Warranties Against Defects: Coming to grips with Regulation 90 of the Competition and Consumer Regulations 2010

This article first appeared in the December 2011 edition of the NSW Law Society Journal, Vol. 49 No. 11, pp. 71-73.

Introduction

Businesses have a nine-month amnesty to provide the prescribed warranties against defects in their goods, but lawyers need to make their clients aware of the Australian Consumer Law (ACL) requirements or retailers could face enforcement action.

Recently competition and consumer law practitioners have been in up in arms about the implications of Regulation 90 of the Competition and Consumer Regulations 2010 (CCR).

The proposed regulation, which commences on 1 January 2012, will have a profound effect on the voluntary warranties provided by many manufacturers, importers and retailers to their consumers, as well as the way they promote such warranties. In broad terms, reg. 90 will be to introduce prescriptive requirements and obligations in relation to the provision of voluntary warranties against defects to consumers.

Legal practitioners with clients who supply goods with a warranty against defects document will need to understand the requirements of reg. 90 and the risks of providing a non-compliant warranty.

Despite the highly prescriptive nature of the legislation, the ACL Regulators have shown a willingness to take a practical and commonsense approach to enforcing the new laws; for example, the recent announcement of a nine month amnesty for suppliers who make a good faith effort to comply with the reg. 90.

However, businesses should also recognise that if they do not make a good faith effort to comply with reg. 90 from 1 January 2012, the ACL Regulators are highly likely to take enforcement action against businesses which come to their attention.

What it is a warranty against defects?

Whenever a consumer purchases a product, they will often receive a warranty against defects document from the manufacturer, importer or retailer. This is not an express warranty such as a statement printed on a label on a scooter that states: “This scooter is suitable for use by riders who weigh less than 100 kgs”.

Rather, warranties against defects are usually general representations communicated to a consumer that a business will:

• repair or replace goods (or part of them); 

• resupply or fix a problem with services (or part of them); or

• provide compensation to the consumer, if the goods or services (or part of them) are defective. 

In some cases, the warranty document will have to be returned to the manufacturer for it to be valid. In other cases, all the consumer has to do is retain their proof of purchase to take advantage of the warranty at a later date.

Less expensive consumer goods, such as home appliances and electrical goods, often have 12-month warranties. However, warranties on new motor vehicles will be considerably longer, usually between three and five years.

Currently there are no legislative requirements that voluntary warranties have to meet, other than they cannot be misleading or deceptive about the mandatory statutory consumer guarantees. However, from 1 January 2012, all such warranties will have to meet the prescriptive requirements contained in reg. 90 of the CCR. There will also be civil and criminal penalties for failing to comply with these new laws.

Who needs to comply?

Manufacturers, importers and retailers, will all have to comply with the new laws. Section 102(2) of the Competition and Consumer Act 2010 (CCA) makes it illegal for a person to:

• give to the consumer a document that evidences a warranty against defects that does not comply with the requirements of reg 90; or 

• represent directly to the consumer that the goods and services are goods or services to which such a warranty against defects relates. The use of the word “give” in s.102(2)(b) indicates that any person in the supply chain who physically provides a document to a consumer which purports to be a warranty against defects will be caught by the provision.[1]

 For example:

• if a manufacturer places a warranty against defects document in a box with a product after 1 January 2012, then sells it directly to a consumer and the document does not comply with reg. 90, the manufacturer will contravene s.102(2)(b) of the CCA; and[2] 

• it would appear that if a salesperson working at a retail outlet hands a consumer a document which purports to be a warranty against defects and it does not comply with reg. 90, that salesperson may have contravened s.102(2)(b) of the CCA.[3]

 The use of the word “give” suggests that a manufacturer will not be liable under s.102(2)(a) for supplying a good with a non-compliant warranty to a retailer which is then sold to a consumer. This is because the manufacturer is not physically “giving” the non-compliant warranty to the consumer – perhaps an unintended consequence of the use of the word “give” in s.102(2)(a).

The other prohibition contained in s.102(2) is that it will be illegal for a person to represent directly to a consumer that a good or service has a warranty against defects if the warranty does not comply with reg. 90. In other words, if a consumer asks a salesperson at a retail outlet whether a product comes with a warranty against defects, it is illegal for that person to say “yes” if the warranty against defects does not comply with reg. 90.[4]

The Australian Competition and Consumer Commission (ACCC) and state fair trading regulators (collectively known as the ACL Regulators) could allege that the failure by a manufacturer, importer or retailer to “provide” a consumer with a compliant warranty against defects constitutes false and misleading conduct in breach of ss.18 or 29 of the ACL. This would avoid the problems in relation to the use of the word “give” in s.102(2)(a).

Retail staff in every retail outlet who sell goods which include a warranty against defects are going to have to receive some training as to what to say to consumers about warranties against defects or risk contravening the CCA.

What are the penalties?

A contravention of s.102(2) can be either a criminal offence[5] or a civil contravention.[6] The financial penalties for a contravention under both regimes will be the same - $50,000 for a corporation for each contravention and $10,000 for an individual per contravention.

The maximum financial penalties for a breach of s.29 are $1.1 million for a corporation for each contravention or $220,000 for an individual for each contravention.

What does Regulation 90 require?

Sections 192 and 224 of the ACL require that from 1 January 2012 all warranty against defects documents provided by manufacturers, importers and retailers to consumers will have comply with reg. 90.

Reg. 90 establishes the following requirements in relation to all warranty against defects documents. The document must:

• be transparent – that is, it must be expressed in reasonably plain language, legible and presented clearly; 

• concisely state what the person who gives the warranty must do so that the warranty will be honoured and what the consumer must do to be entitled to claim the warranty; 

• prominently state the name, business address, phone number and email address (if any) or the person providing the warranty; 

• provide the period or periods within which a defect in the goods or services to which the warranty relates must appear if the consumer is to claim the warranty; 

• provide a procedure for the consumer to claim the warranty including the address to which a claim may be sent; 

• state who will bear the expense of claiming the warranty and if the expense is to be borne by the person who gives the warranty, how the consumer can recoup expenses incurred in making the claim; 

• state that the benefits to the consumer given by the warranty are in addition to other rights and remedies of the consumer under a law in relation to the goods or services to which the warranty relates; and 

• must include the following text: 

Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and for compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.

The above requirements in relation to warranties against defects will provide a number of benefits for consumers.

First, warranty documents will be easier for consumers to understand as they will have to be written in reasonably plain language.

Second, consumers must be provided with all the relevant contact details of the person offering the warranty. This should make it much easier for the consumer to claim the warranty.

Third, the new warranties will be more specific about the consumer’s legal rights under the warranty. The consumer will know how to claim the warranty, how long the warranty is valid for, and what their costs will be of claiming the warranty.

Finally, by requiring the mandatory text in each warranty document, consumers will understand that the warranty against defects does not replace or restrict any other mandatory consumer guarantees which they may have under the ACL.[7]

What are the problems with Regulation 90?

There are a number of potential practical problems with the way reg. 90 will operate.

The most significant problem is that it will apply by reference to when the warranty against defects document is physically given to the consumer rather than by reference to when the product was manufactured. The obvious problem with this requirement is that many manufacturers, importers and retailers are likely to be selling goods after 1 January 2012 that were manufactured prior to that date. Such goods are likely to already have warranty documents included with the product, either in a sealed box or tamper proof plastic packaging, which do not comply with reg. 90.

As a consequence, a range of organisations lobbied the ACL Regulators for some transitional arrangements to avoid the cost and disruption of manufacturers, importers and retailers having to replace existing warranty documents with new ones which complied with reg. 90.

As a result of this lobbying, the ACL Regulators recently announced a nine-month amnesty for businesses which do not comply with the requirements of reg. 90:[8]

A number of businesses have advised ACL Regulators that due to the long lead times associated with many consumer products, and the nature of the packaging of those products, there will be some goods in the supply chain that, as at 1 January 2012, do not contain warranty documents that are compliant with the warranty against defects requirements of the ACL.

The ACL Regulators recognise that transitional practical difficulties may arise in the application of the new provisions. Accordingly, until September 2012, when considering the appropriate enforcement response to any contravention of the warranty against defects requirements that apply to stock in the supply chain manufactured and packaged prior to 1 November 2011, the ACL Regulators will have regard to:

• whether there are serious practical difficulties in updating warranty documents—e.g. the warranty is in a tamper-proof package; and 

• whether the supplier has taken all reasonable steps to otherwise convey the mandatory text and information required by the ACL to consumers—e.g. by placing a compliant sticker on the outside packaging.

In these circumstances the ACL Regulators are unlikely to take enforcement action.

In other words, until September 2012, ACL Regulators are unlikely to take enforcement action in response to contraventions of the warranty against defects requirements that apply to stock in the supply chain manufactured and packaged prior to 1 November 2011.

However, in order to qualify for this amnesty a business will have to demonstrate that they meet the following three conditions: 

1. the relevant goods were manufactured and packaged prior to 1 November 2011, 
2. there were serious practical difficulties in updating warranty documents; and
3. the supplier has taken all reasonable steps to convey the required information to consumers. 

Legal practitioners should be explaining the terms of the above amnesty, particularly the three conditions, to their clients with a view to determining whether these clients qualify for the amnesty. Practitioners should also advise their clients that the amnesty will not apply to any goods manufactured after 30 October 2011.

Another problem is that manufacturers will also be liable for any point-of-sale material which they provide to retailers which states that a good has a warranty against defects if the actual warranty against defects document does not comply with reg. 90. The key issue here is whether the manufacturer has made that representation directly to the consumer, for example, by placing a sticker on the product or by placing written point-of-sale material near the product.

It will also be important for legal practitioners to assist their retailer clients in understanding the new laws. As stated above, s.102(2)(a) of the ACL states that the mere act of “giving” a non-compliant warranty against defects to a customer, say in a box or in tamper proof packaging, may expose a retailer to liability. However, it seems that in practice such an outcome is unlikely.

During a Webinar organised by the ACL Regulators in relation to the ACL,[9] a colleague asked a representative of one of the ACL Regulators whether the mere act of a retailer passing onto a consumer a manufacturer’s non-compliant warranty against defect document, given to the retailer by the manufacturer, would make the retailer liable for a breach of s.102(2)(a).[10] The representative of the ACL Regulator responded that this conduct would not result in liability for the retailer.

However, retailers may be liable under s.102(2)(b) if they make a representation about a warranty against defects which is incorrect or misleading. For example, a retailer will breach s.102(2)(b) if they tell a consumer that a product comes with a warranty against defects, when that warranty does not comply with reg. 90.

Accordingly, legal practitioners have three options when providing guidance to their retailer clients about their obligations:

• advise their client that they must check every warranty against defects document which is being provided to consumers with any of the goods which they are selling to make sure they comply with reg. 90; or 

• direct their salespeople not to make any representations to customers about the warranties against defects provided with any of the goods which they are selling; or 

• check the warranty documents in relation to goods where they believe consumers are more likely to ask warranty questions, for example in relation to more expensive or technically complicated goods, and direct staff to only make representations to consumers about the warranties against defects on these particular goods and no other goods. 

 Some large retailers have taken the approach of demanding that their suppliers provide them with indemnities in relation to the warranties against defects documents for the goods which the retailer is selling. The idea behind seeking an indemnity appears to be that if the particular retailer is pursued by ACL Regulators for a breach of s.102(2) of the ACL, they can effectively shift liability back onto their supplier. While this is a possible fourth strategy, it is both impractical and likely to be unenforceable.

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[1] Unfortunately, the ACCC has used the word “provide” rather than “give” in its advice on how the new provisions will operate - http://www.accc.gov.au/content/index.phtml/itemId/996742.  I agree with other commentators that the word “give’ in s.102(2)(a) requires the physical act of providing the warranty document to the consumer - see Geoff Taperell, “Warranties Against Defects – A New Regulation will Apply from 1 January 2011”, http://www.dlapiper.com/Global/publications/detail.aspx?pub=f1a532d6-f6ac-4f8f-808d-1327a3cd6e1f, dated 16 May 2011

[2] Subject to “amnesty” discussed below.

[3] Subject to Webinar advice discussed below.

[4] Unfortunately, s.102(2)(b) has been very poorly drafted.  The use of the word “or” between ss.102(2)(a) and 102(2)(b) suggests that these sections should be read disjunctively. However, reading the provision in this way makes no sense. For the provision to make any sense, it has to be read conjunctively.

[5] s.192 ACL

[6] s.224 ACL

[7] Under the ACL there are a range of mandatory consumer guarantees which are implied into every consumer contract and which cannot be excluded by manufacturers, importers or retailers.

[8] Warranties Against Defects, ACCC website – see http://www.accc.gov.au/content/index.phtml/itemId/996742

[9] “The Australian Consumer Law – Be Prepared”, ACCC Webinar, held on 29 October 2010, http://webcast.viostream.com/?viocast=3041&auth=cd52b9dd-0a50-4444-a188-53acf89cd811. Unfortunately, a recording of this Webinar is not currently available on the ACCC website.

[10] David Johnson, Managing Director, Watchdog Compliance - http://www.watchdogcompliance.com.au.