The Fair Trading Act – how far can you contract out?
The Fair Trading Act (the Act) imposes various obligations upon those in trade to contribute to a trading environment in which consumer interests are protected, businesses compete effectively and consumer and businesses participate confidently. In 2014, changes were made to the Act to allow parties to contract out of certain obligations when particular requirements are met.
Which obligations may be excluded by contract?
Only certain obligations under the Act may be excluded:
- under section 9, to not engage in conduct that is misleading or deceptive or is likely to mislead or deceive;
- under section 12A, to not make unsubstantiated representations; and
- under sections 13 and 14(1), to not make false or misleading representations.
Other obligations under the Act, such as the obligation to not engage in conduct that is liable to mislead the public cannot be contracted out of. The aim is to allow sophisticated parties to undertake their own assessment of risk, rather than relying on the other party to the transaction to correctly state the position.
This is a potentially powerful tool for those contracting with a non-consumer – and one which is underutilised.
What is required to contract out?
For contracting out to be effective, four requirements must be satisfied:
- the agreement must be in writing;
- the goods, services, or interest in land are both supplied and acquired in trade;
- all parties to the agreement are in trade and agree to contract out of the Act; and
- it is fair and reasonable that the parties are bound by the provision in the agreement.
A provision that purports to contract out of the Act in an agreement with a consumer is unenforceable. Whether it is fair and reasonable for a contracting out provision to be binding depends on all of the circumstances of the agreement including:
- the subject matter and value of the agreement;
- the respective bargaining power of the parties including the extent to which a party was able to negotiate terms and whether a party was required to either accept or reject terms advanced by the other party;
- whether the party seeking to rely on the contracting out provision being effective knew that a representation made in connection to the agreement would breach the Act but for the contracting out provision; and
- whether any or all parties received advice from, or were represented by, a lawyer during negotiations or any other relevant time.
The High Court decision late last year in About Image Ltd v Advaro Ltd  NZHC 3002 suggests that the courts will require strict compliance with the contracting out requirements. In this case, an entire agreement clause was found to be insufficient to contract out of s 9 of the Act because the clause did not specifically refer to the conduct of the supplier.
What is the effect of contracting out?
Contracting out of obligations under the Act regulates the position between the contracting parties only. It will prevent a party from succeeding in a claim against the other party for a breach of the relevant obligation and stop an award of damages.
Contracting out will not affect the powers of the Commerce Commission. The Commission can still prosecute a party for offences under sections 12A, 13 or 14(1) even where the obligations under those same sections have been validly contracted out of. A successful prosecution will expose the party to fines and other penalties – although in a non-consumer transaction the Commerce Commission is unlikely to intervene.
What we recommend
Contracting out of the Act can be commercially valuable for both parties to an agreement. For example, a supplier may have knowledge that it wants to share with the other party but does not want to risk liability by sharing it, and the other party may be happy to accept the knowledge without any warranty. In other cases, a party will be undertaking a full due diligence, and will be relying on its own assessments of performance or potential – so contracting out may well be fair and reasonable.
However, parties must be vigilant to ensure that the contracting out is effective and that liability is not attracted in another way. We therefore recommend that:
- a contracting out clause be carefully drafted, and that attention be given to all the circumstances of the contract, to ensure the enforceability of the clause;
- care is be taken to not breach other provision of the Act that cannot be contracted out of; and
- if there is to be a passing of liability “down the line” to a third party, that there is confidence that the clause is enforceable – complexity and uncertainty otherwise arises.
For further information, please contact a member of our litigation and dispute resolution team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.