Fair Trade Act
MBAZ605 Business Law (2025 S2)
Commercial Transactions
Commercial transactions encompass the legal framework governing sales, financing, and various business activities. These laws establish the rights and obligations of parties involved in trade, aiming to facilitate commerce efficiently while ensuring fairness and protecting all participants. This area of law is critical for the smooth functioning of markets and economic exchanges.
Fair Trading Act 1986
The Fair Trading Act 1986 (FTA) is a pivotal piece of legislation in New Zealand designed to prevent unfair trading practices, ensure a competitive market, and protect consumers. It forms the backbone of consumer protection law, prohibiting misleading and deceptive conduct, false representations, and certain unfair practices in trade.Classification: In-Confidence
Understanding Commercial Law
Commercial law is a distinct branch of law that regulates the rights, relationships, and conduct of individuals and businesses engaged in commercial activities, including merchandising, trade, and sales. Its broad scope covers areas such as contracts, company law, intellectual property, competition law, and consumer protection. A thorough understanding of commercial law is essential for businesses to ensure compliance, mitigate legal risks, avoid disputes, and contribute to a fair and transparent trading environment. It underpins virtually all transactions in the private sector.
Reference to relevant chapters.
Classification: In-Confidence
Purpose of the Fair Trading Act 1986 (S 1A)
Section 1A of the Fair Trading Act 1986 succinctly outlines the Act's fundamental purpose: to foster a dynamic and ethical trading environment within New Zealand. This is achieved by focusing on three key objectives:
The purpose of the Act is to contribute to a trading environment which:
(a) Protects consumers' interests: This involves shielding consumers from various forms of harm, including misinformation, fraud, deceptive advertising, and exploitative business practices. The Act ensures consumers can make informed decisions and have recourse when things go wrong.
(b) Ensures effective business competition: By prohibiting anti-competitive behaviors and promoting fair play, the Act encourages a market where businesses compete based on merit, innovation, and pricing, ultimately benefiting consumers through choice and quality.
(c) Encourages confident participation by consumers and businesses: A robust, clear, and fair legal framework builds trust. Consumers feel secure in their transactions, knowing their rights are protected, while businesses can operate with certainty and predictability, fostering economic growth.
To achieve these overarching goals, the Act implements specific strategies:
(a) Prohibits certain unfair conduct and practices in relation to trade: This includes a wide range of activities, from making false claims about products to engaging in bait advertising or pyramid selling schemes. The Act directly criminalizes (in some cases) and provides civil remedies for such conduct.
(b) Promotes fair conduct and practices in relation to trade: Beyond merely stopping unfair acts, the Act actively encourages businesses to adopt ethical standards and transparency in their dealings, fostering a culture of integrity in the marketplace.
(c) Provides for the disclosure of consumer information related to the supply of goods and services: This ensures that consumers receive all necessary and relevant information about products or services, such as specifications, terms, and conditions, enabling them to make well-founded purchasing decisions.
(d) Promotes safety regarding goods and services: The Act includes provisions for product safety standards and information, ensuring that goods and services offered to the public are not only as described but also safe for their intended use, minimizing risks of injury or harm.
Misleading and Deceptive Conduct
Definition: Section 9 of the Fair Trading Act 1986 broadly stipulates: “No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. This provision is extremely wide-reaching. It captures not only conduct that demonstrably misleads but also conduct that has the potential or likelihood to mislead consumers or other businesses. Importantly, intent to deceive is not a prerequisite for a breach of S 9. Even innocent or negligent misrepresentations can fall foul of this section, placing a high standard on parties engaged in trade. The focus is on the effect of the conduct on a reasonable person.
Definition of Trade
Trade is given a very expansive definition under the FTA, meaning “Any trade, business, industry, profession, occupation, activity of commerce, or undertaking relating to the supply of goods or services or to the disposition or acquisition of any interest in land”. This broad scope ensures that virtually all commercial activities, from large corporate dealings to small individual businesses and professional services, are covered by the Act’s provisions. Examples include retail sales, provision of legal advice, real estate transactions, and manufacturing.
Conduct includes representations: This means that any statement, promise, forecast, opinion, or action (or inaction) made by a person 'in trade' that could influence another party is considered 'conduct'. Representations can be verbal, written (e.g., advertisements, contracts), or implied by actions or omissions.
Contracting Out of Section 9
While the FTA is primarily designed for consumer protection, Section 5D allows parties to contract out of Section 9's provisions under specific, stringent conditions, typically in business-to-business arrangements, not consumer contracts. This means businesses can agree to limit or exclude liability for misleading or deceptive conduct between themselves.
Parties can contract out of S 9 if:
The agreement is in writing: Oral agreements are insufficient; clear, documented consent is required.
Both parties are acting in trade: This clause is strictly for commercial parties, not for transactions involving a consumer.
It is fair and reasonable in the circumstances: A court will objectively assess the fairness and reasonableness of the contracting-out agreement. Factors considered include the parties' relative bargaining power, whether they received independent legal advice, the nature and value of the transaction, and the transparency of the clause itself. This prevents stronger parties from coercing weaker ones into unfair agreements.
An entire agreement clause or a non-reliance clause will suffice if these requirements are met (S 5D Fair Trading Act 1986). An entire agreement clause typically states that the written contract contains the whole agreement between the parties and that no other representations or understandings form part of the contract. A non-reliance clause stipulates that one party acknowledges they have not relied on any pre-contractual statements or representations made by the other party that are not explicitly laid out in the final written agreement. These clauses aim to limit future disputes arising from prior negotiations.
Case Study: Tauranga City Council v Harrison Grierson Holdings Ltd
Context: This significant case involved a dispute where the court had to determine whether specific limitation and exclusion clauses within a commercial contract could effectively exclude liability under Section 9 of the Fair Trading Act. The contract was between two commercially sophisticated entities: Tauranga City Council (a local authority) and Harrison Grierson Holdings Ltd (a significant consultancy firm). The clauses in question aimed to cap or remove responsibility for certain representations made during their dealings.
Finding: The court carefully assessed the circumstances, including the commercial nature of both parties and their experience. It found no evidence of unequal bargaining power between them. Both were large, well-advised organizations capable of understanding and negotiating complex contract terms. Given this context, the court concluded that the limitation clauses were indeed fair and reasonable in the circumstances, thereby allowing the parties to successfully contract out of what would otherwise be a breach of S 9 liability. This case highlights the importance of the 'fair and reasonable' test in commercial contracting out.
Reasonable Person Standard
To establish whether conduct is misleading or deceptive under S 9, the claimant generally needs to demonstrate that a reasonable person in the claimant’s situation would likely have been misled or deceived. This is an objective test, not based on whether the specific claimant was actually misled (though that can be evidence). The court considers the overall context of the conduct, the nature of the parties, and the communication medium. It asks how an ordinary, reasonable individual, acting with a normal degree of care and attention, would interpret the representation (referenced in the Red Eagle Corporation v Ellis case). The standard aims to protect average consumers, not the exceptionally gullible or the overly astute.
Case Study: Red Eagle Corporation v Ellis (2010)
Background: This case involved experienced Auckland businessmen, Tony Falkenstein (of Red Eagle Corporation) and Rick Ellis, who engaged in discussions regarding various project ideas. A particular project, in which Ellis had no formal position or direct financial interest, needed short-term financing. Ellis introduced Annette Black, the project's lead, to Falkenstein.
Financing Context: The project required bridging finance with a substantial interest rate for a short term (14–45 days), with projected future earnings exceeding million. During negotiations, security for the loan was discussed. Options included shares in a parent company (ASL Parent Co) or a personal guarantee from Annette Black. Crucially, Annette Black made fraudulent misrepresentations about her property assets to secure the loan, which Ellis (unknowingly) passed on to Falkenstein.
Outcome: Red Eagle Corporation provided the loan based on the misrepresented security information. When the project failed to repay, Red Eagle Corporation sought damages against Ellis, claiming he breached S 9 of the Fair Trading Act by passing on the misleading property statements, even though he was not the originator of the falsehoods. This resulted in a significant loss of for Red Eagle. The case explores the extent of liability for acting as a 'mere conduit' of misleading information.
Mere Conduit Defence
A defendant may attempt to claim that they acted as a mere conduit, arguing they simply passed on information provided by someone else without endorsing it, verifying its accuracy, or having first-hand knowledge of its falsity. To successfully argue this defence, the defendant must typically demonstrate that they were obviously and openly passing on information from another source, did not adopt the information as their own, and took reasonable steps to dissociate themselves from its truthfulness. However, simply saying "I was just passing it on" is often not enough to escape liability under S 9, especially if they failed to exercise reasonable care or knew, or ought to have known, of its potential to mislead. The Red Eagle case is a prime example where this defence was explored.
Case Study: Godfrey Hirst v Cavalier Bremworth (2014)
This case centered on a dispute between two major carpet manufacturers, Godfrey Hirst and Cavalier Bremworth, concerning the advertising and guarantees offered for a new carpet line. Godfrey Hirst alleged that Cavalier Bremworth's marketing of its new carpet, including certain warranties and claims about its properties (e.g., stain resistance, durability), was misleading and deceptive under the Fair Trading Act. The matter involved the interpretation of marketing claims and the substantiation required for such representations in a competitive market.
Detailed Warranties for STAINMASTER® SolarMax® Carpet
Product warranties are crucial representations about quality and performance. For STAINMASTER® SolarMax® Carpet, the following warranties highlight specific attributes and consumer expectations:
Warranties include:
Lifetime stain resistance: This is a powerful claim, suggesting the carpet will resist stains for the product's expected life, provided proper care is taken.
25-year fade resistance: Guarantees that the carpet color will not significantly fade due to sunlight exposure for a quarter-century.
15-year abrasive wear warranty: Assures consumers that the carpet will withstand normal foot traffic and resist significant wear for a decade and a half.
Lifetime anti-static protection: Guarantees that the carpet will not generate static electricity, improving comfort and safety.
Special exclusions detailed in warranty conditions: It is vital for consumers to understand that these strong warranties almost always come with specific conditions, limitations, or 'special exclusions'. These might relate to commercial use, specific types of stains (e.g., permanent dyes), maintenance requirements, or damage from exceptional events. Businesses must clearly communicate these exclusions to avoid misleading consumers about the true extent of the warranty coverage.
Legal Remedies Available Under the Fair Trading Act 1986
Upon a successful breach claim under S 9 or other provisions of the Fair Trading Act, the courts have a broad range of discretionary powers to grant various legal remedies, aimed at rectifying the harm caused and preventing future breaches. These include:
Grant an injunction restraining further conduct. (S 41): A court order compelling a party to cease a specific action. For example, stopping a company from continuing a misleading advertising campaign.
Declare a contract void, or vary it: The court can nullify an entire contract or alter its terms to remove the misleading element, effectively unwinding the transaction or adjusting it to be fair.
Direct refund of money or return of property: This is a common remedy where the misleading conduct led to the transfer of funds or goods. The court can order the restoration of both parties to their pre-contractual positions.
Assess and provide compensation for loss or damage caused by misleading conduct: The court can order the misleading party to pay monetary compensation to the claimant for any financial loss directly attributable to the misleading or deceptive conduct. This is intended to put the claimant back in the position they would have been in had the misleading conduct not occurred.
Compensation does not equate to full contract damages: It is crucial to distinguish FTA compensation from conventional contract damages. Contract damages aim to put the plaintiff in the position they would have been in if the contract had been properly performed (the 'benefit of the bargain'). In contrast, compensation under the FTA typically aims to restore the claimant's position had the contract not been entered into at all (the 'reliance measure'). This often means recovering out-of-pocket expenses and losses directly resulting from relying on the misleading statement, rather than the profits that would have been made had the representation been true.
Criminal Jurisdiction
Beyond civil remedies, certain egregious contraventions of the Fair Trading Act 1986 can lead to criminal charges, reflecting the severity of the deception and its impact on the market.
S 40: Contraventions of parts of the Act, particularly those involving false or misleading representations (e.g., S 13) and unsubstantiated representations (S 12A), are considered offenses punishable by significant fines:
for individuals: This substantial fine serves as a strong deterrent for individuals engaging in prohibited conduct.
for bodies corporate: Corporations face even higher penalties, reflecting their greater capacity to cause widespread harm and their often larger financial resources. Criminal convictions also carry reputational damage, which can be even more impactful.
Defences to Offences (S 44)
Section 44 of the Act provides specific statutory defences that a defendant can raise if charged with an offense under the FTA. These defences aim to protect those who acted genuinely and took reasonable precautions.
Proving reasonable mistake: The defendant can argue that their conduct was due to a genuine and reasonable mistake. This defence requires demonstrating that the mistake was not due to negligence or recklessness and that it was objectively reasonable under the circumstances.
Reliance on information supplied by others provided it was reasonable: A defendant may claim that they relied on information provided by another person (e.g., a supplier, an advertising agency). To succeed, they must prove that such reliance was reasonable and that they took reasonable precautions and exercised due diligence to ensure the information's accuracy. This is similar to the 'mere conduit' concept but specifically for criminal offences.
Events outside the defendant’s control where reasonable precautions were taken: This defence applies when the contravention was caused by an act or default of another person, an accident, or some other cause beyond the defendant's control. However, the defendant must also prove they took all reasonable precautions and exercised due diligence to avoid the contravention.
Exceptions apply concerning employees or agents' actions: In certain circumstances, a body corporate might argue that an offence was committed by an employee or agent without its knowledge, consent, or connivance, and that it took reasonable steps to prevent such conduct. The Act outlines the conditions under which an employer may or may not be held liable for the actions of its staff.
Specific Misleading Conduct
The Fair Trading Act also details specific areas where misleading or deceptive conduct is particularly prohibited:
Misleading conduct regarding goods: Section 10 prohibits a person in trade from misleading the public as to the nature, characteristics, suitability for a purpose, quantity, or previous history of goods. Examples include mislabeling origin, falsely claiming goods are new, or misrepresenting product capabilities.
Misleading conduct regarding services: Similar to goods, Section 11 prohibits misleading the public as to the nature, characteristics, suitability for a purpose, quantity, or previous history of services. This could involve exaggerating service quality, misrepresenting professional qualifications, or failing to disclose important service limitations.
Misleading conduct in relation to employment: Section 12 specifically addresses misleading representations concerning the availability, nature, terms, or conditions of employment. This prevents false promises about job security, salary, or career advancement, often seen in recruitment advertising or interviews.
Unsubstantiated Representations (S 12A)
Section 12A introduces a crucial proactive measure against deceptive claims, focusing on the basis of a claim rather than its ultimate truthfulness.
Prohibits unsubstantiated claims in trade: This means a person in trade must not make a representation about goods or services unless they have reasonable grounds for making it.
Unsubstantiated if made without reasonable grounds, irrespective of being false or misleading: This is a significant distinction. A claim can be factually true but still unsubstantiated if the business lacked a proper basis (e.g., scientific evidence, market research, or reliable data) for making it at the time it was made. The absence of reasonable grounds, even if the claim later proves true, is a breach.
Court must consider factors like the nature of goods, representation's nature, compliance with standards, and potential effects on parties: When determining whether reasonable grounds existed, a court will objectively examine factors such as the type of product or service, the inherent credibility of the representation itself, whether the representation complies with recognized industry standards or codes, and the potential impact of an unsubstantiated claim on consumers or competitors.
False or Misleading Representations (S 13)
Section 13 is a broad and frequently relied-upon provision that directly outlaws a wide array of false or misleading claims about goods and services, going beyond general misleading conduct.
Outlaws false or misleading claims about goods and services, including quality, sponsorship, origin, etc (S 13). This includes, but is not limited to, claims concerning:
The nature, manufacturing process, characteristics, suitability for a purpose, or quantity of goods or services.
The standard, quality, grade, model, or performance of goods or services.
That goods are new, or have particular history or previous use.
That goods or services have sponsorship, approval, endorsement, performance characteristics, accessories, uses, or benefits they do not have.
The price of goods or services (e.g., fake discounts).
The place of origin of goods (e.g., 'Made in New Zealand' when it's imported).
The existence, exclusion, or effect of any warranty or guarantee.
Case Studies on False or Misleading Representations
These cases illustrate the Commerce Commission's role in enforcing S 13 and the types of conduct considered false or misleading.
Commerce Commission v 2 Cheap Cars Ltd (2019): This case involved deceptive advertisements by a used car dealership. The company was found to have made misleading representations regarding consumer rights (e.g., suggesting waivers of warranty rights), the true prices of vehicles (e.g., implying finance was required to get a certain price), and the condition or history of certain cars, leading to significant penalties.
Commerce Commission v Fujitsu General NZ Ltd (2017): Fujitsu was found to have engaged in misleading conduct regarding the energy efficiency and performance of some of its heat pump models. The claims made in advertising materials overstated the efficiency ratings, misleading consumers about the operational costs and environmental benefits of the products. This highlighted the importance of substantiating performance claims, especially for complex technical products.
Unfair Contract Terms Regime
Introduced in 2015, the unfair contract terms regime aims to protect consumers and small businesses from oppressive conditions in standard form contracts.
Prohibition on unfair contract terms in consumer and small trade contracts (S 26A and 26B): The FTA prohibits "unfair" terms in standard form contracts with individuals (consumers) and, importantly, also extends this protection to "small trade contracts" (where the annual value of the relationship is below a certain threshold, currently at the time of forming the contract). A term is considered unfair if it causes a significant imbalance in the parties' rights and obligations to the detriment of one party, is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and would cause detriment (financial or otherwise) to a party if it were applied or relied on.
The Commerce Commission can apply for a declaration against such terms: Unlike other parts of the FTA where affected parties can seek remedies, the unfair contract terms regime is primarily enforced by the Commerce Commission. The Commission can apply to the High Court for a declaration that a specific term in a standard form contract is unfair. Once a term is declared unfair, it becomes unenforceable, and businesses using similar terms in their contracts may be compelled to remove or amend them to avoid further enforcement action.
Conclusion
The Fair Trading Act 1986 is an extensive and powerful piece of legislation that underpins consumer protection and fair competition in New Zealand. It provides significant legal safeguards for consumers against various forms of misleading, deceptive, and unfair conduct in trade. Simultaneously, it holds businesses accountable for their representations and practices, stipulating clear consequences—ranging from civil remedies like injunctions and compensation to substantial criminal fines—for violations. The Act continually evolves (e.g., with the addition of the unfair contract terms regime) to adapt to modern trading environments and ensure a balanced, trustworthy marketplace for both consumers and businesses.