Fair Trading Act: Protections against misleading or unfair trading
What does the Fair Trading Act do?
The Fair Trading Act 1986 protects consumers by prohibiting traders from:
- behaving in a way that is misleading or deceptive,
- making false, misleading, or unproven (“unsubstantiated”) statements, and
- behaving in any way that is considered an unfair trading practice.
Can someone decide that the Fair Trading Act doesn’t apply?
No. The rules in the Fair Trading Act apply regardless of what the trader tells you or what’s in the contract. A trader can’t decide that the Act doesn’t apply to them, or ask you to sign a contract saying that the Act doesn’t apply (sometimes called “contracting out”).
However, you and the trader can agree to terms that go above and beyond the protections in the Fair Trading Act. In other words, the protections in the Act are a default – you can’t agree to worse or fewer protections, but you can agree to have more or better protections, and that will be legally enforceable.
Types of misleading or unfair practices that are prohibited
What is considered misleading or deceptive conduct?
Traders can’t behave in a way that is (or is likely to) mislead or deceive. This includes not misleading the public about:
- the nature, manufacturing process, characteristics, suitability for a purpose, or quantity of goods, and/or
- the nature, characteristics, suitability for a purpose, or quantity of services.
What’s considered a false or misleading representation or statement?
Traders must not make false or misleading representations or statements about goods or services.
A representation can include an impression given in pictures, advertisements, or other promotional material, or a statement made over the phone. A trader can make a false or misleading representation by leaving out information, as well as by stating things that aren’t true – for example, a false or misleading representation that:
- goods are of a particular kind, standard, quality, quantity, style, or model, or that they have had a particular history or particular previous use (for example, if a bag is advertised as being made of leather when it is actually vinyl)
- services are of a particular kind, standard, quality, or quantity, or that they are supplied by any particular person or by a person of a particular trade, qualification, or skill or with other particular characteristics
- a particular person has agreed to acquire goods or services (for example, that Lydia Ko owns a particular brand of golf clubs)
- the goods or services were made or manufactured in a particular place (for example, if goods made overseas are labelled as “made in New Zealand”)
- hides or lies about the true price of the goods, for example:
- if goods are advertised as “was $100, now $75” when the trader’s normal price is $75
- if you weren’t told about hidden or additional costs, such as connection fees on cell phones, or postage and packaging for mail-order goods
- if the trader places a bid at their own auction (unless it’s made clear the bid is from the trader and the bid is placed before any reserve price is reached). This rule applies to all auctions, whether for land, goods or services.
- the goods or services are needed for a particular reason
- the warrantee or guarantee provides certain protections.
What’s considered an unsubstantiated representation?
Traders must not make claims about goods or services if they don’t have reasonable grounds to believe they are true at the time – even if their claims later turn out to be true. For example, a trader can’t claim that a ‘health drink’ will improve brain function if they currently have no evidence to support this, even if later studies prove it.
This rule doesn’t apply if a reasonable person wouldn’t expect the representation to be actually proven to be true. For example, a reasonable person would not expect that a claim that a beauty product would make you “irresistible to romantic partners” is true.
When deciding whether a trader had reasonable grounds for a representation, a court has to take into account a number of factors, for example:
- the nature of the goods or services
- the nature of the representation (for example, whether it was about quantity or quality)
- any research the trader did
- any information they relied on
- the effect of the representation on you, the consumer.
What’s considered unconscionable conduct?
Unconscionable conduct is behaviour that is unfair, unethical, or takes advantage of someone. The Fair Trading Act prohibits traders from behaving unconscionably – for example, if a trader purposefully takes advantage of a language barrier or unfairly forces someone into a sale.
It is hard to define when exactly conduct will be unconscionable, but the court might look at factors including:
- the bargaining power between the buyer and trader and whether one person was disadvantaged
- whether people acted honestly and good faith
- whether the trader used unfair pressure or tactics
- the particular characteristics of the buyer and trader, like a person’s age or ability to understand the agreement.
What’s considered unfair trading practices?
Traders must not engage in unfair practices. Unfair practices include:
- offering prizes or gifts without intending to supply them, or not supplying them as offered
- bait advertising – this is when a trader advertises particular goods or services at a particular price, but doesn’t intend to sell reasonable quantities at that price for a reasonable period of time
- referral selling – this means convincing you to buy a product or service by saying that you will get a reward each time you sign someone else up to buy the product or service (for example, signing you up to a subscription for monthly boxes of goods and telling you that you’ll earn $1,000 for every person you also sign up)
- accepting payment without intending to supply the goods or services, or when intending to supply different goods or services from those ordered
- making misleading claims about the profitability or risks of certain business activities
- using physical force, harassment or coercion to pressure consumers
- importing goods with inaccurate labels on them
- pyramid selling schemes (explained below).
Pyramid selling schemes
Pyramid schemes are illegal. With a “pyramid selling scheme” you pay a fee to join, with the promise of earning money through recruiting more people. Although these schemes usually involve some kind of product or service (like a personal help programme), the main way of earning money is in fact through recruiting new fee-paying members, rather than through selling the product or service.
If you join one of these schemes you’re unlikely to earn your joining fee back again. To put this in perspective, if a pyramid scheme starts with four people, and each person recruits another four people, by the 13th round of recruitment, there would have to be more than 7 billion people involved.
Multi-level marketing companies are similar to pyramid selling schemes, but are legal. With multi-level marketing schemes, salespeople are expected to sell products directly to consumers and are separately incentivised to recruit others. Multi-level marketing companies claim that their members primarily earn money from selling products, rather than primarily via recruitment. If you’re not sure if an opportunity is a pyramid scheme, you should consider requesting financial information about members’ average incomes, and how much of that income is made up of product sales vs. recruitment incentives.
You can read more about the difference between multi-level marketing companies and pyramid selling schemes on the Commerce Commission’s website, here (or go to: www.comcom.govt.nz and search: “Pyramid schemes”).
Unfair terms in standard form consumer contracts
In general, a “standard form” consumer contract is one that a business has prepared in advance for all its contracts of that type. Using a standard form gives the business all or most of the bargaining power, because there’s no chance to negotiate about the terms of the contract.
The Commerce Commission can apply to the courts for a declaration that a particular term in a standard form consumer contract is unfair. After the court has decided that a term is unfair, no business can include the term in a standard form contract or enforce it.
A business’s standard form term will be “unfair” if it meets all three of the following conditions:
- it would cause a significant imbalance under the contract in favour of the business, and
- the term isn’t reasonably necessary to protect the business’s legitimate interests, and
- it would cause the consumer some financial or other kind of harm (“detriment”).
The Fair Trading Act gives some examples of terms that could be unfair. These include terms that allow the business but not the consumer to terminate the contract, or that allow the business but not the consumer to change the contract’s terms, or that penalise the consumer but not the business for breaching the contract.
Note: When these provisions came into force in March 2015, the Commerce Commission said it would be targeting standard form contracts in the telecommunications, fitness, airline, rental car and online-trading sectors, as well as standard form loan contracts. It said it would pay particularly close attention to terms that limit competition, such as automatic “rollover” or renewal terms, or terms that lock consumers into contracts. The Commission has also published a set of “Unfair Contract Terms Guidelines”, here (or go to: www.comcom.govt.nz and search “Unfair contract terms guidelines”).