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Focus: Interaction between product recalls and consumer guarantees under the Australian Consumer Law

16 November 2010

In brief: The consumer guarantee provisions in the Australian Consumer Law may have serious implications on the product recall regime in the new legislation. In this part of a continuing series of Focus articles on the detail of the Australian Consumer Law, Partner Annette Hughes , Senior Associate Ric Morgan and Lawyer Jess O'Brien report on the interaction between the recall provisions and the consumer guarantees.

Further articles will be published on the new compulsory reporting requirements for product risks and their interaction with similar overseas systems.

How does it affect you?

  • Under the compulsory and voluntary recall regimes in the Australian Consumer Law (ACL), suppliers are able to choose whether to refund, replace or repair recalled goods where those goods pose a risk of injury.
  • Supplying goods that are 'unsafe' constitutes a 'major' failure to comply with the consumer guarantee provisions of the ACL. In these circumstances, consumers are able to reject the goods and choose to receive a refund or replacement goods.
  • Where a safety related recall is conducted, the recalled goods may be considered to be 'unsafe' and the remedies for breach of a consumer guarantee may therefore apply in addition to the specific provisions regulating product recalls . If this is the case, consumers may be able to reject the recalled goods and elect to receive a refund or replacement goods under the consumer guarantee provisions, potentially removing the ability of suppliers to choose to offer only a repair, in appropriate circumstances.
  • An obligation to provide replacement goods or a refund (rather than repair goods), particularly where the goods are costly, will be onerous for businesses.
  • Companies conducting product recalls should take particular care with their comments about the safety of the recalled product to avoid inappropriately admitting a major failure of a consumer guarantee (for example, by characterising their product as 'unsafe' where this is not necessarily the case).

The product recall regime

The ACL will regulate both compulsory and voluntary recalls (see Focus: Product safety and recall regime and the liability for defective products) in circumstances where:

  • it appears that the goods in question will or may cause injury to any person;
  • it appears that a reasonably foreseeable use (including a misuse) of the goods will or may cause injury to any person;
  • a safety standard for the goods is in force and the goods do not comply with the standard; and
  • an interim ban, or a permanent ban, on the goods is in force.1

Where a compulsory recall occurs, section 123(1)(c) of the ACL indicates that the supplier can elect to repair, replace or refund the recalled goods, as the supplier thinks appropriate. Where a voluntary recall occurs aside from notification requirements, the ACL does not specify what action the supplier must take. However, a supplier while under no obligation to do so, will generally choose to either repair, replace or refund the recalled goods depending on what is most convenient to the supplier.

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Consumer guarantees

The implied warranties and conditions in the Trade Practices Act 1974 (Cth) (the TPA) will be replaced by 'consumer guarantees' in the ACL (see Focus: Consumer guarantees under the Australian Consumer Law). The TPA provisions imply terms into contracts with consumers. If these terms are not complied with, consumers can bring an action for breach of contract seeking contractual remedies. By contrast, the ACL consumer guarantees create statutory rights and remedies as set out in the ACL.

The consumer guarantee as to acceptable quality

Section 54 of the ACL contains the consumer guarantee as to acceptable quality. Importantly, sub-section 54(2) states that goods are of acceptable quality if they are as safe as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods) would regard as acceptable.

Failure to comply with a consumer guarantee

As noted in our earlier article (see Focus: Consumer guarantees under the Australian Consumer Law), failures to comply with consumer guarantees, such as the guarantee as to acceptable quality, are divided into 'major failures' and other failures, each with differing available remedies.

Importantly, a 'major failure' includes where 'the goods are not of acceptable quality because they are unsafe'. Consequently, where goods are unsafe, a consumer is entitled to:

  • subject to some specific exclusions, notify the supplier that they reject the goods, giving grounds for the rejection; or
  • by action against the supplier, recover compensation for any reduction in the value of the goods below the price paid or payable by the consumer for the goods.

If the consumer rejects the goods, the supplier must, in accordance with an election made by the consumer:

  • refund:
    • any money paid by the consumer for the goods; and
    • an amount that is equal to the value of any other consideration provided by the consumer for the goods; or
  • replace the rejected goods with goods of the same type, and of similar value, if such goods are reasonably available to the supplier.

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The overlap

As outlined above, during both compulsory and voluntary recalls, suppliers can choose whether to replace, repair or provide a full refund for the recalled goods. However, there is a risk that the suppliers' power to choose how to deal with recalled goods may be overridden by the consumer guarantees provisions, where goods are recalled because they are 'unsafe'.

Conducting a compulsory or voluntary recall under the ACL may expressly or implicitly acknowledge that the goods in question are unsafe. As a consequence, it is arguable that there has been a major failure to comply with the consumer guarantee and consumers would be able to reject the goods and choose to receive a replacement or a refund, removing the suppliers' ability to choose to repair or select the most cost-effective remedy.

This is a problematic result for suppliers and manufacturers, as, with some goods, the cost of replacement or refund can be substantially more than the cost of repair.

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Management of the issue

It will not always be the case that goods that 'will or may cause injury' are also 'unsafe' goods. As the terms are different and are used in different parts of the ACL, it could be argued that they have distinct meanings. For example, 'will or may cause injury' is a broader term that arguably describes a lower risk threshold than the term 'unsafe'. Suppliers may therefore argue that they have recalled goods because they may be unsafe rather than because they are unsafe.

For a number of reasons beyond the scope of this article, it is always advisable for manufacturers and suppliers to manage recalls as voluntary recalls, and avoid mandatory recalls – the crossover between the product recall and consumer guarantee provisions is another reason to do so. Before a mandatory recall can be required by the Australian Competition and Consumer Commission, it must appear to the Minister that there is a sufficient risk of injury, and the Minister's determination that this is the case represents a decision by an independent body relating to the safety of the product. In conducting a voluntary recall, a company will have the opportunity to carefully describe the reasons for the recall and this may enable them to avoid language that would assist a consumer with making out that there was a major failure of the goods to meet the consumer guarantee.

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Conclusion

The crossover between these two regimes creates uncertainty and potentially poses a risk for suppliers and manufacturers that a safety-related recall will lead to goods being considered 'unsafe' under the guarantee regime. Suppliers and manufacturers should be mindful of this risk in conducting recalls and carefully choose appropriate and clear language.

Footnotes
  1. See ACL s122 (compulsory recalls) and s128 (voluntary recalls).

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