Consumer guarantees, do not ignore them in a contract

Consumer guarantees in a contract

Ignoring the application of the consumer guarantees and liability in a contract for the supply of goods and/or services can amount to false or misleading representations. It can also amount to misleading and deceptive conduct. Significant penalties apply, it could ruin your business.

Under the Australian Consumer Law (ACL), you are a supplier of goods by way of sale, exchange, lease or hire. You are a supplier of services if you provide, grant or confer a service.

In a contract with consumers for the supply of goods or services, you generally cannot exclude consumer guarantees or liability for failure to comply with a consumer guarantee under the ACL. However, in certain circumstances, there is scope to limit your liability.

The application of the ACL is extended by State and Territory legislation, in particular the Civil Liability and Fair Trading Acts. Drafting in a contract may need to also reflect the application of relevant State or Territory laws.

The consumer guarantees do not apply to financial services or financial products.

What are consumer guarantees for?

Under the ACL, consumer guarantees apply to consumer goods and services for:

  • goods or services at a price which do not exceed $100,000;
  • goods or services, no matter what the price, ordinarily acquired for personal, domestic or household use or consumption; and
  • for a vehicle or trailer principally used to transport goods on public roads.

Consumer guarantees won’t apply where goods are purchased for resupply or transformed into something else and then on-sold. For example, if you sell your goods at garage sales or on Facebook Marketplace, the consumer guarantees won't apply.

If you are a distributor and you're purchasing products from a supplier and you will use them for the purposes of distribution, then you will not be afforded protection of the consumer guarantees.

You must be careful about the statements you make in contracts. Except in the circumstances I discuss below, you cannot restrict modify or exclude the consumer guarantees or represent that you are limiting them in any way. The contract terms will be void. You may face penalties for providing false or misleading information in addition to breaching the consumer guarantees. For example, if you include a no refund clause in your contracts with consumers.

What consumer guarantees apply to goods?

Goods come with a statutory guarantee under the ACL.

  • You, the supplier, must have title to the goods including freedom from encumbrance.
  • The goods must be of acceptable quality. Acceptable quality under the ACL means:
    • fit for all the purposes for which the goods of that kind are commonly supplied;
    • acceptable in appearance and finish;
    • free from defects;
    • safe; and
    • durable.

If the goods are not of acceptable quality, but the consumer was informed of the issue and still agreed to acquires the goods, or they examined the goods and that would have revealed the position, then the guarantee of acceptable quality does not apply.

  • The goods must be fit for the intended purpose for which the consumer has expressly or impliedly made known.
  • The goods must comply with their description and conform with any sample or demonstration model.
  • The goods must be supplied on the basis the manufacturer will take reasonable action to ensure facilities for the repair of the goods and parts for the goods are reasonably available.
  • There must be compliance with any express warranty given by the manufacturer and the supplier of goods.

What consumer guarantees apply to services?

Services comes with a statutory guarantee under the ACL.

  • The supplier of services must exercise care and skill.
  • The services must be of reasonable fitness for any particular purpose the consumer has made known to the supplier of the services and any product resulting from the services.
  • The services and any product resulting from the services will be of such a nature and quality that they might reasonably be expected to achieve any result that the consumer made known.
  • If no time is fixed for the supply of services, they must be supplied within a reasonable time.

Can you limit liability for failure to comply with a consumer guarantee?

If your supply of goods or services does not exceed $100,000 and are for business purposes only (ie they cannot ordinarily be acquired for personal use), the supplier can limit their liability under s64A of the ACL to the:

  • repair or replacement of goods or payment for the repair or replacement of the goods;
  • resupply or payment of resupply of the services.

However, beware as s 64A is subject to a fairness test. If the consumer can show that it would not be fair or reasonable for the supplier to rely on this limitation of liability, any clause in a contract with that consumer limiting liability under s64A may be deemed void and of no force or effect. For example, if you were negligent in the supply of services or they were not fit for purpose, any resupply or payment for resupply of the services by another professional would be futile and thus arguably it would not be fair and reasonable to rely on that limitation of liability.

Consumer rights and remedies, not all are available

Not all rights and remedies are available for every failure to comply with a consumer guarantee. The ACL introduced a distinction between a “major failure” and anything that is not a major failure is a minor failure.

Is it a major or minor failure of goods?

A consumer can only reject goods if there is a major failure to comply with a consumer guarantee. The consumer can choose a refund, or a replacement, or ask for compensation for any drop in value of the goods.

If it is not a major failure of the goods, the supplier can remedy the failure. However, the impact of s 259(2) of the ACL means that even if it is not a major failure, if the supplier refuses or fails to remedy the failure, the consumer is still entitled to reject the goods.

Minor or major failure of services

A major failure of services is one where:

  • a reasonable consumer would not have acquired the services had the consumer been fully aware of the nature and extent of the failure;
  • the services create an unsafe condition;
  • the services are substantially unfit for the purpose (either the normal purpose or that specified by the consumer).

A consumer can seek damages for failure to comply with the consumer guarantee under the contract. If it's a major failure, the consumer can terminate the contract and get a refund for the services not consumed. Otherwise the consumer can keep the contract and get compensation for the difference in the service delivered and what they paid. If it's not a major failure, the consumer can require the supplier to remedy the failure of services.

Consequential loss or damage

A consumer may claim any reasonably foreseeable loss or damage caused by the failure to comply with a consumer guarantee. For example, a consumer’s new oven is faulty and it causes a fire in the kitchen. The consumer may be entitled to compensation for that loss or damage.

Business to business

If your goods or services purchased at any price, are ordinarily acquired for personal, domestic or household use or consumption, you cannot limit your liability.

A business purchasing goods or services for business purposes may be deemed to be a consumer if they are goods or services that can ordinarily be acquired for personal, domestic or household use or consumption.

Unfortunately the ACL does not clarify the concept of goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption. It has been left to the courts to provide guidance.

In Bunnings Group Ltd v Laminex Group Ltd (2006) 230 ALR 269 at 111, the Court identified four principles:

  • The phrase “goods of a kind ordinarily acquired for personal, domestic or household use or consumption” should be given a broad but uniform meaning.
  • The word “ordinarily” means commonly or regularly, not principally, exclusively or predominantly;
  • Rather than looking at the category of goods and asking about how that category of goods is ordinarily used, you should look at the goods themselves and ask how the goods in question are ordinarily used;
  • And the classification of the essential character of the goods is relevant, but not determinative.

Something like an office chair could be described as a chair ordinarily acquired for business purposes. The office chair could be distinguished from a kitchen chair which is ordinarily acquired for household purposes.

A business acquiring computer software for business purposes will be deemed to be a consumer for the purposes of the ACL if they are goods (and possibly services) of a kind ordinarily acquired for personal use.

Let's say a business is supplying business software packages for less than $100,000. If it’s clearly for business purposes only and they're not financial products, the supplier should ask the consumer to give written acknowledgement the goods are being supplied for business purposes only. This should also be acknowledged in the contract with consumers. That way the supplier may be able to limit its liability for failure of the goods to repair, replacement or payment for the cost of replacement or repair. And the business would not be liable for consequential losses such as loss of business sales, if there is a major failure of the software to comply with the guarantee of acceptable quality. Beware though, even if the software packages are shown to be acquired for business use in a majority of cases, if the software packages could also ordinarily be purchased for personal use, you will not be able to limit your liability.

How do the consumer guarantees apply to mixed sales of goods and services?

A difficulty arises where there is a contract with a consumer for a mixed sale of goods and services for a total price of say $250,000, yet there is no allocation of the price paid for each. Let's say the goods component is $100,000 and classified as non-personal goods, then the supplier can limit liability. But if the services are over $100,000 and classified to be of a kind ordinarily acquired for personal, domestic or household use or consumption, there can be no limitation of liability.

If you supply recreational services to consumers, can the terms of your contract exclude or limit liability?

Section 139A of the ACL provides an exception for a term of a contract with consumers relating to the supply of recreational services. A term can exclude liability for death, physical injury or mental injury or disease, but it won’t apply if the defendant’s conduct is reckless. However, those terms must comply with the wording in clause 139A(3) of the ACL otherwise the clause may be deemed void and of no force or effect.

This is exactly what happened in Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219. A 12 year old consumer was accelerating on a quad bike to keep up with the instructor (a supplier of quad biking services) and suffered personal injury. The contract sought to exclude liability for personal injury, and extended it to exclude liability for property damage and thus s 139A did not apply. Section 64 rendered the clause void. The supplier was found liable under s 60 for failure to exercise due care and skill and ordered to pay damages.

Watch out also for State and Territory legislation that may need to be considered. In Alameddine it was found that ss 5L, 5M and 5N of the Civil Liability Act 2002 (NSW) did not constitute defences to the claims made under ss 60 and 61 of the ACL.

Penalties for non-compliance

The maximum penalties for each breach of the ACL are:

Corporations, the greater of:

  • $50,000,000,
  • if the Court can determine the "reasonably attributable" benefit obtained, 3 times that value, or
  • if the Court cannot determine the benefit, 30% of the corporation's adjusted turnover during the breach turnover period for the offence.

Individuals $2,500,000.

DISCLAIMER - this article is general information only. It is not legal advice. You must seek independent legal advice for your particular circumstances.