Commercial law expert Simon Vannini answers some questions on the key elements of the Bill and outlines the affect it will have on businesses.
  1. What are the main changes brought about by the Consumer Law Reform Bill?

The Bill makes a number of significant changes to the Fair Trading Act 1986, the Consumer Guarantees Act 1999 and other consumer-directed Acts. The most significant amendments to the Fair Trading Act are the proposed introduction of:

  • a new regime prohibiting the making of unsubstantiated representations in trade; and
  • a new regime prohibiting the use of unfair contract terms in standard form consumer contracts.

Unfair Contract Terms

  1. What kind of behaviour is the Bill trying to restrict through the proposed new unfair contract terms regime?

The regime applies only to specific types of terms contained in "standard form consumer contracts". The regime will be enforced by the Commerce Commission (on behalf of an applicant), who can ask the Courts to determine whether:

  • a contract entered into by a consumer is a "standard form consumer contract" (there is a rebuttable presumption that all consumer contracts are standard form consumer contracts); and if so
  •  where one or more of the terms in that standard form consumer contract are unfair terms, and therefore unenforceable against the consumer.
  1. What kinds of things do to the Courts have to take into account in determining whether the contract is a "standard form consumer contract"?

In determining whether a contract entered into by a consumer is a standard form consumer contract, the Court will look at a number of factors, including:

  • the relative bargaining power of the parties;
  • whether the contract was prepared before it was negotiated; and
  • whether there was any opportunity to negotiate the terms.

So most printed-form type contracts are likely to be found to be standard form consumer contracts under this regime.

  1. How does a Court determine whether a term in a standard form consumer contract is an "unfair contract term"?

The Court must be satisfied that the term:

  • causes a significant imbalance in the parties rights and obligations;
  • is not reasonably necessary to protect a parties legitimate interests; and
  • would cause detriment to a party if it was applied, enforced or relied upon.

The Court also has to take into account the contract as a whole, and consider how the terms have been presented to the consumer.

  1. What types of terms could be found to be unfair contract terms?

The Bill provides a list of terms which may be unfair contract terms; these are generally terms which are able to be exercised by one party only, and include the right to terminate the contract, suspend performance under the contract, or vary the terms of the contract, without the other party's agreement.

  1. What are the potential penalties a trader may face for including or attempting to rely on or enforce an unfair contract term against a consumer?

A trader could face fines of up to $200,000 for individuals and $600,000 for bodies corporate, as well as injunctions and other orders a court deems appropriate.

  1. What steps should traders be taking now to be ready for this new regime?

The unfair contracts regime will have a 15 month lead in period, meaning that traders will have 15 months from the time the Consumer Law Reform Bill is passed into law, to review and (where relevant) update or replace their standard form consumer contracts.

Importantly, the new regime prohibiting unfair contract terms will not apply to standard form consumer contracts entered into prior to the regime coming into force. However, the new regime will apply to any variations and renewals of such contracts, which will be treated as new contracts. 

Unsubstantiated Representations

  1. How does the Bill propose to restrict traders making unsubstantiated representations?

There are already prohibitions under the Fair Trading Act on misleading and deceptive conduct in trade. However, this proposed new regime takes this further, by providing that traders cannot make representations in trade without having reasonable grounds for making those representations. This regime will apply to all types of representations - such as through an advertising campaign, marketing brochures, product packaging, or via a direct sales force - that are made in trade.

  1. What is likely to constitute reasonable grounds for making a representation?

The Bill provides that the Courts will need to take into account all of the circumstances in determining whether a representation has been made on reasonable grounds. These circumstances include:

  • the nature of the goods or services;
  • the nature of the representation (eg is it as to quality or quantity);
  • any research undertaken prior to making the representation; and
  • the nature and source of any information relied upon.

Importantly, traders must have reasonable grounds for making the representation at the time the representation is made.

  1. Are there any exceptions to the restrictions on making unsubstantiated representations that a trader can rely on?

There is a specific exception for 'puffery' - ie obviously untrue statements, which a 'reasonable person' would not expect to be substantiated. But it is of course risky to look to rely on this except where it is so obvious that what you are saying about a product or service is clearly not meant to be taken as a fact about the product or service to which the representation relates.

  1. What are the potential penalties for making unsubstantiated representations?

As with the regime prohibiting unfair contract terms, individuals will face fines of up to $200,000, with bodies corporate facing fines of up to $600,000. The Courts can also grant injunctions, and can require a defendant to make a disclosure of information generally in order to counteract the earlier misleading conduct.

  1. What steps should traders be taking to prepare for this new regime?

The Bill provides for a 6 month lead in period for this new regime. Traders should therefore be thinking now about how they currently verify claims they make in trade as part of their business. Traders should consider whether they will need to implement any new processes or procedures to ensure they can show, if required, that they had reasonable grounds for making specific representations.