In this article, we explore whether suppliers that give warranties against defects in their business-to-business (B2B) contracts are required to comply with section 102 of the Australian Consumer Law (ACL)1 and regulation 90 of the ACL Regulations2 (Prescribed Requirements), and how these Prescribed Requirements can conflict with the rights that suppliers have to limit their liability to consumers under section 64A of the ACL (Permitted Remedies).
Suppliers often make the mistake of thinking that they do not need to consider these Prescribed Requirements when they supply goods or services to businesses, as the Prescribed Requirements are reserved for transactions with ‘consumers’ who are natural persons only. However, as we have discussed in a previous article, businesses (and even large businesses) can fall within the definition of ‘consumer’ under the ACL, especially as a result of recent changes to the definition under the ACL.
What is a warranty against defects?
First, let’s start with what is meant by a warranty against defects and consider how this concept applies in the context of a B2B contract.
A warranty against defects is defined under section 102(3) of the ACL as a representation made to a consumer in connection with the supply of goods or services around the time of the supply, that if the goods or services are defective, a person will (unconditionally or in accordance with certain conditions):
- repair or replace the goods;
- provide again or rectify the services; or
- compensate the consumer.
A warranty against defects includes any document by which such a representation is evidenced. For example, a warranty against defects may take the form of a supplier promising to repair or replace goods provided under a contract if the goods are defective within a period of 12 months after the goods are supplied.
Where a B2B contract contains clauses which amount to a warranty against defects, and the contract is with a purchaser that is a consumer (as defined under the ACL), the supplier should ensure that the B2B contract includes clauses that address the Prescribed Requirements (as set out below).
What are the Prescribed Requirements?
The Prescribed Requirements are contained in section 102(1) of the ACL and Regulation 90 of the ACL Regulations. They stipulate:
- when and how you must provide the warranty;
- the information that your warranty must include; and
- the mandatory text that you must include in that warranty (as prescribed under regulation 90 of the ACL regulations) (Mandatory Wording).
See our previous article here for further information about the Prescribed Requirements.
What is the content of the mandatory wording?
The Mandatory Wording differs depending on whether you are giving a warranty against defects in relation to goods, services or both goods and services. The specific wording is set out below:
Goods3 – Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.
Services4 – Our services come with guarantees that cannot be excluded under the Australian Consumer Law. For major failures with the service, you are entitled:
- to cancel your service contract with us; and
- to a refund for the unused portion, or to compensation for its reduced value.
You are also entitled to be compensated for any other reasonably foreseeable loss or damage. If the failure does not amount to a major failure you are entitled to have problems with the service rectified in a reasonable time and, if this is not done, to cancel your contract and obtain a refund for the unused portion of the contract.
Goods and Services5 – Our goods and services come with guarantees that cannot be excluded under the Australian Consumer Law. For major failures with the service, you are entitled:
- to cancel your service contract with us; and
- to a refund for the unused portion, or to compensation for its reduced value.
You are also entitled to choose a refund or replacement for major failures with goods. If a failure with the goods or a service does not amount to a major failure, you are entitled to have the failure rectified in a reasonable time. If this is not done you are entitled to a refund for the goods and to cancel the contract for the service and obtain a refund of any unused portion. You are also entitled to be compensated for any other reasonably foreseeable loss or damage from a failure in the goods or service.
So what’s the issue here?
The problem with the Mandatory Wording is that it does not take into account a supplier’s right to limit its liability for breaches of consumer guarantees under section 64A of the ACL (which we have outlined for reference in the paragraph below). The Mandatory Wording advises consumers that they have rights that can never be excluded and that they may be able to be compensated for consequential loss, yet the limitations permitted under section 64A of the ACL allow the supplier to limit its liability solely to repairing goods, resupplying the goods, resupplying services or paying a sum to have the services resupplied by another supplier. In practice, this inconsistency can be very confusing to both parties of a B2B contract.
How does section 64A of the ACL work and when can a supplier rely on it?
Section 64A of the ACL allows a supplier the right to limit its liability for breaches of consumer guarantees with respect to certain categories of consumers. If a consumer is in the category to which section 64A applies, the remedies set out in the Mandatory Wording will not apply, provided that the supplier has limited its liability in accordance with section 64A.
Let’s take a look at the categories of consumer to which section 64A of the ACL applies.
The ACL defines a ‘consumer’ as any of the following:
- Category 1: a person who acquires goods or services that are of a kind ordinarily acquired for personal, domestic or household use (regardless of the price of the goods or services)6;
- Category 2:a person who acquires goods or services that are priced at $100,000 or less7; or
- Category 3: a person who acquires a vehicle or trailer acquired for use principally in the transport of goods on public roads.8
A person is not a ‘consumer’, however, if they acquire goods for the purpose of resupply or to use up or transform the goods in the process of production or manufacture, or in the course of repairing or treating other goods or fixtures on land.9
If a supplier supplies goods or services to consumers that fall within Categories 2 or 3, Section 64A permits the supplier to limit its liability for a breach of consumer guarantee to any one or more of the following remedies – the repair or replacement of the goods, or supply of equivalent goods or the payment of the cost to repair or replace the goods; the re-supply of the services or the payment of the cost of having the services supplied again (Section 64A Remedies). These limitations are not permitted, however, if goods or services are supplied to consumers that fall within Category 1.
Accordingly, if a supplier gives a warranty against defects to a consumer in Categories 2 and 3, it must include the Mandatory Wording, even though the Supplier is lawfully permitted to limit its liability to these consumers in a different way than is stipulated in the Mandatory Wording.
Are there any circumstances where the mandatory wording and a limitation of liability under section 64A can work together?
Yes, but this is somewhat limited. Section 64A(3) of the ACL provides that the Section 64A Remedies will not apply if it is not ‘fair or reasonable’ for a supplier to rely on such limitations (Not Fair or Reasonable Exception). If a contract contains a limitation of liability in accordance with section 64A of the ACL, and a section 64A Remedy was struck down under clause 64A(3), the Mandatory Wording would be correct in those circumstances.
What is a supplier to do if it is providing a warranty against defects to a consumer that is in category 2 or 3?
Where a supplier is supplying goods or services to customers, some of which are Category 1 Consumers and some of which are Category 2 and/or Category 3 consumers, the Mandatory Wording will always have appropriate application, as the remedies referred to in the Mandatory Wording apply, without exception, to Category 1 consumers. In such circumstances, both the Mandatory Wording and the section 64A limitation of liability clause can apply in respect of the different categories of consumers.
However, if a supplier is providing goods and/or services solely to a Category 2 or Category 3 consumer, should the supplier still be required to include the Mandatory Wording even if it is able to limit its liability under section 64A?
Despite the inconsistencies between the Mandatory Wording and a section 64A limitation of liability clause in such circumstances, it is safer for suppliers to continue to provide both the Mandatory Wording and the limitation of liability in section 64A of the ACL, even if simply to deal with the scenario where the Not Fair or Reasonable Exception could apply.
How can we help?
We have a dedicated consumer law team that can help you manage risk and ensure compliance with the ACL. In addition, we can assist you with navigating any compliance or enforcement action that has been instituted against you by the ACCC. If you would like more information about the services that we provide, please contact us.
This article was written by Teresa Torcasio, Partner and Zoe Vise, Solicitor.
1Competition and Consumer Act 2010 (Cth), Schedule 2 (‘Australian Consumer Law’ or ‘ACL’).
2Competition and Consumer Regulations 2010 (Cth) (‘ACL Regulations’).
3ACL Regulations, regulation 90(2).
4ACL Regulations, regulation 90(3).
5ACL Regulations, regulation 90(4).
6ACL, s3(1)(b).
7ACL, s3(1)(a).
8ACL, s3(1)(c).
9ACL, s3(2).
