Consumer rights Reforming statutory implied conditions and warranties

Purpose

In 2008, the Ministerial Council on Consumer Affairs (MCCA) agreed that the high level national consumer policy objective for the future policy framework should be:

… to improve consumer wellbeing through consumer empowerment and protection, fostering effective competition and enabling the confident participation of consumers in markets in which both consumers and suppliers trade fairly.²

In response to the PC Review and consistent with MCCA’s objective, on 12 March 2009 the Australian Government announced a review of the Australian law on implied terms, to be undertaken by the Commonwealth Consumer Affairs Advisory Council (CCAAC). Under its terms of reference³, CCAAC has examined the existing laws on implied terms in the TPA and state and territory fair trading and sale of goods legislation.

On 26 July 2009 the Minister for Competition Policy and Consumer Affairs, the Hon Dr Craig Emerson MP, released an Issues Paper, Consumer rights: Statutory implied conditions and warranties, on behalf of CCAAC. The Issues Paper⁴ explored and posed questions about the adequacy of the current laws on implied terms and the need, if any, for amendments to improve existing laws and to empower consumer agencies to ensure compliance with these laws. The Issues Paper also considered related issues, such as ’lemon laws’ to protect consumers where goods repeatedly fail to meet expected standards, the existence of extended warranties and their interaction with laws on implied conditions and warranties, and other possible means to improve the operation of the existing laws on implied terms in Australia.

Interested parties were invited to comment on the paper and written submissions closed on 24 August 2009. In response to the Issues Paper, CCAAC received views from 33 submissions, as well as views from further consultation (the consultation process is at Appendix B). A range of stakeholders contributed to the process, including individual consumers, consumer agencies and businesses.⁵

The current environment

Confident and empowered consumers are essential for a thriving and innovative economy, providing individual gain as well as gains for the broader community. Within the economy, consumers play a vital role in promoting well functioning markets. A key contributor to consumer confidence is ready access to clear and accurate information about the characteristics of products and services consumers want to purchase.⁶ Consumers send signals to suppliers through their purchasing decisions and suppliers then compete for business on cost, quality and innovation. Competition between firms and subsequent responses to these consumer signals improve outcomes for consumers and productivity in the economy. However, these outcomes rely on consumers being well informed and sufficiently confident to act on information. This allows them to obtain what they expect from a transaction or, failing that, to seek redress.

A free market economy emphasises the benefits of markets behaving in a way in which resources are allocated efficiently. The efficient allocation of resources is critical in maximising consumer welfare. When this does not occur a market failure exists and there may be a need for government intervention to improve outcomes for the community, the environment, businesses and the wider economy.

Driven by technological change and globalisation, markets are becoming increasingly complex. The cross border nature of an increasing number of transactions has meant markets are more national (and international) in scope. Businesses trading within only one jurisdiction are increasingly rare, as are consumers with little interaction with jurisdictions outside their own.

In conjunction with these changing markets, new attitudes towards consumer policy are providing catalysts for emerging thought. Consumer protection alongside market competition is now recognised as essential for efficient market outcomes. These developments in consumer policy have provided the link between well functioning markets and consumer wellbeing. From this, the link in policy terms between supply side regulation, in the form of competition policy, and demand side interventions, in the form of consumer policy, is commonly accepted as a valid framework within which to develop policy.⁷

Types of warranties

Within the consumer environment three types of warranties have evolved. Consumers can rely on these differing warranties to protect themselves if goods are faulty. They are, in effect, promises by the retailer or manufacturer to stand behind the goods and services they supply and to correct any problems that may arise if the goods have a defect. The law recognises two basic kinds of warranties: a statutory implied warranty; and a manufacturer’s voluntary warranty. To these may be added a third category, the so called ‘extended warranty’ which is a contract separate from the contract of sale for the product, providing for the repair or service of the product. An extended warranty is a contract of insurance or a facility for managing risk.

Statutory implied warranties

Regardless of whether a voluntary or extended warranty is available, the TPA, Fair Trading Acts (FTAs) and Sale of Goods Acts (SGAs) protect consumers when they buy goods and services. They do so by implying certain rights and obligations into all consumer contracts, and these can be categorised as:

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  ‘conditions’, which are essential terms of the contract — that is, terms that are so important to the purpose of the contract that, if they are breached, will allow a consumer to cancel the contract and seek a refund as well as seek compensation for loss or damage; and
  
• 
  ‘warranties’, which are less significant terms —that is, secondary considerations that are important and, if they are breached, will generally allow consumers to seek damages, but will not allow consumers to terminate the contract.
  

Manufacturers’ voluntary warranties

Manufacturers often provide a ‘voluntary’ warranty to their customers, for example, for electronic goods, whitegoods and mobile phones. Voluntary warranties (also called ‘express’ warranties) set out the terms and conditions under which the manufacturer agrees to repair or replace the product or refund the purchase price. These warranties are usually —but not always —in writing and subject to time limits and other conditions. As their name suggests, manufacturers’ warranties are voluntary and their terms and conditions are not prescribed by law. Hence, provision of an express warranty and any terms and conditions it contains are generally at the manufacturer’s discretion⁸. However, if provided, a voluntary warranty may form a collateral contract between the consumer and the manufacturer and, if it does, the consumer has the right to take legal action against the manufacturer if the warranty is not honoured.⁹

Extended warranties

Some businesses also offer consumers the option of purchasing an extended warranty. Extended warranties are usually service or insurance contracts. Under specified conditions these will cover the costs of product repairs or replacement for a set period during and/or beyond the expiration of any voluntary warranty offered by the manufacturer or any statutory warranty. The terms and conditions of extended warranties are at the discretion of the organisation supplying the warranty (which may be the retailer, the manufacturer or a third party).