The COVID-19 health emergency is having far-ranging ripple effects on all aspects of the economy, resulting in cancellations, closures, shortages and delays in the supply of products and services. It is also having an impact on suppliers’ pricing, marketing and sales strategies.

What are some key considerations under the Australian Consumer Law (ACL) for suppliers as they navigate these uncharted waters? Our competition team outlines key areas of risk and potential exposure.

There is no automatic public interest defence to ACL breaches. While the Australian Competition and Consumer Commission (ACCC) can be expected to take a sensible approach to enforcement, the legal position remains unchanged. Contravening the ACL has potentially serious consequences, with corporate penalties for most breaches being the greater of $10 million, three times the gain or benefit, or, if that cannot be determined, 10% of Australian group annual turnover. While the ACCC will take a sensible and balanced approach to enforcement, it will also expect companies to act sensibly and fairly toward consumers, and carefully consider their obligations under the ACL. We expect little sympathy for reckless, irresponsible or intentional behaviour, particularly by larger businesses with more resources or where the likely harm is serious or widespread.

Cancellations and refunds

COVID-19 is resulting in the cancellation or closure of tours, travel-related activities, events and other attractions. It is also impeding or precluding the supply of products and services, triggering a raft of consumer queries about entitlement to refunds.

In general, the ACL creates refund obligations under the consumer guarantees regime in certain circumstances. However, these rights and remedies are not always clear cut, particularly in circumstances where – as is the case here – the cancellation or closure is due (directly or indirectly) to government restrictions to combat the COVID-19 crisis.

So far, the ACCC’s guidance on these matters is very high level, but it can be summarised as follows:

•  As a first step, the ACCC encourages suppliers to contact customers wherever possible to advise them of how they are handling various circumstances, including managing cancellations, delays and suspension of products and services;
• If the event, tour or travel-related or other activity is cancelled, the ACCC expects the supplier to provide a refund or other remedy, such as a credit note or voucher, in most circumstances. Under the ACL, the consumer may also be entitled to compensation for expenses for related products and services bought separately (for example, accommodation), but this will depend on the specific circumstances;
• For suppliers of subscription- or membership-based services that have closed or ceased to provide services (for example, gyms or subscription food delivery services), the ACCC will expect consumers who have made an upfront payment that covers the period of the closure to receive a refund or other remedy, such as a credit note or voucher, for the period of the closure;
• However, if the cancellation or closure (or service suspension) is due to government restrictions, the ACCC's view is that this impacts the consumer's rights under the consumer guarantees, making it unlikely that the consumer will be entitled to a refund under the consumer guarantees regime. In these circumstances, the ACCC has noted that the consumer could still be entitled to a refund under the terms and conditions applying to the supply of the product / service, reiterating that the relevant terms and conditions are those in effect at the time the consumer made the booking (i.e. meaning that the supplier cannot retrospectively change those terms);
• The ACCC has encouraged consumers to contact suppliers directly to request a refund or agree to another remedy such as a partial refund, credit note or voucher, or postponement of the services until a later date if possible. The ACCC has stated that credit notes or vouchers should have an expiration date which is long enough to allow consumers to use it;
• If the consumer no longer wishes to use the product / service (e.g. they no longer wish to attend or travel) due to concerns about COVID-19, this may be treated as a 'change of mind', and consumers should contact the supplier to see if they are entitled to a remedy such as full or partial refund, credit note or voucher (under the terms and conditions applying to the supply of the product / service).

In all cases, the ACCC has emphasised that, given the exceptional circumstances, it encourages all suppliers to treat consumers fairly, including by offering refunds as a goodwill gesture, where appropriate.

In the context of refunds and cancellations (including those caused by events outside any parties’ control, such as government restrictions), suppliers should also be mindful of their obligations under the contract (for example, under any terms and conditions of sale, and whether any force majeure terms are triggered) and at common law, including frustration of contracts. (Find out more about force majeure and frustration issues.)

What about our own cancellation or refund policies or terms and conditions? Do we need to honour these?

Suppliers must honour any representations they make on their website or in advertising or other correspondence with consumers about how they deal with cancellations, delays, refunds and financial hardship allowances (such as allowing the suspension of membership or offering deferred payments) to avoid the risk of engaging in misleading or deceptive conduct. Suppliers should also honour any applicable terms in their cancellation or refund policies, financial hardship policies and supply contracts to avoid the risk of engaging in misleading or deceptive conduct, and breaching their contracts with customers, who may then be entitled to damages.

In relation to keeping consumers' deposits or upfront payments, the ACCC has also stated that a term which allows a supplier to retain the full deposit or payment without having delivered any goods or services, may be considered an 'unfair' term under the ACL. This will not be the case where a supplier can show that it is reasonably necessary to retain the full amount of the deposit or payment in order to protect its legitimate business interests (for example, to cover the costs it has already incurred). The consequences of having an 'unfair' term in standard form contracts is that they can be declared void and unenforceable by a court.

What if we cannot supply our products or services due to COVID-19?

Beyond the above cancellation and refund obligations and implications, suppliers should be aware of the general obligation under the ACL that, where they accept payment or consideration for products or services, they must supply all the products or services within the period specified at or before accepting payment (or within a reasonable time, if no timing was specified). Where this does not occur, significant monetary penalties and other orders may be imposed.

Suppliers will need to consider the extent to which they are or might be relieved of this obligation in a given circumstance, due to an exception that applies where the failure to supply is due to the act or omission of another person. Or it could be due to some other cause beyond the supplier’s control (for example, the COVID-19 emergency) and the supplier took reasonable precautions and exercised due diligence to avoid the failure (for example, by monitoring inventory). Suppliers are also relieved of this obligation where they have offered to supply different or replacement products or services and the customer has agreed to accept the different or replacement products or services.

What if we take payment when we can’t or might not be able to supply our products or services due to COVID 19?

The rapidly evolving COVID-19 crisis also creates practical risks for suppliers who accept payment for products or services to be provided at a future date. This is due to the inherent uncertainty relating to how the emergency will affect their ability to supply products or services at a future date.

In particular, suppliers must be aware of the prohibitions against wrongly accepting payment or other consideration for products or services if, at the time of the acceptance:

• They do not intend to supply the products or services;
• They intend to supply products or services that are materially different from the products or services for which they accepted payment; or
• There are reasonable grounds to believe they will not be able to supply the products or services within the period specified at, or before, accepting the payment, or within a reasonable time, and they are aware or ought reasonably to be aware of those grounds.

Suppliers should be very careful not to accept payment for products or services they will not be able to supply within the specified timeframe or within a reasonable time.

This is particularly relevant:

• For suppliers of services where their ability to open, operate or otherwise supply services in the future is likely to be impacted by COVID-19. The ACCC has already focused on this in the context of subscription- and membership-based services that have closed or ceased to provide services (for example, gyms and subscription food delivery services). The ACCC explained that the ACL prohibits suppliers from taking payments for products or services when there are reasonable grounds to believe the services will not be supplied, regardless of whether or not the contract allows the supplier to suspend payments;
• For suppliers of products that are accepting payment for products to be provided at a later date (for example, products on order or customised). Where suppliers ought to be aware that some of their products may be unavailable (due to supply chain interruptions or high demand), they should carefully consider whether they can accept payment for those products; and
• Where suppliers have already accepted part payment, and are seeking to deduct or collect residual or remaining payments due, they must assess the position when collecting any further payment.

In certain circumstances, it’s entirely possible that accepting payment for products when the supplier is not able to supply the products within a specified period, or within a reasonable time, may be sufficient to constitute unconscionable conduct under the ACL. Similarly, suppliers should also be careful about the representations they make about the availability and stock levels of their products, to ensure they are not engaging in misleading or deceptive conduct.

Can a customer terminate a lay-by agreement?

During this time, consumers and suppliers may find themselves unable to honour lay-by agreements due to financial hardship or an inability to acquire the products under the agreement. The ACL contains specific legal obligations that apply to lay-by agreements. A consumer may terminate a lay-by agreement at any time before collecting the product. Where a consumer has terminated the agreement, the supplier can require them to pay a termination charge, but only if the supplier has not itself breached the agreement. The termination fee must represent the supplier’s reasonable costs in relation to the agreement (for example, administrative costs, loss in value of the product or storage costs). The supplier must otherwise refund all other amounts paid by the consumer.

The ACL also limits the circumstances in which a supplier can terminate a lay-by agreement. This can occur only if:

• The consumer has breached a term of the agreement;
• The supplier is no longer engaged in trade or commerce; or
• The product is no longer available.

If the supplier terminates the agreement for any reason, they cannot require the consumer to pay a termination charge, and must refund all amounts paid by the consumer.

Price gouging – what is it and is it illegal under the ACL?

Various products, such as hygiene, tech and food products, are in high demand as a result of the COVID-19 crisis and the prices of some of these products have increased excessively in recent weeks.

While the ACCC has confirmed that it does not have direct broad-based power to stop excessive pricing, it has flagged the risks that exist in some circumstances in relation to apparent price gouging. It has established a team to look into COVID-19-related refund issues and scams, and businesses profiteering from shortages through price gouging.

The primary basis under the ACL for challenging price gouging by suppliers will be that:

• The behaviour is unconscionable – this is more likely to be the case where it exploits or takes advantage of vulnerable people or businesses (including where the product is critical to the health and safety of vulnerable consumers); and
• The supplier misrepresents the reason for the price increase – for example, they represent that it is due to supply shortages or increased demand caused by COVID-19, when it is simply opportunism by the supplier.

Both these prohibitions carry significant penalties, for both the supplier and its executives, and suppliers who engage in this type of conduct are taking a considerable risk.

The Federal Government has also recently passed legislation which prohibits excessive pricing of alcohol wipes, hand sanitiser, disposable face masks / gloves / gowns, goggles, glasses, or eye visors used for limiting the transmission of organisms to humans.

The ACCC will also still enforce the misuse of market power provisions of the Competition and Consumer Act 2010 (Cth). These provisions prohibit a supplier with a substantial degree of market power from engaging in conduct (which could include price gouging) where the purpose or likely effect is to substantially lessen competition.

Price discounting due to declining retail demand – what are the dangers?

The COVID-19 crisis has seen discretionary spending drop significantly, pressuring retailers into discounting, sales or other promotional activity. Suppliers should be cautious about advertising and marketing strategies that involve discounts, ‘was/is’ or other forms of comparative pricing. This can be a form of misleading or deceptive conduct when used in a way that misrepresents the actual savings available to consumers. From the ACCC’s perspective, claimed savings must be accurate and based on a ‘before’ price that has been offered for a reasonable period. Determining how long a supplier needs to have sold its products at the ‘was’ price will vary from case to case, depending on the type of product or market involved and the usual frequency of price changes for that product or in that market.

In the current environment, where suppliers might engage in continual promotion or discounting activity, risks arise because it will be much more difficult to point to any ‘was’ or ‘before’ price being in place for a reasonable period of time before the promotion. Suppliers should exercise caution in this respect, and establish a reasonable ‘reset’ period of normal pricing between promotional activities.

COVID-19-related claims – what should we look out for?

When advertising and selling products, suppliers must be careful about the representations they make about the nature, benefits and uses of their products to ensure they are not engaging in misleading or deceptive conduct or making false or misleading representations. In particular, suppliers must not make false or misleading representations that:

• A product is of a particular standard, quality, value, grade, composition, style or model;
• A product has sponsorship, approval, performance characteristics, accessories, uses or benefits; or
• There is a particular need for a product.

The above includes claims in connection with the COVID-19 emergency. For example, many suppliers are now producing and marketing hand sanitisers (including some novel approaches by distilleries, which are temporarily switching production from spirits to hand sanitisers). These suppliers must be careful when making claims about their hand sanitisers to ensure they accurately describe the composition, uses and benefits of the products. On the one hand, it may be accurate to say that a hand sanitiser kills ‘99.9 per cent of germs’, but it may be misleading to claim that it will ‘cure/protect against COVID-19’.

The last claim is also prohibited without approval from the Therapeutic Goods Administration (TGA). Suppliers should be very cautious about making any therapeutic claims about products. If a claim relates to curing, alleviating or preventing any disease or condition, it may be considered therapeutic in nature, making it subject to the therapeutic goods regulatory regime. For example, a claim that hand sanitiser kills ‘99.9 per cent of germs’ may not constitute a therapeutic claim, but if the hand sanitiser was also marketed as having a health benefit, such as preventing sickness or alleviating symptoms of a particular medical condition, this may constitute a therapeutic claim, meaning the product is classified as a therapeutic good. It is an offence in Australia to supply a therapeutic good that is not registered or listed on the Australian Register of Therapeutic Goods (ARTG).

Caution should also be taken when making specific claims about hand sanitisers (and household disinfectants). For example, claiming your product ‘kills germs’ may not be considered to be making specific claims, but if you state that the product ‘kills viruses’, it will be considered to be a specific claim and require TGA approval and entry on the ARTG.

Specifically, you cannot make a claim about a therapeutic good that explicitly or implicitly refers to COVID-19 without TGA approval. And, as with any therapeutic claim, there must be evidence to support it; for example, a claim that implies clinical benefit in humans typically requires evidence from clinical trials.

Our specialists are helping many clients navigate their consumer law obligations, including reviewing refund policies, assessing advertising and marketing campaigns, and advising on product and service offerings in light of COVID-19. Please feel free to contact us to see how we can assist you.