Last week, the Court of Appeal confirmed the High Court's interpretation of section 17 of the Fair Trading Act 1986 ("FTA") in a case involving the Commerce Commission ("Commission") and Progressive Enterprises Limited ("Progressive")1. Section 17 principally relates to the offering of gifts and prizes in connection with the supply or promotion of goods or services.
It is now clear that to breach section 17, a person must know that the prizes are being offered and specifically intend that the prize will not be provided. The objective fact that the prize will not be provided is insufficient to meet the mens rea (state of mind element) of the offence. It is also clear from the judgment that the state of mind of servants and employees cannot be aggregated; the knowledge and intention of at least one person must be established.
Background
In mid-2006, Daymon Associates, who Progressive had contracted with to handle the development, sourcing, promotion and advertising of its in-house products (including the Signature Range brand), proposed that Progressive launch a new "Lighten Up" sub-brand of the Signature Range cereals by means of a promotion that offered purchasers of the new cereals the opportunity to enter a draw for one of five trips to the Hunter Valley in Australia. The promotion was advertised by fixing a round printed sticker to the front of all "Lighten Up" cereal packs, and by hanging wobblers (pieces of printed plastic) from relevant supermarket shelves. Neither the stickers nor the wobblers notified customers of the closing date for entering the draw, which was 31 August 2006. This could only be discovered by reading a pamphlet enclosed in the cereal box. The problem for Progressive was that despite the manufacturers being instructed to destroy the promotional material and a number of directions to store managers to cover up the promotional stickers on the cereal boxes and not to continue to promote the competition, cereal packs bearing the promotional stickers were still on display at approximately 70 stores nationwide on 6 December 2006, more than three months after the closing date for entry. This issue came to the attention of the Commission, and Progressive was prosecuted for breach of section 17(a) of the FTA.
Progressive was originally convicted in the District Court for offering prizes without the intention of providing them. A successful appeal was made to the High Court overturning this conviction,2 and this was upheld by the Court of Appeal.
Section 17 Fair Trading Act
Section 17(a) makes it an offence to offer gifts, prizes, or other free items in connection with the promotion, or supply, of goods or services with the intention of not providing them [emphasis added]. At issue in the Court of Appeal was the correct interpretation of the mens rea requirement of the offence, namely:
- Does section 17(a) impose a mens rea requirement or does it create an offence of "strict liability"?; and
- If section 17(a) imposes a mens rea requirement, is it possible under the FTA to aggregate the mental states of knowledge and intention of different servants or agents of a company in order to satisfy the composite mens rea requirement?
Is section 17(a) a strict liability offence?
There was no dispute that Progressive had committed the physical element of the offence by continuing to offer the prize after the closing date for entry to the draw. However the question in the Court of Appeal was whether this was enough to commit the offence under section 17(a).
The Court of Appeal agreed with the judgment of Asher J in the High Court, which found that section 17(a) did not create an offence of strict liability, but, rather, a mental element, or guilty mind, had to be proved beyond reasonable doubt (the criminal standard of proof).
The statutory words, "with the intention of not providing", were interpreted as a clear indication of Parliament's intention that the offence requires both knowledge of the offer of the prizes and a concurrent intention not to provide those prizes. The court contrasted the language in section 17 from that in sections 9 - 14(1) which do not require any mental element. The Court of Appeal also rejected the Commission's suggestion that the consumer protection purpose of the FTA militated against a plain language reading of the section in favour of a broader approach.
Crucial to the outcome of this case was the finding as a matter of fact that no Progressive staff member knowingly offered the prize with the intention to not provide it. As soon as Progressive's management became aware that the promotion was running after the closing date for entry to the competition, a number communications were sent to supermarket store managers directing them to remove all point of sale promotional material immediately. Despite the fact that those directions were not uniformly followed, there was no evidence that any one servant or director of Progressive had the knowledge and concurrent intention of not providing the prize being offered.
This case is in part reminiscent of the House of Lords judgment in Tesco Supermarkets Ltd v Nattras.3 In that case, Tesco were offering a discount on the price of washing powder. One store manager had run out of the lower priced product and replaced it with regularly priced stock despite still advertising the discount on posters displayed in-store. Tesco was charged under the Trade Descriptions Act 1968 (UK) for falsely advertising the price of washing powder. Tesco was acquitted in the House of Lords because it was found that its management had done everything it could to enforce the rules regarding advertising, and this satisfied the defence of taking all reasonable precautions and exercising due diligence. Tesco management's delegation of responsibility to store managers was regarded as performance of due diligence rather than avoidance.
It must be borne in mind that Tesco Supermarkets Ltd v Nattras concerned the defence to a strict liability offence of taking all reasonable precautions and exercising due diligence,4 while Commerce Commission v Progressive Enterprises Limited focused on whether the mens rea element of an offence had been met. Despite this difference, both cases demonstrate to managers the importance of having systems in place to ensure compliance with consumer protection legislation and that it is essential to respond immediately to reports of non-compliance "on the shop floor".
Is it possible to have a composite mens rea?
Having found that section 17(a) did impose a mens rea requirement, the Court of Appeal dealt swiftly with the second issue of whether the state of mind of two different directors or servants of a company can be aggregated to form a guilty mind. As stated above, it was found as a matter of fact that not one Progressive employee knew that the prize was being offered and also intended that it would not be provided.
The answer to this issue in the FTA context lies in the wording of section 45, which provides that to establish the state of mind of a body corporate, it is sufficient to show that "a" director, servant or agent had the state of mind. Clearly the use of the singular does not permit the aggregation of the mental states of two separate people to complete the mens rea requirement.
Accordingly the Commission accepted that in relation to an offence requiring a dishonest intention, it is contrary to principle to combine the mental states of different actors, each on its own innocent, in order to create a guilty mind. The Court of Appeal agreed with this concession, citing the remark of Devlin J:5
Conclusion
The Court of Appeal has made it clear that an offence under section 17 of the FTA cannot be committed inadvertently or carelessly. The case confirms that the offence of offering a gift, prize or other free item with the intention of not providing them as offered is not a strict liability offence. Instead it must be shown beyond reasonable doubt that the gift or prize was offered with the specific intention of not providing it. Further, both the wording of the attribution section in the FTA and legal principle dictate that the guilty mind must be found in (at least) a single servant or director.
Contributed by Lucy George and Andrew Peterson
2 Progressive Enterprises Limited v Commerce Commission, High Court. Auckland, CRI-2008-404-0165, 23 December 2008.
4 The equivalent provision in New Zealand is section 44(1)(c) of the Fair Trading Act 1986:
(i) The contravention was due to the act or default of another person, or to an accident or to some other cause beyond the defendant's control; and
(ii) The defendant took reasonable precautions and exercised due diligence to avoid the contravention.