Getting ready for the Consumer Law Reform Bill

Hayley Miller, Senior Associate | Friday 23 March 2012

The Consumer Law Reform Bill, which is now with the Commerce Select Committee, will require a number of changes to various business practices once it is in force. Some of these changes apply to transactions with non-consumers.

This much awaited piece of law reform is an omnibus Bill, meaning that it includes a package of changes to numerous Acts as summarised below:

The changes to business practices which are likely to be necessary to respond to the Bill include:

• Developing internal processes and guidelines for guarding against a new 'unsubstantiated representation' offence.

• Reviewing terms used in business to business transactions to determine whether or not including 'entire agreement' and 'no reliance' provisions are appropriate given their greater enforceability.

• Amending current extended warranty documentation for compliance with new disclosure requirements and developing internal processes and staff training to ensure required oral disclosures are made to consumers before extended warranty agreements are entered into.

• For businesses that:

  • supply new goods through sale by auction (including online); or

  • are carriers under the Carriage of Goods Act 1979; or

  • supply reticulated gas and/or electricity,

  amending processes and contractual terms to comply with, and address, the new application to such business of the Consumers Guarantees Act 1993 (or specific provisions of that Act).

• Either:

  • ensuring policies and procedures are in place to avoid making sales via the telephone or anywhere other than the business's premises unless the consumer has expressly requested this by inviting the business to such place or making the phone call; or

  • amending processes, disclosures and contractual terms to address 'uninvited direct sales'.

• Developing more formal processes, disclosures and contractual terms for layby sales.

Further details of these changes are outlined below.

KEY CHANGES TO THE FAIR TRADING ACT 1986 (FTA)

• Unsubstantiated representations: The Bill introduces a new offence in the FTA for an 'unsubstantiated representation' in trade in connection with goods, services or interests in land. Although the Bill has 'consumer law' in its title, it is important to note that the FTA, and therefore this new offence, applies to all activities in trade, not just consumer activities.

  An 'unsubstantiated representation' is a representation made where the person, at the time of making the representation, does not have reasonable grounds for the representation. The question of whether or not the representation is in fact correct is not relevant to whether or not an offence has been committed.

  The concept of 'reasonable grounds' appears to be a flexible one. The Bill includes some guidelines, for instance the level of research undertaken before making the representation, but "a court must have regard to all the circumstances". It is not clear at this stage, to what extent know-how attained over time simply by trading would be taken into account.

  What this means for businesses. Although one of the Bill's objectives is to simplify business compliance, this new offence will (at a minimum) require businesses to develop processes and guidelines on what supporting evidence should be prepared and retained. The status quo, of as long as it is true you can generally say it, will no longer be enough.

  Only the Commerce Commission will be able to commence proceedings against a person who has made an unsubstantiated representation and, sensibly, a claim must be suspected of being unable to be substantiated before the claim will be investigated.

  Unhelpfully, the Bill is silent as to the impact (if any) on the concept of "puffery" (an exaggeration so obvious the no-one ought to reasonably believe it). As it stands, the Bill could class puffery such as "This is the best product ever!" as an unsubstantiated representation. We hope that this will be addressed by the Select Committee's review of the Bill.

• Contracting out of the FTA: The Bill introduces an ability for businesses to contract out (as between themselves) in business-to-business transactions of sections 9 (misleading and deceptive conduct generally), 13 (false or misleading representations), and 14(1) (false representations in relation to land) of the FTA. To do so, both the parties must be in trade (as must the agreement itself), the agreement must be in writing and it must be 'fair and reasonable' for the parties to do so.

  This statutory ability to contract out of previous representations will more closely align the enforceability of 'entire agreement' and 'no reliance' clauses for the purposes of these FTA provisions with that currently provided under the Contractual Remedies Act 1979 (CRA). Indeed the matters set out in the Bill, to be taken into account in determining whether the contracting out is 'fair and reasonable', have been sourced from the CRA.

  What this means for businesses. This greater ability to contract out of the FTA increases the importance of the decision whether or not to include 'entire agreement' and 'no reliance' clauses in a broad range of non-consumer related agreements, as such clauses will have greater enforceability.

• Enforcement: This Bill expands the Commerce Commission's powers to enforce the FTA and provides greater scope for the Disputes Tribunal to hear cases under the "misleading and deceptive conduct" provisions of the FTA.

• Product safety and recall: The Bill introduces a number of new provisions to the FTA relating to product safety. These include notification requirements in relation to voluntary recalls of products for safety concerns.

OTHER KEY CHANGES

• Extended warranties: The Bill requires suppliers of extended warranties (being agreements for additional consideration to repair, replace or remedy defective goods or services) and the related manufacturers, to ensure certain written disclosures are made. Such disclosures include the consumer's existing rights under the Consumer Guarantees Act 1993 (CGA) and that the consumer has 5 working days to cancel the extended warranty.

  What this means for businesses. Businesses will need to review and amend current extended warranty documentation for compliance with these disclosure requirements. Additionally consumers must be notified orally, before the agreement is entered into, of their right to cancel. Therefore staff processes and training will need to be updated.

  The disclosure of rights under the CGA needs to be set out on the front page of the extended warranty agreement. It would be useful, and would likely lower compliance costs for businesses, if further clarity was provided as to the level of detail required of such disclosure and the degree of specificity (if any) required in relation to the actual supply being made (in contrast to just very high level general advice).

  Potential problems remain for consumers. As it stands, the CGA provides a number of statutory guarantees drafted in a non-specific manner. The actual effect of these guarantees is largely determined on a case-by-case basis. For example, the nature of the guarantee of acceptable quality depends on the nature of the goods, price, statements and representations made and all other relevant circumstances. So for example, the actual guarantee for one fridge can be different to another fridge. Additionally, the CGA does not prescribe the duration of any of the guarantees in terms of months or years.

  So although there is a requirement to disclose consumers' rights under the CGA, assuming this is done simply by restating the non-specific rights under the CGA, it will still be very difficult for consumers to determine exactly how the extended warranty differs from and provides them more or less than the CGA guarantee they already have under law.

• New CGA applicability: Under the Bill, the current exception to auctioned goods under the CGA is removed, meaning that people selling new goods 'in trade' through online auction sites such as trademe will give the statutory guarantees set out in the CGA.

  Similarly, carriers under the Carriage of Goods Act 1979 will now also be subject to the CGA.

  A tailor made guarantee of 'acceptable quality' in relation to reticulated gas and electricity supply is introduced by the Bill. This relates to the safety, reliability and quality of the gas and electricity supplied. It is the only guarantee under the CGA that applies to such supply. For the purpose of remedies under the CGA, gas and electricity supply are treated as if they were a supply of goods.

  What this means for businesses. For businesses that undertake any of these activities, processes and contractual terms will likely require amendment to comply with, and address, the new application of the CGA (or specific provisions of such Act) to such business.

• Modernisation of uninvited direct sales: The door-to-door sales type protections of minimum disclosure requirements and a right to cancel are extended by the Bill to 'uninvited direct sales'. This covers supplies, in trade, to a consumer of more than $100 as a result of negotiations either at a physical address together at a place other than the supplier's place of business or by telephone, provided the consumer did not invite the supplier to such place, make the call or otherwise invite the negotiations. It includes not only traditional credit transactions, but also cash and credit card transactions.

  What this means for businesses. Businesses that wish to avoid making 'uninvited direct sales' should ensure policies and procedures are in place to avoid making sales via the telephone or anywhere other than its business premises unless the consumer has expressly requested this by inviting the business to such place or making the phone call. If however such sales are part of the business strategy then processes, disclosures and contractual terms will likely require amendment.

• Laybys: The Bill incorporates layby sales into the FTA. The definition of such agreements has been refined to sales where the consumer will not take possession of the goods until full payment and the price is generally no more than $15,000 and paid in 3 or more instalments (or at least 2 instalments if the agreement specifies that it is a layby sale agreement).

  In addition to new disclosure requirements on the Supplier, Buyers may cancel laybys at any time before taking possession of goods (whereas previously cancellation was only up to the time of final payment). In such circumstance any cancellation charge must not be more than the supplier's reasonable costs arising directly from that agreement.

  What this means for businesses. Businesses that offer layby sales will likely need to refine their business processes and implement formal written disclosures and contractual terms.

KEY AUSTRALIAN PROVISIONS DID NOT MAKE THE CUT

As highlighted by the Minister of Consumer Affairs at the first reading of the Bill, legislation to address unfair contract terms and unconscionability did not make the cut for inclusion into the Bill. This was notwithstanding that these are both part of the revised Australian Consumer Law and one of the aims of the Bill was to create greater harmonisation with Australia. Interestingly, the Minister has invited the Select Committee to consider whether the FTA should provide for these protections. Whether this is reconsidered by the Committee will be of interest to many.

TIMELINE

Submissions to the Select Committee on the Bill close on 29 March 2012. The Select Committee is then due to report back in early August. No formal indication has been given on when the Government expects the Bill to be executed.

There are transitional periods built into the Bill to allow time to implement various changes including those relating to:

• 'unsubstantiated representations' in trade;

• layby sales, uninvited direct sales and extended warranty agreements;

• auctions and Auctioneers;

• the Carriage of Goods Act; and

• the CGA's application to gas and electricity.

FURTHER INFORMATION

Do not hesitate to contact Bell Gully if you require further information in relation to the Bill.

Additionally further information can be found at: www.consumeraffairs.govt.nz

The Bill itself can be accessed at www.legislation.govt.nz