Competition and Trade Practices Alert: Consumer Protection - 2 June 2011

As we approach the six-month anniversary of the introduction of the revamped consumer protection regime known as the Australian Consumer Law (ACL), it is timely to alert our business clients to a couple of key points.

Although introduced on 1 January 2011, the ACL (which impacts mostly manufacturers, retailers and service providers) gave business some breathing space until 1 January 2012 to get used to some elements of the new regime.

Here, Special Counsel Brett Bolton looks at two key areas Australian businesses need to be compliant with in the lead up to 1 January 2012.

Key Points

  • Warranties and Comparative Price Advertising

Any business supplying goods or services to consumers, directly or indirectly, will need to review its warranties and marketing material to ensure that they comply with regulations which apply from 1 January 2012.

Businesses using comparative price advertising as a marketing tool need to know that the Australian Competition & Consumer Commission (ACCC) is keeping a very close eye on such advertising techniques and has acted against businesses whose comparative price advertising breaches the ACL. This is discussed further below.

  • Defects Warranties

Manufacturers, retailers and service providers frequently offer a defects warranty as part of their terms and conditions of sale. Those warranties generally say that the business will repair or replace the goods or services if a defect occurs within the warranty period.

However, those types of warranties are no longer sufficient under the ACL and, from 1 January 2012, it will be an offence for businesses to give a consumer a warranty for goods or services that does not comply with regulation 90 of the Competition & Consumer Regulations.

Regulation 90 specifies the items which have to be included in a defects warranty clause. The clause must explain clearly and simply the exact procedures the consumer has to follow when making a claim under the warranty, and how the consumer can recover costs they have incurred in making their claim.

Most importantly, the warranty must contain the following words:

"Our goods come with guarantees that cannot be excluded in the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and for 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."

Business has had some 'breathing space'to get used to the new requirements for defects warranties and to implement those requirements into their terms and conditions of sale. However, that 'breathing space' will come to an end on 1 January 2012. From that date, it will be an offence if your defects warranties do not comply with regulation 90, and fines and other penalties could be imposed for any breach.

If you manufacture or sell goods or provide services, you will need to review your warranty clauses and other terms and conditions of sale to ensure that your defects warranty clause complies with the ACL.

Some pitfalls to avoid when advertising comparative prices

Comparative price advertising is when a business advertises the sale price of its product in a way which favourably compares that sale price against another (higher) price for the same or similar product.

When done effectively, comparative price advertising can be a powerful tool to lure customers into buying the product because of the perceived savings they will achieve. However, it is precisely because of its effectiveness as a marketing tool that the ACCC has been (and will no doubt continue to be) very vigilant in scrutinising comparative price advertising and taking appropriate action against advertising which breaches the ACL.

There are four common types of comparative price advertising:

  • Recommended retail price advertising - where a business advertises the price of its product compared to a higher recommended retail price, in order to demonstrate the savings the consumer will make by purchasing the product at that time.
  • Was/now advertising - this is designed to show the savings the consumer will make by buying the product "now" and not earlier. The implication, of course, is that unless the consumer acts "now" the price will likely revert to the old "higher" price.
  • Strike through advertising - this occurs where the business advertises a price which has been struck through with a new (lower) price appearing immediately above or below the struck through price.
  • Competitor price advertising - this occurs when a business advertises its product at a particular price, and compares it to the price charged by a competitor for such a product.

Generally speaking, comparative price advertising is not unlawful. However, the overall impression created by the advertisement must not be misleading. In other words, the saving the consumer will make by purchasing the product "now" must be genuine. Court decisions and the ACCC's website contain references to many well-known Australian businesses whose comparative price advertising techniques have fallen foul of the consumer protection laws (eg. Prouds Jewellers, the JB Hi-Fi Group, Rug Expos).

With the exception of competitor price advertising (which has to satisfy a slightly different test), a business engaging in comparative price advertising will need to be able to prove, if challenged, that the product in question was sold (or available for sale) for a reasonable period of time and in reasonable quantities before the commencement of the 'discount'.

Competitor price advertising is in a slightly different category because, in this instance, the comparison is between comparable products of two competitors. Generally speaking, the comparison has to be 'like for like'. Many businesses fall foul of these laws because the products being compared are not truly "comparable" or, although comparable, the advertising fails to mention the additional features and benefits being offered by the competitor which might explain the competitor's higher price.

Under the first package of ACL reforms which came into effect in April last year, the ACCC was given greater preventative, investigative and enforcement powers. It has demonstrated a willingness to use these additional powers in the comparative pricing area, including:

  • Substantiation notices requiring a business to substantiate its comparative price advertising claims;
  • Infringement notices, if the business fails to adequately respond to the substantiation notice (or, worse still, provides a false or misleading response); and
  • Public warning notices to alert the public to a business' breach or non-compliance.

What should you do now?

In view of the costs and adverse publicity which would be suffered if a business breached the ACL, the old adage that prevention (in the form of compliance) is better than cure was never more apt. If you offer warranties as part of your terms and conditions of sale, you should review them to ensure that they comply with the requirements of the ACL. If you engage in comparative price advertising (or are considering doing so), you should ensure that your advertising conforms with the requirements discussed above and that you can substantiate any claims you make, if challenged.

For any advice in relation to defects, warranty clauses or comparative price advertising, please do not hesitate to contact HopgoodGanim Lawyers' Competition & Trade Practices team.