Consumer Guarantees - Changes to the Trade Practices Act

Suppliers of goods and services, must pay attention to the changes that will soon be introduced by the new Australian Consumer Law (the ACL).

On 1 January 2011, the Trade Practices Act 1974 (the TPA) will be renamed the Competition and Consumer Act 2010 (Cth) (the Act) and the final parts of the ACL, which is a schedule to the Act, will come into force.

One of the most significant and important changes that the ACL with introduce, will be the replacement of the current implied warranties regime for consumer contracts in the TPA by a set of consumer guarantees. This has important consequences for suppliers of goods and services to “consumers” (which can include other businesses). Those businesses that may be affected will need to review the terms upon which they contract for the supply of goods and services to “consumers”.

Current position

Currently, the TPA implies certain conditions or warranties contracts for the supply by a corporation of goods or services to a “consumer”. These implied warranties relate to title, encumbrances, quiet possession, supply by description, quality or fitness and supply by sample (the Implied Warranties).

A person (including a corporation) will, subject to certain exceptions, be a “consumer” in relation to particular goods and services if:

• the goods or services are priced at $40,000 or less; or
• the goods or services are priced in excess of $40,000 but are of a kind ordinarily acquired for personal, domestic or household use or consumption; and
• in the case of goods, they are not purchased for either re-supply or use in business as part of the production or manufacture process.

Any term in a contract purporting to exclude, restrict or modify liability for breach of one of the Implied Warranties is void. In addition, where a corporation is in breach of one of these implied terms, the “consumer” has a claim against that corporation for breach of contract. Under the TPA, a corporation is only permitted to limit its liability for a breach of one of these Implied Warranties (other than the implied warranty as to title, encumbrances and/or quiet possession) where the goods or services are not of a kind ordinarily acquired for personal, domestic or household use or consumption.

Other warranties and any pre-contractual representations can be, and often are, excluded from the contract by suppliers, or the supplier’s liability is limited in respect of them.

Consumer guarantees

From 1 January 2011, the Implied Warranties will be replaced by a set of consumer guarantees. These consumer guarantees will apply to the supply of goods or services to “consumers”, and it will not be possible for a supplier to exclude liability in respect of them.

The definition of a “consumer” under the ACL is similar to that under the TPA, and, therefore, will, in some circumstances, include corporations as well as individual persons.

As with the Implied Warranties, any term in a contract that purports to exclude, restrict or modify liability for breach of a consumer guarantee is void. Under the ACL, a corporation is only permitted to limit its liability for breach of a consumer guarantee (other than a consumer guarantee as to title, undisturbed possession or undisclosed securities) where the goods or services are not of the kind ordinarily acquired for personal or domestic household use or consumption.

If goods or services are not being supplied to a “consumer” then the consumer guarantees do not apply.

Whilst the consumer guarantees largely reflect the Implied Warranties, there are two important new guarantees which apply to the supply of goods.

“Express warranties”

The first of these is a guarantee as to “express warranties”. This means that if a person supplies, in trade or commerce, goods to a “consumer”, there is a guarantee that the manufacturer of the goods will comply with any “express warranty” given or made by the manufacturer in relation to the goods.

The ACL defines an “express warranty” as including, in relation to goods, an undertaking, assertion or representation in relation to the quality, state, condition, performance or characteristics of the goods, that is given or made in connection with the supply of the goods, and the natural tendency of which is to induce people to acquire the goods.

This would, therefore, include all pre-contractual statements in relation to the goods, as well as any express warranties that a manufacturer may make, and means that liability for these cannot be excluded. Liability for “express warranties” will only be able to be limited where the goods are not of a kind ordinarily acquired for personal, domestic or household use or consumption.

Repairs and spare parts

The other new and significant, guarantee relates to repairs and spare parts. When supplying goods to a consumer, the manufacturer must ensure that facilities for the repair of the goods, and parts for the goods, are reasonably available for a reasonable period after the goods are supplied, unless the manufacturer has given the consumer written notice prior to the consumer agreeing to the supply, that these facilities or parts would not be available. Manufacturers will, therefore, need to consider how they will meet this obligation if they do not currently have repair facilities or spare parts.

Benefit to consumers

It is intended that consumers will have the benefit of statutory remedies for a breach of the consumer guarantees, instead of needing to rely upon a breach of contract claim. The ACL sets out the remedies relating to guarantees, and the circumstances in which consumers can bring an action against the supplier, and the rejection of goods and services.

In addition, a further benefit to consumers is that the ACL permits the consumer to recover damages for a breach of a consumer guarantee that “it was reasonably foreseeable” that the consumer would suffer. This is a wider right than the position under contract law (ie. for a breach of an Implied Warranty) which requires the losses to have reasonably been in the contemplation of the parties.

What do businesses need to do?

Where a business supplies goods or services to “consumers”, it needs to take a careful look at its current terms and conditions of supply, and ensure that:

• any exclusion clauses do not attempt to exclude liability for matters that will fall within the scope of the consumer guarantees;
• any limitation of liability clauses do not attempt to limit liability in relation to matters that will fall within the consumer guarantees where that liability cannot be limited;
• the effects of any “express warranties” have been considered (bearing in mind that liability for these may only be limited where the goods are of a kind not ordinarily required for personal, domestic or household use or consumption); and
• any entire agreement clause does not attempt to exclude liability for pre-contractual statements and representations which amount to “express warranties”.

A business will also need to vet its marketing materials to determine to what extent they contain the type of claims that would fall within the definition of an “express warranty”. Future marketing materials and the conduct of sales staff will need to be carefully controlled to minimize the risk of a business being held to account for “express warranties” that it did not intend to either make or be bound by.