Consumer rights Reforming statutory implied conditions and warranties

Challenges and catalysts for change

For more than a century, State and Territory governments have had provisions in their FTAs and SGAs that imply terms into contracts for the sale of goods and give basic warranties and rights to purchasers. Nationally, the TPA also includes these fundamental rights. Therefore, it is timely to reassess the warranties available to consumers as part of the ACL harmonisation process.

Clarity in the law

Consumer law, perhaps more than any other law, needs to be comprehensible to individual consumers and businesses alike. In such an extensive and important area of the law, consumers need to understand their rights and businesses need to understand their obligations without the need for recourse to expensive legal advice.

The coexistence of individual state and territory law and the nationally focused TPA has resulted in a complex law that has caused uncertainty and confusion in the market place. Changes in the consumer environment have placed further pressure on the adequacy of current laws. Technological changes, changing methods of purchase such as online shopping and electronic platforms for bringing buyers and sellers into contact (so called online auctions), increased access to markets and the increased availability of products have revolutionised the way business and consumers interact.¹⁰ The associated benefits of these changes have arisen alongside other issues, such as increasing complexity both within products and markets, a wider variety of consumer needs and higher consumer expectations.

In addition, the provisions in the TPA and state and territory consumer legislation derive from the United Kingdom Sale of Goods Act 1893 which codified the traditional United Kingdom sale of goods law and was never intended to be a consumer protection regime. The archaic terminology used — for example ‘merchantable quality’ — has failed to provide the modern consumer with clear and meaningful guidance on the essence of the law.

The existing regime is based on the common law ‘privity of contract’ doctrine. Consumers have rights based on terms implied into contracts with retailers. There are two tiers of implied terms (conditions and warranties) with different remedies attaching to them.

Further, if the manufacturer provides a voluntary warranty there may be a collateral contract between the consumer and the manufacturer. These complex contractual arrangements can result in retailers denying liability and referring consumers back to manufacturers, or others in the supply chain, to seek a remedy. Manufacturers, in turn, may deny that a collateral contract exists, or require the consumer to prove that the defect was caused by the manufacturer rather than a component supplier. There is, therefore, a lack of clarity for consumers in the current laws, and this is one of the principal areas CCAAC is seeking to address.

The fundamental principle underlying the law in this area should be that consumers are entitled to get what they pay for, in the sense that goods and services will do what they are supposed to do, thereby reducing the likelihood of consumer detriment and dissatisfaction.

CCAAC believes that there is a need to clarify and simplify the law, so that consumers are provided with a basic minimum level of protection as far as possible within the existing system.

Consumers should not be forced to prove which firm in the supply chain is responsible for a fault or defect in the goods supplied. Manufacturers and retailers should assume joint responsibility for the quality of the goods and services they supply, and the common law privity of contract doctrine should not be a barrier to recovery by the consumer.

CCAAC believes that to clarify the law, a new statutory scheme should be established independently of the law of contract and that the Government should establish post sale statutory guarantees, with statutory remedies provided for breach of these guarantees.

Awareness of rights and obligations

The complexity of the law has also contributed to the widespread lack of consumer understanding and awareness. If a consumer is unable to understand which law is applicable to their situation (or even that there is a law applicable to their situation), how can they be fully aware of their rights?

Further, the coexistence of statutory rights and obligations alongside manufacturers’ voluntary warranties and extended warranties can be confusing for traders and consumers¹¹, blurring the boundaries of statutory rights with the additional rights granted by retailers or manufacturers.

According to the National Education and Information Advisory Taskforce Baseline Study for Statutory Warranties and Refunds August 2009 (the NEIAT study), less than 20 per cent of people were able to demonstrate actual knowledge and understanding of the basic principles of federal or state legislation.

Empirical evidence suggests that ‘when consumers are more informed of their statutory rights, their view of extended warranties changes; they feel that they are being asked to pay for something that they already have the right to expect’.¹² This finding highlights one of the major causes of consumer detriment in the market. While consumers may currently be satisfied with extended warranties and the ‘peace of mind’ they bring, the question arises: would they have the same level of satisfaction with extended warranties if they were fully aware of their existing statutory rights?

CCAAC believes that there is a need to raise awareness among consumers and suppliers about their statutory rights and responsibilities.

Difficulty in enforcement

Problems in relation to enforcement have also been raised. Throughout the extensive consultation process, the need for consumer certainty and ‘peace of mind’ was a recurring theme. Many consumers purchased an extended warranty in the belief that they were acquiring an easier avenue of redress for product failures and a direct point of contact to action redress. Despite existing law and avenues for its redress, empirical evidence suggests that consumers purchase extended warranties because of the time and effort required to gain an understanding of small claims tribunals in each State and Territory and in seeking individual redress.

The problems associated with individual redress are compounded by the fact that statutory rights form part of consumer contracts, meaning only a consumer with a contract can bring an action against a retailer. The NEIAT study found evidence which suggested that ‘only one in six consumers sought advice when things didn’t turn out as hoped, and this was mostly from personal or technical sources’.¹³

In addition, some individual consumers are less likely to enforce their rights as they may experience disadvantage, for example, through minimal education. Consumers from culturally and linguistically diverse communities may also encounter difficulties in accessing remedies. It is therefore important to consider how the law might be drafted to assist individuals especially in relation to self execution of the law. It is also important to consider other approaches that may be able to influence industry conduct to assist and support vulnerable consumers.

CCAAC believes that there is a need for clear laws and enhanced awareness on the part of consumers of their rights, and suppliers of their obligations. This will promote self enforcement by building knowledge and a shared understanding of rights between all parties. Where disputes cannot be resolved by the parties, CCAAC believes that there is a need for more cost effective dispute resolution procedures.

Incentives

The lack of incentives for retailers and manufacturers to comply with the law and assist consumers has also been highlighted. Unlike other provisions in the TPA, the warranty provisions generally only allow enforcement by individual consumers. As noted above, individual consumers can often be deterred from asserting their rights where to do so would require taking action in a court or tribunal.

Further in the case of low value goods it would not be rational economically to take such action having regard to both time and the possible expense involved. This means that retailers and manufacturers who choose not to meet their obligations, do not face the risk of enforcement action from the regulator (unless misleading and deceptive conduct is involved). It also means that retailers and manufacturers could choose whether to comply or not based on a cost/risk basis. Responding to legal action by a few individual consumer actions could be regarded as being a low risk for a business compared to dealing with an action by a regulator.

The uncertainty surrounding the implied statutory protections combined with the lack of awareness by consumers of their rights and the high cost of enforcement, mean that the likelihood of consumers personally enforcing their rights is small. Thus, this further reduces the incentive for retailers to comply with their implied contractual obligations.

There is evidence of the practice of retailers referring consumers back to manufacturers and denying liability. Consumers should not bear the onus of proving which firm in a supply chain is responsible for any defects in the goods.

CCAAC believes that making it simpler for individual consumers to enforce their rights will increase the incentive for manufacturers and retailers to comply with their obligations. Wherever possible, there is a need to make the law self-executing and eliminate recourse to expensive litigation. This can be achieved by making the retailer strictly liable to the consumer for goods that have a defect, even if that defect is not obvious. The retailer must then pursue its claim against others in the supply chain.