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Communtity Law Manual | Consumer protection | Types of misleading or unfair practices that are prohibited

Protections against misleading or unfair trading

Types of misleading or unfair practices that are prohibited

Misleading or deceptive conduct

Fair Trading Act 1986, ss 9–12

Traders must not engage in misleading or deceptive conduct or conduct that 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
  • the nature, characteristics, suitability for a purpose, or quantity of services.

False or misleading representations

Fair Trading Act 1986, ss 13–16

Traders must not make false or misleading representations about goods or services. A representation may include an impression given in pictures, advertisements, or other promotional material, or a statement made over the phone. False or misleading representations can include:

  • 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).
  • A false or misleading representation that 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 false or misleading representation that a particular person has agreed to acquire goods or services (for example, that Lydia Ko owns a particular brand of golf clubs).
  • A false or misleading representation about the place of origin of goods or services (for example, if goods made overseas are labelled as “made in New Zealand”).
  • A false or misleading representation about price – for example:
    • if goods are advertised as “was $100, now $75” when the seller’s normal price is $75
    • when hidden or additional costs are not disclosed, such as connection fees on cell phones, or postage and packaging for mail-order goods
    • when the seller at an auction places a bid, unless it’s made clear the bid is from the seller and the bid is placed before any reserve price is reached (this rule applies to all auctions, whether for land, goods or services).
  • A false or misleading representation about the need for goods or services.
  • A false or misleading representation about the effect of a warranty or guarantee (including any guarantee under the Consumer Guarantees Act).

False representations may be made by leaving out important information as well as by stating things that aren’t true.

Making unfounded claims (“Unsubstantiated representations”)

Fair Trading Act 1986, ss 12A, 12B

Traders must not make claims about goods or services if they don’t have reasonable grounds to believe they are true at the time. This rule applies even if the “representation” does turn out to be true and not misleading. However, the rule doesn’t apply if a reasonable person wouldn’t expect the representation to be actually proven to be true.

When deciding whether a trader had reasonable grounds for a representation, a court has to take into account a number of factors, including, 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, and the effect of the representation on you, the consumer.

Specific unfair practices that are prohibited

Fair Trading Act 1986, ss 17–26

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 seller advertises particular goods or services at a particular price and doesn’t intend selling 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 receive a reward only if you provide the names of other buyers, and only if they buy (for example, signing you up for a two-year membership by promising that you’ll get a week free for every person you refer who also signs 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

With a “pyramid selling scheme” you pay a substantial 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, because the market for potential members is simply too small – that’s why they’re basically a scam and therefore illegal.

Unfair terms in standard form consumer contracts

Fair Trading Act 1986, ss 26A, 46H-46M

In general, a “standard form” consumer contract is one that a business has prepared in advance for all its contracts of that type. Using such a form gives the business all or most of the bargaining power, so that there’s no negotiation between the two sides about the contract’s terms.

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
  • 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 new 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”:

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