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Brief Counsel

Court of Appeal carpet decision puts acid on advertisers

15 September 2014

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The Court of Appeal judgment in a dispute between carpet manufacturers Godfrey Hirst NZ and Cavalier Bremworth makes clear that suppliers cannot rely on the fine print to correct, limit or qualify headline claims in warranties or advertisements.

This reflects some new obligations of the Fair Trading Act and the generally tougher regulatory environment created by new enforcement tools available to the Commerce Commission.

The decision, which sought to draw consistency with Australian cases, still requires the consumer to exercise common sense in making purchasing decisions, but the message now to the supplier is “be very wary”.

The context

Godfrey Hirst had successfully applied to the High Court to prevent Cavalier Bremworth from making extensive warranties about a new synthetic carpet range which could be misleading.  As a result of this action, Cavalier withdrew the offending representations and gave an undertaking not to repeat them.

But Godfrey Hirst felt that, although the immediate problem had been dealt with, the High Court had set the bar too high in terms of the standard of care to be expected from consumers.

The High Court Judge seems to have taken the view that the carpet buying public would be a comparatively well off and sophisticated segment of the market, capable of searching the internet to ascertain the limits of the various warranty offers.

The case

The Court of Appeal found that all consumers and members of a target audience to whom a claim is made are entitled to the protection of the Fair Trading Act except “outliers” – these being people who are “unusually stupid or ill-equipped, or whose reactions are extreme or fanciful”.

Accordingly, it found that the High Court had taken an “overly restrictive view of the consumers targeted by Cavalier’s website” and had been incorrect to expect that they should read the warranty booklet to ascertain for themselves the limits of the terms offered.

Helpfully, the Court of Appeal gave clear guidance as to the correct standards or tests to apply in assessing whether headline representations are misleading.

  • When assessing whether a claim made by a supplier breaches the Fair Trading Act, it is the dominant message of the headline that is important.  This cannot be assessed by analysing each separate representation in isolation.
  • The qualifying information must be sufficiently prominent and instructive to nullify the risk that the headline claims may mislead or deceive.
  • Where the disparity between the headline and the qualifying information is large, the maker of the statement must draw the consumer’s attention to the true position “in the clearest possible way”.
  • Might the advertisement taken as a whole have a tendency to entice the consumer into “the marketing web”, such that he or she will be more likely to buy (even if, at the time of the actual purchase, the limitations of the warranties are understood).

Chapman Tripp comment

The Court of Appeal judgment has been welcomed by the Commerce Commission as “a win for consumer rights”.  It also provides a timely reminder to suppliers of the tougher regime created by the amendments to the Fair Trading Act, which came into force late last year.

Key policy changes

New prohibition on unsubstantiated claims

New section 12A of the Fair Trading Act prohibits suppliers from making “unsubstantiated representations”.  An unsubstantiated representation occurs when a supplier does not have reasonable grounds for making a claim at the time it is made, regardless of whether it is proven to be true at a later time. 

This change is intended to ensure consumers will be able to rely on what they are told and make informed decisions. 

As a practical measure, suppliers should retain product testing or research results together with the source of any information relied upon and evidence of compliance with relevant standards relating to the grounds on which the representation was made.

An extended warranty must go beyond the Consumer Guarantees Act.

Use of extended warranties is now subject to specific control, to ensure that they provide cover additional to what is automatically provided under the Consumer Guarantees Act.  Warrantors must provide a dated copy of the extended warranty, including all terms and conditions and the total price to be paid.

The warranty must also include:

  • a summary of the rights and remedies available under the Consumer Guarantees Act
  • a comparison of these rights and remedies with those that will be offered under the extended warranty
  • a summary of the right to cancel under the Fair Trading Act, and

  • the details of the warrantor.

Commission’s new power to compel interview

The Commerce Commission can now require people to attend interviews if the Commission considers this necessary or desirable for carrying out its functions under the Fair Trading Act.  This power is in line with that provided in the Commerce Act 1986 and cannot be avoided on the grounds of self-incrimination.  Since it got this new power on 18 December 2013, the Commission has exercised it 16 times. 

In the past many investigations were delayed or thwarted because the Commission was unable to talk to key people.  

Much higher penalties

Recent amendments also include a significant increase to the fines.  Penalties for misleading and deceptive conduct, false representations, unfair practices and product safety breaches have increased from $60,000 to $200,000 for individuals and from $200,000 to $600,000 for businesses.

Further, individuals who repeatedly break the law can also face banning orders for up to ten years.  Infringement notices can be issued by the commission for more straightforward breaches.

Our thanks to Melissa Hay and Steven Li for writing this Brief Counsel. 

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