Legal update - Consumer Law reform - Tranche two

30 June 2014

The second tranche of major consumer law changes came into force yesterday (17 June 2014).

The changes include:

  • New rules for contracting out of the Fair Trading Act and the Consumer Guarantees Act

  • A new prohibition on making unsubstantiated representations

  • New disclosure rules for extended warranties

  • A new delivery guarantee

  • Changes to the guarantee of acceptable quality, generally and for the gas and electricity sectors specifically

  • Broadening the application of the Consumer Guarantees Act to include auctions, and new rules for the conduct of auctions. The rules for auctions now include traders who sell goods or services over the internet

  • Modernisation of the regulation of door-to-door sales, unsolicited goods and services, and layby sales.

Business-to-business contracting out

The Fair Trading Act has been amended to specifically provide for businesses to contract out of some Fair Trading Act obligations in their relationships with other businesses (see new section 5D). The change is not intended to be a radical departure from the common law position, but it adds an important restriction:  the parties will only be bound by the contracting out provision if it is fair and reasonable for them to be bound.

The obligations that may be contracted out of are limited to section 9 (misleading and deceptive conduct), section 12A (unsubstantiated representations), section 13 (false or misleading representations) and section 14(1) (false representations and other conduct in relation to land).

Contracting out only regulates the position as between the contracting parties. Further, the contracting out provisions do not allow contracting out of liability under sections 10 and 11, which relate to representations liable to mislead the public.

This is important: the Commerce Commission may still investigate conduct and apply to the Court for fines to be imposed and, in theory, the Court may order a refund of money, or award damages.  This means that, even if the contracting out was fair and reasonable in the circumstances, thereby minimising the risk that the parties to the contract will take action against each other, the threat of Commerce Commission action remains.

The Consumer Guarantees Act has provided for contracting out in business-to-business transactions for some time. However, a "fair and reasonable" test has been added, to align with the new Fair Trading Act provision.

Factors relevant to whether contracting out of each Act as part of an agreement is "fair and reasonable" include:

  • The subject matter of the agreement

  • The value of the goods, services, interest in land, gas or electricity

  • Each party's relative bargaining power. This includes each party's ability to negotiate the terms of the agreement, and whether one party was required to accept or reject the terms of the agreement presented by the other party

  • Whether the parties to the agreement received legal advice.

Prohibition on unsubstantiated representations

The Fair Trading Act now includes a prohibition on making unsubstantiated representations (see new section 12A). This means that businesses must be able to back up any claim that they make about goods, services, or interests in land, at the time that they make the claim.  The fact that a claim may turn out to be true will not save a business from breaching the new provision.

A representation is "unsubstantiated" if the person who makes the representation does not have "reasonable grounds" to make the representation when they make it. In broad terms, "reasonable grounds" can come from:

  • Information provided by reputable suppliers or manufacturers

  • Information held by the business making the claim

  • Any other reasonable source, such as scientific or medical journals.

Businesses can still engage in "puffery" – the practice where as part of its advertising, a business makes claims so sensational that the audience knows that they are not true. This is because the prohibition does not apply to representations that a reasonable person would not expect to be substantiated.

For most businesses, checking that claims are able to be substantiated is standard practice.

For the Commerce Commission, which has faced difficulties in the past in establishing that a representation is false or misleading, the new prohibition will be an important weapon in its enforcement arsenal – perhaps one that justifies the Commission's submission to the select committee that the unsubstantiated representations prohibition was the most important provision in the Consumer Law Reform Bill.

Only the Commerce Commission can enforce the unsubstantiated representations prohibition.

Extended warranties

Businesses that offer extended warranties must now comply with a new disclosure regime under the Fair Trading Act. An agreement for an extended warranty must be in writing.  The first page of an extended warranty agreement must set out:

  • The warrantor's name, street address, telephone number and email address

  • A comparison between the protections in the extended warranty agreement and the protections that are already provided to the consumer by the Consumer Guarantees Act, and a summary of the consumer's rights and remedies under the Consumer Guarantees Act

  • The consumer's rights to cancel the extended warranty agreement, including the consumer's right to cancel the agreement within the five working day "cooling off" period.

Aside from the rather optimistic suggestion that required disclosure information has to be contained on the first page of an agreement, the new provisions will no doubt add additional rigour to the sales of extended warranty products – and give rise to new Fair Trading Act risks if the Consumer Guarantees Act guarantees are inaccurately described.

Delivery of goods

The Consumer Guarantees Act now includes a guarantee as to delivery times.  If a supplier is responsible for delivering goods to a consumer, or arranging for goods to be delivered to a consumer, the supplier guarantees that the delivery will take place at or within the time that the supplier and consumer agree.  If the supplier and consumer do not agree on a delivery time or time period, the supplier guarantees that the delivery will take place within a reasonable time.

If the supplier does not satisfy the guarantee, the consumer has the right to damages for any foreseeable loss or damage that results from the failure. If the supplier's failure to satisfy the guarantee is of a substantial character, the consumer can reject the goods.

Guarantee of acceptable quality

Under the Consumer Guarantees Act, goods supplied to a consumer must be of an acceptable quality. The standard for "acceptable quality" is further clarified, so that the nature of the supplier and the context in which the goods are supplied to the consumer are relevant.  This change should help ensure that the "acceptable quality" standard is better tailored to the particular circumstances.  It is also important because goods sold at auctions can be covered by the Consumer Guarantees Act, as discussed below.

New regime for gas and electricity

The Consumer Guarantees Act now includes a separate guarantee of acceptable quality for gas and electricity supplied to a consumer.

If gas or electricity is not of acceptable quality, a consumer will have a remedy against their retailer. However, if the failure to supply gas or electricity of acceptable quality is associated with an issue on a lines network (distribution or transmission), the retailer is entitled to be indemnified by the relevant lines network owner for any remedy costs paid by the retailer to the consumer.

Auctions and internet sales

The definition of "auction" is modernised, to include auctions that take place on the internet, on the phone, or by any other means.

Before this week, goods sold in auctions or by competitive tender were exempt from the Consumer Guarantees Act. This exemption is repealed.  However, there is some scope to contract out of the Consumer Guarantees Act for certain business-to-business sales that take place at an auction.

If the vendor of an auction is selling goods that consumers usually acquire for personal, domestic or household purposes, and the vendor is selling those goods in trade as a supplier, the notice must include that information.

Auctioneers have new disclosure obligations under the Fair Trading Act. A notice setting out the terms of an auction must be readily available to view by all participants or potential participants of an auction, before and during the auction.  For auctions that are attended by participants in person, the terms of an auction must be displayed by a notice at the auction itself.  For auctions that are not attended in person, the terms of an auction must be on a readily accessible website.

Other – door to door sales, layby sales and unsolicited goods and services

The Door to Door Sales Act, Unsolicited Goods and Services Act and the Layby Sales Act have all been repealed, and regulation of such transactions has been brought into the 21st century with new provisions included in the Fair Trading Act.