Consider the Australian Consumer Law before accepting payment for goods in instalments

Many businesses allow their customers, whether they are individual consumers or other businesses, to pay for goods in instalments.

However, this could inadvertently cause the arrangement to be a “lay-by agreement” under the Australian Consumer Law (ACL).

If this occurs, the arrangement will be subject to the rules set out in the ACL and, as a supplier, you will have obligations under the ACL even if you do not call the arrangement a “lay-by agreement”.

What is a “lay-by agreement” under the ACL?

An agreement will be considered a lay-by agreement under the ACL if the consumer:

1. Does not receive the goods until the total price of the goods has been paid; and
2. The price of the goods is to be paid in three or more instalments (or in two or more instalments if the agreement is specified to be a lay-by agreement).

Any deposit paid by a consumer is considered to be an instalment.

When you think of a lay-by agreement, you probably think of purchasing a household item from a department store on lay-by terms. However, B2B transactions paid in instalments can also be caught by the ACL. This is because under the ACL, a person (including a business) acquires goods as a consumer if:

1. The amount paid or payable for the goods does not exceed $40,000; or
2. The goods were of a kind ordinarily acquired for personal, domestic or household use or consumption; or
3. The goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads.

Therefore, a person (including a business) can be considered a consumer under the ACL even in a B2B transaction. For example, the purchase of industrial machinery for under $40,000 would be considered consumer transactions. Further, should the industrial machinery be payable in three or more instalments, their sale would be caught by the rules applying to lay-by agreements.

There are penalties if you don’t comply

If your arrangement is considered to be a “lay-by agreement”, you will have failed to comply with the requirements under the ACL if you:

• Enter into a lay-by agreement without putting it in writing;
• Do not give the consumer a copy of the written agreement;
• Terminate the agreement (except as permitted by the ACL);
• Refuse to refund the consumer’s money if they terminate the arrangement (except for the termination charge); and
• Charge a termination fee which is greater than the reasonable costs relating to the agreement, or when you have breached the lay-by agreement.

Each contravention attracts civil and criminal penalties of $30,000 for a body corporate and $6,000 for an individual.

How to avoid lay-by arrangements

Suppliers wishing to prevent their sale transactions from being lay-by agreements under the ACL should consider:

1. Only allowing goods to be paid for by a maximum of two instalments; and/or
2. Delivering the goods to the consumer prior to the total price of the goods being paid (for example, where goods are purchased using Afterpay), although this should only be considered in light of the risks associated with supplying goods prior to payment.

If it is a lay-by agreement, what rules apply?

The form of the lay-by agreement

A lay-by agreement must be in writing and a copy of it must be given to the consumer.

A lay-by agreement must also be transparent, which means that it must be written in plain language, be clearly presented and include all terms and conditions, including any termination charge.

Termination of lay-by agreements by consumers

A consumer may terminate the lay-by agreement at any time before the goods are delivered to them. This may be particularly problematic for suppliers selling custom made, commissioned or other goods which are difficult to sell to another party.

The lay-by agreement must not require the consumer to pay a termination charge for the termination of the agreement unless:

1. The agreement is terminated by the consumer; and
2. The supplier has not breached the agreement.

If the agreement provides that a termination charge is payable, the amount of the charge must not be more than the supplier’s reasonable costs in relation to the agreement.

Termination of lay-by agreements by suppliers

A supplier of goods who is a party to a lay-by agreement must not terminate the agreement unless:

1. The consumer breached a term of the agreement; or
2. The supplier is no longer engaged in trade or commerce; or
3. The goods to which the agreement relates are no longer available.

Effect of termination

If a lay-by agreement is terminated, the supplier must refund the consumer all amounts paid by them other than any termination charge payable under the agreement.

Further, the supplier is not entitled to damages, or to enforce any other remedy, in relation to termination of the agreement except any termination charge payable under the agreement.

Therefore, it is important to document the reasonable termination charge payable. If this isn’t documented, the supplier will have to refund all amounts to the consumer should the agreement be terminated.

This article was written by Teresa Torcasio, Partner, Marian Ngo, Senior Associate and Ruth Trevenen-Williams, Solicitor.