Enforcement actions for consumer guarantee failures and supplier indemnities

Since the Australian Consumer Law (ACL) was enacted in its current form in 2010, the ACCC has published extensive guidance on the operation of the consumer guarantees for consumers and businesses. Despite active compliance activity by the ACCC and state ACL regulators, complaints regarding a failure of suppliers to comply with these guarantees represent a significant and growing number of ACCC complaints.

The ACCC considers that the current consumer guarantees framework does not provide incentives for businesses to comply with their consumer guarantee or supplier indemnification obligations, and that the protections for consumer guarantees are less effective and efficient compared to other ACL protections.

This article examines the Federal Government’s proposals to strengthen the provisions of the ACL to provide new ACL prohibitions and penalties for:

• businesses that fail to provide remedies to consumers for breaches of the consumer guarantees;
• manufacturers that do not reimburse (indemnify) a supplier when required; and
• manufacturers that retaliate against suppliers which seek indemnification.

Background to current regime

Consumer guarantees

The consumer guarantees establish a number of minimum requirements for goods and services supplied in consumer and certain small business transactions, which enable consumers and small businesses to seek redress from the relevant supplier for any failure to meet these guarantees. The consumer guarantees in respect of goods include:

• title to the goods;
• undisturbed possession of the goods;
• the goods are free from any undisclosed security;
• the goods are of acceptable quality;
• the goods are fit for any disclosed purpose; and
• the goods correspond to a relevant sample or demonstration model.

The ACL also provides the following consumer guarantees in respect of services:

• the services will be rendered with due care and skill;
• the services are fit for a particular purpose as disclosed by the consumer to the service provider; and
• if no timeframe is otherwise specified, that the services will be supplied to the consumer within a reasonable time.

However, the ACCC and state-based ACL regulators can only take indirect action to enforce the consumer guarantees, such as where a business makes a false or misleading representation regarding a consumer’s rights under the ACL, or where non-compliance with the ACL constitutes unconscionable conduct. Neither action addresses the core issues of a business refusing to comply with the consumer guarantees on a standalone basis, without having engaged in a separate ACL contravention.

Other situations include instances where a business simply states that it refuses to provide a refund, repair or replacement to a consumer who is entitled to either remedy under the ACL, but does not otherwise make a misleading or deceptive representation to the consumer. Such a statement is not currently captured as a breach of the ACL.

The 2023 Australian Consumer Survey found that 31 per cent of surveyed consumers did not have their issue relating to a consumer guarantee failure resolved, and of the 69 per cent of surveyed customers whose issues were resolved, a third were unhappy with the resolution.

Supplier indemnification

Section 274 of the ACL provides that a manufacturer of goods is liable to indemnify a supplier who supplies goods to consumers if either:

• a supplier is liable to pay damages to the consumer for loss or damage for a consumer guarantee failure; or
• an ‘affected person in relation to the goods’ has a right to recover damages from a manufacturer for a breach of the consumer guarantee that goods are of an acceptable quality.

Manufacturers are not subject to a penalty if they do not indemnify their supplier where the manufacturer is responsible for the consumer guarantee failure. There is also no penalty which applies if a manufacturer retaliates against a supplier seeking an indemnity for any remedies provided to a consumer in respect of a consumer guarantee failure.

Stakeholder feedback to a 2021 consultation process looking at these issues reported that manufacturers often dispute the existence of the rights of suppliers to seek indemnification, which often leads to suppliers bearing the costs of remedies provided for consumer guarantee failures. This was often attributed to a lack of awareness among manufacturers of this indemnification right.

Retaliatory conduct by a manufacturer may include:

• termination of contract(s);
• increased prices;
• withdrawal of supply; or
• other less favourable terms and conditions.

Proposed amendments

The ACCC has previously indicated its support for the following proposals, currently under consideration by the Federal Government, to strengthen consumer guarantee and supplier indemnification protections:

• a prohibition against not providing a remedy for a consumer guarantee failure – the ACCC has identified a variety of reasons for why many businesses do not comply with the consumer guarantees, including:
  • where the business is a multi-national company and has imported its internal policies from other jurisdictions, and those policies are not compliant with the requirements of the ACL;
  • a lack of judicial guidance and precedents on the application and enforcement of the consumer guarantees in superior courts (as most consumer guarantee disputes are handled by administrative tribunals);
  • where the business considers the consumer’s complaints having no basis and not being raised in good faith; and

  • where businesses simply refuse to engage with customers on consumer guarantee failures. 

    Under this prohibition, penalties may be imposed with the purpose of deterring businesses from neglecting their responsibilities and obligations under the consumer guarantees. The ACCC has voiced support for this prohibition to be enforceable with the full range of its investigation and enforcement mechanisms.
     

• a prohibition against manufacturers not indemnifying suppliers for consumer guarantee remedies – this would apply in circumstances where the manufacturer is responsible for the failure being remedied.
  
  The key issues with the current supplier indemnification provisions include:
  • insufficient compliance incentives for manufacturers;
  • suppliers disproportionately bearing the cost of providing consumer guarantee remedies;
  • suppliers are disincentivised from providing remedies for consumer guarantee failures when they expect to bear the cost of a remedy and/or lack certainty that they will be reimbursed by the manufacturer; 
  • manufacturers which provide indemnification to suppliers face higher costs than non-compliant competitors; and
  • a lack of judicial consideration of the supplier indemnification provisions to provide guidance to businesses.
    
    The ACCC has also previously provided support for a prohibition against manufacturers which engage in retaliatory conduct against suppliers seeking indemnification.

Penalties

The ACCC has previously expressed support for applying the existing penalty regime that is in place for other core ACL prohibitions if these prohibitions are introduced, being the greater of:

• $50 million;
• 3x the benefit received from the prohibited conduct; or
• 10 per cent of annual turnover for the prior 12-month period (if benefit cannot be calculated).

The ACCC’s expectation is that in considering a range of factors when calculating the penalty amount (such as nature and circumstances of the conduct, deliberateness, harm suffered, etc.), courts will only impose significant penalties in serious circumstances with exacerbating factors. However, the ACCC has also indicated that it would like to ensure that this penalty regime is in place and appropriate penalties are available to deter prohibited conduct.

Next steps

Interested parties are invited to submit responses to the Treasury’s consultation process by 14 November 2024.