Measures designed to protect Hong Kong consumers

Traditionally, Hong Kong commerce has been governed by that famous Latin maxim caveat emptor: let the buyer beware. This year, the Hong Kong Legislative Council has introduced two new laws which may start to change that rule.

In our July article, the Hong Kong Competition Ordinance - has it been worth the wait?, we discussed the enactment of the long-awaited Competition Ordinance, which prohibits companies from engaging in anti-competitive arrangements and misusing their market power.

A second measure designed to protect Hong Kong consumers is the Trade Descriptions (Unfair Trade Practices) (Amendment) Bill (the Amendment Bill), which was passed on 17 July and will commence in 2013.

While the Trade Descriptions Ordinance (the Ordinance) has been in force in Hong Kong for 15 years, it previously only prohibited the false description of goods. Somewhat surprisingly, the prohibition did not apply to services.

The Amendment Bill broadens the scope of the Ordinance by: 

  • extending the prohibition on false trade descriptions to services as well as goods; 
  • prohibiting a number of other unfair trade practices in addition to false descriptions; and 
  • strengthening the enforcement mechanisms available to authorities.

While the Ordinance is primarily intended to prevent “sharp” business practices, it is drafted broadly enough that it has the potential to catch business practices which might not traditionally be thought of as unfair. It is also possible for even perfectly honest traders to fall foul of the Ordinance through mistakes or carelessness.

Who do the new rules apply to?

The prohibitions in the Ordinance and the Amendment Bill apply to “traders”, which covers any person who carries on a commercial trade or business in or from Hong Kong, but excludes a range of registered professionals, such as accountants, lawyers, architects and estate agents.

The prohibitions apply when a trader is engaging with a “consumer”, which means a person who is acting outside their trade or business – i.e. in a personal or domestic capacity. Therefore the prohibitions will not apply to a “business-to-business” transaction such as wholesaling.

However, the consumers at which the practices are directed do not need to be located in Hong Kong – so the Ordinance will apply to internet traders operating from Hong Kong, even if they only sell to overseas consumers.

False trade descriptions in relation to services

The Amendment Bill extends the existing prohibition on false trade descriptions to services. A “trade description” in relation to services means any direct or indirect indication about the services or any part of the services.

To avoid breaching the prohibition, traders providing services need to be careful that they are clear about, and can substantiate, every statement or representation they make to consumers about:

  • the nature, scope or quantity of the services; 
  • the effectiveness or benefits of the service; 
  • the fitness of the services for a particular purpose; 
  • the procedure by which the services are to be supplied; 
  • the approval of the services by any person or authority; or 
  • the price of the services or the manner in which the price is calculated.

The prohibition does not apply to financial and insurance services, which are regulated under industry-specific legislation.

Prohibitions on other unfair trade practices

  • Misleading omissions

The Amendment Bill provides that a trader must not:

  • omit or hide material information that is to a transaction; or 
  • provide material information in a manner that is unclear, unintelligible, ambiguous or untimely, in a manner which is likely to cause an average consumer to enter into a transaction that they would not have otherwise have entered into.

While this prohibition sounds simple, “material information” is defined broadly and traders will have to think carefully about how much or how little they give consumers about their products. “Material information” includes any information about the product or the transaction which the average consumer would need in order to make an informed decision about the transaction.

  • Aggressive commercial practices

Traders must not engage in aggressive commercial practices in relation to a consumer. An “aggressive commercial practice” means a practice that is likely to significantly impair a consumer’s freedom of choice through the use of harassment, coercion or undue influence and is therefore likely to cause the consumer to enter into a transaction that they would not have otherwise have entered into. This would cover the use or threat of physical forceas well as exploiting a position of power or influence over the consumer.

  • Bait advertising

Traders must not advertise products for sale at a specified price, if:

  • there are no reasonable grounds for believing that they will be able to offer the products at the price; or 
  • they fail to offer the goods at that price for a reasonable time and in reasonable quantities, having regard to the nature of the market and the nature of the advertisement.

Traders will therefore need to be sure when advertising products that they will be in a position to meet likely demand at the advertised price. If the supply of products is limited, then traders can avoid liability for bait advertising provided the advertisement clearly states the period for which, or the quantities in which, the products are offered for sale.

  • Bait and switch

Traders must not make an offer to sell a product at a specified price with the intention of promoting a different product by:

  • refusing to show or demonstrate the product to the consumers; 
  • refusing to take orders for the product or deliver it within a reasonable time;
  • or showing or demonstrating a defective sample of the product.

To avoid being accused of bait and switch, traders who advertise products and subsequently find that they are unable to supply them should avoid directing customers towards an alternative product.

  • Wrongly accepting payment

Traders must not accept pre-payment for a product if, at the time of payment:

  • the trader intends not to supply the product or to supply a materially different product; or 
  • there are no reasonable grounds for believing that the trader will be able to supply the product.

Therefore traders need to be confident that they will be able to supply the product ordered before accepting pre-payments.

  • Enforcement

If a trader is found guilty of engaging in any of the above acts, it will have committed a criminal offence, with the maximum penalty of $500,000 and imprisonment for 5 years.

It is important for directors and other officers to be aware that they may have personal liability under the Ordinance. If a body corporate is convicted of a criminal offence under the Ordinance, and the offence was committed with the consent or connivance of, or is attributable to the neglect of, any director, officer or manager of that body corporate, then that person will also be criminally liable.

If a trader is convicted of an offence, in addition to any criminal penalty, the court may also award compensation to any person who has suffered loss resulting from the offence. The Amendment Bill will also introduce a mechanism for aggrieved consumers to commence their own legal action to seek compensation if they suffer loss or damage as a result of the breach of a prohibition.

What should you do next?

It is important for all businesses supplying good and services to consumers to take steps to ensure they do not breach the new restrictions. Your business should:

  • consider whether the goods and services that it provides to consumers could fall within the scope of the Ordinance; 
  • consider whether any of its existing advertising or sales practices could potentially breach of the Ordinance - for example, whether it:
    • makes claims about products which are ambiguous or would be difficult to substantiate if challenged; 
    • advertises products which are in limited supply or which will only be available for a limited time; 
    • places any pressure on consumers to make purchase decisions; or 
    • accepts pre-payments from customers; and 
  • monitor how the Government proposes to enforce the amended Ordinance and industries which it considers likely targets for enforcement action; and 
  • start to conduct training for employees to ensure they are aware of the new restrictions and any changes in business processes.