Last week the Commerce Select Committee reported on the Consumer Law Reform Bill.  It recommended further substantive changes to the Bill, including tripling the penalties for breaches of the Fair Trading Act, giving the Commerce Commission compulsory interview powers for Fair Trading Act investigations, introducing new prohibitions on "unfair contract terms", and extending the criteria before businesses may contract out of the Fair Trading Act and Consumer Guarantees Act in business-to-business transactions.  With the Bill already proposing the most significant changes to consumer laws in more than 20 years, businesses should ensure they are aware of the proposed changes.

This Alert explores the key recommendations of the Committee's report and the potential implications for businesses.1

Background

The Consumer Law Reform Bill (the "Bill") has its origins in a 2010 initiative to simply and modify New Zealand's consumer laws and to harmonise them with Australia's.2  The Bill was introduced to Parliament in May 2011,3 passed its first reading in February 2012 with strong bipartisan support and was referred to the Commerce Select Committee (the "Committee") for the consideration of submissions.4

Unsurprisingly given the significant reforms being proposed, the Bill generated substantial interest with the Committee receiving 90 submissions.  The Committee's report, released on 2 October 2012, recommends further changes to the Bill that will have significant impacts for New Zealand businesses.  These changes are discussed below.

The Committee's key recommendations

Prohibition on "unfair contract terms"

The most significant change recommended by the Committee is the introduction of a specific prohibition in the Fair Trading Act 1986 (the "Fair Trading Act") on "unfair contract terms" in standard form consumer contracts.5

This is surprising given that an "unfair contract terms" regime was originally excluded from the Bill because of insufficient evidence that there was a problem.  It is unclear what evidence has caused the Committee to reverse this position.

Under the recommended regime the Commerce Commission (the "Commission") will be able apply to the court for a declaration that a standard form contract term is unfair, and the court will be able to make such a declaration where it is satisfied that the term:

  • would cause significant imbalance in the contracting parties' rights and obligations;
  • is not reasonably necessary for the protection of the party advantaged by the terms (usually the supplier); and
  • would cause detriment to the other party (usually the consumer) if enforced.

To assist in recognising "unfair contract terms" the Bill then sets out a so-called "grey list" of examples of contract terms that may be unfair, for example a term that permits one party to cancel a contract, but not the other.6  It also establishes a general principle that terms that define the main subject matter of the contract or set the upfront price payable under the contract may not be declared "unfair". 

Such an exclusion of course raises the question of what is the "main subject matter" of a contract, and what is the "upfront payable price".  These are not necessarily easy questions to answer, as the banking industry found out in the UK when the Courts had to consider a similar exclusion in determining whether the Office of Fair Trading ("OFT") had the power to assess whether unauthorised overdraft charges are unfair.7  Following appeals from the High Court and the Court of Appeal, the UK's Supreme Court held that “bank charges levied on personal current account customers in respect of unauthorised overdrafts … constitute part of the price of remuneration for the banking services provided" and, therefore, that the charges could not be assessed for fairness by the OFT.8

Under the proposed Bill, where the court makes a declaration that a term is unfair the offending party will be subject to the existing Fair Trading Act remedies, including the prospect of fines, injunctions, advertising orders and damages.  This goes much further than the Australian "unfair contract terms" regime that this proposal is purporting to replicate - in Australia the only consequence of a term being found to be unfair is that the unfair terms are deemed void. 

The introduction of an uncertain, and emotive, concept such as "unfairness" into all standard form contracts will result in detriments to businesses and consumers alike - the Australian regime, which has been in place since 2010, remains untested so there no body of Australian case law to provide guidance on how such a prohibition may be applied, and the UK regime is sufficiently different that it will not provide clear guidance.  Parties to standard form contracts will not know whether there are any void terms in their contract until a person seeks to enforce that contract, and the uncertainty, increased compliance costs and loss of transaction cost efficiencies will inevitably have to be passed onto consumers.

Contracting out of the Fair Trading Act and Consumer Guarantees Act

Another significant change recommended by the Committee is the introduction of a more onerous regime before businesses may negotiate out of their Fair Trading Act and Consumer Guarantees Act obligations in business-to-business transactions.

As introduced, the Bill proposed a regime for businesses to negotiate out of their Fair Trading Act obligations where such an exclusion was in writing and was "fair and reasonable".  This was a welcome proposal to allow businesses to negotiate their own rights and obligations, although the inclusion of the "fair and reasonable" requirement meant the proposed regime lacked the clarity and certainty that exists under the existing Consumer Guarantees Act regime, whereby parties can expressly exclude their Consumer Guarantees Act obligations in business-to-business transactions.9

Disappointingly for a reform that was initiated to simplify New Zealand's consumer laws and facilitate business certainty, rather than translating the simplicity of the existing Consumer Guarantees Act exclusion regime into the Fair Trading Act, the Committee has instead recommended incorporating the "fair and reasonable" requirement into the Consumer Guarantees Act, and has further recommended introducing additional subjective criteria in evaluating whether a clause that purports to exclude Fair Trading Act or Consumer Guarantees Act obligations is "fair and reasonable".  These additional criteria include:

  • the value of the goods or services;
  • the respective bargaining power of the parties including:
    • the extent to which a party was able to negotiate the terms of the agreement; an
    • whether a party was required to accept or reject the agreement on the terms and conditions presented by the other party; and
  • whether any of the parties received legal advice.

These criteria are similar to those contained in s 4(1) of the Contractual Remedies Act 1979, pursuant to which "no representation"/"no reliance" clauses are only enforceable if fair and reasonable in the circumstances of the particular transaction.  As such, case law in respect of s 4(1) is likely to be of some assistance in the context of the application of the proposed new criteria in the Fair Trading Act and Consumer Guarantees Act.

These proposals, if enacted, will mean that parties may not always successfully contract out of their Fair Trading Act and Consumer Guarantees Act obligations, despite express terms in their business contracts to the contrary.  Businesses will potentially be subject to claims from another business that their goods are not of "acceptable quality" even where such a warranty is expressly excluded. 

If the Bill is enacted all businesses would need to reconsider the extent to which they include, for example, express warranties in their contracts, and the measures that they may take to increase the likelihood that contracting out clauses would be considered "fair and reasonable".

Tripled Fair Trading Act penalties

In response to the Commission's call for significantly increased penalties for breaches of the Fair Trading Act, the Committee has recommended increasing the penalties from $60,000 to $200,000 per offence for individuals, and from $200,000 to $600,000 per offence for companies.

While this recommendation does not go as far as the Commission's submission, which called for penalties to be increased to $1.1 million per offence for companies, it still represents a significant increase, particularly given:

  • the inevitable result of a three-fold increase in the maximum penalties available under the Fair Trading Act is that Courts will interpret the change as a direction that penalties are to increase by that amount (which is what happened when the maximum penalties were doubled in 2003);
  • Fair Trading Act breaches are strict liability offences, requiring no element of intention or moral wrongdoing, which are often caused by technical errors by employees or software despite a business's best efforts to ensure compliance; and
  • the Commission typically lays multiple charges under the Fair Trading Act to achieve penalties significantly in excess of the maximum penalty per offence.

The result will be significantly increased compliance risks and costs for businesses, likely resulting in even further oversight, consideration and checks and balances before any new, including legitimate, entrepreneurial drives are initiated.  It is not clear that further increasing the compliance risks and costs of doing business in New Zealand is in the bests interests of New Zealand's economy and its competitiveness on the world stage.

Compulsory Commission interview powers

Picking up on another submission from the Commission, the Committee has recommended the introduction of compulsory interview powers for the Commission in investigations of offences under the Fair Trading Act, equivalent to the Commission's powers under the Commerce Act 1986 (the "Commerce Act") and the Credit Contracts and Consumer Finance Act 2003 (the "CCCFA").  This seems a logical step given the Bill, as amended by the Committee, now also proposes introducing protections equivalent to the Commerce Act's protection against evidence gathered in such interviews being used as evidence against the interviewee in proceedings for penalties under the Fair Trading Act.

Unconscionable Conduct

The Committee recognised that the introduction of a specific prohibition on "unconscionable conduct", similar to the prohibition in the Australian Consumer Law, would introduce uncertainty into New Zealand's consumer law given the untested nature of such a prohibition.  This is a sensible recommendation given the increased compliance costs for businesses and uncertainty that such a provision would introduce.  However, the Committee has recommended that this position be reviewed once the Australian courts have had time to develop a body of case law on the application of the equivalent prohibition in Australia.   

Unsubstantiated Representations

The Bill at first reading proposed a prohibition on making "unsubstantiated representations" that would require businesses to substantiate all claims that are made to consumers with evidence of that claim.10  While not addressing the increased business compliance costs that such a prohibition will introduce, the Committee has sought to appease concerns about the impact on advertising creativity by making it clear that the provision does not include representations that a reasonable person would not expect to be substantiated - the researchers at Red Bull will no doubt be relieved that they will no longer need to search for evidence of wing growth.

Next Steps

The Consumer Affairs Minister Simon Bridges has indicated that he intends to see the Bill through its remaining stages quickly, noting that the Bill will soon be read for a second time in Parliament.11  Those that wish to convince the Minister that further changes should be considered when the Bill is before the Committee of the Whole House should act quickly to have their views heard by the Minister.  Parties may wish to point out that some of the extensive reforms recommended by the Committee have not been robustly tested, given that the drafting was not included in the Bill as introduced.  For matters such as "unfair contract terms" and contracting out of the Fair Trading Act and Consumer Guarantees Act, the devil will be in the detail.