Australia: The application of the Australian Consumer Law to B2B transactions

Last Updated: 30 March 2012
Article by Donna Bartlett and Szemei Ng

Most Read Contributor in Australia, September 2018

Transactions involving the supply of goods and services to businesses, as opposed to individuals, are often mistakenly presumed by businesses to be outside the operation of the provisions of the Australian Consumer Law (ACL). This misconception can expose businesses to serious implications. While this misconception existed under the Trade Practices Act supply of goods or services which are1 (TPA), it has been further complicated by the introduction of different definitions of "consumer" and "consumer transactions" within the ACL.

This article specifically covers the application of the consumer guarantee provisions of the ACL to business transactions and sets out:

  • the "consumer" definition applicable to the consumer guarantee provisions;
  • the types of business to business transactions which may fall within that definition; and
  • the practical steps which businesses need to take to address the impact.

While this article focuses entirely on the consumer guarantee provisions, it is noted that the definitions of "consumer" under the Australian Consumer Law are complex and the applicability of the operation of the provisions governing other matters such as product liability and unsolicited consumer agreements also require similar careful consideration in the context of business to business transactions.

Consumer guarantee provisions

If an individual or business has acquired goods or services as a "consumer" under the ACL, then the transaction is subject to the new statutory consumer guarantee regime.

The consumer guarantees applying to goods include that:

  • goods are of acceptable quality;2
  • goods are fit for any specified purpose;3
  • goods correspond with their description;4
  • goods match the sample or demonstration model;5
  • the manufacturer will take reasonable action to ensure that repair facilities and parts for goods are reasonably available;6 and
  • manufacturers or suppliers will comply with any express warranty they make about goods, such as relating to the quality, state, condition, performance or characteristics of goods.7

The consumer guarantees relating to services include that:

  • services are performed with due care and skill;8
  • services are fit for a particular purpose;9 and
  • services must be supplied within a reasonable time, if no time has been specified.10

As these consumer guarantees cannot be excluded from "consumer" transactions, it is important to assess whether goods or services are acquired by a "consumer" under the applicable definition.

What is a "consumer" under the consumer guarantee provisions?

For the purposes of the consumer guarantee provisions, a purchaser is taken to have acquired goods or services as a "consumer" if:

  1. the amount paid or payable for the goods or services did not exceed $40,000.11
    Under this limb of the definition, the price in itself is determinative; or
  2. the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption.12
    Under this limb, the nature of the goods or services is determinative irrespective of the nature of the party acquiring them or the price of the goods or services; or
  3. the goods consist of a vehicle or trailer acquired for use principally in the transport of goods on public roads.

While there are specific exceptions to the definition (in particular financial goods and services which are addressed under the Australian Securities and Investment Commission Act13 and goods acquired for the purpose of re-supply),14 for the purpose of this article, the impact of the first two limbs on business to business transactions is the focus.

First Limb: the threshold amount

Any person or entity that acquires goods or services at a price not exceeding $40,000 is a "consumer" for the purposes of the consumer guarantee provisions. Neither the nature of the party acquiring the goods or services, nor the nature of the goods or services themselves will exclude the transaction from being subject to the operation of the consumer guarantee provisions.

By way of example in the context of similar provisions in the TPA, in Seely International Pty Ltd v Newtronics Pty Ltd15 since the contract price was less than the $40,000 threshold, the purchaser was considered a "consumer" regardless of the fact that the services were not provided for a domestic purpose.

In determining the "amount paid or payable" under the first limb, the ACL provides that this is taken to be "the price paid or payable by the person for the goods or services",16 where the "price" may include "any charge of any description".17 Generally, the determination of the price will be relatively straightforward but in the context of goods or services that are supplied as part of a larger acquisition or where they are acquired other than by means of a purchase, then difficulties may arise.

In the context of mixed purchases of goods or services, the ACL provides that the price for goods or services through purchases will be determined on the basis of:

  1. the price at which the goods or service could have been purchased individually from the supplier;
  2. the lowest price the goods or services could have been reasonably been acquired for individually at the time from another supplier (if scenario (a) does not apply); or
  3. the value of the goods or services at the time of acquisition, if the goods or services could not have been acquired from any other supplier except by mixed supply.18

Similarly, another issue that arises is in the context of goods or services which are provided over a course of time. It is common in business transactions for services such as training services to be paid for in advance and supplied over an extended period. Consideration must be given to the price for such services in the context of the operation of the consumer guarantee provisions, for example whether the price for each training course is the applicable "price" or whether it can be genuinely said that the price for the services is the aggregate total price.

Second Limb: "ordinarily acquired for personal, domestic and household use"

Under the second limb of the consumer definition, the nature of the goods or service is the determinative factor irrespective of price. This means that a person acquiring goods or services for a price exceeding the statutory amount will be considered a consumer where the goods or services are of the kind ordinarily acquired for personal, domestic and household use.19 This provision has been read widely by the courts to include transactions between companies involving goods or services which households might commonly acquire.

The applicable test is determining what the goods and services are ordinarily used for rather than looking at what they are actually used for. There will be instances where it may be relatively easy to characterise the good or service. For example, a kitchen kettle or board game is ordinarily acquired for personal, domestic or household uses, whereas egg incubators,20 a reduction photocopier21 and building services for the construction of an office building22 are not.

The complexity in applying the test arises in borderline cases where goods or services have both a commercial and domestic application. Determining whether or not the goods or services are ordinarily acquired for personal, domestic or household purposes is a question of fact and will depend on the type or class of the goods or services and not how the goods or services are actually used.

In Carpet Call Pty Ltd v Chan,23 the sale of domestic grade carpet to a nightclub fell within the definition of a consumer transaction on the basis that carpet is a product ordinarily acquired for household or domestic use. Thomas J held that this was a "consumer transaction" because carpet is a good "ordinarily acquired" for domestic consumption and does not lose that description by reason of a commercial setup or some quality which makes it last longer than other carpet normally supplied for use in a household setting. This case illustrates that the use of common household goods or services in a business does not prevent the purchaser from being a "consumer", where goods or services still retain their "personal, domestic or household" character.24

Conversely, even if goods or services are used for personal or domestic means, this does not make an inherently commercial good or service a "consumer" item. For example, goods such as an air-seeder25 and large tractor26 were not considered to be "consumer" goods despite their domestic application.

What is the consequence of a consumer transaction?

A fundamental concern for businesses operating under the misconception that the consumer guarantee provisions of the ACL are not applicable to their transactions and agreements is the use of clauses in those agreements which have the effect of excluding those statutory guarantees. Broad exclusion clauses which are expressed to exclude statutory warranties and warranties of the type provided in the consumer guarantee provisions (such as warranties as to fitness for purpose) will be void in transactions which fall within the consumer definition. Such clauses are particularly apparent in boilerplate agreements originating in foreign jurisdictions.

Under s 64(1) of the ACL, a term which "has the effect of" excluding, modifying or restricting any consumer guarantees will be void. This prohibition on contracting out of statutory guarantees prevents suppliers and manufacturers avoiding any of their obligations in respect of consumer guarantees under the ACL.

However, s 64A operates as a form of exception to s 64 which applies in limited circumstances. If the contract is for the supply of goods or services which are not ordinarily acquired for personal, domestic or household use or consumption, then under s 64A of the ACL a trader can limit its liability to one or more of the following:

  • for goods:
    • replacement of the goods or the supply of equivalent goods;
    • the cost of replacing the goods or acquiring equivalent goods;
    • repair of the goods; and
    • the cost of having the goods repaired; and
  • for services:
    • supplying the services again; and
    • payment of the cost of having the services supplied again.

Therefore businesses should include an express limitation on their liability that is consistent with the permitted limitation under the ACL. However, in doing so businesses should be mindful that:

  • limitation of liability and exclusion clauses in agreements which go beyond the limitations permitted under s 64A will be void by virtue of the operation of s 64; and
  • the application of the limitation of liability clause under s 64A is subject to an overriding fair and reasonableness test27 which the purchaser has the onus of establishing.

What could amount to misleading and deceptive conduct?

A failure to recognise the application of the consumer guarantees in the terms of a contract and express exclusions can in some circumstances also amount to misleading and deceptive conduct which carries serious penalties.

For example, in TPC v Radio World Pty Ltd28 the court in interpreting similar provisions to s 64 of the ACL found that a sign which set out the conditions of purchase breached the misleading and deceptive conduct provisions of the TPA despite an acknowledgement of the application of the TPA. The court found that the positive and absolute terms of statements made such as "no moneys will be refunded under any circumstances" meant that the recognition of the application of the TPA was not sufficient to communicate to consumers their rights under the TPA. Overall the sign as a whole was misleading and deceptive.

What should I do to ensure compliance with the ACL?

Many businesses employ the use of standard contract templates for transactions which are widely diverse in terms of price and the nature of the goods or services provided. Businesses also often employ the use of master contracts where the initial acquisition is for a price well in excess of the statutory amount of $40,000 but subsequent additional purchases arising under the master contract fall under the monetary threshold.

Accordingly, in practice, in any business context where there is any potential for the price or nature of the goods or services being supplied to potentially fall within the operation of the ACL, a prudent approach should be adopted.

Any contract (including a standard template contract) used in a transaction which has the potential to fall within the definition of a purchase by a "consumer" under the ACL will need to be reviewed to ensure that:

  • it includes an express acknowledgement of the potential application of the ACL and a provision that nothing in the agreement attempts to exclude the operation of the ACL;
  • any exclusion of warranty provisions are carefully drafted to expressly acknowledge the potential application of the consumer guarantees under the ACL and that there are no blanket exclusions of liability;
  • any limitations and exclusions of liability are drafted to expressly acknowledge that such limitations operate subject to the application of the ACL; and
  • where goods or services are of a kind not ordinarily acquired for personal, domestic or household purposes, then the contract should include a limitation of liability clause for breach of the consumer guarantees consistent with the limitations permitted under s 64A of the ACL.

Fundamentally, businesses need to be fully aware of their obligations and responsibilities arising under the ACL in the context of all of their transactions with both consumers and businesses.

Footnotes:

1 Trade Practices Act 1974 (Cth).
2 Section 54 of the Australian Consumer Law.
3 Section 55 of the Australian Consumer Law.
4 Section 56 of the Australian Consumer Law.
5 Section 57 of the Australian Consumer Law.
6 Section 58 of the Australian Consumer Law.
7 Section 59 of the Australian Consumer Law.
8 Section 60 of the Australian Consumer Law.
9 Section 61 of the Australian Consumer Law.
10 Section 62 of the Australian Consumer Law.
11 Section 3(1) of the Australian Consumer Law.
12 Section 3(1) of the Australian Consumer Law.
13 See Pt 2 of the Australian Securities and Investments Commission Act 2001 (Cth).
14 Section 2 of the Australian Consumer Law.
15 Seeley International Pty Ltd v Newtronics Pty Ltd (2002) Aust Contract R 90-142; [2001] FCA 1862; BC200108270.
16 Section 3(4) of the Australian Consumer Law.
17 Section 2(1) of the Australian Consumer Law.
18 Section 3(5) of the Australian Consumer Law
19 Section 3(1) of the Australian Consumer Law.
20 Crago v Multiquip Pty Limited (1998) ATPR 41-620; BC9704181.
21 Four Square Stores (Qld) Ltd v A B E Copiers Pty Ltd (1981) ATPR 40-232.
22 Westminster Properties Pty Ltd (1985) ATPR 40-566.
23 Carpet Call Pty Ltd v Chan (1987) ASC 55-553; (1987) ATPR (Digest) 46-025.
24 Crawford v Mayne Nickless Ltd (1992) ASC 56-144; (1992) ATPR (Digest) 46-091.
25 Jillawarra Grazing Co v John Shearer Ltd (1984) ASC 55-307; (1984) ATPR 40-441; BC8400694.
26 Atkinson v Hastings Deering (Qld) Pty Ltd (1985) 8 FCR 481; 71 ALR 93; (1985) ASC 55-439; (1985) ATPR 40-625.
27 Section 64A(3) of the ACL.
28 Trade Practices Commission v Radio World Pty Ltd (1989) 16 IPR 407; (1989) ASC 55-929; (1989) ATPR 40-973.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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