Unfair Trade Practices

Unfair business practices are oppressive or unconscionable acts by companies against consumers or other stakeholders.

Learning Objective

Explain the concept of unfair trade practices relative to legal concerns and pricing

Key Points

Unfair business acts are generally prohibited by law, so committing them may force a company to provide for the award of compensatory damages, punitive damages, and payment of the plaintiff's legal fees.
Two major forms of unfair trade practice are fraud and misrepresentation.
Unfair trade practices not only affect consumers, but may affect other stakeholders as well, such as competitors and investors.

Terms

misrepresentation
A false statement of fact made by one party to another party, which has the effect of inducing that party into the contract.
fraud
Any act of deception carried out for the purpose of unfair, undeserved, or unlawful gain.

Example

Samuel Israel III was a former hedge fund manager who ran the former fraudulent Bayou Hedge Fund Group, and faked his suicide to avoid jail. Approximately $450 million was raised by the group from investors. Its investors were defrauded from the start with funds being misappropriated for personal use. After poor returns in 1998, the investors were lied to about the fund's returns and a fake accounting firm was set up to provide misleading audited results.

Full Text

Unfair Trade Practices

Unfair business practices include oppressive or unconscionable acts by companies against consumers and others. In most countries, such practices are prohibited under the law. Unfair trade practices can occur in many different areas such as insurance claims and settlement, debt collection, and tenancy issues.

Unfair trade practices also include such acts as:

Fraud: This is an intentional deception made for the company's gain or to damage the other party .
Misrepresentation: This is a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product may constitute misrepresentation.

In addition to providing for the award of compensatory damages, laws may also provide for the award of punitive damages as well as the payment of the plaintiff's legal fees. When statutes prohibiting unfair and deceptive business practices provide for the award of punitive damages and attorneys fees to injured parties, they provide a powerful incentive for businesses to resolve the claim through the settlement process rather than risk a more costly judgment in court.

In the European Union, each member state must regulate unfair business practices in accordance with the Unfair Commercial Practices Directive, subject to transitional periods. This is a major reform of the law concerning unfair business practices in the European Union.

Unfair trade practices not only affect consumers, but other stakeholders as well. Unfair competition in a sense means that the competitors compete on unequal terms, because favorable or disadvantageous conditions are applied to some competitors but not to others; or that the actions of some competitors actively harm the position of others with respect to their ability to compete on equal and fair terms. Often, unfair competition means that the gains of some participants are conditional on the losses of others, when the gains are made in ways which are illegitimate or unjust.

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