Consumer rights Reforming statutory implied conditions and warranties

Motor vehicle lemon laws

Lemon laws in other jurisdictions

Motor vehicle lemon laws have existed in all US states for several decades. As noted previously, this may well have been a response to widespread concerns about the prevalence of lemons in the market for motor vehicles at that time.

However, the various states have enacted different lemon laws, leading to a lack of uniformity of consumer rights in this area. What appears to be the most common form of lemon law identifies a lemon as a vehicle where the manufacturer is incapable, within a reasonable period, of correcting any defects that substantially impair the use, value or safety of the vehicle. Rules about how long constitutes a ‘reasonable period’, and what remedies are available, vary markedly from state to state.

Application of lemon laws to other goods

It is not immediately obvious that a lemon law need be restricted in its application to motor vehicles. For example, Dr Nottage considers that discussion of lemon laws has focused on motor vehicles ‘due to the high cost of cars, potential for fraudsters in used goods markets, and simply Akerlof’s famous article. Prime candidates in Australia would be high value whitegoods and consumer electronics, both new and used.’¹⁸⁸

Industry specific regulation

To introduce a lemon law for motor vehicles and not for other consumer goods would give consumers a different level of protection or mechanism for redress in relation to one class of products compared to others.

The 2008 PC Review of Australia’s Consumer Policy Framework considered in detail the nature and value of industry specific consumer regulation. The PC found that industry specific regulation may be appropriate ‘where the risk of consumer detriment is high and/or the quality of the product or service is difficult to establish prior to purchase’.¹⁸⁹ However, the PC also made it clear that industry specific regulation should avoid being overly prescriptive, and that the need for any such regulation should be considered in the light of the provisions of the generic consumer law.

While it has been noted that the detriment occasioned by the supply of a lemon motor vehicle may be particularly significant for those consumers who buy them, the evidence in submissions indicates that the risk of detriment is low. The RACV indicated that perhaps 1 per cent of new motor vehicle sales risk generating disputes between consumers and dealers.¹⁹⁰

Further, it is not necessarily the case that the quality of motor vehicles is much more difficult to establish prior to purchase than the quality of other products. As the LCA noted, consumers are able to undertake additional enquiries before purchasing a motor vehicle, to satisfy themselves that a particular vehicle is of the standard they are seeking.¹⁹¹

Additionally, particularly in respect of used motor vehicles, a number of organisations offer a pre purchase vehicle inspection service, which may be an appropriate mechanism for informing consumers about the quality of the cars they purchase. While positing the need for increased disclosure about the previous uses of used motor vehicles, Veda Advantage noted that consumers currently have access to:

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  generic advice on the performance of a make and model;
  
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  an assessment of a car’s current running condition through mechanical inspection;
  
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  a REVS [Register of Encumbered Vehicles] check to verify encumbrances; and
  
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  Government vehicle products, providing information limited to the period of registration within that state.¹⁹²
  

No evidence was submitted to CCAAC indicating that information asymmetries in relation to new motor vehicles are insurmountable.

Notwithstanding the significance of the purchase of motor vehicles for Australian consumers, and the detriment that can arise when a motor vehicle is out of service, it is not clear that problems with motor vehicles should necessarily be subject to a greater degree of regulation than problems with other consumer products, provided the generic consumer law deals with those problems adequately.

Adequacy of the generic law

Merchantable quality and fitness for purpose

The utility of the term ‘merchantable quality’ is discussed elsewhere in this report, and it is suggested that the term be replaced with ‘acceptable quality’ and defined in more detail in the ACL. That is, CCAAC proposes that the NZ approach to guaranteed ‘acceptable quality’ in relation to consumer products be adopted.

Whatever the form, the merchantability provisions of the generic law apply to the sale of motor vehicles to consumers. The implementation of national consumer guarantees will reduce uncertainty for consumers as rights and remedies will both be provided for in the TPA.

To a significant extent, submissions received by CCAAC indicated that the implied terms found in the TPA and other legislation adequately encompassed the problem of lemons. Hunt & Hunt, for example, considered that ‘the existing statutory implied terms provide sufficient protection for consumers, and that introducing a new lemon law would be unlikely to add anything of significance to these terms’.¹⁹³ Hunt & Hunt suggested that the emphasis of any lemon law should be on ensuring consumers are properly informed about the extent of their rights.

Similarly, the LCA considered that existing protections are adequate, and that to introduce a lemon law ‘will likely add an unnecessary layer of regulatory burden and complexity … [and] add to the cost and confusion in this area’.¹⁹⁴

Even those submissions most supportive of a lemon law indicated that the existing law does recognise lemons as failing to meet the standards required by the implied terms.¹⁹⁵ It appears, then, that calls for a lemon law are not driven by the inadequacy of the implied terms themselves in capturing lemons, but rather by concerns about the effectiveness of the implied terms regime as a mechanism for redress.

Incentives to repair or replace

Clearly, there exist circumstances in which consumers of motor vehicles have difficulty in enforcing their contractual right to be supplied with a vehicle of merchantable quality. The example supplied by Mr Guden¹⁹⁶, of a vehicle returned to a dealer for repair 33 times without achieving a satisfactory outcome, is a telling illustration of this difficulty.

As noted in the Issues Paper, the lack of incentives for dealers to deal appropriately with a faulty vehicle is driven by the asymmetry of information between dealer and consumer. It may be that, in the case of latent vehicle faults, repairers will not feel moved to make the further examinations necessary to identify and repair the fault. It has been put to CCAAC that this situation may arise because there is insufficient clarity around consumer rights and, as the RACV noted, there is a lack of a clear process for consumers to follow when they identify faults in their vehicles.¹⁹⁷

Enforcement rights

Some submissions in support of lemon laws considered that while the existing implied terms did provide ‘an option, [they] are costly and rely upon the vehicle’s owner being able to mount a sufficiently strong case in support of a claim’.¹⁹⁸ The RACV noted several obstacles to achieving effective outcomes for consumers of lemons, based on there being no clear process to follow when claiming redress:

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  difficulty in establishing the existence and cause of a vehicle’s problems;
  
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  the manufacturer being obliged only to repair the vehicle, rather than responding to a consumer’s request for a refund or replacement vehicle;
  
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  the respective responsibilities of dealers and manufacturers being unclear, leading to consumers being referred from one to the other; and
  
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  the dispute resolution process being potentially ‘lengthy and arduous’.¹⁹⁹
  

For these reasons, the RACV recommends the development of a dispute resolution process with binding outcomes, which might give consumers a clearer process for pursuing redress.

Chapter 7 of this report deals with the enforcement of consumer rights under implied contractual terms, and finds that consumers would benefit from a cheaper, timelier and more accessible mechanism for resolving disputes than the current system. The more inaccessible the dispute resolution mechanism, the less certain are the consumer’s rights, whatever the law itself provides.

The measures contemplated in Chapter 7, to increase the availability of accessible tribunal mechanisms for resolving disputes about implied terms (or consumer guarantees), will go a long way to addressing concerns about motor vehicle lemons.

However, it cannot be denied that motor vehicles are a highly technical class of consumer product, and often require special expertise and diagnostic equipment to identify and analyse their faults. It follows that consumers who are supplied lemon motor vehicles may continue to face difficulties enforcing their rights even under a simplified enforcement regime.

The consumer guarantee regime in NZ is accompanied by both a general disputes tribunal and a specialist Motor Vehicle Disputes Tribunal (MVDT). Consumers are able to bring disputes about motor vehicle traders to the MVDT, which — through an informal hearing process — can make a decision about how best to resolve the dispute.

It is desirable, in CCAAC’s view, that any dispute resolution system introduced to handle complaints related to consumer guarantees should have a special facility for dealing with motor vehicle disputes, to ensure that an appropriate level of expertise is brought to bear on consumer complaints about motor vehicles.

Reducing disputes

Ideally, the existence of specialist dispute resolution mechanisms for a motor vehicles tribunal would not just provide a more effective mechanism for resolving disputes, but would discourage disputes from reaching that stage at all. This would increase the incentive for dealers to examine vehicles thoroughly when a consumer suspects a fault, and for them to remedy the fault in the most appropriate manner as quickly as possible. This is the most appropriate way to ensure consumers get what they pay for when they buy motor vehicles, reducing the likelihood of consumer dissatisfaction and detriment.