Speed read

This  is  our  third  article  on  key  17  June  law changes, along with an action list for suppliers.

From June, B2B suppliers can override some but not all Fair Trading Act obligations but it will be harder to contract out of Consumer Guarantees Act requirements. So far, obligations, such as the Section 9 FTA misleading and deceptive provision, generally  override  contractual limitations of liability, creating a major source of uncapped compensation liability for suppliers. Suppliers can find they face unlimited liability despite  contract  terms.  However,  the  17 June 2014 changes to the FTA mean that B2B suppliers can often contract out of substantial FTA liability if the right words and approach are used. But much FTA compensation liability will remain as well as prosecution risk. Plus, the ability to do this is limited to what is reasonable,   based on a list of factors. This article provides a heads-up about the changes and implications for suppliers and their business customers. We’ll start with the current FTA position and then move to the changes, dealing only with B2B sales.

The CGA carve out for B2B has been changed to make it mesh with the FTA carve-out making it harder to exclude GGA liability.

Here’s a list of things to do for B2B issues:

  1. Analyse position having regard to industry specific issues as each will vary.
  2. Checkexisting B2Bcontracts:

2.1.toensureCGA carveout stilleffective(if not,change if possible);

2.2. to see if change can and should be made to contract out of limited FTA exemptions

  1. CheckcomplianceregardlesswiththeFA,despitethelimitedcarveout,including the new substantiation provision;
  2. Set up system and precedents for new B2B contracts to maximise CGA and FTA carve-outs where appropriate.

Current position: FTA

If a supplier breaches the FTA commitments in section 9 (misleading or deceptive conduct), 10 and 11 (misleading representations to the public as to goods and services) or 13 (false or misleading representations), it can be liable to compensate business (and consumer) customers1   for loss and damage caused by the breach.2  This is civil liability in addition to the risk of prosecution under the FTA. This article does not deal with real estate-related issues.

Generally, FTA liability gazumps any limitation in the B2B contract so that liability is unlimited, although the authorities are evolving so that the contract terms may limit liability in some instances. This will be relatively limited however. Therefore, FTA liability will often be important in the common situation where the suppliers’ terms limit liability, making a contract claim otherwise unviable.

Current position: CGA

B2B suppliers can contract out of any CGA obligations – in relation to goods and services of a type supplied to consumers – if the statutory form is followed. In particular, the contracting out must be in writing.3

The Changes: FTA

There will be a new s12A providing that suppliers cannot make “an unsubstantiated representation”. See our article, Biggest June 2014 Fair Trading  Act change for most businesses: representations must be substantiated.4

The new FTA – at Section 5D – will enable suppliers to contract out of liability flowing from that new s12A, plus, the liability from two of the sections in the list above: s9 (misleading and deceptive conduct) and s13 (false or misleading representations).5

Contracting out of B2B liabilities and responsibilities will need to be in writing and, here’s the rub, for the contracting out to work, it will need to be “fair and reasonable that the parties are bound by the provision in the agreement.”

What’s “fair and reasonable” is to be assessed based on all the circumstances in the case, including, for example:

  • The subject matter of the agreement and its value;
  • The respective bargaining power of the B2B parties and issues such as “take it or leave it” terms;
  • Whether the parties, or either, were legally represented;
  • Whether the supplier knew that, but for the provision in the contract, s12A or s13 (but not s9) would have been breached.

Overseas regimes will help with the interpretation of the approach. For example, many B2B cases on detailed supply terms in  the UK raise issues under the Unfair Contracts Terms Act 1997 (UK), with its reference to reasonableness. That Act has significant differences from the proposed FTA in NZ but there are useful overlaps and court decisions on

those overlaps: we give an example of this in our article, Case study: Limiting ICT B2B liabilities under the new law.6

An unusual thing is that, despite the ability to contract out, the Commission can still prosecute as to offences on the same facts under s12A and s13. The Commission can also seek other remedies. That signals an intention to drive compliance with those sections anyway, overlapping with the last point in the bullet- pointed list above. So the carve out for civil liability won’t stop exposure to prosecution. Therefore, regardless of the B2B carve out, suppliers and advertisers should seek to comply with the Act such as in relation to substantiation of representations.

There’s a bunch of issues to work through and the facts and circumstances for each supplier and/or industry sector will differ.

The changes: CGA

To bring the CGA B2B carve-out into line with the new FTA regime noted above, it won’t be enough just to contract out in writing. There is also a fair and reasonable test largely mirroring the new FTA regime.7 If it is not fair and reasonable, the carve-out won’t be upheld. So, that needs focus too.

Thus, existing B2B contracts, to which the CGA would apply as is often the case, will need their CGA carve-out clauses reviewed.