in small trade contracts where the contracts are worth less than $250,000 in a 12-month period, and so the SOP makes sure that the prohibition—well it currently covers related parties and, unfortunately, the ambiguity in that could mean it’s complex to enforce and complex to understand for those who are caught up in it. So we want to remove that ambiguity. It means it will apply slightly more broadly, which we think’s a good thing.

Ultimately, with this legislation, those who are engaged in fair trade, in fair conduct, and are contracting fairly have nothing to fear from this legislation. It really is already the case that, for example, in Australia they have similar legislation. There’s plenty of law there which shows that the system works. Those who are trading well and trading fairly can get on with their contracting. Those small businesses, certainly, where we’ve heard anecdotes of them being given unfair terms are freed of that, and can get on with the business that they’re engaged with. So I don’t want to spend too long at the outset. Looking forward to questions from all sides of the Chamber about this useful and important piece of law. Thank you, Mr Chair.

Thank you, Mr Chair, and I thank the Minister for his welcoming of questions as I do have a couple. I think when we were on the second reading of this bill we did discuss unconscionable conduct quite a bit and I might come back to that later, but my question actually relates to the expected total value of less than $250,000 in a 12-month period. I think they welcome, coming up with a number, and my question really is around the validity of that number. Is that the total value of the transactions between two parties or is that the expected profit or margin from companies? There is quite a difference. Some companies, of course, have quite a sizable contract between them but with very low margins. The $250,000 sounds a lot, but if it’s a very small margin—let’s say it’s $300,000 worth of transactions between them, or contract, but there’s only a $10,000 or $20,000 profit or something like that. So we’d like some clarity around that from you, Minister, if we could have that.

The $250,000 is the total value of the transactions.

Thank you, Mr Chair. I’m wanting to ask about clause 6, which inserts new sections 7 and 8, and which relates to one of the main provisions in this bill, in so far as it changes the Act, which is around the creation of a new offence of unconscionable conduct. In reading the departmental statements about that, the regulation review of this by the Ministry of Business, Innovation and Employment, and in reading the summary of concerns raised by the Ministry of Justice, it leads me to a couple of questions for the Minister. Because, of course, the principle of any regulation is that it needs to provide, wherever possible, clarity, certainty so that those who are affected by that regulation can know what is required of them in order to comply with it and can go about their business accordingly. It is not good regulation if it is subjective, if those who are having to operate under it aren’t sure how to interpret it, lack clarity about what would or wouldn’t be allowed for by the regulation, and where that regulation creates uncertainty.

So it is of concern to me that the Minister’s own officials, when advising him on these clauses in the bill, said that this was not their preferred option—to create this offence of unconscionable conduct. They, instead, preferred a different option, which was the prohibition of oppressive conduct, and the reason that they, according to the documents released to us, had that preference was that they saw a particular threat of the potential for uncertainty associated with the new offence of unconscionable conduct. They said that they thought there was a risk that prohibiting that kind of conduct could lead to the courts either interpreting the prohibition too narrowly, which is to say that it wouldn’t capture the range of offences that the Minister may or may not have in mind, and of course the reverse is also true: that, where things are ill defined, they may be interpreted too broadly and may end up as a prohibition of a much broader range of conduct than the Minister has in mind.

So my first question to the Minister is why he rejected his officials’ advice here, of not using this offence of prohibiting oppressive conduct rather than the unconscionable conduct. And my second question is around the precise words that are being used here—factors such as “conscience and norms of society” that could be referenced under an unconscionable conduct prohibition. Apparently, that is what has been followed in the Australian case, and I just would like the Minister to clarify for us why he was happy to leave it so vague as to what this regulation actually contains and why he rejected his officials’ advice on that matter.

Thank you, and I thank the member. These are, in my view, good questions that get to the nub of the important issues in this bill, quite frankly. And the conversations I have had with officials have gone backwards and forwards on this. In the end, the advice shaped by officials that has gone into the Supplementary Order Paper does rest on a belief that, actually, the unconscionable conduct, by not defining it too specifically, is actually, on balance, the best approach. The Australian courts have found a way of interpreting that, looking, as the member says, to the conscience and norms of society for guidance instead of defining too narrowly and risking a piece of legislation that’s stuck in time and no longer fit for purpose in a few years’ time if things change. It’s been preferred to go with a slightly more flexible approach that sets out issues, factors a court can consider when determining whether the conduct is unconscionable, and that includes the following: the relative bargaining power of the parties; whether unfair pressure or tactics were used; and the extent to which the parties acted in good faith. Now, the bill is meant to address serious misconduct that goes beyond what is commercially necessary or appropriate, and by not defining unconscionable conduct, it means that the risk of a narrow definition unduly limiting the circumstances in which the protections could be used is eliminated.

I thank the Minister for addressing that question. I would invite him, if he would, to comment more specifically on why he rejected the alternative option put forward by officials, which was to prohibit oppressive conduct. Because to the point that the Minister has just made, officials advised that the definition of oppressive conduct already has a body of case law associated with it in New Zealand, and to quote the officials, “that appears to strike a suitable balance between prohibiting conduct that is grossly unfair, while not unnecessarily intervening in everyday, reasonable commercial conduct.”, whereas the lane that the Minister has chosen to go down with unconscionable conduct creates this risk of interpretation from the courts. So I’d invite the Minister to comment on that if he would.

Well, the advice that I’ve received on this is that the Australian courts have found their way to putting good case law together that our courts might well look to for understanding unconscionable conduct. And that test there has proven to be a useful one. It retains the flexibility—and obviously we’re wanting to be on the side of consumers and small businesses here, to make sure that they are protected, that the law is not too inflexible to enforce their rights, and to make sure that there are not unfair terms of contract.

I thank the Minister for sharing with the committee his reasoning there. I would invite him to comment on what consideration he gave to advice he received from the Ministry of Justice about this provision, because I understand that that advice raised concerns about the potential offence, because there’s actually a fairly high bar for what unconscionable conduct brings with it. It is not only a civil offence but it is a criminal offence. The Ministry of Justice, as I understand it, specifically raised that the provision could capture an overly broad range of conduct, and their concern was with the significant penalties that individuals would face on conviction. Given the lack of clarity here, it appears that those concerns were elevated.

I also note in particular that the Ministry of Justice raised a concern about the fact that there would not need to be any explicit mens rea element to the offence. Now, I was not one of the many members of Parliament who received a law degree before coming into this House, but I do know enough as a bush lawyer to know that mens rea—this idea of intent—is pretty important, generally, in criminal law. So it does strike me that having a definition of an offence that carries criminal liability but doesn’t require intent to be proven is quite a significant step. I note the Ministry of Justice raising these concerns, and I’d invite the Minister to again address why he rejected the advice on that.

Look, I’ve asked my officials just to put that advice in front of me again so that I can give the member an exact response to the exact advice. But I think I can comfortably speak to the broad point, which is that there is already guidance in our current system which points to grey terms already, so that businesses can identify what might be unfair terms in their contracts. And here we have a situation where, if businesses are trading fairly and are being respectful and fair in their terms, they really do have nothing to hide.

So in terms of a mens rea test, I imagine we’re talking about a pretty high bar here, and I’m expecting that the way this will be interpreted will be to look to see whether the intent is unfair—whether those grey terms have been explored or brought into question. Those who are going nowhere near this really will not be affected by it, of course. This is really only to address the obvious or just unfair terms where they are present in contracts. And we know that the majority of businesses want to trade in a way that is fair, because they rely on the relationships in their business trading. They want to have good outcomes for the people that supply them, as well as the people that consume their products. So what we’re talking about here is protections against those who would deliberately go out of their way, ignoring the advice that’s already available around grey areas, ignoring the law cases that have been interpreted, and would still go ahead and seek to have unfair advantage because of their size or scale in dealing with smaller players in the market.

I thank the Minister for that response. I note that his officials are bringing advice to the table, so perhaps we’ll get a bit more of a discussion of that Ministry of Justice advice and how it’s responded to.

But just a question here, because I think the Minister and I can agree that while unconscionable conduct may exist in one person’s mind, it may not exist in another person’s mind—which is to say that it is subjective—and that does create regulatory risk for individuals and businesses. So has the Minister had mind to what guidance may be published for small businesses? I am sure that the Minister would not want a situation in which small businesses are facing considerable legal risk and uncertainty and are having to take their own legal advice about what may or may not count as unconscionable conduct where they will lack clarity on that, so is there an intention for guidelines to be issued about this, or is this something that will simply develop as a matter of case law over time and, therefore, small businesses can expect to live in a jungle of uncertainty until the courts work this out?

Again, I’d put to the Minister, given the Ministry of Justice concerns and given his officials’ concerns: has he satisfied himself that this isn’t going to impose an unreasonable burden of regulatory uncertainty and cost on small businesses?

I thank the member. Firstly, I’ll address perhaps the second part of her question which she’s just raised, and I’ll come back to the Ministry of Justice concerns, and the officials have duly supplied me with a brief outline of how their concerns have been taken into account.

The “jungle of uncertainty” has a certain poetry to it, but I would say that that’s probably an unfair characterisation. There are already, as I say, the grey areas outlined in the contracts with consumers, so by extending this to business to business, businesses can take some guidance from that existing law and practice that’s already in place. So I don’t think there really is a jungle of uncertainty per se. We do want as much confidence for businesses as possible about the environment they’re in, but I would note again, as I have previously, that this is an on-balance approach, and it allows the flexibility for future situations that haven’t been considered now for the courts to be clear on addressing any unconscionable behaviour based on the norms and expectations of society.

But I come back to the member’s previous point around the Ministry of Justice’s concerns. I might even read this out—it’s very short, the way in which the Ministry of Business, Innovation and Employment has responded to those concerns. It’s noted that, firstly, “parallel civil and criminal remedies are an existing feature of the Act, as well as a range of other commercial legislation;”—so that’s not a new thing—“the level of penalty is consistent with the existing penalties in the Act, and reflects the serious nature of unconscionable conduct; and while there is no explicit ‘mens rea’ element to the offence, unconscionable conduct is inherently conduct in which a level of intent is likely to be necessary for there to be breach of the prohibition.”

I think, actually, in this conversation, the member is drawing out a degree of explicit description that might help businesses that are at the margins of this or that are concerned.

Minister, with regards to this bill, we’re about to pass a bill where there’s no actual definition of the term that is at its very heart. I’ve found it interesting that the financial markets conduct bill actually has a definition of fair trading, yet we can’t seem to come up with a definition of what unconscionable behaviour is. Now, I don’t know what your advisory team is doing, but I’ve just found one in Australia.

As Russell McVeagh says, this is a very serious move which will transform the landscape of consumer law in New Zealand, and this will result in people either going to jail or losing lots of money, and at a practical level there is some doubt whether the Ministry of Business, Innovation and Employment, in its research, actually proved the case that this was actually needed in the first place. Now, with my learned colleagues’ assessment of oppressive behaviour, the famous matrix has been pulled out of the pack of papers, which does show that oppressive behaviour is probably more formed and designed than unconscionable conduct.

Now, with unconscionable conduct, we know that business dealings and consumer dealings—this is effectively a conduct-focused response. Now, with conduct leads to all sorts of anomalies, and leads to all sorts of misinterpretations. We think this bill should go back to the select committee for more work—it’s not too late. We believe that it’s not made it in its current context, and we’d like to get it right because of the implications that it has on New Zealand consumer law.

So the perfect example of this would be to have a regulatory standards bill where this would be filtered through it, and it probably wouldn’t pass the sniff test at all. We believe, at the ACT Party, that the Minister has given his intention to proceed with option 1A, and in relation to that, it’s not much better than doing nothing, or the status quo, which his own advisers have pointed out. So why are we doing it? Option 2 extends the protections to businesses with a value cap of $250,000. We request, at the ACT Party, that this be raised to $450,000, to help the transport industry, where a lot of cases of this nature appear and are defined. So it’s not just a case to just cover the market; it has to actually cover real transactional and commercial law disputes

So we are a bit confounded with regards to why some laws can have a definition. You’re asking us to pass a law which has no definition in the area of law in this country, i.e., consumer law and commerce law, which actually is the most definitive and tightly webbed, knitted together set of laws that we actually have. So we believe that it’s going to lead to relative uncertainty in the courts. We actually know, from the definition of your own matrix, that there is no case law at all at the moment to provide for this, although it is creeping in as a term, but it’s not clearly defined. So we need to go hand-in-hand with New Zealand, take them along with us on those two questions. To conclude, from the ACT Party’s point of view, we’d have liked to support this bill but we can’t, because we can’t get a definition of “unconscionable”, and that cap needs to be raised, because in this day and age, $250,000 is not a huge sum with regards to those disputes. We’d like, potentially, for the Minister to just embrace those two points and see if there’s any common ground. Thank you.

I thank the member for his contribution, and I would note that we may end up agreeing to differ on these points. We are determined to be on the side of consumers and small businesses, and as a Labour Party we are concerned that unfair practices shouldn’t disadvantage those groups. The member be asking for a higher cap, that protecting the interest of bigger businesses, or may have a more liberal approach to what’s fair or unfair. We believe that the majority of businesses want to behave in a fair and ethical way, and they shouldn’t be stiffed by those businesses that want to behave in an unfair way. That is why we’re changing the law.

Thank you, Mr Chair. I wanted to kind of pick up where Damien Smith, the previous speaker prior to the Minister, left off. I too was raising concerns about the transport industry in particular, but lots of other industries, I suspect, where the transaction value may exceed $250,000. I think what we are, essentially, talking about here is a solution to a problem of what will in some cases be buyer’s remorse. That is a grey area, and the unconscionable conduct clause or definition, while it is being claimed as widely accepted in the legal fraternity, the reality is that what we are actually talking about here is someone who doesn’t feel they’ve got a good deal.

Now, no one in this House, I think, would stand on the side of people who indulge in unfair business practices or unfair terms of a contract. However, that is incredibly difficult, at the margins, to actually define, and that is why we are in the situation that we are in. So, I think, what we have here, in part, is a well-intentioned solution looking for a problem, in some respects.

But I want to focus particularly on the Supplementary Order Paper No 39, on clause 7, replacing new section 26D(2). I think this really comes back to the whole $250,000 question, because under replacement section 26D(2) it says, “Trading relationship, in relation to a contract, means a relationship consisting of—(a) that contract; and (b) any other contract (whether current or prospective)”. And what my question would be is: what happens if a dispute arises partway through a contract and it is lower than $250,000? It says here, quite clearly, “whether current or prospective”. And various actions along the way in the contract trigger further an expansion of that current contract, and it ends up being $252,000 or $300,000 worth of transactions that therefore falls outside of this bill. What happens then to that particular action? Does it fall over because it then falls outside of the bill? And there will be no case law, of course, to fall back on. If the prospective amount of the contract exceeds $250,000, do you not even get past the first base if you have an issue and an issue arises?

I can think of lots of instances. The previous speaker mentioned transport, for example. It could be a $400,000 contract if all of the prospective agreements go through, but we could be partway through the year, say, or the length of that contract and a dispute arises, they start to trigger this action at $200,000, say, and then we continue on and, because of the contract, the business has to continue, the contract exceeds $250,000, then the whole thing falls over.

I’d like a lengthy and fulsome response from the Minister, please, rather than a yes or a no. I want to actually know how this is going to work, because this is so nebulous, this bill, quite frankly. We need something on the record that we can all sheet home in the future, when this comes up in court. Thank you.

I just want to pick up on something that the member Damien Smith raised before, because I think I misinterpreted something he said, and I do want to apologise to the member. He was suggesting raising the cap to have a wider cover for unfair contract terms. I think he was disagreeing with the definition that we were putting forward, but actually suggesting a wider group, if I understand him correctly—and, if that is the case, I do apologise to the member because it is a slightly more nuanced argument that he was making.

But to come to Stuart Smith’s point, larger strategic contracts would be subject to due diligence, so if the contract goes to a larger amount, then it is treated in the way of a larger commercial contract, and those protections would not necessarily apply in the same way.

I, firstly, wanted to thank the Minister for being here and being able to answer the questions. I’ve got two specific questions, building on those that my colleagues have raised, and I guess the first relates to this law. We’ve talked a lot around the unconscionable conduct aspect and the fact that the definition is not there. So I guess the question I’ve got is: is this, in effect, a symbolic law? Is this, in effect, going to be unenforceable? And I guess, to that concern, I’d like to know from the Minister what, if any, advice has he received, particularly from Crown Law, around the actual ability for this law to actually proceed through the court system and for someone to actually be found guilty or not guilty under this area.

The second question I’ve got, Minister, relates to the cost implications of such changes of legislation on our small-business community. Obviously, when we’re implementing a law such as this, which has, in effect, an undefined aspect to it—you know, there’s a lot of unknowns that our businesses will have to work through in terms of that and considerations, advisers, etc. So what I’m interested in, from the Minister, is if he could give us a little bit of comfort around the consultation or the advice around the impact on our business community. Because I do cite my understanding that Business New Zealand are opposed to this legislation, and they represent a significant element of that community. I guess I’m looking for a degree of substantiation around where the Minister sees the advice that balances out the fact that our largest representative of our business community is against this legislation. Thank you, Minister.

To address the member’s point around unconscionable conduct—will it be unenforceable—no. Of course it will be enforceable. The Australians have a similar set-up and there’s some expectations, some principles—we already covered this off in the debate—that point to the kinds of factors a court would be considering when it’s determining whether conduct is unconscionable. That includes—just for the member’s benefit—the relative bargaining power of the parties, whether unfair pressure or tactics were used, and the extent to which the parties acted in good faith. So there are some bits of guidance already in place around that. Of course, where there’s contracts in place for consumer contracts with consumers, there’s some good understanding around the law already in that respect.

The member had another question around perhaps costs on business. I think, arguably for those businesses caught up in this arrangement, it will lower their due diligence costs and so on, because they’ll be able to expect that the people they’re dealing with are acting fairly and that they can be prosecuted in a court of law. So, you know, that may, in fact, reduce business costs in many cases for those smaller contracts, because there is an expectation that people will be dealt fairly with. They won’t have to be reading the fine print on every part of the commercial contracts. So it may well lower costs in that respect.

Thank you, Madam Chair, and thank you, Minister—you’re giving a good go at these questions, anyway. But I want to go a little bit further on the contract and the $250,000, because I think it’s a really important point. So I want you to imagine for a moment that there are contingencies in a contract and the contract is less than $250,000 and the contingencies actually take it over $250,000 at a later date. What happens then? Similarly, what happens if there are penalties in a contract? We all know there are significant penalties in contracts when certain clauses in the contract are not met, and that happens particularly in the building industry, lots of our other industries as well, and they could easily imagine the contract blowing out over the $250,000. I appreciate there’ll have to be an arbitrary number, but I go back to the point that was made earlier when I first arose in this debate that actually a lot of business is carried out with very large transaction costs but very low actual margins and while $250,000 might sound like a lot of money, it could be a very small margin.

I’m not sure how this number was arrived at and I’m not sure there is a really good number. I don’t have a suggestion, although I think $250,000 is too low, but it wouldn’t matter what the number is, you’re always going to have the possibility—well, not you, Madam Chair, but we all can imagine a scenario where a contract with contingencies or with penalties blows out over the $250,000 after a claim has been made. I think, particularly if it’s something in dispute in the building industry, that is most likely to occur. So I would like to know what has been—what evidence did the officials look at to deal with this? What advice did the Minister get on this particular subject—both the penalties and contingencies can be quite different—so I really look forward to hearing your response.

The contract value threshold is based on an expected annual value at the outset of the contract and I expect—the member, when he described contingencies said, you know, build in contingencies because you expect them to go over. In that case, you’d expect that to be the number that’s used, so there’d be reasonable case law around this.

I guess the other thing is if there’s some debate about whether it’s going to go over or under, companies might consider not putting unfair terms in, just to avoid the benefit of doubt.

Well, actually, Minister, that’s not correct because the contract could be worth $180,000 and the penalties could be blown out over $250,000 if the supplier didn’t meet certain criteria. If the building fell over, for example—if it is a building—I don’t know what the scenario would be. But it’s quite a common thing for these sorts of things to happen. I’m not talking about the cost blowing out; I’m talking about a penalty clause coming in to action because of some unforeseen thing which may not have anything to do with the disputed payment in the first place or the dispute over payment in the first place.

I think these are really important things that happen all the time in business and it sounds very much like this has not been thought through. This will be, I would wager, the first major case that will come up when something like this occurs and the front-page headline will be how the business that could and should have been able to get redress through the courts can’t because the penalty clause has come in and it’s blown it out over $250,000 and the whole thing falls over. So I respect you had a good go at it, Minister, but it wasn’t quite good enough, so I’ll give you another chance.

I appreciate the member’s faint praise. Look, to be clear, and if he’s talking about penalties per se rather than contingencies, penalties will not count towards the threshold as they are not to be expected.

So I’ll have another go. So if we imagine building a house and there’s a subcontractor that has done the substructures and the builder who’s building the structure above the substructure has a dispute on a contract and then the substructure collapses and you get a third party. The penalty clause goes into the builder, it takes the builder over $250,000, and then they are not able to claim under this law. So have another go, Minister, because I think you’ve missed the point and it seems like this is why we need a much more fulsome process to get these things through because clearly this hasn’t been teased out in the select committee process. So I think there’s a lot more thought needs to go into this because this will turn into a shoddy bit of law and we’ll end up with people being significantly disadvantaged from it. Exactly the people this bill seeks to serve will be the ones that are served very badly by it. So I think a lot more thought needs to go into this.

Thank you, Madam Chair. I clearly have a great deal more respect for the member’s colleagues than he does, given that the National Party held the balance of power on the committee that dealt with this bill over the normal period that one would expect to deal with a bill, and a departmental report was produced and considered by members, and I consider that the advice that they passed through to be quite good. Now, I’ll leave that for the member to discuss with his own colleagues if he thinks they’ve done a shoddy job in that select committee process such as it was. I actually think the outcome and the advice that’s come through from officials to be pretty sound and I can spell it out again for the member that penalties will not count towards the threshold as they would not have been expected.

It didn’t get to this stage so I think that speaks for itself.

The question is that the Minister’s amendments to Part 1 set out on Supplementary Order Paper 39 be agreed to.