Australia: Statutory Guarantees Under the Competition and Consumer Act: A Can of Worms - Part 1

Last Updated: 31 March 2012
Article by Jenny Kojevnikov and Kathryn Edghill

1. Introduction

This paper:

  1. illustrates the complexities of the new Australian Consumer Law ("ACL") which is set out in (Schedule 2 of the Competition and Consumer Act 2010 (Cth));
  2. explains the statutory guarantee regime in place since 1 January 2011, and
  3. explains consequential changes made to the regulation of warranties as a result of the statutory guarantees.

2. What are the Statutory Consumer Guarantees?

The consumer guarantees in the ACL replace the implied warranties and conditions in the former Trade Practices Act 1974 (Cth).

The consumer guarantees apply to any contract for the supply of goods or services to a consumer made after 1 January 2011.

A consumer is defined in section 3 of the ACL as a person who acquires goods:

  • for an amount under $40,000 (or such other greater amount as may be prescribed); or
  • which, if for an amount over $40,000, are of a kind ordinarily acquired for personal, domestic or household use or consumption; or
  • which otherwise consist of a vehicle or road trailer acquired for use principally in the transport of goods on public roads;

except where such goods are acquired for the purpose of resupply or transformation in trade or commerce during production or manufacture.

A person will be taken to have acquired services as a consumer if:

  1. the amount paid or payable for the services is under $40,000 (or such other greater amount as may be prescribed; or
  2. the services are of a kind ordinarily acquired for personal, domestic or household use or consumption.

A note of caution - section 64 of the ACL provides that the consumer guarantees cannot be excluded, restricted or modified by contract.

3. What are the Statutory Guarantees In Relation to Goods?

There are nine consumer guarantees which automatically apply to the supply of consumer goods. They are:

(a) The supplier guarantees that they have a right to sell the goods, unless a contrary intention appears in a contract or can be inferred from the circumstances of that contract (section 51 of the ACL)

Exception: this guarantee does not apply to a supply of "limited title", for example hire or lease agreements, or otherwise where the intention is clear either from the contract or the circumstances of that contract that the goods weren't to be sold to the consumer.

(b) The consumer has the right to undisturbed possession of the goods unless there is a pre-existing security, charge or encumbrance (section 52)

Exception: this guarantee does not apply to a supply of "limited title", for example the period of any hire or lease agreements, or otherwise where the intention is clear between the supplier and consumer that ownership in the goods is to be transferred to another person.

(c) The supplier will supply goods to a consumer that are free from any security, charge or encumbrance (section 53)

Exception: this guarantee does not apply to a supply of "limited title", where a supplier has disclosed to a consumer all known securities and charges on a good prior to the sale.

(d) Goods that are supplied to a consumer (except when they are supplied by auction) will be of acceptable quality (section 54)

Suppliers and manufacturers guarantee that goods sold to a consumer are of acceptable quality. This guarantee also applies to goods that are leased or hired to a consumer.

(i) What does "acceptable quality" mean?

Section 54 (2) of the ACL provides that goods are considered to be of acceptable quality if a reasonable consumer fully acquainted with the goods (including any defects) regards the goods as being:

  • fit for all purposes for which goods of that kind are commonly supplied;
  • acceptable in appearance and finish;
  • free from defects;
  • safe; and
  • durable.

In considering acceptability of the goods, a reasonable consumer can be expected to have regard to (section 54(3)):

  • the nature of the goods, e.g. a fridge would be expected to last longer than a toaster;
  • the price of the goods (if relevant) e.g. whether a 'premium' price was paid for a top range product;
  • any statements made about the goods on any packaging or label on the goods, e.g. a claim on the packaging about the features of the product;
  • any representation made about the goods by the supplier or manufacturer of the goods; and
  • any other relevant circumstance relating to the supply of the goods.

The question of whether goods are of acceptable quality is to be determined at the time the goods are supplied to the consumer 1.

(ii) What if the goods are defective at the time of purchase?

Defective goods will be deemed to be of 'acceptable quality' if a supplier draws the consumer's attention to the defective qualities of the goods prior to the sale, lease or hire of those goods, and if the consumer has examined the goods prior to the sale, lease or hire of those goods (section 54(4)).

For example, where attention has been drawn to the specific nature of the defect in the good, e.g. a hole in shirt, the goods provided will be deemed to be of acceptable quality. However, even if specific attention is drawn to a particular defect, if another defect occurs and is unrelated to that defect (e.g. a thread unravelling in a shirt), the goods may not be of acceptable quality in relation to that defect.

(iii) Exceptions

This guarantee will not apply if the consumer causes the goods to become of unacceptable quality, or fails to take reasonable steps to stop the goods becoming of unacceptable quality, or if they are damaged by abnormal use. There is no definition of 'abnormal use' in the ACL; however this could be interpreted to mean any use outside of the common purpose for which the goods are supplied.

(e) Goods that are supplied to a consumer (except when the goods are supplied by auction) will be reasonably fit for any disclosed purpose, and any purpose which the supplier represents they are reasonably fit for (section 55)

Exception: This guarantee will not apply if the circumstances show that the consumer did not rely on, or it was unreasonable for the consumer to rely on the skill or judgment of the supplier, manufacturer, or person in making the representation that the goods would be fit for purpose (section 55 (3)).

(f) Goods that are supplied by description will correspond with that description (unless the goods are supplied by auction) (section 56)

This guarantee may also apply even if the consumer has previously inspected the goods before purchase. The guarantees in section 57 (see below) will also apply to any goods supplied in this manner.

(g) Goods that are supplied (unless supplied by auction) with reference to a sample or demonstration model will correspond with the sample or demonstration model in quality, state or condition; the consumer will have reasonable opportunity to compare the goods with the sample; and the goods are free from any defect that would not be apparent on reasonable examination of the sample or demonstration model or would cause the goods not to be of acceptable quality (section 57)

The guarantee in section 56 will also apply to any supply of goods in this manner if the supply was also by description (section 57(2)).

(h) The manufacturer of the goods (unless the goods were supplied by auction) will take reasonable action to ensure that facilities for the repair of the goods are reasonably available for a reasonable period after the goods are supplied, unless the manufacturer took reasonable action to ensure the consumer would be given written notice that this would not be the case (section 58)

What is deemed a 'reasonable' amount of time will depend on the type of goods being supplied, e.g. a reasonable period for availability of parts for a fridge may be for a number of years, while spare parts for a cheap children's toy may be for a considerably less amount of time.

Exception: This guarantee will not apply if the manufacturer took reasonable action to ensure that the consumer would be given written notice, at or before the time of sale, that repair facilities would not be available after a certain period, or if parts for the goods would not be available after a certain period.

(i) The manufacturer and supplier of the goods will comply with any express warranty given or made by the manufacturer or the supplier in relation to the goods (unless the goods were supplied by auction) (section 59)

The manufacturer and supplier guarantee that the goods will comply with any express warranty given by the manufacturer or supplier. An express warranty can include a "warranty against defects" provided by a manufacturer. There are further requirements which apply from 1 January 2012 for the form and content of a "warranty against defects". These are found in the Competition and Consumer Regulations 2010 (Cth).

4. What are the consumer guarantees in relation to services?

There are three consumer guarantees which apply to the supply of consumer services.

(a) Services will be provided with due care and skill (section 60)

A supplier guarantees that services are provided with due care and skill. In the event that any loss or damage occurs as a result of any breach of this requirement, a consumer may also have a claim in negligence against the supplier.

(b) The services will be fit for any specified purpose (section 61)

Exception: this guarantee will not apply if the circumstances show that the consumer did not rely on (or it was unreasonable for the consumer to rely on) the skill or judgment of the supply (section 61(3)). This guarantee also does not apply to any supply of services by a qualified architect or engineer in their area of professional expertise (section 61(4)).

(c) The services will be supplied within a reasonable time (section 62).

If there is no date for the completion of services in a contract for services or a date otherwise agreed between the consumer and supplier, there is a consumer guarantee that the services will be supplied within a reasonable time.

What is considered a "reasonable time" will depend on the nature of the services provided.

(d) When do the consumer guarantees for services not apply?

The consumer guarantees in relation to services do not apply to insurance contracts, or a contract for the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored (Section 63). The consumer guarantees do not apply to electricity, telecommunications and gas services, or any other services specified in the Competition and Consumer Regulations (Section 65). There are currently no other services specified in the regulations.

Suppliers may also limit their liability for the supply of services (unless it is not fair or reasonable for the supplier to rely on the term), to supplying the services again, or the payment of the cost of having the services supplied again, other than where the services are of a kind ordinarily acquired for personal, domestic or household use or consumption, (section 64A(2)).

5. To Whom Do the Statutory Guarantees Apply?

The consumer guarantees are given by suppliers (e.g. a trader, retailer or service provider) and manufacturers.

The consumer guarantees will apply to the following:

(a) Suppliers

Supply is defined in section 3 the ACL as including:

  • In relation to goods – supply (including re-supply) by way of sale, exchange, lease, hire or hire-purchase; and
  • In relation to services – provide grant or confer.

"Supplier" is deemed to have a corresponding meaning.

(b) Manufacturers

Section 7 of the ACL defines a manufacturer very broadly to include those who:

  • produce grow, extract, process or assemble goods; and
  • hold themselves out to the public to be the manufacturer or permit others to do so.

(c) Deemed Manufacturers

Section 7 of the ACL also defines a manufacturer as a promoter of goods:

  • A person who causes or permits another person, in connection with the supply or possible supply of goods by that other person; or
  • The promotion by that other person by any means of the supply or use of goods.

To hold out the first person to the public as the manufacturer of the goods.

(d) Deemed Importers

An importer is also a deemed manufacturer under section 7 of the ACL and is defined as:

  • A person who is not the manufacturer of the goods; and
  • At the time of importation, the manufacturer of the goods does not have a place of business in Australia.

6. What are the Obligations to Repair, Replace or Refund?

A supplier or manufacturer will have obligations under the Australian Consumer Law depending on whether the failure is a major failure. A major failure of goods is defined in section 260 of the ACL as:

  • the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure;
  • the goods depart from either the description (if supplied by description) or depart from a sample or demonstration model (if supplied by reference to a sample or demonstration model);
  • 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;
  • the goods are unfit for a disclosed purpose that was made known to the supplier of the goods or a person with which the consumer made prior negotiations or arrangements with in relation to the acquisition of the goods, and the goods cannot be easily remedied within a reasonable time to make them fit for that disclosed purpose;
  • the goods are not of acceptable quality because they are unsafe.

A failure to comply with a consumer guarantee for services is a major failure in any of the following situations (section 268 of the ACL):

  • the services would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure;
  • the services are substantially unfit for a purpose for which services of the same kind are commonly supplied and they cannot easily be remedied within a reasonable time to make them fit for such a purpose;
  • where the services and any product resulting from the services are unfit for a particular purpose for which the services were acquired by the consumer that was made known to the supplier of the services, and the services and any of those products cannot easily be remedied within a reasonable time to make them fit for such a purpose;
  • where the services and any product of the services are not of such a nature, or quality, state or condition that they might reasonably be expected to achieve a result desired by the consumer that was made known to the supplier; and the services and any of those products cannot easily be remedied in a reasonable time to achieve such a result;
  • the supply of the services creates an unsafe situation.

7. What rights does a consumer have when consumer goods fail to comply with a consumer guarantee?

Where a supplier supplies goods to a consumer in trade or commerce to which a consumer guarantee applies and there is a breach of an applicable consumer guarantee:

(a) A failure which is not a major failure

Under section 259 (2) of the ACL, the consumer may require the supplier to remedy the failure within a reasonable time. If the supplier refuses or fails to comply with the requirement to remedy the failure within a reasonable time or at all, the consumer may:

  • have the failure remedied by someone else and recover all reasonable costs incurred by the consumer in having the failure remedied; or
  • notify the supplier that he or she rejects the goods (provided that the rejection period for the goods referred to below hasn't ended, and the goods haven't otherwise been lost, destroyed, disposed or damaged by the consumer under section 262 of the ACL).

(b) A failure which is a major failure

Under section 259 (3) of the ACL, the consumer may:

  • reject the goods by notification to the supplier (provided that the rejection period for the goods referred to below hasn't ended, and the goods haven't otherwise been lost, destroyed, disposed or damaged by the consumer under section 262 of the ACL), or
  • recover compensation for any reduction in the value of the goods below the price paid or payable by the consumer for the goods.

The rejection period is the period from the time of supply of the goods in which it is reasonable for the consumer to expect the relevant failure of the goods to comply with a guarantee to become apparent, having regard to:

  • the type of goods;
  • the likely use of the goods by the consumer;
  • the length of time for which it is reasonable for them to be used; and
  • the amount of use to which it is reasonable for them to be put before such a failure becomes apparent (section 262(2) of the ACL).

The goods do not need to be in their original packaging in order to obtain the remedies listed above from the supplier (section 259 (7) of the ACL).

(c) When is a consumer not permitted to reject goods?

Under section 262 of the ACL, a consumer cannot reject goods where:

  • the rejection period has ended;
  • the goods have been lost, destroyed or disposed of by the consumer;
  • the goods were damaged after being delivered to the consumer for a reason unrelated to their state or condition at the time of supply; or
  • the goods have been attached to, or incorporated in any real or personal property and cannot be detached or isolated without damaging the goods.

(d) What happens if a consumer rejects goods?

If a consumer notifies a supplier that he or she rejects the goods, the consumer must return the goods to the supplier unless they:

  • have already been returned or retrieved by that supplier; or
  • cannot be returned, removed or transported without significant cost to the consumer because of:
  • the nature of the failure to comply with the statutory guarantee; or
  • the height or size , or method of attachment of the goods.

In this situation the goods must be collected at the supplier's expense.

The supplier must also, in this instance, refund any money paid by, or equal to the consideration given by the consumer for the goods or replace the rejected goods with goods of the same type and of similar value (if reasonably available to the supplier). The ownership of the goods also re- vests in the supplier upon notification of the rejection (section 263 of the ACL).

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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