- An effective compliance program is necessary if an organisation is to be able to rely on the defences in section 85 of the Trade Practices Act 1974.
- A compliance program is a factor in the mitigation of penalties.
Two types of product standards may be made under the Trade Practices Act 1974 (the TPA) - product safety and product information standards. Both types of product standards may be made by regulation or by a gazetted ministerial notice.
If a company supplies goods which do not comply with a relevant product standard, it is guilty of an offence and is liable to a fine up to $1.1 million. In addition, employees can be liable not only under the accessorial liability provisions of the TPA (section 79) but also primarily liable under the provisions of the state Fair Trading Act. This means that a plaintiff who claims under a state Fair Trading Act does not have to prove that an employee was "knowingly concerned" in the contravention in order to establish a claim against the individual, which has proven to be a hurdle in past litigation.
An effective compliance program is essential!
Why should a business have a compliance program? Predominantly, because the cost of any breaches may be high. In addition to a fine, a failure to comply with product standards often attract widespread unfavourable media coverage, damaging an organisation's business reputation.
The purpose of a compliance program is to prevent breaches of a company's legal obligations from occurring. If, despite having a compliance program, a breach does occur because of human error, then the existence of such a program may be a defence to a prosecution under section 85(1) of the TPA. That section says that it is a defence if the defendant establishes that the contravention
- was caused by a reasonable mistake of fact, including a mistake caused by reasonable reliance on information supplied by another person; or
- was due to the act or default of another person, to an accident or to some other cause beyond the defendant's control and the defendant took reasonable precautions and exercised due diligence to avoid the contravention.
The term "another person" does not include a person who is:
- a servant or agent of the defendant; or
- if the defendant is a body corporate, a director, servant or agent of the body corporate.
Additionally, section 85(4) states that in a criminal or civil proceeding under the TPA for supplying goods that did not comply with a consumer product safety or information standard, it is a defence if the defendant establishes:
- that the goods were acquired for the purpose of re-supply from a person who carried on in Australia a business of supplying such goods otherwise than as the agent for an overseas person; and
- the defendant did not know and could not with reasonable diligence have ascertained, that the standard had not been complied with, or there was good faith reliance on a representation by the supplier that there was no standard for the goods.
The scope of the defences
So what do the courts require a defendant to do in order to be able rely on section 85? In Universal Telecasters (Qld) Ltd v Guthrie (1978) 18 ALR 531 Chief Justice Bowen said:
"... that two responsibilities ... [to be] discharged, in order to establish ... [the defence in section 85(1)(c)], would be that it had laid down a proper system to provide against contravention of the Act and that it had provided adequate supervision to ensure the system was properly carried out." (Judgement, page 534.)
Some very high hurdles need to be met before a court will uphold the defences.
An old case, illustrates this point. In Gardam v George Wills and Co. Ltd. (No. 1) (1988) 82 ALR 415, the fire safety tag on children's nightdresses did not comply with the consumer product safety standard.
The wholesaler, Wills, argued that the section 85(1)(c) and 85(4) defences applied. Justice French examined Wills' compliance system. There was evidence that samples of clothing were obtained from a third party manufacturer and their labelling checked before any orders were placed. The person placing the order usually applied a rubber stamp to the order form saying that the goods must comply with the consumer care labelling requirements of the TPA. But in this particular instance, it was not possible on the evidence to conclude that these steps were taken. Once an order arrived at Will's premises, beyond spot checks of individual items, there was no system for inspecting a sample of each size and style of garment.
While recognising that what constitutes "reasonable precautions" and "due diligence" will depend upon the circumstances of the case, the court held that Wills had not met that standard. Also, Wills did not show that it "could not with reasonable diligence have ascertained" that the goods did not comply with the relevant standard.
Compliance programs and the mitigation of penalties
Given the high hurdles to establish a defence, is it worth having a compliance system? The answer is yes, because even if a defence cannot be established, the existence of a compliance program is an important factor in the mitigation of penalties under the TPA.
On the other hand, the lack of a compliance program exposes an organisation to a potentially higher penalty, particularly if the organisation has committed similar breaches of the TPA in the past.
So what sort of compliance system is needed?
It is clear that for there to be a reduction in penalty there must be a substantial compliance program in place which was actively implemented, and the implementation of the program must be successful (Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36).
The courts have also recognised that Australian Standard AS 3806: Compliance Programs is an appropriate benchmark against which a TPA compliance program should implemented or reviewed. This standard is also regularly referred to by the ACCC in court enforceable undertakings accepted under section 87B of the TPA and in court orders sought in respect of breaches of the TPA.
In a future article, we will further examine AS 3806 and tricks and traps with its use by organisations in a TPA context.
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.