REJECTIONS, REFUNDS AND REPLACEMENTS – UNDERSTANDING MINOR VS MAJOR FAILURES UNDER THE ACL

Since coming into effect on 1 January 2011, the Australian Consumer Law (ACL) has had a profound impact on consumers’ rights to remedies for issues they encounter with motor vehicles.

Through the introduction of ‘consumer guarantees’, the ACL brought warranties into effect as statutory obligations. These statutory obligations are not limited by the ‘factory warranty’ obtained when purchasing a vehicle or the time or kilometres travelled (as opposed to other existing state legislation or private contractual warranties). Instead they are based, for example, on a relative assessment of whether a vehicle is of ‘acceptable quality’.

The introduction of the consumer guarantees also came with a range of possible remedies to which a consumer might be entitled in the event of a failure on the part of the manufacturer or the supplier to comply with the guarantee.

Given the ease with which consumers can now access information about the ACL – including the Australian Competition and Consumer Commission’s recent focus on informing consumers’ about the ACL as a means to resolve their issues – a body of case law has steadily emerged dealing with the application of the ACL to motor vehicle claims.

Understanding how the ACL applies to consumers’ complaints about ‘acceptable quality’ is essential to dealing with those complaints quickly, efficiently – and, most importantly – in a manner that properly reflects a Dealer’s legal risk (whether high or low).

Failures generally

The consumer guarantee as to acceptable quality is not a guarantee of ‘absolute’ quality. The test for establishing whether there has been a breach is an objective and relative test. It is objective because it is assessed from the perspective of a ‘reasonable consumer fully acquainted with the state and condition of the goods.’ It is relative because whether a good is of acceptable quality is to be assessed by reference to:

(a) the nature and price of the goods;

(b) any statements made about the goods on any packaging or any representation made about the goods by the supplier or manufacturer; and

(c) what a reasonable consumer would consider as acceptable having regard to the matters set out above.

The onus is with the consumer to establish that there is a fault of a kind that would amount to a failure of the guarantee. This is especially significant in cases where a consumer complains of a fault but the fault cannot be replicated or diagnosed at the dealership.

Major vs minor failures

In the event of a failure of the consumer guarantee as to acceptable quality, the consumer is entitled to a remedy that corrects the failure. However, the type of remedy to which a consumer is entitled depends on whether that failure is a minor failure or a major failure.

If a failure is minor, a consumer is entitled to a remedy selected by the supplier and/or the manufacturer. In most motor vehicle cases, the remedy would be a repair (including, for example, the replacement of a component of a motor vehicle).

If a failure is major, a consumer has the right to select the remedy – and may be entitled to reject the good and elect either a refund or replacement.

A failure will only be a major failure if any of the following conditions have been met:

(a) the goods would not have been acquired by an objective reasonable consumer fully acquainted with the nature and extent of the failure; or

(b) the goods depart in one or more significant respects:

(i) if they were supplied by description – from that description; or

(ii) if they were supplied by reference to a sample or demonstration model – from that sample or demonstration model; or

(c) the goods are substantially unfit for a purpose for which goods of the same kind are commonly supplied and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or

(d) the goods are unfit for a disclosed purpose that was made known to:

(i) the supplier of the goods; or

(ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the goods were conducted or made;

and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or

(e) the goods are not of acceptable quality because they are unsafe.

Case examples

In the recent 2019 case of Avci v Inchurch Automotive Pty Ltd, the NSW Civil & Administrative Tribunal followed an earlier NCAT decision and held that:

(a) a major failure may occur either by one fault or by a series of faults which each on their own do not amount to a major failure but when taken as a whole, amount to a major failure;

(b) defects which result in goods failing to comply with the guarantee of acceptable quality will not invariably be a major failure and it will depend on the nature and extent of the failure; and

(c) a reasonable consumer would expect teething problems, even in a new vehicle.

The point at which ‘teething problems’ might lead to a major failure has also been tested in claims concerning product recalls. In Australia Rong Hua Fu Pty Ltd v Ateco Automotive Pty Ltd, the Victorian Civil and Administrative Tribunal held that ‘if the reasonable consumer was not prepared to purchase any [vehicle] because [they] may…be the subject of teething problems or were the subject of a recall notice, then they would not purchase any [vehicles].’

In other words, the Tribunal declined to find a ‘major failure’ had occurred because it did not accept the assertion that an objective reasonable consumer would not have purchased a motor vehicle had he or she known it would have ‘teething problems’ or be the subject of a recall. However, there is also a tipping point at which such ‘teething problems’ might accumulate, or the product recall be severe enough, to amount to a major failure.

Rejection and the entitlement to reject

Finding that a ‘major failure’ of a consumer guarantee has occurred does not guarantee a consumer will be entitled to a refund or replacement. There is an intervening step. That is, a consumer must ‘reject’ a good. Rejection is the act by which a consumer crystallises their right to elect to receive a refund or replacement from the supplier.

However, there are certain circumstances in which a consumer is not entitled to reject a good. One circumstance in which a consumer cannot reject a good is if the good has been damaged after being delivered for reasons not related to their state or condition at the time of supply.

Whether or not a motor vehicle has been damaged will not always be obvious. Some damage, such as a dent from an accident, may be obvious. However, other damage may be more difficult to detect – such as aftermarket modifications to suspension components or a reprogramming or ‘flash’ of an engine control unit. Such modifications may be held by a Court to constitute damage insofar as they represent an alteration to the characteristics of a vehicle compared to its condition when it left the showroom, or insofar as they might accelerate the wear on other components of a vehicle.

If a consumer has damaged their vehicle, they are not entitled to reject it even in the case of a major failure unconnected to that damage. This means that while a consumer is still entitled to have a Dealer or manufacturer remedy the failure, the consumer will not have access to a refund or replacement.

There are other circumstances in which a consumer is not entitled to reject a vehicle – for example, if the ‘rejection period’ is over or the vehicle has been sold. In each case, Dealers should seek legal advice if confronted with a demand by a customer for a refund or replacement vehicle.

Conclusion

The ACL has added to the range of remedies available to consumers. However, it does not entitle consumers to ‘refunds on demand’ for any type of dissatisfaction or inconvenience they might encounter with their motor vehicle. The critical lesson for Dealers is to ensure that you have a process in place to handle ACL complaints, whether they relate to minor ‘teething problems’ or more significant faults. If in doubt, seek expert legal advice as soon as possible. Further, whilst you should ensure you are communicating with the manufacturer, do not rely on the manufacturer to resolve a consumer’s ACL claim, because Dealers’ obligations under the ACL are separate and independent to obligations of the manufacturer. Having a good understanding of the ACL means that you will communicate more effectively with consumers and, in the long run, reduce the likelihood that precious time and money will be spent litigating claims.

This article was written by Evan Stents – Lead Partner, and Christian Teese – Senior Associate, Automotive Industry Group | HWL Ebsworth Lawyers

Evan Stents
Lead Partner, Automotive Industry Group, HWL Ebsworth Lawyers

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