UNFAIR CONTRACT TERMS AND WARRANTY AUDITS – LIMITATIONS AND OPPORTUNITIES

Protections for consumers against unfair contract terms (UCTs) in standard form contracts were first introduced into the ACL in July 2010.

The extension of these protections to standard form small businesses contracts came more than six years later, in November 2016, along with a Government commitment to review this extension within two years of the extension. In accordance with its commitment, a discussion paper was released in November 2018 with the purpose of seeking feedback from stakeholders on the impact of extending protections and whether the objective set for original reform has been met. The Australian Automotive Dealer Association (AADA) responded to the discussion paper supporting the review, but noted some of the key limitations of UCTs for Dealers. The extension of UCT legislation to small business contracts has been a positive change for many; however, its limited scope has sidelined Dealers from making any use of this protection.

Several distributors include UCTs in their warranty policy documents which require Dealers to conform to strict process requirements. Failure to comply with these strict requirements is often enough justification to claw back warranty payments due to Dealers. For example, some warranty policy documents require strict adherence to the following:

  1. Dealers must take a digital photo of a vehicle part replaced under warranty.
  2. Dealers must have a warranty repair order signed by the service manager.
  3. Dealers must have entered clocking on and off times when conducting warranty repairs.

The inclusion of warranty policy terms with the onerous requirements mentioned above would likely be deemed unfair. The warranty policy terms place an unbalanced burden on Dealers to conform to the stringent requirements of the distributors and also place all the risk of an express manufacturer warranty on Dealers when product issues are the responsibility of the distributor and manufacturer. The warranty policy terms are unreasonable and unnecessary for protecting the distributor’s legitimate interests, as Dealers can have proof of the validity of their warranty claim and yet can still have their warranty payments clawed back. Furthermore, the warranty policy terms cause financial detriment to Dealers, as they are forced to cover the expense of the warranty repairs themselves.

Under current legislation, most Dealer agreements are effectively excluded for not meeting the definition of ‘small business contract’ and this leaves Dealers unprotected and vulnerable to exploitation by distributors.

A contract is a small business contract if:

(a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
(b) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(c) either of the following applies:

(i) the upfront price payable under the contract does not exceed $300,000;
(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

A dealer agreement between a Dealer and distributor usually fails to meet parts (b) of the legislation. Most dealers employ far more than 20 employees. Failure to meet the requirements of a small business contract means that Dealers are not protected from UCTs in the ACL.

There are, however, two possible solutions that could assist Dealers. The first is the existence of the Motor Dealers and Repairers Act NSW and, more specifically, s142 of this Act, which contains the UCTs legislation from the ACL. This protects Dealers in NSW; however, Dealers outside NSW do not benefit from the protection. A second solution is for Dealers to restructure their businesses so that they are able to meet the legislative requirement in the ACL of having fewer than 20 employees.

The purpose of UCT legislation is to protect from entering into standard form contracts vulnerable parties who lack the skills, resources, time and bargaining power to negotiate for their contractual interests. Extending these protections to small businesses came out of the recognition that small businesses can often be just as vulnerable as consumers when entering into contractual relationships with large organisations. Dealers, just like small businesses and consumers, have the same, if not more, vulnerabilities when entering into contractual relations with distributors.

An improved and more inclusive legislation should focus on including all franchise agreements. This would be more aligned with the stated aims of UCT legislation to protect vulnerable parties in large standard form contracts. The advantage of legislating to include all franchisees is that it recognises the true source of the problem which is inequality in size and power between contracting parties. Current legislation is attempting to deal with this issue in a piecemeal way by slowly and inefficiently expanding the coverage of UCT laws.

For further information,
contact Vinesh George on 0404 077 078
or email vinesh@vsgeorge.com.au

 

Vinesh George
Company Secretary and Legal Counsel, AADA | Principal,
VS George Lawyers

Leave a Reply

Your email address will not be published.