The new criminal prohibition

A new provision (section 12A) introduced under the Fair Trading Amendment Act 2013 which prohibits businesses from making unsubstantiated representation is one of the key amendments to the Fair Trading Act 1986 ("FTA").

The inclusion of such a prohibition means that businesses must be able to back up all claims in respect of their products (or services) before they are made, and must be able to do so before such claims are made.

What constitutes unsubstantiated representation?

A representation is unsubstantiated if the person making the representation does not, when the representation is made, have reasonable grounds for the representation, this is irrespective of whether the representation is false or misleading. A trader could later prove a claim to be true, but it will still be a breach on the trader's part if at the time the claim was made the trader did not have grounds to substantiate it.

What are reasonable grounds?

The Commerce Commission has published a factsheet (December 2013 – published 1 April 2014) which is designed to assist businesses and consumers to understand their obligations and rights when claims are made about goods and services. In summary, reasonable grounds can come from (1) information provided by reputable suppliers or manufacturers; (2) information the business making the claim holds; (3) any other reasonable source e.g. scientific or medical journals.

There are no precise tests for what constitutes reasonable grounds as this is influenced by factors such as:

  • The nature of the goods/services;
  • The nature of the representation;
  • Any research or other steps the business took before making the representation;
  • The nature or source of any information the business relied upon to make the representation;
  • The actual or potential effects on the representation;
  • Compliance with the requirements of any statues, codes or practice relating to the grounds for the representation.

These provisions do not apply to representations that a reasonable person would not expect to be substantiated, i.e. puffery, for example, claims such as "world best", "kiss by the rain" are mere puffery and are not claims which a reasonable person would expect to be substantiated. However, businesses must ensure there is no underlying representation

In general, manufacturers and brand owners would be expected to be able to substantiate their claims. The requirement on retailers may not be as high if it simply relies on the claim of the manufacturers.

Defence to Prosecution

Section 44 of the FTA sets out those defences that are available to a prosecution for unsubstantiated representations – these include:

  • If the contravention was due to reasonable mistake;
  • If the contravention was due to reasonable reliance on information supplied by a third party.
  • If the contravention was due to the act of default of another person (not employee or agent) and the defendant took reasonable precautions and exercise due diligence.

What does it mean for businesses

Make sure you check your representations, evaluate the need for each representation, consider the consequences of representations being wrong, seek substantiating data and retain documentation supporting any claim you make about your products or services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.