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Heavy fines if businesses fail the new ‘warranty against defects’ test

Heavy fines if businesses fail the new ‘warranty against defects’ test

08 Oct 2019

Heavy fines if businesses fail the new ‘warranty against defects’ test
WRITTEN BY
Kate Mansfield
Kate Mansfield
Associate

Heavy fines if businesses fail the new ‘warranty against defects’ test

08 Oct 2019

Would you get a gold star if the Australian Competition and Consumer Commission (ACCC) were to take a look at your terms and conditions, customer contracts and service agreements today to assess whether they comply with the recently introduced warranty against defects provisions under the Competition and Consumer Regulations 2010 (Cth) (Regulations)?
 
The new requirements in a nutshell
Up until June 2019, the warranty against defects legislation required mandatory text in respect of the supply of goods only.  However as of 9 June 2019, Regulation 90 of the Regulations (warranties against defects) was amended to require that mandatory wording must be included in almost all warranty against defects documentation (whether for the provision of goods, services or both goods and services).  The new mandatory wording has been introduced with the intention of standardising consumer rights and improving awareness of the consumer protections in place. 
 
That means your terms and conditions, customer contracts, terms of use, service agreements, product packaging, labels, receipts, product manuals, marketing and advertising material, websites, social media pages or any other documents in which you provide a warranty against defects need to have been reviewed and updated to include such wording - already. 
 
Can you be penalised if your warranty material is not up to date?
The ACCC may impose civil penalties on businesses that do not comply with these requirements with the risk of non-compliance attracting penalties of $50,000 for corporations and $10,000 for an individual.  The ACCC may alternatively issue an infringement notice with a penalty of $10,800 for a corporation or $2,160 for an individual. 
 
In addition to the above, pecuniary penalties may be imposed for making a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy of up to the greater of the following amounts:
  • $10,000,000;
  • three times the value of the benefit obtained by the company (including any related body corporate) from the offence that led to the penalty; and
  • if the benefit cannot be determined by the court then 10% of the annual turnover of the company in the past 12 months.
So it is important to ensure your employees are well equipped with appropriate sales training and know what they can and can’t say in order to avoid any express warranty being given which your company does not wish to offer.
 
What is a “warranty against defects”?
Section 102(3) of the Australian Consumer Law (ACL) defines a warranty against defects as:
“a representation communicated to a consumer in connection with the supply of goods or services, at or about the time of supply, to the effect that a person will (unconditionally or on specified conditions):
  1. repair or replace the goods or part of them; or
  2. provide again or rectify the services or part of them; or
  3. wholly or partly recompense the consumer;
if the goods or services or part of them are defective, and includes any document by which such a representation is evidenced.”

Does your business need to make any changes to its warranties against defects?
If, for example, your business provides IT services, and you offer a warranty against defects in relation to your services (which may include computer hardware repairs, software upgrades, establishing networks, virus removal, data back-up and recovery, and the re-installation of goods), you will need to assess whether your warranty against defects is for services only or for goods and services and include the appropriate mandatory text prescribed by Regulation 90 in your warranty.
 
Any document including a warranty against defects will need to include the appropriate mandatory wording as well as other additionally required information.
 
Does the following mandatory text apply to your warranty against defects documentation?
The mandatory text for warranties against defects for the supply of goods only which has been in place since 2011 continues to be applicable.  However if the goods are supplied in combination with a service, then the wording in the warranty needs to be updated to the following prescribed text:
 
Supply of goods and services – mandatory text*
"Our goods and services come with guarantees that cannot be excluded under the Australian Consumer Law. For major failures with the service, you are entitled:
  • to cancel your service contract with us; and
  • to a refund for the unused portion, or to compensation for its reduced value.
You are also entitled to choose a refund or replacement for major failures with goods. If a failure with the goods or a service does not amount to a major failure, you are entitled to have the failure rectified in a reasonable time. If this is not done you are entitled to a refund for the goods and to cancel the contract for the service and obtain a refund of any unused portion. You are also entitled to be compensated for any other reasonably foreseeable loss or damage from a failure in the goods or service."
 
The warranty against defects must be in a document that is clear and easily able to be understood by the customer. 

How does the new mandatory text differ from the pre-9 June 2019 text?
Interestingly, the goods component of the mandatory wording for the supply of goods and services does not mirror the pre-9 June 2019 mandatory wording for the supply of goods only.  Set out in the table below are the differences between what the consumer is entitled to in the warranties against defects for goods only and for goods and services.
 
Mandatory wording
Major failure Not major failure
Goods only
  • A replacement or refund; plus
  • Compensation for any other reasonably foreseeable loss or damage
  • Have the good repaired or replaced if the good fails to be of acceptable quality
Goods + services
  • Choose a replacement or refund
  • Have the failure rectified in a reasonable time; and 
  • If the failure is not rectified in a reasonable time:
- refund; plus
- compensation for any other reasonably foreseeable loss or damage
 

The key differences here are:
  • if a consumer has a major failure in a combined good with a service, they are able to choose whether they receive a replacement or a refund, however they can no longer claim any compensation; and
  • if the failure does not amount to a major failure, where a good is supplied with a service, an element of reasonableness has been introduced to the effect that the supplier has increased accountability to the consumer to respond in a timely manner.
And the fine print - additionally required information
On top of the mandatory text, further particulars must also be included in any warranty against defects.  Listed below are just some of those required particulars:
  • a concise outline of what the customer needs to do to entitle them to claim the warranty (for example, stop using the goods as soon as a fault arises or contact the supplier or manufacturer and point to the defect);
  • the warranty period;
  • the procedure for your customer to claim under the warranty; and
  • a statement that the benefits provided to the customer by the warranty are in addition to other rights and remedies available to the customer under law.
Exceptions to the inclusion of the mandatory wording
There are certain contracts in which the mandatory wording does not need to be included.  These are:
  • service contracts for or in relation to the transportation or storage of goods for the purposes of the consumer’s business, trade, profession or occupation;
  • insurance contracts; and
  • contracts for the supply of gas, electricity or telecommunication services where the supply is a supply of a kind specified in the regulations.
How can a business get compliant with warranties?
If you haven’t already done so, now is the time to update your warranty documentation. Your business should:
  • identify which of your agreements and other materials contain a warranty against defects and:

a)  in connection with the supply of services, updating your service agreements, general terms and conditions and other warranty documentation to include the new mandatory text for the supply of services; and/or

b)  in connection with the supply of goods and services, revising your general terms and conditions and other warranty documentation to include the new mandatory text applying to goods and services;

  • ensure all other required information is incorporated into those documents;
  • identify any other means of representation and revising how such representations are made in line with the above requirements; and
  • if in doubt, consider whether you need to seek legal advice.
Seeking legal advice is always advisable.  If this article has raised concerns for your business, Australian Business Lawyers & Advisors can assist with reviewing or drafting your agreements and other documentation containing a warranty against defects.  Call 1300 565 846 or get in touch at info@ablawyers.com.au.
 
* Note that the mandatory wording for the supply of goods only and the supply of services only is not included in this article.

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