Watch out – Australian Consumer Law broadens again

10 minute read  24.11.2020 Natasha Simonds

A key change coming into effect on 1 July 2021 will shine a spotlight on who is a 'consumer', plus future reforms to major failures and unfair terms.

Key takeouts

  • The definition of 'consumer' under the Australian Consumer Law is set to broaden on 1 July 2021, meaning that the rights and remedies under the consumer guarantees regime will apply in more situations (including B2B scenarios) when a party buys goods and services.
  • Treasury has proposed an amendment to the definition of a 'major' failure to comply with the consumer guarantees regime under the Australian Consumer Law, clarifying that a series of multiple, minor failures can amount to a major failure.
  • On 6 November 2020, Commonwealth and state and territory consumer affairs ministers agreed to strengthen the existing unfair contract terms (UCTs) protections in the Australian Consumer Law, including proposed reforms to make UCTs unlawful, giving courts the power to impose civil penalties, and increasing the scope of the regime to cover larger businesses.

Here, we outline the changes, which will expand the operation of some consumer protections to a broader range of transactions, including more B2B transactions.

We also cover two other significant proposed reforms:

  • Clarifying what constitutes a 'major' failure under the consumer guarantees regime; and
  • Toughening up the unfair contract terms regime to make unfair contract terms unlawful (and subject to a penalty) as well as capturing larger business' standard form contracts.

Consumer guarantees regime to apply to more 'consumers'

The definition of 'consumer' under the Australian Consumer Law (ACL) is set to expand on 1 July 2021. This means that a 'consumer' will be able to rely on the rights and remedies given to them under the consumer guarantees regime when buying goods and services acquired in more situations, including in B2B scenarios.

Currently, a person is taken to have acquired goods or services as a 'consumer' if the amount they paid was $40,000 or less (or if the goods or services were of a kind ordinarily acquired for personal, domestic or household use or consumption).

This monetary threshold is set to increase in the next financial year from $40,000 to $100,000 under the Treasury Laws Amendment (Acquisition as Consumer – Financial Thresholds) Regulations 2020 (Financial Threshold Regulation). This is a significant change, given that the $40,000 threshold has been in place since 1986.

The significant increase in the monetary threshold will result in a broader range of goods and services being classified as 'consumer' goods or services.
In particular, there will be a new spotlight on goods and services (including commercial goods and services) that are not of a kind ordinarily acquired for personal, domestic or household use or consumption that are between $40,001 and $100,000. These goods and services currently fall outside of the definition of 'consumer' but will soon be captured.

The ACL creates 'consumer guarantees' regarding the quality and function of goods and services that automatically apply to every supply to a 'consumer'.

These cannot be waived, limited or excluded, or misrepresented. For example, where goods are supplied to a 'consumer', the supplier guarantees that they are of acceptable quality, fit for any particular specified purpose, and corresponded with any description or sample given. Where services are supplied to a 'consumer', the supplier guarantees that the services will be provided with due care and skill, fit for any specified purpose and supplied in the timeframe agreed or within a reasonable time.

A failure to comply with the consumer guarantees entitles the consumer to particular remedies under the ACL including repair, replacement, refund, cancellation and compensation, depending on the nature and extent of the failure. We discuss the concept of 'major' and 'minor' failures to comply with the consumer guarantees, and the potential reforms that are happening in this space, in more detail below.

Apart from the consumer guarantees regime, the definition of 'consumer' also applies to other consumer transactions in Part 3-2 of the ACL such as unsolicited consumer agreements and lay-by sales agreements.

The changes will also amend the definition of 'consumer' in the Australian Securities and Investments Commission Act 2001 (Cth), which contains consumer protection provisions that mirror the ACL relating to financial products and services.

To be prepared, suppliers and manufacturers of goods and services valued at up to $100,000 will need to consider whether this increase is likely to bring their business operations (including B2B sales) within the scope of what the ACL considers to be 'consumer' goods and services.

If your business supplies good or services worth between $40,000 and $100,000 then you should consider conducting a review of your existing contracts, policies and processes to ensure that they are updated before 1 July 2021. For example:

  • Standard contracts and terms & conditions: terms should be reviewed to ensure that they do not mislead or misrepresent consumers' rights and remedies. Apart from potential penalties for making false or misleading representations, if a term does not comply with the consumer guarantees regime, then the term will be void under the ACL;
  • Marketing materials / packaging: collateral should be reviewed to ensure it does not cut across the consumer guarantees regime;
  • Warranties against defects: if you are offering a warranty against defects for your goods and / or services, the warranty must comply with consumer protection regulations, which include mandatory text that must be included in the document; and
  • ACL compliance training for employees: it is important that sales, customer service and management staff understand the consumer guarantees regime to ensure that they do not misrepresent or mislead customers about their rights and remedies available to them under the ACL, and handle complaints appropriately.

Watch this space: proposed change for 'major' failures to include multiple minor failures

Treasury has released a proposed amendment, The Treasury Laws Amendment (Measures for a later sitting) Bill 2020: Minor and Technical Amendments, which includes changes to the consumer guarantee provisions in the ACL.

The purpose of the amendments is to clarify what constitutes a 'major' failure to comply with the consumer guarantee regime. The proposed amendment will clarify that multiple, non-major (or 'minor') failures can amount to a major failure, by inserting an additional test into the definition of a major failure (in section 260 (in relation to goods) and section 268 (in relation to services) of ACL).

This change would mean that a failure to comply with a consumer guarantee would be considered to be a 'major' failure if (i) it is one of a series of non-major failures, and (ii) a reasonable consumer would not have acquired the good or service if they were aware of the nature and extent of those non-major failures taken as a whole, at the time of the supply. The failures do not need to occur in a similar period of time, relate to the same reoccurring issue or result in the same type of problem, and there not a specified or threshold number of non-major failures required to amount to a major failure of this nature.

In practice, the courts have already interpreted and considered the meaning of a 'major' failure to include multiple minor failures, however, the amendment will provide clarity and address any uncertainties in the application of the law going forward. This proposal is intended to clarify the law so that consumers can establish a major failure where, for example, there are multiple issues with a vehicle that, collectively, would be enough to deter a reasonable consumer from buying it.

This change may reduce the costs and time associated with disputes involving multiple minor failures, and may also assist suppliers in making claims for indemnification against manufacturers who have supplied faulty good with multiple minor defects.

Watch this space: proposed expansion of the unfair contract terms protections

On 1 July 2010, protections for consumers against unfair contract terms (UCTs) in standard form contracts were introduced into the Trade Practices Act 1974 (Cth) (now contained in the ACL) as well as the Australian Securities and Investments Commission Act 2001 (Cth).

In November 2016, the UCT protections were extended to small business contracts, and the government undertook a review of these protections two years later in 2018.

On 6 November 2020, Commonwealth, State and Territory consumer affairs ministers agreed to strengthen and broaden the existing UCT protections in the ACL.

Key proposed reforms include:

  • making UCTs unlawful and giving courts the power to impose a civil penalty;
  • providing more flexible remedies to a court when it declares a contract term unfair by:
    • giving courts the power to determine an appropriate remedy (such as vary the relevant term), rather than the term simply being automatically void;
    • clarifying that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and
    • creating a rebuttable presumption provision for UCTs used in similar circumstances (i.e. a term would be unfair if, in a separate case, the same or substantially similar term has been used by the same entity or in the same industry, and declared by a court to be unfair). The contract-issuing party would then be required to produce evidence to show why the term is not unfair in the specific circumstances;
  • increasing eligibility for the UCT protections by:
    • expanding the definition of small business (from businesses with less than 20 employees to less than 100 employees). and introducing an annual turnover threshold of less than $10 million as an alternative threshold for determining eligibility
    • removing the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the UCT protections; and
  • improving clarity on when the protections apply, including on what is a ‘standard form contract’ by providing further certainty on factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract.

The purpose of these reforms is to help reduce the perceived prevalence of UCTs in standard form contracts. In particular, the ACCC, ASIC and small business commissioners submitted that the UCT protections would be more effective if there was a pecuniary penalty available to act as a deterrent, so that larger businesses would therefore be more motivated to ensure that they remove UCTs from their standard form contracts.

On 9 November 2020, Treasury released its Regulation Impact Statement for Decision titled ‘Enhancements to Unfair Contract Term Protections’, that outlines the current concerns with the UCT regime.

It is important that businesses continue to review their standard form contract for UCTs, especially with the potential broadening of the application of the UCT regime to cover larger businesses and the possibility of civil penalties. This proposal comes at a particularly challenging moment for the insurance industry with insurance contracts due to become subject to the unfair terms regime for the first time in April 2021 and many insurers 'in flight' with their review programs based on the existing rules.

As a next step, Treasury will develop exposure draft legislation, which will provide a further opportunity for stakeholders to comment on the detail of the reforms.

We can assist with:

  • Reviewing standard form contracts and terms & conditions: to ensure that they do not contain UCTs and do not mislead or misrepresent consumers' rights and remedies;
  • Reviewing warranties against defects: to ensure that they comply with the consumer protection regulations such as including the mandatory wording required to be in the warranty document;
  • Conducting ACL compliance training: to ensure that front-line sales, customer service and management staff understand the consumer guarantees regime so that they do not misrepresent or mislead customers about their rights and remedies available to them under the ACL and handle complaints appropriately; and
  • Auditing current consumer law compliance policies, procedures and processes: to ensure that they comply with the ACL and industry best practice.

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