Consumer rights Statutory implied conditions and warranties

Chapter 3
Current Australian law

All Australian jurisdictions have laws which provide consumers with basic protections in relation to the goods and services they acquire. While there is some variation in these laws, there is general consistency in their operation. However, some of the variations between jurisdictions may have consequences for consumers. Further, in some jurisdictions, the implied terms can be modified or excluded by the supplier, denying consumers access to redress.

The Trade Practices Act 1974

Division 2 (Conditions and warranties in consumer transactions) of Part V of the TPA implies terms into consumer transactions. Division 2A (Actions against manufacturers and importers of goods) creates separate causes of action which consumers may enforce against manufacturers and importers where consumer goods fail to comply with certain standards.

Application of Divisions 2 and 2A

Divisions 2 and 2A apply only in relation to the supply of goods or services by a corporation in the course of business to a ‘consumer’.

A person is defined in section 4B of the TPA to be a consumer if either:

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  the goods or services have a value of $40,000 or less; or
  
• 
  the cost of the goods or services exceeds $40,000 but they are of a kind ordinarily used in or purchased for personal, domestic or household use or consumption (or, in the case of vehicles, the vehicle is acquired primarily for use in the transport of goods on public roads);
  

and, in the case of goods, they are not purchased either for re supply (further defined in section 4C) or for the purpose of using them up or transforming them in business in the course of a process of production or manufacture or of repairing or treating other goods or fixtures on land.

Section 6 of the TPA extends the operation of Part V Divisions 2 and 2A to include individuals supplying goods in the course of a business if they are involved in overseas trade or commerce or trade or commerce with a Territory, between a State and a Territory or between two territories.

Part V does not apply to the supply or possible supply of financial services (defined in section 4).¹² Mirror provisions in Part 2 Division 2 of the Australian Securities and Investments Commission Act 2001 (ASIC Act) apply the consumer protection provisions to financial services. The Australian Securities and Investments Commission (ASIC) can delegate to the ACCC the exercise of authority in relation to breaches of the equivalent consumer protection provisions of the ASIC Act.

Apart from section 69 (Implied undertakings as to title, encumbrances and quiet possession), the conditions and warranties implied by Part V Division 2 and rights of action given by Division 2A expressly do not apply to auction sales.¹³

Part V Division 2 Part V Division 2 of the TPA implies into all consumer contracts certain non excludable conditions and warranties. Implied terms In relation to goods, Division 2 provides for the following conditions and warranties: a condition that the supplier has a right to sell the goods (paragraph 69(1)(a)); a warranty that the consumer will enjoy quiet possession of the goods (paragraph 69(1)(b)); a warranty that the goods are free from encumbrance (paragraph 69(1)(c)); a condition that goods supplied by description will correspond with the description (subsection 70(1)); a condition that goods are of merchantable quality (defined in section 66 as fit for the purpose for which goods of that kind are commonly bought), including where the actual purpose is made known by the purchaser, the goods are fit for that purpose (section 71); and a condition that goods supplied by sample will correspond with the sample (section 72). In relation to services, the TPA provides for: a warranty that services will be rendered with due care and skill (subsection 74(1)); a warranty that any goods supplied with services will be fit for purpose (subsection 74(1)); and a warranty that, where the actual purpose is made known by the purchaser, the services and any goods supplied with them will be fit for that purpose (subsection 74(2)).

Remedies Since the terms outlined in Division 2 are implied into the contract, the action to be brought by the consumer is an action for breach of contract rather than an action for breach of the TPA. Section 75A also allows that, where a corporation breaches a condition implied into a contract for the supply of goods by Division 2, the consumer can rescind the contract by serving a notice on the supplier or returning the goods. Ability to exclude or contract out of provisions Section 67 of the TPA ensures that suppliers are not able to avoid Part V Division 2 by providing for the law of another jurisdiction to apply to the contract (that is, by including a choice of laws clause in a contract and choosing that the law of another country is to apply). If Division 2 would apply in the absence of the choice of law clause, then it applies regardless of the law chosen under the contract (paragraph 67(a)). Further, any terms that attempt to substitute the provisions of another jurisdiction’s law in place of Division 2 are ineffective (paragraph 67(b)). Section 68 declares void any attempts by parties to modify or exclude any part of Division 2, or the exercise of any right, or the liability of a corporation for breach. The only exception allows state and territory law to limit or preclude liability for a breach of the warranties in relation to services (subsection 74(2A)). The combined operation of sections 67 and 68 ensures that contracts between foreign corporations and residents of Australia are subject to the operation of Part V Division 2. Limitation of liability Section 68A allows a corporation to limit its liability for breach of an implied term, excluding the conditions and warranties implied by section 69, other than where the goods or services supplied are goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption. Liability may be limited to: in the case of goods, one or more of: replacement of the goods or supply of equivalent goods (subparagraph 68A(1)(a)(i)); repair of the goods (subparagraph 68A(1)(a)(ii)); payment of the cost of replacing the goods or of acquiring equivalent goods (subparagraph 68A(1)(a)(iii)); or payment of the cost of having the goods repaired (subparagraph 68A(1)(a)(iv)); or in the case of services: the supplying of the services again (subparagraph 68A(1)(b)(i)); or payment of the cost of having the services supplied again (subparagraph 68A(1)(b)(ii)).

Section 68B provides that a corporation may exclude, restrict or modify the warranties — or the exercise of any right, or the liability of a corporation for breach — in relation to the supply of services (section 74) as they apply to recreational services. The exclusion, restriction or modification must be limited to liability for death or personal injury (defined in subsection 68(2)). Recreational services is defined in subsection 68(2) to mean sporting activities or other activities that involve a significant degree of physical exertion or physical risk undertaken for recreational purposes. Subsection 74(3) excludes from the types of services covered by the warranties in section 74: contracts for the transportation or storage of goods for the purposes of the customer’s business; and contracts for insurance. Part V Division 2A Part V Division 2A imposes certain obligations on manufacturers and importers of goods. Unlike Division 2 which will only provide a remedy to a consumer if there is a contract into which the terms can be implied, Division 2A allows the consumer to take direct action against a manufacturer (or importer) in the case where there is a reseller interposed between the manufacturer and the consumer. Rights of action Division 2A provides for causes of action (which are similar to the terms implied under Division 2) in respect of: unsuitable goods (that is, goods which are not reasonably fit for the purpose for which they were supplied) (section 74B); goods which do not correspond with the descriptions (section 74C); goods of unmerchantable quality (section 74D); goods which do not conform to a sample (section 74E); failure to provide facilities for repairs or parts (section 74F); and non compliance with an express warranty (section 74G). Under section 74H, a seller liable to pay compensation to a consumer for a breach of a condition or warranty implied by a provision of Division 2 is also given the right to recover against the manufacturer or importer of the product. Ability to exclude or contract out of provisions Any term of a contract that succeeds or attempts to exclude, restrict or modify the application of Division 2A is void (section 74K).

Limitation of liability In the case of goods other than goods of a kind ordinarily acquired for personal, domestic or household use or consumption, the liability of a manufacturer to a seller under section 74H is limited to a liability to pay to the seller an amount equal to the lowest of: the cost of replacing the goods; the cost of obtaining equivalent goods; or the cost of having the goods repaired. Section 74J also imposes a limitation period on the actions under Division 2A, which is three years.

State and territory legislation

Implied terms laws across Australian jurisdictions are either based on the TPA or are to the same effect. A comparison of implied terms provisions across Australia is in Appendix A.

Remedies

As with the implied terms in the TPA, the remedy for breach of these provisions in state and territory legislation is a claim for damages of a breach of a term of a contract rather than damages for a contravention of the provisions of the legislation.

Variation across jurisdictions

Although state and territory laws on implied terms appear broadly similar, the application of the statutory conditions varies across jurisdictions. Some of the main differences relate to:

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  whether the conditions and warranties are excludable;
  
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  the definition of ‘consumer’ and variations in purchase value and use thresholds for eligibility;
  
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  whether the supply of services is subject to conditions or warranties;
  
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  factors to be considered in determining whether the provisions apply (for example, price, terms of supply and condition of goods);
  
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  obligations on the buyer to examine goods prior to purchase;
  
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  the extent to which the skill or judgment of the supplier is relevant; and
  
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  whether the supplier could reasonably be aware of the defect or whether the defect was brought to the attention of a consumer.
  

Excludability

All jurisdictions make provision for implied terms in contracts for the sale of goods in sale of goods legislation. These terms can be effectively modified or excluded by the supplier in some jurisdictions.

Only NSW, Victoria, WA, SA and the NT have introduced explicitly non excludable warranties in their respective FTAs (the Consumer Transactions Act 1972 in SA).

The ACT and Tasmania do not cover warranties and refunds in their consumer legislation. The ACT is covered by the TPA. In Tasmania, the SGA includes some warranties and refunds provisions but it allows contracts to vary the statutory warranties relating to clear title and for manufacturers’ voluntary warranties to explicitly override a statutory warranty in relation to fitness for purpose. In Queensland, the same provisions exist in the SGA as in Tasmania, but the FTA prohibits manufacturers’ voluntary warranties from overriding statutory warranties.

Application

While there is similarity in the value and use of goods covered by statutory implied terms in different jurisdictions — for example, all jurisdictions cover consumer goods (goods normally used for personal or household use) that are purchased for personal use, regardless of the value of the goods — there are differences in the treatment of business goods (goods normally used for a business purpose) purchased for personal use and any type of goods (consumer or business) purchased by businesses.

Table 1 — Coverage of statutory conditions and warranties¹⁴

	TPA	NSW	QLD	VIC	WA	SA	TAS	NT	ACT
Goods for personal use
Consumer goods under $40,000
Consumer goods over $40,000
Business goods under $40,000
Business goods over $40,000
Goods for business use, excluding goods used for resupply, in production or manufacturing process, to repair other goods or fixtures to land
Consumer goods under $40,000
Consumer goods over $40,000
Business goods under $40,000
Business goods over $40,000

As with the TPA, the statutory implied terms in other jurisdictions require:

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  the consumer to have clear title to the goods (that is, the supplier has a right to sell the goods, the consumer has the right to enjoy quiet possession of the goods, and the goods are free from encumbrance);
  
• 
  the goods to be of merchantable quality;
  
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  the goods to be fit for purpose (including where the actual purpose is made known by the purchaser, fit for that purpose); and
  
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  the goods to match any description or sample.
  

Other issues

Part V Division 2A of the TPA enables consumers to take action against manufacturers or suppliers of goods that are not fit for purpose, and not just the retailer. Only NSW and the Northern Territory include similar provisions in their FTAs.

There are other differences across jurisdictions, including for example:

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  requirement for goods to comply with a sample — for example, in Victoria the statutory warranty applies only if the buyer is shown a sample of the goods and is induced by the sample to buy the goods or goods of a similar kind;
  
• 
  rescission of contract — SA includes additional provisions that allow a consumer, on writing to the supplier, to rescind a contract for the supply of goods within seven days if those goods do not meet the statutory warranties;
  
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  choice of redress — consumers are generally entitled to their choice of a refund, replacement or repair if the good does not meet a statutory condition, but may only be entitled to repair (or pro rata refund) once they have accepted the good and used it for some time.
  

Issues Bearing in mind existing consumer awareness about implied terms, are the statutory implied terms in the TPA adequate? If not, what amendments should be made? Are the terms used in these provisions (for example, ‘merchantable quality’) — and the way the terms are defined — clear and appropriate? Are there particular elements of state and territory implied terms legislation which work well for consumers?

Lack of clarity in legislation

While manufacturers’ voluntary warranties usually explicitly state the manufacturer’s obligations, the consumer’s rights and how long those obligations and rights last, the rights and obligations conferred by the statutory implied terms in consumer legislation are less clear. It could be that one of the reasons consumers and traders rely so heavily on voluntary and extended warranties is that the rights conferred by the legislation are unclear.

Consumer Affairs Victoria (CAV) has identified the following issues (in the context of the Victorian FTA) as being contributing factors¹⁵:

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  Consumer legislation relies on extraneous materials from contract law and sale of goods legislation and does not expressly set out all the consequences of a breach of an implied condition. For example, it does not clarify that it is not for the seller to elect the remedy, which has encouraged a widespread belief that the seller can select a refund, repair or replacement.
  
• 
  The critical terms regarding fitness for purpose depend on what level of fitness is ‘reasonable’ to expect, and that will depend on the circumstances of each case.
  
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  It is unclear to what extent the fitness for purpose terms are limited in time and whether and to what extent there is a durability requirement.
  
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  It is unclear whether the merchantability term extends to cosmetic or minor defects or is confined to simple workability.
  
• 
  The question of who pays for any costs of return or pick up of defective (or allegedly defective) goods is not addressed, nor is the question of the seller’s costs incurred in dismantling and examining goods, where the fault is determined not to be the result of a breach of an implied term.
  

Issue Are the statutory implied terms in the TPA and state and territory legislation clear?

Chapter 4
Enforcement

A breach of a statutory implied term is a breach of the contract concerned, not of the Act which creates the condition or warranty. Breaches of these implied terms are generally, therefore, enforced in the same way as any other breach of contract. However, the provisions of Part V Division 2A of the TPA may provide consumers with a direct right to compensation, rather than relying on the law of contract.

Remedies for breach of contract

When a contract is breached, this will generally entitle the party not responsible for the breach to sue for damages when his or her side of the bargain has been carried out (for example, by providing payment for a product). Where the breached term is a ‘condition’ of the contract — that is, is a fundamental part of the bargain which goes to the root of the contract — the innocent party may be entitled to terminate the contract. In some cases, there may be a right to rescind a breached contract.

Damages

Damages are the usual remedy sought when a party breaches its obligations under a contract. In most cases, the suffering caused by the breach of a contract can be remedied by the payment of money. Where the breach is of a statutory condition or warranty, the money compensates the consumer for the loss they have suffered, and is calculated based on the discrepancy between the utility the consumer would have experienced had the condition or warranty not been breached and the actual utility experienced by the consumer as affected by the breach.

Termination

If a condition — including a statutory condition — of a contract is breached, then the consumer is entitled to regard the contract as having been terminated. This means the contract is no longer operable and the parties are no longer placed under any obligations according to the terms of the contract. So, for example, a consumer is no longer liable to pay any outstanding instalments on a product the contract for the sale of which has been validly terminated. Termination is not generally available for less important terms of a contract, such as warranties.

Equitable remedies

While the common law remedies described above deal largely with money, where money alone (or the end of an obligation to pay money) cannot adequately remedy a breach of contract, the law of equity may provide an appropriate remedy. Equitable remedies include specific performance — where a court orders a party to perform the obligations imposed by the contract — and injunctions.

In the context of statutory implied terms, specific performance might involve the court ordering a supplier to provide the applicant consumer with a product that complies with the description or sample provided to the consumer. However, specific performance is not available where damages would suffice as a remedy, or where forcing the supplier to comply with the order would cause undue hardship.

Rescission

Rescission involves winding back a contract as though it had never taken place, and has been used as a remedy in both common law and equity to provide a just outcome in certain contractual situations. For example, rescission has often been available as a remedy in cases of misrepresentation. However, it is generally only available when it is possible to return both parties precisely to the state of affairs they were in before the contract took place.

The TPA provides for a statutory right to rescission in certain circumstances in section 75A. Where a corporation breaches one of the statutory conditions in Part V Division 2 of the TPA, the consumer is entitled to rescind the contract by writing to the corporation advising of the breach, or returning the goods to the corporation and advising of the breach. This entitlement to rescind the contract is subject to various conditions, including conditions relating to timeliness of the rescission and consumer treatment of the goods.

Alternative remedies

Actions against manufacturers and importers of goods

While not technically statutory conditions or warranties, the provisions of Part V Division 2A of the TPA (and similar provisions in state and territory laws) impose certain liabilities on manufacturers and importers of goods. Consumers generally contract with suppliers of goods, rather than with manufacturers or importers. Since there is no contract between the consumer and manufacturer or importer, actions for breach of contract are unavailable, and these provisions provide a right to a remedy.

Division 2A provides a right of action in cases such as the supply of unsuitable or unmerchantable goods, or in respect of false descriptions or non correspondence with samples. These provisions specify that the manufacturer and importer are liable to compensate the consumer in such cases, irrespective of any contractual rights.

Other remedies

The remedies currently available for breaches of the statutory implied terms provisions have been criticised as often being inadequate. For example, in submissions to the 1994 Australian Law Reform Commission inquiry into compliance with the TPA¹⁶, some argued for remedies similar to those under section 80 and 87 of the TPA (injunctions and other orders) while others argued that it would be sufficient if the current range of remedies was enhanced by introducing a right to a replacement good or service, including as an alternative to a refund under section 75A.

Issues Do existing remedies provide adequate redress to consumers harmed as a result of breaches of statutory implied terms? What additional or alternative remedies might complement or replace existing remedies?

Possible barriers to enforcement

The provision of statutory implied terms creates contractual rights — or similar rights to compensation — which consumers can use to obtain redress. However, there may be some institutional and economic factors which prevent consumers from always obtaining the redress to which they are entitled.

Privity of contract and personal enforcement

It is a well established — if flexible — principle of the law of contract that a contract binds and is enforceable only by the parties to it. Since a statutory implied term is part of a contract between supplier and consumer, only the supplier and consumer can enforce it. It cannot be enforced by a government or a regulator. While ‘enforcement’ can mean anything from making a verbal complaint over the telephone to engaging in litigation to obtain redress, in all cases it is something for the consumer to pursue. The role of consumer affairs agencies, with respect to statutory implied terms, is limited to educating consumers about their rights and businesses about their obligations.

This situation is in contrast to many of the other consumer protection provisions of the TPA and equivalent state and territory legislation. As another example, the New Zealand model is also quite different, providing for a stand alone system of statutory consumer guarantees and enabling regulators in many instances to bring actions against businesses in response to breaches of the law. The regulator is able to enforce statutory guarantees against suppliers on behalf of consumers, including the guarantee that goods will be of ‘acceptable quality’, fit for purpose and will correspond with their description.¹⁷ The types of remedies which can be obtained for consumers include repairs, replacements, refunds and damages.

The resources and expertise of consumer agencies such as the ACCC can mean that, in many instances, it would be better equipped than individual consumers to investigate and take action in relation to contraventions of the warranty provisions. This is particularly the case where many consumers are affected by the conduct of one trader (or only a few traders).

Transaction costs and coordination problems

Consumers are likely to encounter costs associated with enforcing their rights under statutory implied terms. For example, if a consumer wishes to rescind a contract on the basis of a breach of a condition, they must serve a notice on the supplier in writing, with particulars of the breach, and arrange for the goods to be returned to the supplier. This can be a costly process.

Even if a consumer only wants repair of the goods, there are costs associated with arranging for repair, as well as not being able to use the goods while they are being repaired. In cases where the costs of obtaining a remedy outweigh the likely benefit of having the problem remedied, there is no incentive for consumers to enforce their rights under statutory implied terms.

Where many consumers suffer similar detriment as a result of a common breach by a supplier, there may be incentives for consumers to band together in a common effort to obtain redress. This may take the form of a legal class action, or a concerted consumer campaign to pressure a supplier into establishing a system of redress. In this way the costs of obtaining redress are spread across a larger group of consumers, lowering costs for individual consumers and increasing incentives to seek redress.

However, it may be difficult for consumers to coordinate in this way. There may be no obvious mechanism for consumers to signal to each other that they are suffering similar detriment. Alternatively, the potential benefit available from coordinating may be different for each consumer, so only some consumers of the affected class may be willing to coordinate. This can limit the effectiveness of the coordination effort, and in turn reduce incentives for consumers to participate.

Availability of legal assistance

Section 170 of the TPA allows people to apply to the Attorney General for a grant of legal assistance where they institute, or propose to institute, legal proceedings under certain provisions of the TPA. The provisions of Divisions 2 and 2A are not currently covered by section 170, although Part VA — which addresses the liability of manufacturers and importers for defective goods — is. Legal aid programs are offered by the States and Territories and may vary in their availability for contractual disputes. Generally speaking, legal aid is rarely provided in civil cases not involving family law issues.

There are a number of possible measures to improve access to remedies, particularly by avoiding recourse to the courts. The availability of tribunals like the Victorian Civil and Administrative Tribunal provides alternative means of dealing with disputes about the supply of goods and services.

Issues Are there institutional, structural or economic barriers that prevent consumers from enforcing their rights under implied terms? Should consumers’ rights be implied into contracts, leaving it to the consumer to take action for breach of contract (as is currently the case in the TPA)? Or should consumers’ rights form part of a stand-alone statutory regime where the regulator can also bring action on behalf of the consumer (along similar lines to the New Zealand model)? Do litigation costs act as a deterrent for the personal enforcement of consumer rights? Do such costs contribute to consumer uptake of products such as extended warranties? What, if any, alternative dispute resolution forums should be available? Should consumer agencies be able to take action in respect of breaches of implied terms? Would retailers and manufacturers have a greater incentive to comply if the regulator could take action against them on behalf of the consumer? Are existing processes and mechanisms for facilitating consumer access to remedies adequate?

Consumer confidence and redress

Therefore, consumers may be reluctant to take action to enforce rights under the statutory implied terms regime. A range of studies have summarised the reasons for this¹⁸:

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  not knowing who to approach for assistance;
  
• 
  believing that seeking assistance is too much trouble or would not warrant the cost;
  
• 
  concerns about the cost of litigation;
  
• 
  not having confidence that further action would solve the problem;
  
• 
  being too busy to take further action;
  
• 
  being too nervous or embarrassed; and
  
• 
  seeking to upgrade or replace goods rather than pursuing their rights to repair or replace the faulty good, particularly young consumers buying high tech products.
  

In many instances, consumers lack the expertise, resources and confidence to enforce their rights under the statutory implied terms regime. This is often exacerbated by the actions of traders, who make it more costly or difficult for consumers to take action or encourage consumers to replace or upgrade a product rather than pursuing their rights to repair or seek a refund.

Issue Is the process for seeking redress for faulty goods clear and accessible to consumers?