Unfair and unconscionable sales acts and practices

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Published — August 9, 2017

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Read Also: Frequently Asked Questions on the Law on Contracts

Every entrepreneur, whatever line of business may be, is bound to deal with fairness and honesty, and promote equitable relations among the parties in consumer transactions. Sadly, in trying to extract more profits from their business, some entrepreneurs do not observe, if not violate, these ideals on business dealings that they ought to conform to. Therefore, in order to protect the public against deceptive, unfair and unconscionable sales acts, the law designated the Department of Trade and Industry (“DTI”) to clamp down on those who carry out such unacceptable practices.

To avoid committing inequities in dealing with the purchasing public, it has become imperative for business owners to know what constitutes unconscionable sales acts and practices.

In this regard, the Consumer Act (R.A. No. 7394) declares that, in connection with a consumer transaction, an act or practice shall be deemed deceptive whenever the seller, through concealment, false representation or fraudulent manipulation, induces consumers to buy his product or avail his services [See: Art. 50]. Moreover, an act or practice shall be deemed unfair or unconscionable whenever the seller, by taking advantage of the consumer’s physical or mental infirmity, ignorance, illiteracy or the general conditions of the environment or surroundings, induces the consumer to enter into a transaction that is grossly inimical to the latter’s interests, or grossly one-sided in favor of the seller [See: Art. 52].

Thus, where a seller, through its representative stationed in malls, entices the people to purchase its products by misrepresenting to the consumers that they have won a gift when said gift can only be claimed when they purchase the seller’s products is clearly an unconscionable sales act or practice [See: G.R. No. 189655].

Chain distribution or pyramid sales schemes

The Consumer Act likewise makes it clear that chain distribution plans or pyramid sales schemes shall not be employed in the sale of consumer products [See: Art. 53].

Broadly speaking, a pyramid distribution plan is a means of distributing a company’s products or services to consumers. Pyramid schemes generally consist of several distribution levels through which the products or services are resold until they reach the ultimate consumer. A pyramid is merely a variation on a chain letter and almost always involves large numbers of people at the lowest level who pay money to a few people at the topmost level.

The pyramid scheme is prohibited because new participants pay a sum of money not really to buy the seller’s product but merely for the chance to join the program and advance to the top level, where they will realize profit not from sales, but from the initial payments made by later participants.

A pyramid scheme always involves a certain degree of failure, as it can work only with unlimited supplies of new participants. There will come a point where the pyramid will eventually fail to attract new participants, and the individuals who joined later will not anymore receive any money because there will be no new bottom level of participants to support the plan [See: Sherman, Franchising & Licensing].

Home solicitation sales

No business entity shall conduct any home solicitation sale of any consumer product or service without first obtaining a permit from the DTI [See: Art. 54].

When permitted, home solicitation sales may be conducted only between 9:00 o’clock in the morning and 7:00 o’clock in the evening of each working day. However, solicitation sales may be made at any other time when the person being solicited has previously agreed to it. Moreover, home solicitation sales shall be conducted only by a person who has the proper identification and authority from the principal that he represents to make such solicitation [See: Arts. 55 & 56].

Home solicitation sale shall not represent that the buyer has been specially selected, that a survey, test or research is being conducted, or that the seller is making a special offer to a few persons only for a limited period of time [See: Art. 58].

Referral sales

Referral selling is the means employed in acquiring new customers who are referred to by existing customers. These existing customers are usually enticed to make referrals by being promised to be given a so-called “referral fee” for every successful deal from customers that they were able to refer.

Under the Consumer Act, referral selling plans shall not be used in the sale of consumer products unless the seller executes in favor of the buyer-referrer a written undertaking that will grant a specified compensation or benefit to the referrer in return for each and every transaction consummated by the seller with the persons referred to him, or for subsequent sales that the seller was able to close with the help of the referrer [See: Art. 59].

Penalties for violation

Any person who shall violate the rules on unconscionable sales acts and practices, including the prohibitions on chain distrubution plans or pyramid sales schemes, and those pertaining to home solicitation sales and referral sales, shall upon conviction, be subject to a fine of Php 500.00 to Php 10,000.00, or imprisonment of 5 months to 1 year, or both, upon the discretion of the court [See: Art. 60].

Considering the noble purpose of the law in protecting the consumers from possible abusive selling, business owners who deal with consumer products and services would do well to avoid engaging in unfair and unconscionable sales acts and practices. After all, doing business with clean hands is the surest way to net more customers, enhance business reputation, and build goodwill with the purchasing public. Ultimately, clean business dealings will benefit not only the consumers but the enterprise as well.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding marketing and sales laws, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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