1 Steven Brown Page 1 Australian Consumer Law: Defects, Warranties and Unfair Contracts Paper written by Steven Brown, Etienne Lawyers, B.Ec, LL.B, (Sydney), M. App. Fin (Macquarie), FAICD, Accredited Business Law Specialist, AIMM, FPIAA. BASIL CLE Conference on Saturday 24 March 2012 at the Sebel Hotel, Parramatta Introduction This paper is about recent changes to Trade Practices Act 1974 (Cth) ( TPA ), by the Competition and Consumer Act 2010 (Cth) and the introduction of the Australian Consumer Law (the ACL ) and my comments on the likely impact they will have on consumer transactions in Australia. Recent Changes The changes we will look at are the amendments to Act made by the Trade Practices Amendment (Australian Consumer Law) Act 2010 ( ACL. Defects and Warranty Changes under the Competition and Consumer Act 2010 The New Consumer Laws: 1. What are the differences between Then and Now? 2. contractual warranties cf statutory guarantee 3. Who is a consumer? Has the Law changed? 4. Guarantees and Auctions. One of the highest profile changes introduced by the ACL is the new system of statutory guarantees which replace the conditions and warranties previously implied into consumer contracts by the Trade Practices Act 1974 (Cth) (TPA) and various state laws.
2 Steven Brown Page 2 Rational for the change In July 2009, the Commonwealth Consumer Affairs Advisory Council (CCAAC) noted that the crucial failing of the system of implied terms in the TPA had long been identified: It is clear from studies over the past two decades that the key problem with the current statutory implied terms regime is a lack of awareness by consumers, retailers and, to a lesser extent, manufacturers of their legislated rights and responsibilities. [Consumer rights: Statutory implied conditions and warranties Issues paper, Commonwealth Consumer Affairs Advisory Council, July 2009, Page 7] The TPA and the corresponding state legislation operated by implying conditions and warranties into the contract for purchase of goods or services by a consumer. These implied conditions used terms, such as merchantable quality and fitness for purpose, drawn from 19th-century English mercantile law. Terms familiar and known to lawyer but complex and confronting so the legislature thought for consumers. [Example to show complexity of these things.] Carpet Call v Chan The TPA regime did not provide express remedies for consumers. Consumers, who wanted to enforce their rights, had to do so under the law of contract. Section 75A of the TPA effectively gave consumers the right to return some products for a refund but did not use the word refund, referring instead to purported rescission and the right to recover from the corporation, as a debt, the amount or value of any consideration. This was not language that was easily comprehended by most consumers. The legislature concluded that it is not surprising that consumers did not understand their rights. The Regulation Impact Statement prepared for the Ministerial Council on Consumer Affairs (MCCA) [Regulation Impact Statement: The Australian Consumer Law A national consumer guarantees law, December 2009, also considered the report
3 Steven Brown Page 3 dated 30 October 2009 prepared by the Commonwealth Consumer Affairs Advisory Council (CCAAC) for the Minister for Competition Policy and Consumer Affairs, Consumer rights: Reforming statutory implied conditions and warranties (CCACC Report) and concluded that there were so many deficiencies in the previous system that better consumer education would not fix the problems. So, while the previous TPA provisions formed the base of the majority of the ACL [This was the recommendation of the Productivity Commission. See Productivity Commission (2008) Vol. II, p.62.], the MCCA recommended that the system of implied contractual warranties and conditions be replaced with a system of clearly expressed statutory guarantees, coupled with express remedies. The MCCA accepted this recommendation in December 2009 and consumer guarantees were born [see: Joint Communiqué, MCCA Meeting, 4 December 2009]. Lessons from New Zealand The consumer guarantee regime in the ACL is largely modelled on the provisions in New Zealand s Consumer Guarantees Act 1993 (NZ) [See: A new approach to Consumer Policy Strategy , MCCA, 4 December 2009]. Useful insights as to how the ACL provisions are likely to be applied can therefore be gained from New Zealand case law. When do the statutory guarantees apply? The new consumer guarantees in the ACL apply to consumer transactions. The definition of a consumer transaction is largely unchanged from the TPA. Section 3 of the ACL defines a consumer to be: A person (which can include a corporation) is taken to acquire goods or services as a consumer if: (a) the amount payable does not exceed $40,000; (b) the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption; or (c) in the case of goods, those goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads,[section 3(1), ACL]
4 Steven Brown Page 4 and, in the case of goods, the goods are not acquired for re-supply or to be used up or transformed in a manufacturing process.[section 3(2), ACL] What are the guarantees? The ACL sets out nine guarantees that apply to supplies of goods, and three that apply to services. Most of these closely follow the language of the warranties that were previously implied by the TPA. Sections 51 to 53 of the ACL provide guarantees that the supplier of goods has the right to sell the goods, that the purchaser will receive undisturbed possession, and that the goods are free from undisclosed securities. Sections 54 to 57 contain guarantees as to the quality of the goods supplied. These are that the goods must be of acceptable quality, fit for any disclosed purpose, and match descriptions and/or samples previously provided. There is also a guarantee of availability of repairs and spare parts (s 58). Finally, s 59 provides that any express warranty given by a manufacturer will also have effect as a statutory consumer guarantee. The guarantees applying in respect of consumer supplies of services are that the services will be supplied with due care and skill (s 60), that the services will be fit for any disclosed purpose (s 61) and that, if no specific time for provision of the services is agreed, they will be supplied within a reasonable time (s 62). Guarantee of acceptable quality The guarantee of acceptable quality replaces the previous implied condition that goods would be of merchantable quality.[ Sections 71 and 74D, Trade Practices Act] As this is the guarantee likely to be most often relied upon by consumers when they have a faulty product, it merits particular consideration. Section 54(2) of the ACL provides that:
5 Steven Brown Page 5 Goods are of acceptable quality if they are as: (a) fit for all the purposes for which goods of that kind are commonly supplied; and (b) acceptable in appearance and finish; and (c) free from defects; and (d) safe; and (e) durable; as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods) would regard as acceptable having regards to the matters in subsection (3). Subsection (3) then lists five matters to be taken into account in determining what is acceptable : 1. the nature of the goods; 2. the price of the goods; 3. any statements made on packaging; 4. representations made about the goods by the supplier or manufacturer; and 5. any other relevant circumstances. Reasonable expectations of an inexpensive product might be quite different from what would be reasonable to expect of an expensive product of the same kind. The inclusion of an express requirement that goods be durable is new. Previously, if goods failed early, it was necessary to show that this failure was due to a defect present at the time of supply that rendered the goods of unmerchantable quality. Now, a failure to comply with the consumer guarantee of acceptable quality can be established simply by showing that the product has failed to last as long as a consumer would reasonably expect. In New Zealand, where the definition of acceptable quality is substantially identical to that in the ACL, the New Zealand Court of Appeal has stated that acceptable quality sets a higher bar than merchantable quality : Nesbit v Porter  NZLR 465 at . Nevertheless, the guarantee of acceptable quality is not a guarantee of
6 Steven Brown Page 6 perfection. Rather, it is a guarantee that a product will reach standards that a reasonable consumer would regard as good enough. Consumer remedies an overview Part 5-4 of the ACL sets out the remedies to which a consumer is entitled when a guarantee has been breached. In many cases, a consumer will have a choice of enforcing remedies against either the manufacturer of the goods (which includes the importer) or the retailer. The only guarantees that cannot be enforced against a retailer are the guarantee relating to the availability of a repair network and spare parts, and the guarantee that the manufacturer will comply with its own express warranty. As under the TPA, retailers have a right of indemnification against manufacturers where the retailer has incurred loss honouring a consumer guarantee that could have been directly enforced against the manufacturer: Section 274, ACL. Section 271 of the ACL allows consumers to enforce the guarantees of acceptable quality, compliance with sample, availability of spare parts and a repair network and compliance with any express warranty directly against the manufacturer. A consumer only has a right to damages against a manufacturer, not to return the goods. In practice, a faulty good may be found to have no value and so damages will be equal to the purchase price of the good. This is effectively the same remedy as a return of the goods for a refund. If a consumer guarantee is not complied with and: (a) the failure to comply with is major ; and (b) the rejection period has not expired.
7 Steven Brown Page 7 then a consumer will generally be entitled to their choice of a refund, repair or replacement product. If the failure to comply with the consumer guarantee is not major, the supplier can choose what remedy is provided: Section 259(2)(a), ACL. The remedy the supplier may choose depends on the type of failure, but for a defective product the supplier can choose to repair, replace or refund the product: Section 261, ACL. The right to a refund or replacement what is a major failure? Where a consumer wants to return a product for a refund or replacement, they must first show that there has been a major failure to comply with a consumer guarantee. Section 260 of the ACL defines a major failure as follows: A failure to comply with a guarantee referred to in section 259(1)(b) that applies to a supply of goods is a major failure if: (a) the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or (b) the goods depart in one or more significant respects: (i) if they were supplied by description - from that description; or (ii) if they were supplied by reference to a sample or demonstration model - from that sample or demonstration model; or (c) the goods are substantially unfit for a purpose for which goods of the same kind are commonly supplied and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or (d) the goods are unfit for a disclosed purpose that was made known to: (i) the supplier of the goods; or (ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the goods were conducted or made; and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or (e) the goods are not of acceptable quality because they are unsafe. Although there are five alternate grounds for categorising a failure as major, the reasonable consumer test (subs (a)), the unfit for purpose test (subs (c)) and the
8 Steven Brown Page 8 unsafe goods test (subs (e)) can be expected to be the grounds most commonly relied on to establish a major failure. The reasonable consumer test - s260(a) Experience in New Zealand suggests that the determination of whether a failure is major will most often turn on the reasonable consumer test. This provides that a failure will be major if a reasonable consumer who knew of the failure in advance would not have acquired the goods. The fact that an individual consumer, whose sensitivities may differ from those of the reasonable consumer, may not have purchased a product, does not necessarily mean that a defect is major. [Somewhat worryingly, at page 23 of the ACCC Consumer Guide, the ACCC appears to misapply this test, stating that: There is a major failure to comply with a consumer guarantee where you would not have purchased the product had you known about the problem. (Emphasis added) Consumers reading this guide are likely to understand that the relevant test is a subjective test based on whether the individual consumer would have purchased a product if they had known of a particular defect, rather than the objective test of what a reasonable consumer would have done.] The New Zealand case of Norton v Hervey Motors Ltd  DCR 427, provides a useful example. In that case, the consumer was unhappy with defects in the paintwork on a vehicle she had purchased and she wished to have the vehicle replaced. The expert evidence was that the defect was easy to remedy and covered by the express warranty that came with the vehicle. In those circumstances, the court held that a reasonable consumer, having regard to the existence of the express warranty, would still have purchased the vehicle. Therefore the failure was not of substantial character (or, in ACL terms, major ) and the consumer did not have the right to return the vehicle. Although this test does not expressly include any assessment of whether the fault is easily repairable, New Zealand courts have found that whether a failure is major is a matter of degree:
9 Steven Brown Page 9 On a monetary level, being required to spend $1000 on repairs in respect of a vehicle purchased for $5000 might indicate a failure of a substantial character but that would not necessarily hold true for the same repairs on a vehicle of significantly greater value [Stephens v Chevron Motor Court Ltd  DCR 1 at ]. New Zealand courts have also held that a reasonable consumer must be taken to expect that there may well be some matters which will require remedy : Norton v Hervey Motors Ltd  DCR 427 at . This will clearly be the case when a consumer is purchasing certain types of products, such as a motor vehicle. In recent years, cars have become increasingly reliable. Nevertheless, a car is such a complex combination of systems that most reasonable consumers would still be likely to expect that any vehicle they purchase will suffer minor faults from time to time. It follows that, provided they will be remedied under the manufacturer s warranty, such faults would be unlikely to cause a reasonable consumer not to purchase. Similar logic may apply to appliances such as washing machines that most reasonable consumers are likely to expect will require service calls from time to time. The reasonable consumer test may give different results, however, when applied to products that consumers don t expect to suffer frequent faults. For example, most reputable brands of television are highly reliable. Unlike a consumer purchasing a car, a consumer purchasing such a television may reasonably expect their purchase to operate without fault for several years. However, if their television does develop a fault, fixing it will require the consumer to disconnect the television, work out how to get it to a service agent, and then, in most cases, live without television for a number of weeks. Once the television is repaired, the consumer must arrange to collect it again and then work out how to reconnect it properly. Most televisions can be expected to operate without fault for years. Therefore, it is likely that a reasonable consumer who knew ahead of time that a television would experience any fault in the first few years requiring it to be taken to a service agent would choose to purchase another brand instead. This means that even a fault that can be quite easily fixed may constitute a major failure and give rise to a right of refund if it nevertheless causes a consumer considerable inconvenience.
10 Steven Brown Page 10 Unfit for purpose s260(c) and (d) Sections 260(c) and (d) provide that failure of a product to be fit for purpose (eg, because it is defective) will constitute a major failure if it cannot be remedied easily and within a reasonable time. The corollary, of course, is that if a product can be repaired or modified easily within a reasonable time, the initial failure to be fit for purpose will not be deemed under s 260(c) or (d) to be major. It appears that many suppliers understand this to mean that if a product can easily be repaired, a consumer has no right to require a refund or replacement. The Australian Competition and Consumer Commission (ACCC) appears to encourage this view by placing greater emphasis in its guidance on the unfit for purpose test than the reasonable consumer test. For example, the ACCC s Consumer Guarantees A Guide for Consumers (ACCC Consumer Guide) states: Minor failures to comply with a consumer guarantee can normally be fixed or resolved in a reasonable amount of time. Major problems cannot be fixed or are too difficult to fix [ACCC Consumer Guide, at page13]. This ignores the fact that, as described above, even a fault that can easily be fixed may cause sufficient inconvenience that a reasonable consumer would not have purchased the product had they known about the failure in advance. If so, the fact that the product can be repaired for the purposes of s 260(c) or (d) will not prevent the failure being major under the test in s 260(a). If Australian courts and tribunals follow the New Zealand interpretation of the reasonable consumer test, suppliers that insist upon repairing products rather than accepting returns may risk substantial penalties for misrepresenting consumers rights under the statutory guarantee regime. Unsafe products s260(e) Section 260(e) of the ACL provides that goods have a major failure if they are not of acceptable quality because they are unsafe. This means that any failure of the
11 Steven Brown Page 11 guarantee of acceptable quality that arises as a result of a safety defect is automatically a major failure. This raises the spectre that almost any safety defect in a product may give rise to a right for consumers to claim refunds. Of course, before a safety defect can be deemed to be a major failure, it must be serious enough to breach the guarantee of acceptable quality in the first place. In practice, this means that the defect must result in the product not being as free from defects or as safe as a reasonable consumer would regard as acceptable. The High Court of New Zealand had reason to examine the level of safety expected by a reasonable consumer in Contact Energy Ltd v Jones  2 NZLR 830. In that case, which concerned the supply of electricity, the court found that a reasonable consumer may be willing to accept a degree of risk - particularly with products that have an inherent degree of risk. Nevertheless, it seems clear that a motor vehicle that has a defect that results in an increased risk of brake failure, or an electrical appliance with a fault that creates a risk of electrocution, will breach the guarantee of acceptable quality on the basis that these products would not be as safe as a reasonable consumer would regard as being acceptable. Section 260(e) will then deem the relevant failure to be major, giving affected consumers a right to claim a refund. This has serious implications for manufacturers conducting safety recalls. Where products have a potential safety issue, the normal approach is for the manufacturer to issue a recall for a specified range (such as a serial number range), have each product inspected and take the necessary action (such as a repair or replacement) for products that are found to be affected by the fault. Under the new law, however, if a product is found to be affected by a defect, manufacturers may not have the right to insist that consumers accept a repair of their product. Instead, a safety recall may well give affected consumers the right to insist on their choice of a refund or replacement. The government s Consumer Guarantees A Guide for Businesses and Legal Practitioners states that a potential safety issue does not automatically amount to a major failure. Instead, it says that [e]ach of the goods subject to the recall would need to be considered individually.[commonwealth of Australia, Consumer
12 Steven Brown Page 12 Guarantees A Guide for Businesses and Legal Practitioners, 2010 (ACL Business Guide), p 21.] The inference is that if a product is recalled because it may have a safety defect, then where an individual product is inspected and found not to be affected by the defect, there would be no right of refund. It seems difficult to avoid the conclusion, however, that once an inspection shows that a product is affected by a safety defect, the consumer is entitled to insist upon a refund or replacement. This means that future safety recalls may be very expensive indeed for manufacturers. The right to a refund or replacement the rejection period Section 262 of the ACL provides that, in certain circumstances, a consumer is not entitled to return goods for a refund or replacement even though they have suffered a major failure. This will occur where the goods are lost or destroyed, have been attached to other property in a way such that they cannot be removed without damage, or the rejection period has ended. The most important of these limitations is the rejection period. Section 262(2) defines the rejection period as follows: The rejection period for goods is the period from the time of the supply of goods to the consumer within which it would be reasonable to expect the relevant failure to comply with a guarantee referred to in section 259(1)(b) to become apparent having regard to: (a) the type of goods; and (b) the use to which a consumer is likely to put them; and (c) the length of time for which it is reasonable for them to be used; and (d) the amount of use to which it is reasonable for them to be put before such a failure has become apparent. This important limitation would seem to have the following consequences: 1. If consumers do not act reasonably promptly once they discover a fault, they may lose their right to return the goods to claim a refund or replacement, and will instead have to accept a repair.[in Nesbit v Porter the Court accepted that
13 Steven Brown Page 13 this period must also include some allowance for the consumer to become properly informed about the nature of the defect and to consider an appropriate decision, whether or not to return the goods (at )] 2. However, where a product is affected by a latent defect, a consumer may be able to claim a refund once the defect becomes manifest, even if that is a considerable time after the goods were purchased. For example, if an expensive consumer durable has a design fault that is likely to cause it to fail at some point within its first two years of life, then it is likely that this will be a major failure to comply with the guarantee of acceptable quality. Section 262 provides that the rejection period for that product will be the period within which it would be reasonable to expect the relevant failure to comply with [the guarantee of acceptable quality] to become apparent. In this case, since the defect normally takes up to two years to become apparent, the rejection period will be up to two years, and consumers may be entitled to claim a full refund for their product for up to this long. 3. If a fault takes longer than could reasonably be expected to manifest, such as where the consumer only rarely uses the product, the right to return the product may be lost. In Nesbit v Porter  NZLR 465 the New Zealand Court of Appeal considered the equivalent section in the Consumer Guarantees Act. In that case, a second hand Nissan Navara vehicle was found to have rust and problems with the steering and shock absorbers. The court found that it was reasonable to expect those defects to become apparent soon after supply. As the vehicle was subject to six monthly roadworthy tests, the court found at  that: the motor vehicle dealer should be generally freed from the burden of having to accept rejection of a vehicle of this age and pedigree after the time for the next mandatory six monthly Warrant of Fitness check had passed. If, at the latest, a defect of the kind found in the Navara has not manifested itself on such an inspection, it would be an unfair burden upon the supplier if a buyer of such a vehicle,
14 Steven Brown Page 14 which must be assumed to have been in daily use, sometimes in rough conditions, should thereafter be able to reject it. The court went on to find that since the rejection period had expired before the consumer attempted to return the vehicle, the right to reject the vehicle was lost. On the other hand, in a matter before the Motor Vehicle Disputes Tribunal of New Zealand [Reference No. MVD 211/09 (Auckland)  NZMVDT 8 (5 February 2010)], a purchaser wished to return a car some six years after purchase because the vehicle s transmission had started to malfunction. Although the vehicle was six years old, it had only travelled 34,000 kilometres. The tribunal accepted expert evidence that a failure of transmission after so few kilometres could not be considered as anything other than premature failure and found that the vehicle had suffered a major failure of the guarantee of acceptable quality. The Tribunal found that the consumer was entitled to return the vehicle, even though it was six years old. Original Packaging Restriction No Longer s 259(7) ACL Consumers were in the past often thwarted in relying upon TPA remedies by being contractually required to produce the original packaging for a consumer good sought to be returned. Section 259(7) no expressly prohibits a retailer or manufacturer from honouring the statutory warranties just because goods are not returned in their original packaging. Special case lemons The reviews of the consumer protection laws that preceded the ACL considered whether a specific lemon law was required; either for motor vehicles specifically, or for consumer products in general.[see Consumer rights: Statutory implied conditions and warranties Issues paper, CCAAC, July 2009, chapter 6] While there are varying definitions of a lemon, the CCAAC defined lemons as products that simply will not function as intended, for reasons that are beyond the expertise of a reasonable repairer to remedy.[see CCAAC Report, page 92] In simple terms, it is a product that, despite repeated repairs, continues to break down. The CCAAC acknowledged that lemons can cause consumers considerable inconvenience. However, it also found that the incidence of lemons, either in motor
15 Steven Brown Page 15 vehicles or in consumer products generally, was not high enough to warrant specific legislation. The CCAAC also thought the new consumer guarantees may address some of the difficulties facing consumers in obtaining a remedy under the TPA. Consequently, the CCAAC recommended against a specific lemon law.[see CCACC Report, page 99] Whether the new consumer guarantees do in fact address issues relating to lemon products remains to be seen. It is interesting to note that the ACCC does not appear to address the question at all in its guides. It seems clear that a product that breaks down repeatedly will breach the guarantees of acceptable quality and, possibly, fitness for purpose. The remedy most consumers will then seek will be a refund or a new product, not more repairs. To require this, the relevant failure must be major. Under s 260(a), a failure is major if the reasonable consumer, fully acquainted with the nature of the failure, would not have purchased the product. It is not clear that this language is well adapted to allow a series of failures to be taken into account. The alternative argument is that a product that continually fails is not fit for purpose under s 260(c) or (d). If several previous repairs have failed to make a product reliable, a consumer may then be able to argue that it has been shown that the problem cannot easily, and within a reasonable time, be remedied and that the definition of major failure in s 260(c) or (d) has become satisfied, entitling them to require a refund or replacement. Again, however, this right seems less than clear. Manufacturers Warranties The Trade Practices Act did not regulate the content or form of manufacturers warranties. The ACL, however, sets out a range of requirements for such warranties, including a requirement to include a statement informing consumers of their rights under statutory consumer guarantees. These requirements come into effect on 1 January From this date, failure to comply with the new laws may result in penalties ranging from $10,000 per offence for individuals to $50,000 per offence for corporations. Every product a manufacturer
16 Steven Brown Page 16 sells without a compliant warranty statement will be a separate offence (that is, there is a separate offence for every single item sold). To comply with the ACL, from 1 January, 2012 all manufacturers warranty statements must: (a) include the following text, which must be set out exactly as set out below: Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and for compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure'. There is no specific requirement for prominence of this text. Our advice is that the print be at least as prominent as other text in the warranty document or statements. (b) be drafted clearly and legibly; (c) concisely state the following (i) what the supplier will do under the warranty (e.g., repair or replace the product); and (ii) what the consumer must do to entitle the consumer to claim the warranty. (d) prominently state the following information about the supplier: (i) the supplier s name; (ii) the supplier s business address; (iii) the supplier s telephone number; (iv) the supplier s address (if any); (e) state the period or periods within which a defect in the goods or services to which the warranty relates must appear if the consumer is to be entitled to claim the warranty; (f) set out the procedure for the consumer to claim the warranty including the address to which a claim may be sent; and (g) state who will bear the expense of claiming the warranty and, if the expense is to be borne by the person who gives the warranty, how the consumer can claim expenses incurred in making the claim.