The new Australian Consumer Law what does it mean for your business?

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1 From 1 January 2011, the Trade Practices Act 1974 (Cth) (TPA) will be amended by the Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 and replaced by the Competition and Consumer Act 2010 (Cth) (CCA). The CCA is intended to provide a single, national law covering consumer protection and fair trading both nationally and in each State and Territory. This final tranche of the new Australian Consumer Law will join changes introduced earlier this year including those dealing with unfair contracts and expanded powers for the ACCC. The majority of the final tranche of changes will commence on 1 January Some changes have been delayed until 1 July 2011 (provisions in relation to notices relating to repair of goods) and until 1 January 2012 (provisions detailing requirements for warranties against defects). Transitional provisions have also been inserted in relation to the requirements for unsolicited consumer agreements. Among the most important provisions that will commence on 1 January 2011 are the consumer guarantee and product safety provisions. Each of these new regimes is discussed below as these are likely to have the biggest impact on many Australian suppliers. The CCA will represent a significant departure from the TPA as it applied at the beginning of this year and it remains to be seen how the courts will deal with these new provisions. The New Consumer Guarantees Regime The CCA will introduce a regime of consumer guarantees which provide protection for consumers who acquire goods and services from Australian suppliers, importers or manufacturers. There are a number of significant changes to note. The reference to goods being of merchantable quality in the TPA has now been replaced to require goods to be of acceptable quality. Section 54(2) of the CCA defines goods to be of acceptable quality if they are: fit for purpose; acceptable in appearance and finish; free from defects; safe; and durable. The material differences between acceptable and merchantable quality: Fitness for purpose under the new acceptable standard means that goods must be fit for all purposes for which goods of that type are commonly supplied. The current standard of merchantable quality only required that goods must be of use for any purpose for which such goods would normally be used. The threshold requirement of free from defects is quite high. If the concept of defect extends to minor and cosmetic defects as well as major defects, the product may potentially fall short of the acceptable standard whereas under the current regime it may still satisfy the merchantable quality standard. 1

2 Consumers can now rely upon statutory remedies for breach of consumer guarantees. Under the current law notions such as merchantable quality and fitness for purpose are implied terms in contracts with consumers for the supply of goods and services. The onus is then on consumers to claim in contract when an implied term has been breached. Under the new regime, purchasers will have a statutory right to enforce consumer guarantees and the ACCC will also be entitled to take action against suppliers who do not comply with the new consumer guarantees regime. Express warranties There is a significant new guarantee in the legislation which will apply to contracts for the supply of goods only. The new guarantee states that express warranties take effect as consumer guarantees. The term express warranty is defined very broadly and will include many precontractual representations, assertions and statements that are made in connection with the nature, supply or promotion of goods. It will not be possible to exclude liability in respect of express warranties when supplying goods to consumers however, liability may be limited in certain circumstances. What other guarantees does the CCA refer to? Guarantees relating to the supply of goods Other consumer guarantees that provide consumers with a statutory basis for seeking remedies include when: the goods are not of acceptable quality; they are not acquiring proper title to the goods; other people claim to have a right to the goods; the goods are not fit for a purpose that the consumer makes known to the supplier; the goods are not fit for a purpose that the supplier says that they will suit; the goods do not match any description, sample or demonstration model used by the supplier; repairs and spare parts for the goods have not been made available for a reasonable period; or any express warranty has not been complied with. These guarantees apply if goods are supplied in trade or commerce meaning trade or commerce within Australia or trade or commerce between Australia and places outside Australia. With the exception of the guarantees as to title, undisturbed possession and undisclosed securities, they do not apply to sales by individuals outside of the business context. For example, a one off private sale of a used car by one person to another would escape regulation under these provisions. The provisions also do not apply to sales made by way of a traditional auction where an auctioneer acts as an agent for a person to sell goods. They do apply to sales 2

3 made by businesses on the internet by way of online auction websites when the website operator does not act as an agent for the seller. Guarantees relating to services The CCA also sets out consumer guarantees that provide consumers with a statutory basis for seeking remedies when: services are not rendered with due care and skill; services, and any product resulting from the services, are not fit for a purpose that the consumer made known to the supplier; or services are not supplied within a reasonable time. Who benefits from the guarantees? It is important to note that the consumer guarantees do not only apply in situations where you are dealing with individual consumers. Consumer is defined to mean: a person (including a corporation) that acquires goods or services at a price not exceeding $40,000; a person (including a corporation) that acquires goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption (at any price); and a person (including a corporation) that acquires goods consisting of a vehicle or trailer acquired for use principally in the transport of goods on public roads. A person is not a consumer if goods are acquired for the purpose of re-supply or using them up or transforming them, in trade or commerce: in the course of a process of production or manufacture; or in the course of repairing or treating other goods or fixtures on land. Therefore, the consumer guarantees apply to business to business transactions where the price of the goods or services was $40,000 or less and the exclusions set out above do not apply. If the price of the goods or services is more than $40,000, and they are not goods or services of a kind ordinarily acquired for domestic or household use, the consumer guarantees do not apply. Can liability be excluded or limited? Generally, no. The CCA provides that consumer guarantees cannot be excluded by contract. This ensures that a supplier or manufacturer cannot avoid obligations under consumer guarantees by reaching an agreement with a consumer to the effect that consumer guarantees do not apply. However, the CCA provides that suppliers and manufacturers can limit their liability for failure to comply with consumer guarantees in contracts for the supply of goods and services with persons (including corporations) that acquire goods or services where: the goods or services not of a kind ordinarily acquired for personal, domestic or household use or consumption; and it is fair and reasonable for the supplier to rely on the limitation. 3

4 The ability to limit liability does not allow a manufacturer or supplier to exclude all liability that would otherwise arise under the relevant consumer guarantees. In respect of the supply of goods, liability may be limited to: the replacement of goods or the supply of equivalent goods; the repair of goods; the payment of the cost of replacing the goods or of acquiring equivalent goods; or the payment of the cost of having goods repaired. So far as services are concerned, liability may be limited to: the cost of supplying services again; or the payment of the cost of having services supplied again. What remedies will be available to consumers? The CCA sets out the various statutory remedies that are available when consumer guarantees are not complied with. This is different from the current law where breach of an implied term gives rise to a claim in contract and associated contractual remedies. In general terms, consumers are entitled to have a supplier offer a refund, replacement or repairs if the standards required by a guarantee are not met. The applicable remedy depends on which guarantee has not been complied with and the nature of the failure to comply. Consumers will be able to seek damages from a manufacturer if goods are not of acceptable quality, do not match their description, or if spare parts and repair facilities are not made available for a reasonable period. Manufacturers are required to indemnify suppliers in respect of the costs of complying with the guarantee obligations related to acceptable quality, descriptions applied to goods by manufacturers and fitness for a purpose that a consumer makes known to a manufacturer. The CCA also provides that suppliers of goods and services must provide remedies to consumers within a reasonable time. If a remedy is not provided within a reasonable time a consumer may have the failure remedied elsewhere and have the supplier pay for the remedy. Manufacturers will be exposed to broader direct liability Manufacturers (and importers) will have increased liability under the consumer guarantees. The CCA includes provisions giving consumers a right to bring actions directly against manufacturers (and importers, where the manufacturer does not have a place of business in Australia). A manufacturer must ensure reasonable repair facilities are available and will also be unable to exclude liability in respect of the consumer guarantees (including express warranties). As mentioned above, manufacturers will also be required to indemnify suppliers for their liability to consumers for breach of the consumer guarantees in certain circumstances. What should I do now to ensure compliance with the new legislation? It is recommended that suppliers, retailers, manufacturers, importers and others in the supply chain amend their contracts with consumers (remembering that 4

5 consumers are not only individual consumers, but include businesses in many circumstances) with a view to: reviewing existing supply agreements with businesses (and otherwise) who are not themselves retailers or other manufacturers to ensure that you are not caught by the consumer guarantee provisions. For example, if you were to supply goods or services to a major corporation and the price was less than $40,000, that supply would be caught by the consumer guarantees and enliven the relevant statutory remedies; replacing all references in existing and new contracts to the Trade Practices Act 1974 (Cth) with Competition and Consumer Act 2010 (Cth) ; removing a term which excludes all liability in relation to consumer guarantees; removing broad limitation of liability clauses (but see comments below); insofar as a contract relates to the provision of goods, removing sweeping entire agreement clauses, which seek to exclude express warranties (including pre-contractual statements); insofar as a contract relates to the provision of goods, removing express warranties (unless you are prepared to accept unlimited liability in respect of such warranties); and removing choice of law clauses which nominate another jurisdiction (including a State or Territory) in a situation where a particular State or Territory of Australia would otherwise be the proper law of the contract. As discussed above, suppliers and manufacturers transacting with consumers that acquire goods not of a kind ordinarily acquired for personal, domestic or household use or consumption may in many cases limit their liability in respect of the application of the consumer guarantees. In essence, suppliers of goods to the relevant consumers can still include express warranties in their contracts because it will still be possible to limit liability. However, beware the general prohibition against misleading or deceptive conduct under the CCA. It is also recommended that consideration be given to how marketing practices in respect of goods may be amended to avoid making express warranties in connection with marketing goods (because pre-contractual statements fall within the definition of express warranties ) at every stage in the supply chain. It would be prudent to ensure that a retailer, for example, understands that all precontractual statements made about the nature of any goods being supplied will take effect as consumer guarantees. As mentioned earlier this is one of the most significant changes to be introduced in this last tranche of the ACL. The new Product Safety Regime Australian Consumer Law introduces Mandatory Reporting for Product Safety Incidents A new reporting requirement for suppliers of consumer goods or product related services has been introduced by the CCA. Suppliers of such goods and services will be obliged to report to the Australian Competition and Consumer Commission (ACCC) when their consumer goods or product related services have caused (or may have caused) a death, serious injury or illness. 5

6 The new requirement is onerous, with suppliers only having two days from when they first became aware of a death, serious injury or illness in which to report the incident. This is a significant change from the current law which only requires notification of recalls after the recall has been initiated. Instead of the current system where product safety incidents are largely investigated and managed by suppliers themselves, it is now likely that there will be greater involvement by the ACCC from the earliest stages of a potential product safety incident. It is critical for suppliers to comply with the new law, as there are criminal penalties for persons who supply consumer goods or product related services in contravention of requirements. Consumer goods and product related services The reporting requirements apply in respect of consumer goods and product related services. Consumer goods are defined as goods that are intended, or are of a kind likely, to be used for personal, domestic or household purposes. Product related services are defined as services that relate to the installation, maintenance, repair, cleaning, assembly or delivery of consumer goods of a particular kind. This is not an exhaustive definition but an inclusive one, and includes other types of services where they relate to the supply of consumer goods of a particular kind. A service is not a product related service if it is not related, connected or associated in some way to the supply of a consumer good. What are the triggers for reporting an incident? Where: a supplier of a consumer good or product related service becomes aware of a death or serious injury or illness of any person (Incident); and the supplier: - considers that the Incident was caused or may have been caused by the use or foreseeable misuse of their good, or of a consumer good which relates to their service; or - becomes aware that another person considers that the Incident was caused or may have been caused by the use or foreseeable misuse of their good, or of a consumer good which relates to their service, then the supplier must report the Incident to the responsible Commonwealth Minister within two days a very short period of time. In other words, the reporting requirement is triggered if a supplier considers a consumer good supplied by it, or a good relating to a product related service supplied by it, was the cause or may have been the cause of a death, serious injury or illness. The reporting requirement will also be triggered where a supplier becomes aware that another person considers that its good, or a good related to its services, was the cause or may have been the cause of an Incident. For this purpose, another person includes any member of the public (such as a consumer). 6

7 The CCA does not require a supplier to undertake further investigations to make themselves aware of information that they would not otherwise be aware of. Reports that are suspected to be fraudulent or misguided may need to be reported, as two days may be an insufficient time to investigate whether a report is genuine. However, as will be explained in further detail below, there are some limited exemptions from the reporting requirements. What constitutes a serious injury or illness? Serious injury or illness is defined to mean an acute physical injury or illness requiring medical or surgical treatment by or under the supervision of a qualified doctor or nurse. The medical or surgical treatment can be provided in a hospital or clinic, or in a similar place like a regional or rural clinic where, in the circumstances, hospitalisation may not be possible. The injury or illness in question must be acute in nature arising through sudden onset rather than after gradual development over time. The injury or illness must also be serious rather than minor in nature. Lastly, the injury or illness must not be a disease, which is defined to include an ailment, disorder or morbid condition which arises through sudden onset or gradual development. For the purposes of the reporting requirement, a serious injury or illness can include: an external physical injury, such as a serious burn, deep cut, broken bone, choking or serious fracture; an internal injury, such as internal bleeding; an illness, such as poisoning. When does a supplier become aware of the information? A supplier becomes aware of a death, serious injury or illness when they are informed or notified about the Incident. Similarly, a supplier becomes aware that another person considers that a good was or may have been the cause of an Incident when they receive that information or are notified about it. A supplier can become aware of information through any avenue or means. For example, a supplier may become aware of an Incident if a consumer calls or sends an , complaining to the supplier and alleging that their product was or may have been a cause of an Incident. Causation The concept of an Incident being caused by a product covers situations that include: where the Incident was the result of, or possibly the result of, using the good; and where the Incident was the result of, or possibly the result of, misusing the good, and the misuse is reasonably foreseeable. The CCA does not require a supplier to have established that their product was the cause of an Incident before making a report. 7

8 Use and foreseeable misuse Where use or foreseeable misuse of a consumer good is considered by a supplier of that good (or by the supplier of a product related service which the good relates to) to be the cause or possible cause of a death, serious injury or illness, then the supplier must report the Incident to the ACCC. Use of a consumer good includes applying the good for its primary, normal or ordinary purpose(s). Labels, instructions, directions and any other information that may accompany a good may be relevant in determining what the uses are for the good. A foreseeable misuse of a consumer good includes applying the good for a purpose other than its primary, normal or ordinary purpose(s), as long as the misuse is reasonably foreseeable. The intention or motivation of the user or whether the good was deliberately or intentionally misused is irrelevant. What is relevant is whether the misuse is reasonably foreseeable. For example, placing a toy in one s mouth, although not a normal or intended use for that type of good, is nevertheless reasonably foreseeable where the intended user is a small child. Who exactly is required to make the report? Suppliers of the consumer good considered to have caused or possibly caused an Incident, or of the product related service which the good relates to, are required to provide a report to the ACCC. Suppliers of similar products or of substitute or competing products are not required to provide a report. Suppliers of a consumer good include all participants in the supply chain for that good. In other words, it includes those who were involved in supplying the good in question, such as the manufacturer, retailer, distributor, dealer or importer of the good. For example, the manufacturer of a bicycle who considers that a bike that he or she manufactured may have caused a serious injury will be required to report the Incident under the mandatory reporting requirement in the CCA. Similarly, the retailer who sold the bicycle or, say, the repairer who repaired the bicycle will be required to make a report if they believe (for instance, through a consumer complaint) that the bicycle may have caused an Incident. Exemptions to the reporting requirements Suppliers may be exempt from making a report under section 131 or 132 of the CCA in limited circumstances. Suppliers are exempt from reporting an Incident to the ACCC if one of the following four specific circumstances exist: where it is clear that the use or foreseeable misuse of a consumer good supplied by them, or of a good relating to a product related service supplied by them, was not the cause of the Incident in question; where it is very unlikely that the use or foreseeable misuse of a consumer good supplied by them, or of a good relating to a product related service supplied by them, was not the cause of the Incident in question; where the supplier or another person is already required to report the Incident under another law specified in the regulations (see below); or where the supplier or another person is already required to report the Incident under an industry code of practice specified in the regulations. 8

9 Clearly or very unlikely to be the cause In order to demonstrate that an Incident is clearly or very unlikely to have been caused by the good in question, it is not enough for a supplier to show that their good, or a good relating to a their service, may not have been the cause of the Incident in question. Rather, the supplier must have some reason to believe that that use or foreseeable misuse of the good either clearly did not cause, or was very unlikely to have caused, the Incident. For example, where a sporting injury was suffered as a result of rough play on the playing field, the manufacturer of the footwear worn by the injured player at the time of Incident could rely on the first or second reporting exemption noted above. Reporting under another law or industry code Suppliers are exempt from having to report an Incident if they or another person are already required under a specified law or specified code of practice to report about the same Incident to a regulator. The Competition and Consumer (Australian Consumer Law) Amendment Regulations 2010 have now been formalised. To avoid duplication of regulatory requirements, it was intended that the automotive industry, the pharmaceutical industry and the food industry be exempt from the notification requirements that would otherwise apply under sections 131 and 132 of the CCA, to the extent that they are subject to similar requirements under other laws. Accordingly, regulation 92 provides that a supplier is not required to notify a death or serious injury or illness under sections 131 or 132 if they are required to make that notification under the listed Commonwealth, State and Territory laws which include laws related to road transport, health and some regulated substances and devices such as those regulated by the Therapeutic Goods Act It is significant to note that the exemption relates to a death or injury or illness, and not the product or class of products. This is relevant to suppliers in these industries because the potential to create twin reporting requirements remains. For example, where an Incident is not required to be reported under any of the listed legislation, a reporting obligation will still exist under the CCA. Protections offered to suppliers making reports Those making reports will be protected in a number of ways: the CCA provides that giving a notice is not an admission of liability in respect of the products or the injury or death; confidentiality provisions also apply to the reports; the liability of an insurer under a contract of insurance between the insurer and a supplier is not affected because the supplier has provided information relating to consumer goods to the responsible Minister or other person listed in the CCA. (Note that the insurance contact must relate to the recall of consumer goods supplied by the supplier or to the supplier s liability with respect to a possible defect in the goods). 9

10 Penalties Contraventions of the new reporting requirement imposed by the CCA have an associated criminal offence. The maximum fine payable for a contravention of the reporting requirements is $16,650 for a body corporate and $3,300 for individuals. What should I do now to ensure compliance with the new legislation? The two business day reporting timeframe is extremely short and can be triggered by an or phone call from a consumer or even a comment by a consumer at a point of sale. Because of the short timeframe, suppliers will be unable to investigate the report properly, so in practice the reporting obligation is likely to be triggered by any report, regardless of whether the supplier thinks that it is fraudulent or genuine. The early involvement of the ACCC will mean that suppliers have less control over the conduct of the investigation, and will be required to respond to requests for information from the ACCC while simultaneously conducting their own investigations. It is therefore important that suppliers: review their internal reporting processes to ensure that these are adequate to deal with the new requirements. In particular, reports of injury or death need to be escalated to senior management as soon as reports are received to allow for reporting to the ACCC within two days; have adequate technical expertise available (internal or external) to be able to conduct a thorough investigation into product safety Incidents quickly; ensure that any relevant test reports, such as those demonstrating compliance with mandatory standards, be readily available so that these can be provided to the ACCC swiftly; keep in mind that the product safety regime applies equally to services as well as products. That is, whilst a product such as a chemical may itself be dangerous, service providers who use such chemicals need to ensure that the methods in which they are used do not result in an event likely to cause death or injury. If the latter is the case, this also becomes a reportable incident. A supplier may be forced to recall its products or take other remedial action if it is unable to demonstrate to the ACCC that its product is safe, even if an investigation later shows that such action was unnecessary. For further information please contact: Christine Ecob Kate Fitzgerald Partner Partner p P christine.ecob@jws.com.au kate.fitzgerald@jws.com.au Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. 10