FAIR TRADING ACT (1986)

If you are in business, it is important that you understand how the Fair Trading Act (1986) affects your day-to-day operations.

The Act applies to all aspects of the promotion and sale of goods and services - from advertising and pricing to sales techniques and finance agreements.

This document aims to provide guidance on how to operate your business without breaking the law. It gives examples of unlawful trade practices, which breach the Act, and explains the role of the Commerce Commission in enforcing the Act and product safety and consumer information standards.

Compliance with the Act benefits consumers. It also protects traders who ensure they comply with the Act. In addition to any action the Commerce Commission might take in relation to a breach, consumers and competitors can take their own legal action against a trader breaching the Act. The document is a guideline only. It is not intended to be definitive, and should not be used instead of legal advice.

The Fair Trading Act
The Fair Trading Act came into force on 1 March 1987, replacing earlier laws relating to misleading and deceptive conduct, unfair trading practices and consumer information.

When making claims about products you manufacture or sell, you must remember that your audience will include some people who are more easily misled than others.

The courts have said the Act is there to protect everyone, including those who may be gullible, of less than average intelligence or poorly educated.

Certain groups, by reason of language difficulties, age or lack of education, may be susceptible to being misled or deceived. If your customers include such people, you must take this into account and be especially careful when preparing your advertising. The Fair Trading Act:

• Prohibits people in trade from engaging in misleading or deceptive conduct generally (section 9)
• Prohibits certain types off false or misleading representations about employment (section 12), goods or services, including false claims that goods or services are of a particular price, standard, quality, origin or history, or that they have particular uses or benefits or that they have a particular endorsement or approval (section 13)
• Prohibits certain unfair trading practices (sections 17 to 24)
• Provides for consumer information & product safety standards (sections 27 to 33).

In practice, if you are found to have breached the Fair Trading Act, it is likely you have breached both the misleading and deceptive conduct provisions and the false or misleading representations provisions of the Act. You can therefore face both criminal and civil actions.

Important points to note about the Act are:

• It protects both consumers and law-abiding traders
• In most cases it is not relevant whether a trader intended to deceive or mislead, rather the issue is whether their actions did or could deceive or mislead
• it does not need someone to suffer or be directly affected by the trader's behaviour for action to be taken, as the Act applies not only to conduct which has actually misled or deceived somebody, but also to conduct likely to mislead or deceive
• Both companies and individuals can be prosecuted for breaching the Act. Where a company acts unlawfully, the directors, managers and employees can be held liable. Anyone else who aided and abetted the offending conduct may also be held liable. This includes, for example, advertising agents who design and prepare misleading or deceptive advertisements for their clients, or wholesalers and retailers who sell misleadingly or deceptively labeled goods

False or Misleading Advertising

• Availability of goods advertised - you should not advertise goods or services, which you know you cannot or may not be able to supply.

• Comparative advertising - promoting goods and services by comparing them to competing products and services is now a common and accepted method of advertising. However, as with all advertising, comparative advertising must not mislead or deceive. The comparisons made must be accurate, and must be of "like" products or services available in the same market.

• Description of goods - any description of goods must be accurate to avoid breaching the Fair Trading Act. This includes any description made in promotional material, invoices, in advertisements or by staff.

• Employment advertisements - the Fair Trading Act specifically prohibits anyone from misleading or deceiving others about the availability, nature, terms or conditions, or any other matter relating to a job opportunity.

• Fine print - many advertisements include fine print sections containing details of conditions and qualifications. However, you must not use fine print to conceal important information, which would be critical to people's decision to buy your goods or services. Fine print cannot be used to modify a claim made in the "big print" or headline.
  
  If the overall impression given by an advertisement is misleading, information contained in fine print may not save you from prosecution for breaching the Act. If there are important conditions on a sale, or on other transactions such as finance agreements, these should be shown in a bold, clear and compelling way in the advertisement. "Special Conditions Apply" does not protect you when the conditions are inconsistent with or modify the main message.

Fine print is also often used in contracts. In a number of cases, courts have decided that you cannot rely on fine print conditions in a contract if you previously made false or misleading statements to encourage the signing of the contract. You should also take care that fine print in your contracts does not conflict with any statutory obligations. In particular, you should not attempt to limit a consumer's rights under the Consumer Guarantees Act.

• Pictorial representations - it is possible to mislead or deceive customers - and therefore breach the Act - with pictures as well as with words.

You must ensure that any illustrations used in your advertisements relate specifically to the goods being promoted. The picture in the advertisement must not be, for example, of a more popular or expensive model. Similarly, any pictures used on packaging must show the exact product contained inside.

If the product illustrated is different from the one offered, fine-print explanations are unlikely to prevent people being misled. In that case, the picture or illustration would be likely to breach the Act.


• Puffery - the Fair Trading Act does not prohibit "puffery" - exaggerations which are so obvious that they are unlikely to mislead anyone. Humorous and imaginative advertisements often use this technique. Examples are a claim that a product is "the best looking" or a car driving up a wall. Such statements reflect personal opinions, and no objective test can be used to determine their truth or otherwise, or are obvious exaggerations.
  
  You should, however, be careful when using exaggerated statements. Representations and claims that appear to relate to facts rather than opinion, particularly regarding quality and price, may break the law if they cannot be substantiated. Claims that a product is "the best", "the fastest" or "the most economical" would not be mere puffery if the product was substandard or a second.
  
  Where a claim is solely an expression of opinion, it is probably puffery and unlikely to contravene the Act. The more factual or seemingly factual (and therefore the more capable of being proved or disproved) a claim is, the more likely it is to be a representation, which if misleading or deceptive, could break the law.
  
  You should also bear in mind the sophistication or otherwise of your target audience when making exaggerated claims which seem to be obvious puffery.
  
  
• Claims about qualifications and skills - any claims, which you, as a trader, make about qualifications or skills you or your employees, possess, must be truthful and accurate.
  
  Do not claim membership or approval of trade organisations unless your membership has been approved. Do not base such claims on pending applications.
  
  Do not claim the endorsement of fictitious or disbanded bodies.
  
  
• Sponsorships and endorsements - to promote your product or services, you may decide to seek an endorsement from a prominent person or organisation.
  
  
The Fair Trading Act prohibits false claims that a product or service has the support or endorsement of any person or group.

If you claim that someone uses your product, this claim must be true. It must also be current; such a claim would be false if that person had stopped using the product.

Any claims made by someone endorsing your product or service must be true.

False or Misleading Representations About Price
Price is usually a major factor in a customer's decision to buy, and false or misleading representations about the price of goods and services are prohibited by section 13(g) of the Fair Trading Act.

Under the Act, the definition of the "price" offered by a trader is not limited to that stated in advertising. It can also include special concessions, bonuses or deals which in some way affect the actual and final price a buyer pays for goods or services.

• Goods and Services Tax (GST) - when consumers see advertised prices for goods or services, they are entitled to assume that those prices are final and, therefore, include GST.

• If GST is not included in the price quoted, this must be made clear so as not to mislead buyers. The statement "excluding GST', or similar, must be prominent and be close to the prices shown in the advertisement. A small- print statement in a far comer of the advertisement is unlikely to prevent customers being misled. It is misleading to compare GST inclusive price with a GST exclusive price as this may give a false impression of savings.

• Hidden or additional costs - you must clearly disclose all costs, which affect the true cost to the buyer of goods or services at the time an offer or representation is made.
  
  Hidden or additional costs, which buyers will incur as a result of a purchase, must be included. These would include legal fees, administration charges, postage and packaging of mail order or similar goods, essential parts, and so on.

• Quotes and estimates - you must take great care not to mislead potential customers when giving quotes and estimates. When you quote a price to customers, they must be able to rely on that figure. It is on the basis of your quote that they may decide whether to purchase your goods or services.The Fair Trading Act makes no distinction between an oral quote and a written quote. A quote is an offer to do a job for a certain price. If accepted, then the work must be done for that price, unless the parties agree to a change in the price to cover extra work not covered by the original quote.
  
  An estimate is the nearest price, or range of prices, that you can give based on your past experience. In terms of good business practice, estimates should not vary from the final cost by more than 10 percent. It is also good business practice to put quotes and estimates in writing, and any charge for giving a quote or estimate should be disclosed before agreeing to provide it.
  
  It is possible under the Fair Trading Act for estimates and quotes to be false or misleading. If you have any doubts about your ability to do the work or provide the goods for the price, you must make this very clear to the customer. All limits and conditions must be clearly spelled out.
  
  Estimates or quotes should be given carefully. An Australian court ruled, under legislation very similar to the Fair Trading Act, that a trader who gave an inaccurate oral estimate, which proved to be too low, was guilty of deceptive and misleading conduct.

Debt Collecting
There will be times when customers do not pay on time for the goods or services you provide. When you, or a collection agency you have employed, seek to recover debts, you must take care to comply with the law.

You should not seek any collection or late-payment fees on top of the original debt unless the debtor was made aware before incurring the debt that they may face such charges. If the debtor was not warned that, in the event of non-payment, they would have to pay extra charges, any attempt to make them believe they have to pay additional collection and late-payment fees would be misleading.

If costs are demanded in a misleading way by a debt collector acting on your behalf, you may be responsible.

If you wish to recover additional costs from your customers when they do not pay for the goods or services you have provided, you could inform them of this by placing large notices in your office or shop, by providing written notice of your terms of trade and by having customers endorse cheques agreeing liability for collection costs.

If debtors still do not pay their debts, you are entitled to take legal action to recover the debt and any other costs, such as collection and late-payment fees, which relate to the non-payment of the debt. It is up to the court to decide whether to order the payment of such costs, or any other penalties, and the debtor has the right to challenge your claim before the court. You should, therefore, take care that in your warnings to debtors you do not represent the possible legal consequences of non-payment as inevitable.

Debt collection documents must not mimic court or other official notices or orders.

Consequences of Contravention
The Commerce Commission, or anyone else, can take court action under the Act. Legal proceedings must begin within three years of the alleged breach occurring.

Civil proceedings under the Act can take place in the High Court, the District Court or the Disputes Tribunal, depending on the type of order sought and the amount of the claim. Criminal proceedings are taken in the District Court.

Criminal court action may result in fines of up to $30,000 for an individual and $100,000 for a company. Frequently the Commission will prosecute both a company and the individuals involved in a breach. They may also face the costs of adverse publicity and lost sales, as well as of defending themselves in court.

Anyone can apply to the High Court for an injunction to stop the Act being breached. The court can grant injunctions to stop activities that traders are currently engaged in, or are likely to engage in. Where prompt intervention is necessary to minimise damage caused by unlawful conduct, the court may order an interim injunction pending a full hearing of the case.

The Commerce Commission also has the right to apply to the High Court for corrective advertising orders.

Defenses
Traders are obliged to comply with the Fair Trading Act and not conduct business in a false, misleading or deceptive way.

However, section 44 of the Act provides some general defenses to criminal actions taken under the Act.

These defenses are that:

• The contravention was due to a "reasonable mistake". To prove a reasonable mistake, it is necessary to show there was an intention to act correctly. This means some system of checking, such as a compliance programme, should have been in place to detect errors.
• The contravention occurred because the trader "reasonably relied" on information from another person (other than their employee or agent). The person reasonably relied on must be someone outside the control of the defendant
• The contravention was caused by an "accident" outside the trader's control, or was caused by the actions of a third party (not an employee or agent), and reasonable and diligent steps were taken to avoid the contravention. The accident must be one, which could not have been avoided if reasonable precautions were taken that is, if the defendant had been diligent. In one instance, the court found that because a shopper had moved a can of soup to a different place on a shelf, the resulting incorrect shelf pricing of the can was due to an accident beyond the defendant's control.

Role of the Commerce Commission
The Commission's role is to bring about awareness and acceptance of, and compliance with the Fair Trading Act so that producers and consumers benefit from healthy competition. The Commission does this by providing information about the provisions of the Act and, where necessary, taking action against traders who break the law.

Other Links:

• Citizen's Advice Bureau
• Consumer's Institute of New Zealand
• Consumer Guarantees Act
• Disputes Tribunal