Consumer rights Reforming statutory implied conditions and warranties

Part III — Other issues

8 Extended warranties and consumer choice

Key points There has been significant growth in the sale of extended warranties over recent years. In regulating the sale of goods and of extended warranties for those goods, there is currently interaction between different laws — the TPA, the ASIC Act and the Corporations Act. The general lack of awareness on the part of consumers between statutory implied terms and extended warranties, may be contributing to the growing uptake of extended warranties Consumers commonly purchase extended warranties for whitegoods and large electrical items because they intend to keep them for a longer period and they provide consumers with ‘peace of mind’. There is a need for disclosure of clear information to consumers about how their statutory rights interact with other warranties, including extended warranties.

Nature of extended warranties

An extended warranty, broadly defined, is an agreement offered by a retailer, manufacturer or third party to cover against the risk that the product will develop faults during the term of the warranty. Consumers are required to enter into a contract separate from the contract of sale for the product, and to pay a separate price for the warranty. Generally, the warranty is acquired at the point of sale soon after the purchase of the underlying product. Extended warranties are offered for a wide range of products, including whitegoods, electrical and electronic goods, furniture and motor vehicles. The level of cover varies, but they would normally cover the repair of the underlying product, and may also provide for its replacement in certain circumstances.

Uptake of extended warranties

There has been a significant growth in the sale of extended warranties over recent years. Extended warranties are being widely offered for a range of products and many consumers are purchasing them, although details of the number of claims made by consumers under extended warranties are difficult to ascertain.¹³⁰ The NEIAT study revealed that 38 per cent of a sample of consumers reported that they had purchased an extended warranty at some time.¹³¹

In 2008, the NSW Office of Fair Trading commissioned CHOICE to research the uptake of, cost of, and consumer experiences relating to, extended warranties. The research was conducted through surveys and ‘mystery shopping’. The CHOICE report found that 97 per cent of consumers surveyed who knew what an extended warranty was had been offered one before, and one third had been offered an extended warranty on more than five occasions.¹³²

Types of extended warranties

Extended warranties are of two types, although both are offered to consumers to help them manage the risks of product defects and faults for a certain period.

The first type of extended warranty is sold by a retailer at the same time that the goods are acquired. In this case, the warranty provider is the manufacturer or retailer of the product. This is not a contract of insurance but is likely to be a facility for managing financial risk. It is likely to fall within the ‘incidental product’ exemption in section 763E of the Corporations Act 2001.

The second type of extended warranty is either sold by: the retailer/dealer as an agent or intermediary on behalf of an insurer; or a third party warranty provider who is not involved in the supply of the product covered by the warranty. This type of extended warranty is a financial service since they are either contracts of insurance or contracts for managing financial risk. Accordingly, these extended warranties are subject to the consumer protection provisions of Part 2, Division 2 of the ASIC Act, rather than Part V of the TPA.

An extended warranty of this nature is a financial product and any advice given in relation to acquiring it is a financial service subject to the implied terms regime in section 12ED of the ASIC Act. Section 12ED provides that in every contract for the supply of financial services by a person to a consumer, there is an implied warranty that the services will be rendered with due care and skill. If the consumer, expressly or by implication, makes known to the person providing the financial service any particular purpose for which the service is required or the result that they desire to achieve, there is an implied warranty that the service will be reasonably fit for that purpose.

Existing Commonwealth legislation

Trade Practices Act 1974

Whilst the implied terms in the TPA (in Part V, Division 2) do not apply to financial products and financial services, the TPA prevents businesses from providing false, misleading or deceptive information to consumers, for instance, when selling an extended warranty.¹³³ Further, businesses are not allowed to exclude, modify or restrict any of the statutory implied terms, for instance, through an express or extended warranty.¹³⁴

Regulating the sale of extended warranties

In terms of regulating the sale of goods and of extended warranties for those goods, there is currently interaction between different laws: the TPA, the ASIC Act and the Corporations Act. For instance:

• 
  the sale of the goods is subject to the statutory implied terms in the TPA (Part V, Division 2);
  
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  pre contractual advice and negotiations surrounding the sale of the goods are subject to the consumer protection provisions of the TPA (Part V, Division 1);
  
• 
  pre contractual advice and negotiations surrounding the sale of an extended warranty that is not an ‘incidental product’ are subject to the requirements in the Corporations Act; and
  
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  pre contractual advice and negotiations in relation to the sale of an extended warranty that is a ‘financial product’ under the ASIC Act are subject to the consumer protection provisions of that Act (Part 2, Division 2).
  

The application of several Acts to such contracts also attracts the jurisdiction of several consumer agencies. For instance, if an extended warranty is a financial product and a retailer has provided false or misleading advice to a consumer in relation to the warranty, such as the extent of its coverage and additional benefits over the statutory warranties, then the ACCC may have a role with regard to the pre contractual advice provided. In addition, ASIC may also have a role in relation to that same advice, but more specifically to the extended warranty.¹³⁵