On 17 June 2014, new provisions of the Fair Trading Act came into force. Changes to unsubstantiated claims will have an impact on how businesses advertise. Read on to find out how to comply with the changes.

As part of a recent reform of New Zealand's Consumer Laws, the Fair Trading Act 1986 has received an overhaul.

On 17 June 2014, new provisions of the Fair Trading Act came into force. Changes to unsubstantiated claims will have an impact on how businesses advertise.

Everyday, consumers are faced with advertising that claims goods and services are now cheaper, superior, or provide particular benefits. Consumers need to be able to rely on the accuracy of claims made to make informed buying decisions.

It is now illegal to make a claim about a good or service without any reasonable basis. Businesses must now have reasonable grounds for making those claims if they want to avoid breaching the Fair Trading Act.

Below we have more information on:

What claims need to be substantiated?

All claims a business makes about a good or service must be substantiated - whether the claim is express or implied.

An express claim is a direct statement made in advertising or other material, such as 'All chairs half price' or 'Clinical tests undertaken prove…'.

An implied claim is one which is inferred or made indirectly, like 'Available to you at factory prices'. This claim suggests the price is especially low because it reflects what a retailer would pay to the manufacturer when buying for resale.

Who is liable for unsubstantiated claims?

Every business that makes an unsubstantiated claim about a good or service may be at risk of breaching the Fair Trading Act.

This liability exists even if they did not make or supply the good or service or develop the promotional material.

This means that retailers who promote, or make, an unsubstantiated claim about a good or service they are selling may be liable. The manufacturer or supplier from whom the claim originated would also be liable.

A retailer that relies on information provided by a third party (such as the manufacturer or supplier) may not be liable for making an unsubstantiated claim if, in the circumstances, they have reasonable grounds for the claim.

What are reasonable grounds?

A business making a claim must have reasonable grounds for the claim.

Reasonable grounds can be established by:

  • information provided by suppliers or manufacturers
  • information the business making the claim holds
  • any other reasonable source (for example, scientific or medical journals).

It is important to note that a business must have reasonable grounds for the claimat the timethey are making the claim. If they don't, they will breach the Fair Trading Act.

While there is no precise test for what makes up reasonable grounds, here are factors that would be considered:

  • the nature of the goods or services
  • the nature of the claim
  • any research or other steps taken by the business making the claim before it was made
  • the nature and source of any information the business relied on to make the claim
  • the actual or potential effects of the claim
  • compliance with the requirements of any standards, codes or practices relating to the grounds for the claim.

Is puffery allowed?

Puffery is still allowed.

'Puffery' is used to describe a claim that a consumer would not expect to be substantiated. Such claims are often expressions of opinion that are so exaggerated that they are unlikely to mislead anyone.

The reasonable grounds requirement does not apply to claims that a reasonable person would not expect to be substantiated

While a business can use puffery when describing their goods or services, it is still important not to misrepresent goods or services, or assign them characteristics or benefits that they do not have.

What if a claim is true but unsubstantiated?

Even if a claim is true, it may still breach the Fair Trading Act if a business did not have reasonable grounds for making it at the time it was made.

The substantiation requirement applies irrespective of whether the claim is false or misleading.

What are the penalties for breaching the Fair Trading Act?

Breaches of the Fair Trading Act are determined by the Courts. A company found guilty of breaching provisions of the Fair Trading Act could be fined up to $600,000 and individuals up to $200,000.

A District Court may impose a management banning order against anyone convicted of these offences on two or more separate occasions within a ten year period.

Make sure you comply

Some quick tips:

  • Don't make claims that you don't have reasonable grounds for believing to be true
  • Rely on facts, figures and other credible sources of information
  • Keep copies of all information that you have collected sourcing or researching a good or service
  • You must have reasonable grounds for claims at the time they are made.   Substantiating a claim after it was made may still leave you liable.

An edited version of this article appeared in the August 2014 issue of NZ Retail magazine.