During 2020, businesses have had to learn the hard way when their Contracts have not been up to scratch, with increased regulator scrutiny, enforcement of unfair contract laws, and the Australian Competition & Consumer (ACCC) keeping a close eye on business to ensure consumers are treated fairly in the midst of a global pandemic. Now is the time for business to take stock of lessons learnt and review their contracts and terms of business to ensure they are up to date, compliant and pandemic proof. Never before has it been so important to have contracts that protect your business to the maximum extent permitted by law, while also being compliant with applicable laws to avoid regulator action.
Changes to ACL affecting Business Contracts
Businesses should be aware that ‘business to business’ commercial contracts are set to be shaken up in 2021. The Federal Government has recently passed a legislative change to the Australian Consumer Law (ACL), which will broaden the definition of a ‘consumer’. This means the ACL (which includes implied statutory consumer guarantees and rights to refund for products and services), will apply to not just the typically small-scale individual consumer transactions, but will also apply to a greater number of business contracts and high value industrial and commercial goods.
What are the changes?
Currently, a person or business is considered a ‘consumer’ under the ACL if they purchase goods or services that:
- are ordinarily acquired for domestic, household or personal use or consumption; or
- cost up to $40,000 (regardless of the type or purpose of the goods or services).
You will not be a consumer if you on-sell goods or ‘use them up’ in the course of production, manufacturing, or repairs of other goods (but your end customer may be).
Technically, the amending regulations do not change the $40,000 threshold in the definition of ‘consumer’ in relation to services in s 3(3) of the ACL. However, it is expected that this is an oversight that will likely be corrected before 1 July 2021, given that the Amendment specifically notes that the $100,000 threshold applies in relation to goods or services acquired on or after 1 July 2021 (per item 4 of Sch 1 of the amending regulations, inserting a new r 100 into the Competition and Consumer Regulations).
How does this affect businesses?
Under the new threshold, businesses that manufacture or supply goods or services to customers up to $100,000 will need to understand and comply with legal obligations under the ACL as their business customers will be considered ‘consumers’ with associated protections. For example, a supplier that purchases industrial equipment for $80,000 for its manufacturing facility will be a ‘consumer’ under the ACL from 1 July 2021. The business ‘consumer’ will then have the benefit of all consumer guarantees and rights under the ACL relating to refunds, warranties and liability for damages if the goods or services is faulty, defective or does not perform as promised or in accordance with the consumer guarantees (regardless of any other warranty terms provided or negotiated under a commercial contract).
What are consumer guarantees?
The ACL imposes a number of automatic guarantees that apply to goods and services purchased by consumers. The rights under these statutory guarantees cannot be excluded, waived or contracted out of in your business terms and conditions (e.g. by limitation of liability clauses) and failure to comply with these guarantees can result in infringement notices or court proceedings and significant penalties (see below).
For goods, the consumer guarantees imply a warranty that the goods will:
- be of acceptable quality (e.g. safe, not defective or faulty);
- fit for the disclosed purpose;
- match any description or samples provided;
- meet promises or performance or quality; and
- have spare parts and facilities for repairs available for a reasonable time.
, the consumer guarantees imply a warranty that services will:
- be provided with acceptable care and skill or technical knowledge and taking all necessary steps to avoid loss and damage;
- be fit for the purpose that you and the business agreed to;
- be delivered within a reasonable time (when there is no agreed time frame).
Consumer guarantees do not apply if you:
- on-sell goods or ‘use them up’ in the course of production, manufacturing, or repairs of other goods;
- simply changed your mind, found it cheaper somewhere else, or decided you did not like the purchase;
- misused a product in any way that caused the problem;
- knew of or were made aware of the faults before you bought the product;
- asked for a service to be done in a certain way against the advice of the business or were unclear about what you wanted.
If a business does not comply with a statutory consumer guarantee under the ACL, the remedies available to the consumer will vary depending on whether the failure is major (in which case the consumer has statutory rights to a replacement, refund or compensation) or minor (in which case the consumer may seek repairs or replacement).
Additionally, it is also a breach of the ACL to falsely represent the rights or remedies available. For example, a business (including by its employees, on its website, in its contracts etc) that is subject to the consumer guarantees must not make any false statement as to whether a customer is entitled to refund or other remedy. The maximum penalty for doing so is the greater of $10 million, three times the amount gained from the conduct or 10% of annual turnover.
What should businesses do?
For businesses selling, supplying or manufacturing goods or services, it is critical to get on top of your ACL obligations before July 2021 and ensure your contracts, websites and marketing material are compliant and not misleading. Businesses who purchase commercial or industrial equipment, or other goods and services may benefit from this extended definition of consumer as claims against suppliers and manufacturers will be easier to prosecute as a ‘consumer’ under the ACL and this will truncate negotiations of contractual warranty and guarantee clauses. Businesses should also be sure to update their warranty statements as the ACL stipulates mandated forms of warranty statements which includes specific information and wording to ensure it is easily understood by consumers. Frontline staff and managers should also be trained on the ACL and business contracts to ensure they do not inadvertently make false representations when dealing with customer issues, complaints and refund / warranties claims.
If you are concerned about your contracts, compliance with the ACL or want to take the opportunity to update your terms of trade and ensure you have maximum protection and minimum risk to your business, contact our Commercial Team of the Year 2020 legal experts on +61 2 9458 7005 for a confidential discussion or join us at our upcoming Business Contracts half-day training.