What is misleading and deceptive conduct in business dealings?

Quick summary of misleading and deceptive conduct

Section 18 of the Australian Consumer Law (ACL), in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act), provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.  The cases include conduct in advertising, leases, business sales and online activities.

——— The prohibition

What is misleading and deceptive conduct?

Conduct, in trade or commerce, that is misleading or deceptive or likely to mislead or deceive, which section 18 of the ACL prohibits.

Schedule 2 of the Competition and Consumer Act contains the ACL.

Section 18 of the ACL is the successor of the much interpreted section 52 of the Trade Practices Act 1975 (Cth) (Trade Practices Act).  Section 18(1) of the ACL provides:

"a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive".

In short, section 18(1) of the ACL prohibits misleading or deceptive conduct in trade or commerce, as section 52 of the Trade Practices Act did before it.

——— The test

How do Courts decide whether conduct is misleading or deceptive?

The test is an objective one which a Court must determine for itself, and the principles must be applied as a two-step test.

The elements of the prohibition against misleading or deceptive conduct

A useful analysis of the principles involved in establishing whether conduct is likely to be misleading or deceptive is contained in Australian Competition and Consumer Commission v Dukemaster Pty Ltd [2009] FCA 682 (Dukemaster),^[1] where Gordon J restated the following principles:^[2]

• the "conduct" in the circumstances, must lead, or be capable of leading a person into error;^[3]
• the error or misconception must be caused by the conduct of the corporation, not other circumstances for which the corporation is not responsible;^[4]
• to mislead and deceive there must be a real and not remote chance that the conduct will mislead (regardless of whether it is less or more than fifty per cent (50%));^[5] and
• the conduct must be considered in context and not in isolation.^[6]

The test is an objective one which a Court must determine for itself.^[7]

Application of the elements of misleading and deceptive conduct

The above principles must be applied as a two-step test:^[8]

• the first question is whether each or any pleaded representation is conveyed by the particular events [conduct] complained of;^[9] and
• secondly, it is necessary to determine whether the proven representations are misleading or deceptive or likely to mislead or deceive (which has been said to be a "quintessential question of fact").^[10]

In short, the Court first asks whether the representation is conveyed by the conduct, and then whether it is misleading or deceptive or likely to mislead or deceive.

——— Sales puffery

Is sales puffery misleading and deceptive conduct?

Puffery is a permissible level of embellishment, but there is a fine line between what constitutes puffery and what constitutes misleading and deceptive conduct.

The Courts have determined that in commercial dealings a certain level of embellishment is permissible and is to be expected.  This hyperbole is commonly referred to as puffery or "sales talk".  The difficulty is that there is a fine line between what constitutes puffery, and what constitutes misleading and deceptive conduct.

Generally the more outrageous a comment is, the more likely it is simply puffery.  By way of example:

• a statement regarding an office cleaning business that "the business ran itself" was held to be puffery, because no business has ever run itself;^[11] and
• on the other hand, a statement that a battery is the "world's longest lasting battery in high powered devices" was found to extend beyond puffery.^[12]

The table sets the two examples side by side.

In short, the more outrageous a comment is, the more likely it is simply puffery.

——— Business dealings

What conduct has been held to be misleading and deceptive in business?

The cases include half-truths in advertising, statements about rent, representations as to future matters, representations in business sales, silence about a material fact and disparaging comments about a competitor's business.

Advertising

Advertisements that tell half-truths have been found to constitute misleading and deceptive conduct.  An example of misleading and deceptive conduct in advertising involved phrases used by Coles in advertising its bread as "baked today sold today" and "freshly baked".  Coles par-baked and snap froze its bread with a final baking process occurring on the day the bread was sold.^[13]  In this example the statement is not technically incorrect, however it was found to be misleading and deceptive.

See our commentary here.

Leases

Statements about rent may be misleading and deceptive, especially in circumstances where the maker of the statement has no basis for the statement, or fabricates the basis for the statement.^[14]  An example of this may be where a lessor states that it has engaged a specialist to value the rent and that the rent being offered is very reasonable and below market value, when in fact no specialist was engaged and there is no proof that the amount of rent is reasonable or below market value (as was the case in Dukemaster).

Representations as to future matters

A representation that something will occur in the future may be misleading and deceptive conduct if the person making the representation does not have reasonable grounds for making the representation.^[15]  Representations to the effect that:

• a loan will be repaid with interest;^[16] or
• that changes in government spending will positively affect the business,^[17]

have been held to constitute misleading and deceptive conduct as to future matters.

Business sales

Due to the complexity of business sales, there is ample room for conduct to be considered misleading and deceptive.  Representations in relation to:

• the financial position of a business;^[18]
• the quality of a tenant;^[19] and
• how much workers are paid^[20] where the entity making the representation had no reasonable basis for making the statement,

have all been found to be misleading and deceptive.

Silence

Silence or non-disclosure of a material fact when entering a transaction or agreement may constitute misleading and deceptive conduct.  The relevant considerations are the level of sophistication of the parties involved, and the expectation that the parties would make reasonable enquiries about the transaction or agreement that they are entering into.  The more sophisticated a party is, the more likely it is that the party should make its own enquiries before entering into the transaction or agreement.^[21]

Disparaging comments about a competitor's business

In Seafolly v Madden [2012] FCA 1346 (Seafolly), disparaging comments made by Madden about a competitor's designs were ultimately held to be misleading and deceptive.  See our commentary here.

In short, conduct in many common business settings has been found to be misleading and deceptive, particularly where the person making a statement had no reasonable basis for it.

——— Online activities

Can online activities be misleading and deceptive conduct?

Yes.  Using a competitor's registered trade marks in Google AdWords has been held to be misleading and deceptive, and fake testimonials and price representations have led to proceedings.

Google AdWords

Using a competitor's registered trade marks in Google AdWords has been held to be misleading and deceptive.  See our commentary here.

Allegedly making false testimonials

In July 2014, the Australian Competition and Consumer Commission (ACCC) commenced proceedings against A Whistle (1979) Pty Ltd, the franchisor of the Electrodry Carpet Cleaning business, alleging that it made false and misleading representations by posting fake testimonials relating to its business on the internet and that it attempted to induce franchisees to make false or misleading representations on the internet.

See our commentary here.

Knowingly failing to remove known false testimonials

The ACCC brought proceedings against Allergy Pathway alleging that representations made about Allergy Pathway's allergy diagnosis products were false.  Allergy Pathway provided undertakings that it would not make any further false representations in relation to its ability to diagnose and treat allergies.

Third parties subsequently posted comments on Allergy Pathway's website and social media pages.  The ACCC argued that by failing to remove the comments, Allergy Pathway was liable for contempt for breaching their undertaking.  The Court found in favour of the ACCC and ordered that Allergy Pathway pay $7,500.00 and that it publish corrective advertising.

See our commentary here.

Price representations

In Specsavers Pty Ltd v Coastal Contacts (Aus) Pty Ltd [2012] FCA 102 (Specsavers)^[22] an application was made for interlocutory relief based on allegations of misleading and deceptive conduct pursuant to section 18 and also section 48's single price provisions.

The Court held that the representation "Focus Dailies Lenses Only $18.99"^[23] contravened the single price provisions of section 48(1) as 6.95% was added to every order for insurance and handling.^[24]  It was further held that the disclaimer "see website for details" did not cause the conduct to fall within an exception to the single price provisions of section 48(3) of the ACL.^[25]

Other business and commercial situations

There are many other common business and commercial situations where a party's conduct may breach the provisions of the ACL relating to misleading and deceptive conduct.  This article and our specific commentaries will be updated regularly.

In short, what a business does online, from the keywords it uses to the testimonials on its pages, can expose it to proceedings.

——— Remedies

What remedies are available for misleading and deceptive conduct?

Parties who have suffered loss as a result of misleading and deceptive conduct may be able to claim damages.

The plaintiff must establish that the:

• conduct was misleading and deceptive in contravention of the ACL;
• that the loss or damage was caused by the conduct;
• declarations;
• injunctions;
• compensation orders;
• orders for corrective advertising; or
• orders for corrective letters to be sent.

Where a Court finds that loss or damage has been caused by the misleading and deceptive conduct, the amount of damages awarded is usually the difference between the price paid for the item and the true value of the item.  It is important to note that the true value is not necessarily the market value.^[26]

The ACCC may also bring an action against entities that engage in misleading and deceptive conduct.

In short, damages are usually the difference between the price paid and the true value, which is not necessarily the market value.

Frequently asked questions about misleading and deceptive conduct

Key takeaways about misleading and deceptive conduct

• Section 18(1) of the ACL provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.
• The test is an objective one, applied in two steps: whether the representation is conveyed by the conduct, and whether it is misleading or deceptive or likely to mislead or deceive.
• A certain level of embellishment is permissible, and generally the more outrageous a comment is, the more likely it is simply puffery.
• Half-truths in advertising, and representations about rent, future matters and business sales made without a basis, have been found to be misleading and deceptive.
• Using a competitor's registered trade marks in Google AdWords has been held to be misleading and deceptive.
• Damages are usually the difference between the price paid and the true value of the item, which is not necessarily the market value.

Need advice about statements made in a business deal? Call Dundas Lawyers on 07 3221 0013 or submit an enquiry online.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Cases

Australian Competition and Consumer Commission v Dukemaster Pty Ltd (ACN 050 275 226) [2009] FCA 682

Beach Petroleum NL v Johnson [1993] FCA 283

Caffey v Leatt-Hayter (No 3) [2013] WASC 348

Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300

Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) [2011] FCA 981

Seafolly v Madden [2012] FCA 1346

Specsavers Pty Ltd v Coastal Contacts (Aus) Pty Ltd [2012] FCA 102

Videos

Directors' personal liability for misleading and deceptive conduct