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Australian Consumer Law: defects, warranties and unfair contracts basil 120324

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  • 1. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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 2010-2012, 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. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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 [2000] NZLR 465 at [52]. Nevertheless, the guarantee of acceptable quality is not a guarantee of
  • 6. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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 [1996] 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. ACL: Defects, Warranties and Unfair Contracts 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 [1996] DCR 1 at [16]]. 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 [1996] DCR 427 at [10]. 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. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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 [2009] 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. ACL: Defects, Warranties and Unfair Contracts 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. ACL: Defects, Warranties and Unfair Contracts 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 [40])] 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 [2000] 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 [48] 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, which must be assumed to have been in daily use, sometimes in rough conditions, should thereafter be able to reject it.
  • 14. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 14 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) [2010] 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 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
  • 15. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 15 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. Summary
  • 16. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 16 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 2012. 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 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: The law relating to Warranties against defects in the ACL at Section 102. This relevantly provides that a person must not give a document to a consumer that evidences a warranty against defects unless it complies with the requirements prescribed in the Regulations.
  • 17. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 17 These requirements are contained in the Competition and Consumer (Australian Consumer Law) Amendment Regulations 2010, and while these are not yet in force, they are due to come into force on 1 January 2012. Regulation 90 of this provides that a Warranty against defects must: 1. Be transparent 2. It must concisely state; - What the person who gives the Warranty must do so that the Warranty may be honoured, and. - What the Consumer must do to entitle the Consumer to claim the Warranty 3. It must contain the comment “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 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.” 4. Prominently state the following information about the person who gives the warranty: - the person’s name - Business address - Telephone number - Email address (if any) 5. 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 allowed to claim the Warranty. 6. Set out the procedure for claiming the Warranty. 7. State who will bear the expense of claiming on the Warranty, and if by the person who gives the Warranty – how the consumer can claim expenses incurred in making the claim. 8. State that the benefits to the consumer given by the Warranty are in addition to other rights and remedies of the consumer under a law in relation to the goods or services to which the Warranty relates.
  • 18. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 18 In the case of the first of these requirements, the term “Transparent” is defined in Section 2 of the ACL to mean “expressed in plain language, legible and presented clearly.”; in summary it must be in language that can be easily understood. In the case of the third requirement, the term “major failure” is defined in Sections 260 and 268 of the ACL and this specifies a series of scenarios where goods are a “major failure” and these are: • • • • If the goods would not have been acquired by a reasonable consumer who knew the extent of the failure fully; If the goods are different from their description of a sample of them; If the goods are unfit for the purpose for which they were bought and cannot be remedied to make them fit for such a purpose; or If the goods are unsafe. Businesses should consider all places where statements regarding a warranty against defects are made, such as warranty cards, product packaging, instruction manuals, point of sale materials and websites. Businesses that import products to Australia or sell products with a significant lead time for manufacture or packaging may need to act soon to correct statements included in product packaging to ensure compliance. Under the guarantee regime of the ACL, suppliers need to tread very carefully when dealing with product faults, particularly if they wish to attempt a repair before offering a refund. Misleading consumers as to their statutory rights is a ‘hot button’ issue for the ACCC and with the introduction of civil penalties for contraventions of the ACL, the ACCC has potent weapons to clamp down on suppliers who contravene the law. The ACCC has recently taken a number of enforcement actions in this area, including issuing an infringement notice to a major fashion retailer for representing that there were ‘no returns’ on sale items and prosecution of a major computer store chain for misleading in-store signage about warranty rights that ultimately led to penalties of $203,500 being imposed. All suppliers of consumer products should be reviewing their refund policies to ensure that they take into account consumers’ rights under the ACL. In particular, refund policies must not:
  • 19. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 19 1. make blanket ‘no returns’ or ‘no refunds’ statements, even on sale items; 2. require a customer to take an exchange or credit note rather than a cash refund; and 3. require customers to keep their receipt (although satisfactory proof of purchase can be required) or return products in their original packaging. Of course businesses do not have to accept ‘change of mind’ returns and, if they do, they are entitled to set conditions on those returns such as a length of time or the requirement for all labels and tags to still be attached. Often the difference between compliant returns policies and those that breach the law are relatively minor (e.g., ‘no returns on sale items’ is illegal whereas ‘no change of mind returns on sale items’ is perfectly legal). It is therefore important to ensure that suppliers’ policies are reviewed. Businesses should also consider all places in which their policies are represented, such as in-store signage, printed on receipts, websites and the statement staff make to customers. Store staff also need to have adequate knowledge of consumer’s rights and all businesses should have an appropriate complaints handling system to ensure that all customer complaints are handled promptly and professionally. Businesses may also wish to consider displaying the recently released national pointof-sale sign that informs customers of their rights to a repair, refund or exchange of faulty goods. This sign replaces other government approved signs that were applicable to the previous state and federal legislation. Although the sign is not mandatory, retailers are encouraged to display the sign at their point-of-sale such as a cash register. Consumer guarantees under the ACL are unlimited as they were under the Trade Practices Act. A guarantee that cannot be excluded allows the consumer to recover their loss not just the cost of replacing the defective good.
  • 20. ACL: Defects, Warranties and Unfair Contracts Steven Brown Schematic of (new) Australian Consumer Guarantee Types of Guarantees Given to Consumers New Required by Law Australia Consumer Law (ACL) Subtopic Guarantees Contractual warranty Offered though not required by law Representation that is actionable under s 18 of ACL misleading and deceptive conduct personal use Who is a Consumer Defined by s3 ACL Goods ordinarily acquired for domestic use household use Note what are consumer goods can be surprising: Carpet Call v Chan (1987) ATPR 46-025 - Carpet in a night club a consumer good Page 20
  • 21. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 21 Unfair Contract Changes Laws attempting to deal with unfair contract terms in consumer contracts are not a new phenomenon. Indeed when Senator Murphy (latter His Honour Justice Murphy) introduced the Act into the Senate in 1973 he said about Part V of the then bill (which became the TPA): “The age of caveat emptor is now dead. It is now the age of let the seller beware.” This sentiment is current. The second reading speech for the ACL noted that in regards unfair contract laws: “…. similar laws … have been in place in Victoria since 2003. And laws tackling unfair contract terms exist in the United Kingdom, in the rest of the European Union, in Japan and in South Africa. Laws which allow for the examination of the fairness of contracts and contract terms also exist in jurisdictions in Canada and the United States.” How does the unfair contract terms law differ from unconscionable conduct? The ACL introduces new consumer protection provisions to the TPA and the Australian Securities and Investment Commission Act (“ASIC Act”) in the form of the unfair contract terms provisions. Consumer protection provisions prohibiting unconscionable conduct have existed in the both pieces of legislation for some time, but there are differences between the two regimes that will ensure their concurrent operation. The unconscionable conduct provisions deal with the conduct of a party entering into a contract or other transaction, and/or its conduct once the contract has been entered into, rather than an assessment of terms of the particular contract. Part IVA of the TPA contains a range of factors that the court may consider when determining whether conduct has been unconscionable. These factors may include any contractual terms (for example, whether the consumer was required to comply with conditions not reasonably necessary to protect the interests of the supplier, or whether the consumer understood documentation relating to the supply), but extend to broader concepts such as the use of unfair tactics, undue influence or pressure by the supplier. The list is broad and non-exclusive. Some factors contained in the unconscionable conduct provisions are similar to those in the list of considerations that the court must take into account when determining
  • 22. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 22 whether a contract term is unfair under the unfair contract terms provisions of the ACL. For example, both the unconscionable conduct provisions and the unfair contract terms provisions provide for consideration by the court of the extent of each party’s bargaining power in relation to the contract. However, the relative strengths of the parties’ bargaining positions in the unconscionable conduct provisions is only one factor that the court may (and is not required to) take into account. Conversely, under the unfair contract terms provisions, the court is required to determine as the first limb of the test for unfairness whether a term in a consumer contract would cause a ‘significant imbalance’ in the parties’ rights and obligations arising under the contract. In determining whether a term of a consumer contract is unfair, the court may take into account any matters it considers relevant but must take into account the extent to which the term is transparent and the contract as a whole. The ACL is a schedule to the TPA, so that it can easily be applied by the States and Territories into their respective legislation. It is important to note that the definition of a consumer under section 4B of the TPA is broader than the definition of a consumer for purposes of a consumer contract under the ACL. Under section 4B of the TPA, a person (including a corporation) is deemed to be a consumer, where the goods or services acquired by the consumer were ‘of a kind ordinarily acquired for personal, domestic, or household use or consumption’ (subject to certain exceptions and provided the price of the goods or services exceeds the prescribed amount). The definition of a consumer in section 4B is focused on the nature of the goods or services purchased. Such goods or services may satisfy the test as being of a kind ordinarily acquired for personal, domestic, or household use even though they may also be of a kind acquired for business use. For example see the case of Carpet Call Pty Ltd v Chan (1987) ASC 55-553; where commercial grade carpet used in a night club was held to be a good acquired for personal, domestic or household use. Under the unfair contract term provisions of the ACL, a consumer contract is defined as a contract for the supply of goods or services or a sale or grant of an interest in land ‘to an individual whose acquisition of the goods, services, or interest is wholly or predominantly for personal, domestic, or household use or consumption.’ The
  • 23. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 23 definition is narrower because it focuses on the purposes of the contract under which purchaser acquires the goods or services and not on the nature of the goods or services purchased. There is no monetary limit specified. On 17 March 2010 the ACL introduced laws regulating unfair contract terms. The unfair contract terms have now commenced. The unfair contract terms provisions will apply only to standard form consumer contracts—for example, contracts for the supply of goods or services to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption. To assist businesses, legal practitioners, consumers and industry organisations understand the new unfair contract terms laws, national guidance has been developed. The draft publication Australian Consumer Law: A guide to unfair contract terms (the “Draft”) provides information on the types of contracts and contract terms which may be affected by these new laws. Remember, that even when the Guide is no longer a draft it is nevertheless only the ACCC’s views of what courts might do not what they will or must do when they come to interpret the amendments. The unfair contract terms provisions apply to ‘consumer contracts’ as defined by both the ACL and the ASIC Act. Under the ACL, a ‘consumer contract’ is a contract for: • the supply of goods or services, or • sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest in land is wholly or predominantly for personal, domestic or household use or consumption (ACL, s.3). Under the ASIC Act, a similar definition of a consumer contract applies in relation financial products and services (ASIC Act, s.12BF). An “interest” in relation to the land means:
  • 24. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 24 (a) a legal or equitable estate or interest in the land; or (b) a right of occupancy of the land or of a building or part of the building erected on the land arising by virtue of the holding of shares, or by virtue of a contract to purchase shares in an incorporated company that owns the land or building; or (c) a right, power or privilege over, or in connection with, the land. (ACL Part 1, Clause 1). Four points to note in relation to the meaning of a “consumer contract” are: 1. The definition does not limit the operation of the unfair contract term provisions to things of a personal, domestic or household nature. The definition will include the supply of any good, service or interest in land to a consumer provided the acquisition of what is supplied under the contract is wholly or predominantly for personal, domestic or household use or consumption. For instance, is a loan taken over a directors home where the director uses the money received to invest in his or her business a consumer contract or not? 2. The definition of “interest” goes beyond the usual notions of legal or equitable estates. The definition extends the meaning to include a right of occupancy of land arising by virtue of holding shares in a company, or a contract to purchase shares in a company that owns the land or the building. The definition extends the normal concept of an interest in land. It also includes a right, power or privilege over or connection with the land. This too may go far beyond normal concepts of equitable interests in land. 3. The definition of “interest” could cause an interesting conflict in how courts deal with what is a consumer contract. As the extended definition allows courts to treat a “contract to purchase shares in an incorporated company that owns land or building, as a “consumer contract”. Yet that same contract could be the constitution of the incorporated company which is an expressly excluded contract for the purposes of the ACL. How the courts will address this issue when the time comes will be interesting.
  • 25. ACL: Defects, Warranties and Unfair Contracts Steven Brown 4. Page 25 The definition of consumer is not the same as the definition of consumer for the purposes of the statutory warranties. The definition is more restrictive. It is restricted to predominantly for consumer purposes not ordinarily acquired. If this definition was used for the Carpet Call v Chan case a different result would most likely arise. What is a standard form contract? The ACL does not define the term “standard form contract”. The Draft at page 5 states: "..in broad terms a standard form consumer contract will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties – that is, it is offered on a ‘take it or leave it’ basis." Section 7(2) of the ACL provides guidance to a court in determining whether there is a standard form contract by considering the following: (a) Whether one of the parties has all or most of the bargaining power relating to the transaction; (b) Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) Whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which it was presented; (d) Whether another party was given an effective opportunity to negotiate the terms of the contract; (e) Whether the terms of the contract take into account the specific characteristics of another party or the particular transaction; and (f) Any other matter prescribed by regulation (The ACL provides for the Minister to augment the list by Regulation to allow the list of considerations to be expanded
  • 26. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 26 in response to changes in markets and the way in which standard form contracts are construed and used (s7(2)(f) ACL). The onus of proving that a contract is not a standard form contract is reversed. The business operator has the onus of establishing that there were free and frank negotiations before the contract was entered into. The Draft at page 6, states that the onus of proof is reversed as a businesses will be better placed to bring evidence in respect of the nature of the contract it uses and the way in which it deals with its counterparties. Whereas the individual will only have evidence that is particular to their transaction along and not have the evidence about how the business operates. This takes up the comments in the Explanatory Memorandum at paragraph 108, which read: “If a party wishes to argue that the contract has been negotiated and is not in a standard form, then the rebuttable presumption requires the party that presents the contract to show that the contract is not a standard form contract. This reflects that: (a) the claimant will usually only have evidence of the existence of one contract - their own; and (b) the respondent is best placed to bring evidence regarding the nature of the contracts it uses and the way in which it deals with other parties to such contracts, including whether negotiations have been entered into.” The unfair contract terms provisions do not apply to the following terms of a standard form consumer contract that are excluded by section 5(1) of the ACL or 12BI(1) of the ASIC Act: Ø terms that define the main subject matter of a consumer contract; Ø terms that set the ‘upfront price’ payable under the contract; Ø terms that are required, or expressly permitted, by a law of the Commonwealth or a State or a Territory; or Ø Contracts excluded by regulation.
  • 27. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 27 The practical result of the ACL is that it will apply to all commonly known forms of standard consumer contracts. That is, unless the business can show a real and genuine intention to present a draft contract for the supply of goods or services and to engage in effective negotiations with the consumer on the terms of such supply, it is difficult to envisage a practical situation in high volume consumer transactions that will not be caught. Terms that define the main subject matter of a consumer contract The purpose for exempting these terms is said to remove from consumers the ability to avoid their contractual obligations because of a simple change of mind. (Draft p7) Terms that set the ‘upfront price’ payable under the contract The rationale is that the upfront price is easily understood by consumers, and when the price is stated in an upfront manner it is unlikely to create any imbalance in the parties' rights and obligations. The Draft at p8 provides examples as follows: “The ‘upfront price’ would not include further payments under the contract that are contingent on the occurrence or non-occurrence of a particular event. This would exclude from the upfront price, for example, provisions that impose fees for additional goods or services that are not identified at the time the contract was made and default penalty fees or exit fees. In the context of a financial product or service, for example a consumer credit agreement, the upfront price includes the amount borrowed and the interest payable and any fees disclosed at the time the contract is entered into but does not include contingent fees, often referred to as default fees.” However, I am not convinced that the views of the ACCC will necessarily be those of the Courts. Why wouldn't a late penalty fee if clearly set out in a standard form
  • 28. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 28 contract at the time the contract was entered into be the same as the interest payable at the time the contract was entered into. Surely if the new provisions will be that easily circumvented they would seem not to be of much use or benefit to consumers. Terms that are required, or expressly permitted, by a law The amendments are not intended to apply to terms of contracts that are required or expressly permitted by a law of the Commonwealth, or a State or a Territory, but only to the extent that they are required or permitted. This is self evident as it is not appropriate for the courts to determine whether a term is unfair when it has been mandated by a law to be included in the form of contract before it. Contracts excluded from new amendments Certain contracts even if standard in form are expressly excluded from being reviewed by the ACL amendments. These contracts are: Ø Shipping contracts; Ø Constitutions of companies, Management investment schemes or other kinds of bodies; and Ø Most insurance contracts will not be reviewable by the new amendments due to section 15 of the Insurance Contracts Act. Note: As Private Health insurance contracts are not regulated by the Insurance Contracts Act (see section 9 of that act) then to the extent they are standard form consumer contracts their terms will fall for consideration under the amendments. When will a term be "unfair" Under the ACL amendments a term in a consumer contract is unfair if three limbs are all satisfied:
  • 29. ACL: Defects, Warranties and Unfair Contracts Steven Brown • Page 29 First - it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and • Second - the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and • Third - it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. Significant imbalance There is no statutory definition of the concept of significant imbalance, nor any assistance in the Explanatory Memorandum which at paragraph 51 simply reads: “This would involve a factual determination of whether any such significant imbalance exists.” The Explanatory Memorandum does disclose that the amendments are based upon Victoria’s Fair Trading Act 1999. Consequently, some guidance from that case law on the equivalent sections will be useful. The words ‘significant imbalance’ in the context of Part 2B of the Victoria’s Fair Trading Act 1999, were considered by Cavanough J in Jetstar Airways Pty Ltd v Free [2008] VSC 539. In that case, Cavanough J interpreted the term ‘significant imbalance’ in the Victorian law as follows: [I]n the phrase "significant imbalance", the word "significant" seems to me to carry, or to include, a quantitative sense. The word can certainly carry the meaning "substantial". As Thomas JA said in Emaas v Mobil Oil Australia Ltd, the word "significant" very much takes its meaning from the context in which it is used… I recognise the perils of attempting to paraphrase statutory language, but, in my view, the context of the word "significant" in section 32W shows that it means, principally at least, "significant in magnitude", or "sufficiently large to be important", being a meaning not too distant from "substantial”. Whilst trite all that can be said now is that “significant imbalance” will be determined by the courts as a mixed question of both fact and law. The courts will need to determine the relevant rights and obligations of each party and then a “balancing”
  • 30. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 30 assessment to determine whether there is a significant imbalance as between the parties’ rights and obligations. In the area of industrial law the courts in New South Wales have been considering what is an unfair contract for some time and continue to do so when interpreting and applying Part 9 Division 2 of the Industrial Relations Act 1966 (NSW) and its predecessors in section 275 of the Industrial Relations Act 1991 (NSW) and section 88f of the Industrial Arbitration Act 1940 (NSW). Since, 2007 the Federal Courts have been required to do similarly in regards independent contracts under the Independent Contractors Act 2006 (Cth). However, another commentator has said: “To me at least, this seems like an unusual test and one which could be quite difficult to apply. From the supplier’s point of view, it may involve giving factual evidence as to the practical consequences of its warranty obligations for example compared to the simple obligation of the consumer to pay the purchase price.” (See Booth, Peter, Victorian Bar, Paper 20 August, 2009 at paragraph 27.) Not reasonably necessary The second limb to be satisfied before a term in a contract is declared “unfair” is that its existence was not reasonably necessary. The onus is on the respondent to establish, on the balance of probabilities, that the term which the consumer alleges is “unfair” was reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term: in most cases the business operator (see s3(1)(b) ACL). The reason for this is that the terms in a consumer contract are presumed not be reasonably necessary unless the party that seeks to reply upon them can prove otherwise to the court (see s.3(4) ACL). The type of evidence that might be introduced to prove that a term is necessary to protect the legitimate interest of the business on the balance of probabilities could include material relating to the respondent’s costs and business structure, the need for the mitigation of risks and relevant industry practices to the extent that such material is relevant to establishing that a term or terms are reasonably necessary to protect the respondent’s legitimate interests. Evidence that it is common practice in
  • 31. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 31 the industry may not be all that useful unless and until court decisions in upholding the legitimate interests of a party have been established. The approach taken by the ACL appears to be predicated on the premise that freedom of contract operates and should continue to operate. Whether this is indeed correct is not known but whether it is something that should be maintained is something which the Parliament did not consider. Consumers in reality have when entering into contracts the choice of accepting the business standard form contract or not. Negotiating terms is not a possibility. The notion that freedom of contract has any scope in the contracts entered into between consumers and business is fanciful. This limb adds an additional factual consideration that a respondent will need to prove in each case. Any evidence that can demonstrate that the inclusion of the term was reasonably necessary may be led. Accordingly, the factual issues are expanded. With more facts to deal with the greater will be the cost of defending such litigation. As Peter Booth states at paragraph 31 of his paper: “It is not hard to foresee that evidence of that type might be quite complex and involve considerations of effect on the market were such a term to be held to be void.” Detriment Detriment is not limited to financial detriment. This is designed to allow the court to consider situations where there may be other forms of detriment that have affected or may affect consumers disadvantaged by the practical effect of an unfair term. Other forms of detriment may include inconvenience, delay or distress suffered by the consumer as a result of the unfair term. The claimant in the proceedings will be required to prove detriment as part of their claim that the term is unfair. This aligns the unfair contract terms provisions more closely with the unfair contract terms provisions contained in the Victorian Fair Trading Act. Sections 4(1)(a)-(h) ACL, and sections 12BH(1)(a)-(h) ASIC Act, set out, without limitation, examples of the kinds of terms of a consumer contract that may be unfair, such as the business operator:
  • 32. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 32 (a) avoiding or limiting their performance of the contract; (b) terminating the contract; (c) penalising the consumer for a breach of termination; (d) varying the terms of the contract; (e) renewing or not renewing the contract; (f) varying the upfront price payable under the contract without the consumer being able to terminate it; (g) varying the characteristics of the goods or services supplied or financial services supplied to or to be supplied under the contract; (h) determining whether the contract has been breached or to interpret its meaning. By way of expanding the examples we will consider four situations. (1) Section 4(1)(a) ACL, section 12BH(1)(a) ASIC Act - a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract Terms that permit a supplier to avoid or limit its performance of its obligations under the contract, at its discretion and without liability, otherwise known as an exclusion clause, has the potential to cause a significant imbalance in the parties’ rights and obligations arising under the contract. Terms may be less likely to be considered unfair if they are qualified in such a way that consumers understand when and how they are likely to be affected, or if the terms outline reimbursements available to the consumers when such terms are relied upon by the supplier.
  • 33. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 33 (2) Section 4(1)(b) ACL, section 12BH(1)(b) ASIC Act - a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract Terms that allow the supplier to cancel a fixed term contract at will, without having any valid business reason or in response to an inconsequential breach of contract by the consumer, may be considered unfair by a court. An example of this arose in the Victorian case of Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493 at 53, where Morris J found that an immediate termination clause in a mobile phone contract potentially had broad application: A customer may have breached the agreement in a manner which is inconsequential, yet faces the prospect of having the service terminated. Further, if the customer changes his or her address (which will not necessarily be the address for receipt of billing information) this will also provide a ground to AAPT to terminate the Agreement. Because these provisions are so broadly drawn, and are one sided in their operation, they are unfair terms within the meaning of the Fair Trading Act. Terms may also be considered unfair if they undermine the consumer’s right to terminate the contract. Terms which state or imply that the consumer cannot cancel the contract under any circumstances or only with the supplier’s agreement, regardless of the supplier’s action or omission under the contract, may be considered unfair. (3) Section 4(1)(c) ACL, section 12BH(1)(c) ASIC Act - a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract Terms imposing penalties for trivial breaches of a contract committed inadvertently by consumers may be unfair.
  • 34. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 34 A contract may also be considered unfair if it threatens sanctions over and above those that can be imposed at law. A term that imposes a penalty on a consumer for terminating a contract because the supplier has not complied with its obligations under the contract is likely to be at risk of being considered unfair in some circumstances. An example of this may be where a supplier is unable to supply a product ordered by a consumer by the date specified in the contract, but also refuses to refund any money paid by the consumer if they attempt to terminate the contract due to the non-delivery. (4) Section 4(1)(d) ACL, section 12BH(1)(d) ASIC Act - a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract A contract term that provides a right for one party to alter the terms of the contract after it has been agreed, without the consent of the other party or without notice, may be unfair. This may operate similarly to a term that permits one party (but not the other party) to avoid or limit performance of the contract. If a term could require a consumer to accept increased costs or penalties, new requirements, or reduced benefits, for example, it may be considered unfair. A unilateral variation clause may cause a significant imbalance in the rights of the parties to the contract even if it was intended solely to facilitate minor adjustments. This applies to terms giving the supplier the right to make corrections to contracts at its discretion and without liability. An example of an unfair unilateral variation clause was identified in the Victorian case of Director of Consumer Affairs Victoria v Train Station Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092. The Victorian Civil and Administrative Tribunal found that a clause in a consumer contract allowing the health club operator to unilaterally change the location of the club within a 12 kilometre radius of the club’s original location, among other things, was unfair “in that it is a term to which the consumers’ attention is not specifically drawn, and which may operate in a way in which the consumer may not expect and to his or her disadvantage.”
  • 35. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 35 A variation clause may be more likely to be acceptable if it can be exercised by either party and only for legitimate reasons stated in the contract which are clear and specific enough to ensure the power to vary cannot be used by the supplier at will to suit its interests, or in a manner that would be detrimental to consumers. For example, a unilateral variation clause may be acceptable where: • the potential circumstance for its operation is clearly expressed in the contract, • it is reasonably necessary to protect the legitimate interests of the party using the term, and • where the consumer has a right to cancel the contract, without penalty, if the change is detrimental to the consumer. In determining whether a term of a standard form consumer contract is unfair, a court may take into consideration any matter that it thinks relevant. It must, however, take into consideration the following: • the extent to which the term is transparent; and • the contract as a whole. A 'transparent' term A lack of transparency regarding a term in a standard form consumer contract may cause a significant imbalance in the parties’ rights and obligations. A term is considered to be transparent if it is: • expressed in reasonably plain language; • legible; • presented clearly; and • readily available to any party affected by the term. (see s3(3) ACL) Examples of terms which may not be considered transparent include terms that are hidden in fine print or schedules, or that are phrased in legalese or in complex or technical language. Again, it is important to note that only the court can determine what a ‘transparent term’ is for the purposes of the unfair contract terms provisions.
  • 36. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 36 Although the court must take into account the transparency requirement, a contract that does not meet the transparency requirement will not necessarily be unfair. Further, transparency, on its own account, will not necessarily overcome underlying unfairness in a contract term. The UK unfair contract terms provisions use the term ‘plain and intelligible language’ rather than ‘transparent’. Despite the difference, the finding of Smith J in Office of Fair Trading v Abbey National PLC [2008] EWHC 875 may provide some guidance: “Regulation 6(2)…requires not only the actual wording of individual clauses or conditions be comprehensible to consumers, but that the typical consumer can understand how the term affects the rights and obligations that he and the seller or supplier have under the contract.” The fairness or otherwise of a particular contractual term cannot be considered in isolation, and must be assessed in light of the contract as a whole. Some terms that might seem quite unfair in one context may not be unfair in another context. An apparently unfair term may be regarded in a better light when seen in the context of other counter-balancing terms. However, in Director of Consumer Affairs Victoria v AAPT [2006] VCAT 1493, Morris J said that even if a contract contains terms that favour the consumer, such favourable terms may not counterbalance an unfair term if the consumer is unaware of them. Examples include implied terms, or terms that are hidden in fine print, in a schedule or in another document, or are written in legalese. This may result in an information imbalance in favour of the supplier. The concept of looking at the contract as whole in regards to where and how terms are located introduces an entirely new concept of contractual interpretation. To date the court has been concerned solely with the substance of a contract. It seems that the concept of “considering the contract as a whole” is introducing a form element into how courts should interpret contracts. Not only must they be substantively fair, the appearance of a standard form contract could by the use of small print and complicated definitions result in the contract being unfair due to its very form.
  • 37. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 37 In summary, the requirements of “transparency” and looking at the stand form consumer contract as a whole, appear to have been introduced to act against the business operator, in the sense that the more difficult the term is to comprehend, or find, the more likely it is that it will be seen by a court as “unfair”. The effect of an unfair term on the contract A finding by a court that a term is unfair, and therefore void, means that the term is treated as if it never existed. However the contract will continue to bind the affected parties to the extent that the contract is capable of operating without the unfair term. Under section 87AC of the TPA and 12GBA of the ASIC Act, the ACCC, ASIC or a party to a standard form consumer contract may apply to the court for a declaration that a term of the contract is an unfair term. When the States and Territories apply the ACL in their jurisdictions, they may also allow for similar actions under their respective legislation. A business that is found to have included an unfair term in a consumer contract a wide. To assist the imagination of the courts Parliament has enhanced the list of remedies as follows: Civil pecuniary penalties will be available for conduct that does not warrant a criminal penalty and will now include the unconscionable conduct provisions and the unfair contract terms provisions of the ASIC Act. These penalties vary. The maximum penalties are consistent with those presently available for breaches of certain consumer protection provisions of the TPA ($1.1 million for corporations and $220,000 for individuals). Disqualification orders are also made available for breaches of certain provisions of the ASIC Act (including those relating to unconscionable conduct, pyramid selling, certain product safety and product information and the use of prescribed unfair contract terms). Disqualification orders will prohibit individuals from managing
  • 38. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 38 corporations or engaging in particular activities in connection with the management of corporations. Substantiation notices ASIC and ACCC have the power to issue substantiation notices requiring a business to provide information or documents capable of substantiating a representation made by the business in relation to the supply or possible supply of financial services (ASIC) and goods and non-financial services (ACCC). Infringement Notices may be issued by ACCC and ASIC for breaches of certain parts of the ACL and ASIC Act, including the unfair contract terms provisions, with penalties of up to $6,600. These are designed to supplement more serious penalties by facilitating relatively small financial penalties for minor contraventions without requiring court proceedings. Public warning notices may be issued by ACCC and ASIC to inform the public of potentially harmful conduct without the need for a court order. Redress Orders ASIC and ACCC may seek court orders requiring a business to provide redress to consumers who are not parties to a particular enforcement proceeding. This power is designed to be used where a large number of consumers suffer similar identifiable damage. The redress can take a number of forms, including refunds, the variation of a contract or orders to honour representations. Injunctions prohibiting offending conduct of the way a contract is entered into or a form of contract not to be used could be made (section 80 of the TPA; section 12GD of the ASIC Act). Orders prohibiting payment or transfer of moneys or other property can be made by the court (section 87A of the TPA; section 12GN of the ASIC Act). Orders to provide redress to non-party consumers (section 87AAA of the TPA Act; section 12GNB of the ASIC Act).
  • 39. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 39 Any other orders the court thinks appropriate (section 87 of the TPA; section 12GM of the ASIC Act). Enforcement The amendments will be overseen by: Ø The ACCC (and State Departments of Fair Trading) for consumer non-financial consumer contracts which oddly enough includes interest in land. Ø ASIC for consumer financial contracts. As under the TPA and ASIC Act, prior to the amendments, ASIC and ACCC are not required to take enforcement action when they become aware of a breach of the ACL or ASIC Act. Each has the right but not the obligation to prosecute wrong doing when in their opinion they see it. Individual consumers can also take action to protect their interests. The approach of the amendments is ex post in that their operations in a practical sense depends upon litigation, of what is an unfair term and what is a term that is or is not reasonably necessary in a standard form contract, will (unless the term is a prohibited term) have to depend upon the outcome of case law. The approach may be well and good but it is addressing the issues case by case and not in a wholesale manner. The difficulty is as Tonking SC has said at paragraph 6: “The (Contracts Review Act 1980 (NSW)) has been in place for nearly 30 years and ‘is probably still developing’. This is understandable when regard is had to the fact that much of the enforcement of unfair terms has de minimis consequences, such that the party affected will be disinclined to consider the detriment sufficient to warrant the time and effort, let alone costs and risks, associated with litigation.” Whether consumers will be considered enough to take costly litigation is yet to be seen.
  • 40. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 40 Managing your risks or How it affects competition in the market place The amendments are significant and far reaching. They have the potential to expose businesses to significant risk if not managed carefully. Having regard to the above, the term "standard form contract", is likely to capture most non-negotiable, general "terms and conditions" agreements given to consumers to sign before a company provides its goods or services, such as: • banking documents, including mortgages and credit card terms and conditions; • terms and conditions attaching to airline, train, bus and taxi travel; • terms and conditions attaching to the transport of produce or possessions for personal, domestic or household use; • contracts for utilities, including telephone, internet, electricity and gas contracts; • contracts for the sale and purchase of land principally by developers; • residential leases; and • contracts for recreational services such as tickets to concerts or sporting events. Businesses should: • Review existing standard form contracts to consider: o o • whether those contracts contain any possible unfair terms; and if so, whether the terms are ‘reasonably necessary’. If the terms are not reasonably necessary, serious consideration should be given to whether they should simply be removed as they may well serve no real purpose or address any real or potential risk. • If the term is considered to be reasonably necessary, it is important for businesses to document the basis for the term in the event that there is a subsequent challenge and consider whether the term should be disclosed in a particular way to ensure it is ‘transparent’. • Review existing contracts which use a standard form and where there are provisions for variation or extension after 1 January 2010 to consider: o Whether they contain any unfair terms; o Whether the terms are reasonably necessary;
  • 41. ACL: Defects, Warranties and Unfair Contracts Steven Brown o Page 41 If the terms are reasonably necessary, consider disclosing the terms so that they are ‘transparent’ and document a business case for why the term is ‘reasonably necessary’; • Start to consider and document why terms are included into their standard contracts. Having concurrent evidence supporting why a term is reasonable will have greater probative value that an argument seeking to defend a term that might appear to a court a creature of recent invention. Alternatively, are there sound commercial/business reasons behind the existence of the clause? Are there industry-standard terms, such as an acknowledgment that one party has read and understood the contract? If there are, then you need to closely monitor the development of the new unfair contracts laws. • Ensure there is an appropriate and well communicated procedure for creating and entering into standard form contracts that involve some compliance or legal review; • Ensure staff are properly inducted and trained on the use of standard form contracts and potentially unfair terms. The new law is described as consumer legislation. However, the provisions reach far beyond consumer contracts to provide a powerful weapon by which many other agreements will also be able to be challenged - franchisees will use the legislation to strike down terms in franchise agreements, tenants (both commercial and residential) will be able to use them to avoid harsh lease provisions, and independent contractors will have a powerful new tool to challenge provisions in quasi-employment agreements. As mentioned above the new laws have conflicts as to interests in land being subject to the laws but constitutions are excluded. Yet what will be the situation when a constitution deals with an interest in land such a company title matter. As a result, the new provisions are quickly likely to become among the most litigated provisions in the TPA vying for the title of most litigated section with section 52 of the TPA. A schematic has been developed by a firm. A copy appears on the next page.
  • 42. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 42 www.holleynethercote.com.au/.../Unfair%20Contract%20Terms%20Blog%20Version%2009-07-13.pdf
  • 43. ACL: Defects, Warranties and Unfair Contracts Steven Brown Page 43 Bibliography ACCC website New unfair contract terms law—Draft guidance for consultation 26 March to 12 April <http://www.accc.gov.au/content/index.phtml/itemId/920435> Booth, P, Unfair Contract Amendments Act ACL Seminar Paper 20 August, 2009. www.holleynethercote.com.au/.../Unfair%20Contract%20Terms%20Blog%20Versio n%2009-07-13.pdf     Tonking, AI Submission to Senate Standing Committee On Economics – Inquiry into the Trade Practices Amendment (Australian Consumer Law) Bill 2009, 27 July, 2009.