Faulty products under Australian consumer law and your obligations as a supplier

If you sell goods to consumers in Australia, the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), attaches a set of automatic guarantees to every sale. Those guarantees operate whether or not your terms of sale mention them, whether or not your marketing promised anything, and whether or not the overseas factory or local wholesaler you bought from gave you any protection. When a product is faulty, the law requires you, as the supplier, to give the customer a remedy. The customer does not have to chase the manufacturer for it.

This article sets out who the obligation falls on, what makes a product faulty in the eyes of the law, which remedies you must offer, what you cannot do in your returns policy, and the penalties that apply if you get it wrong.

Who owes the consumer guarantees and when they apply

The guarantees are owed by any business that supplies goods to a consumer in trade or commerce. That includes retailers, online sellers, second-hand dealers and wholesalers that sell to end buyers. Private sales between individuals sit outside the regime because they are not made in trade or commerce.

The definition of consumer matters, because it is broader than many operators expect. Under s 3 of the ACL, a person acquires goods as a consumer if the price is $100,000 or less, if the goods are of a kind ordinarily acquired for personal, domestic or household use (whatever the price), or if the goods are a vehicle or trailer acquired for use principally in transporting goods on public roads. The main exclusions are purchases made for the purpose of re-supply, or for transforming or using the goods up in a production, manufacturing or repair process.

The point that catches businesses by surprise is the $100,000 limb. A sale to another business can still be a consumer transaction. A $25,000 commercial coffee machine sold to a café is supplied to a consumer under the ACL if the café is not buying it to re-sell or to transform into something else. The guarantees therefore reach well beyond your consumer-facing retail channel.

The guarantees also apply to second-hand and discounted goods. The standard is not fixed: acceptable quality is assessed having regard to the nature of the goods, the price and anything said on the packaging or in representations (s 54(3) of the ACL). A $40 used kettle does not have to perform like a new premium model, but it must still be safe and do the job a reasonable consumer would expect for the price. One carve-out to know: the acceptable quality guarantee does not apply to goods bought by auction (s 54(1) of the ACL), which is why auction sales are commonly described as "as is".

Within a supply chain, the obligations split between roles:

• Supplier: owes the consumer the remedy for faulty goods and must not direct the customer to the manufacturer to sort it out.
• Manufacturer: owes separate duties, including making repairs and spare parts reasonably available, and can be sued directly for damages for some guarantee failures.
• Importer: the ACL can treat an importer as the manufacturer for these purposes where the overseas manufacturer has no Australian presence, so it is worth confirming how your supply chain is characterised.

The guarantees your products must meet

A product is faulty, in ACL terms, when it fails one of the guarantees in Division 1 of Part 3-2 of the ACL. The guarantees that matter most in practice are:

• Acceptable quality (s 54): goods must be fit for all the purposes for which goods of that kind are commonly supplied, acceptable in appearance and finish, free from defects, safe and durable, judged from the perspective of a reasonable consumer fully aware of the goods' state and condition.
• Fit for disclosed purpose (s 55): if the customer told you, or you said, that the goods would suit a particular purpose, they must be reasonably fit for it.
• Match description (s 56): goods must correspond with any description you applied to them.
• Match sample or demonstration model (s 57): goods supplied by reference to a sample must correspond with it in quality, state and condition, and be free of defects that would not be apparent on reasonable examination of the sample.
• Repairs and spare parts (s 58): the manufacturer must take reasonable action to ensure repair facilities and parts are reasonably available for a reasonable period after the goods are supplied. This guarantee does not apply if the manufacturer gave the consumer written notice in advance that repairs or parts would not be available.
• Express warranties (s 59): promises made in a written warranty must be honoured.
• Title (ss 51-53): the seller must have the right to sell the goods and the customer must have undisturbed possession of them.

The remedy duty: minor versus major failures

When a guarantee is breached, what the customer can demand depends on whether the failure is minor or major.

For a minor failure, the customer can require you to remedy the problem within a reasonable time, and s 261 of the ACL lets you choose how: repair the goods, replace them with goods of an identical type, or refund what the customer paid. If you refuse or take too long, the customer can have the fault fixed elsewhere and recover the reasonable cost from you, or reject the goods.

A failure is major under s 260 of the ACL if:

• a reasonable consumer fully acquainted with the nature and extent of the failure would not have bought the goods;
• the goods depart significantly from their description or sample;
• the goods are substantially unfit for a purpose for which goods of that kind are commonly supplied, and cannot easily be fixed within a reasonable time;
• the goods are unfit for a disclosed purpose and cannot easily be fixed within a reasonable time; or
• the goods are not of acceptable quality because they are unsafe.

For a major failure, the customer chooses. They can reject the goods and take a refund or a replacement of the same type and similar value, or keep the goods and claim compensation for the drop in value. They can also recover damages for reasonably foreseeable loss caused by the failure (s 259(4) of the ACL), for example the cost of a hire car while a faulty vehicle is off the road.

The ACCC guidance on repair, replace and refund adds practical detail. A refund for a major failure must be the full amount paid, with no deduction for the use the customer has had of the product, and it should be provided in the same form as the original payment unless the customer agrees otherwise. When goods are rejected, the customer must return them unless that would involve significant cost because of the size or nature of the goods, in which case you must collect them at your own expense within a reasonable time (s 263 of the ACL). If you confirm the product is faulty, you must reimburse the customer for reasonable return costs they have already paid. You are entitled to assess the product and to ask for proof of purchase before providing a remedy, and the customer does not need the original packaging (s 259(7) of the ACL).

What you cannot do: excluding the guarantees and "no refunds" signs

The guarantees cannot be contracted out of. A term that purports to exclude, restrict or modify them is void under s 64 of the ACL, whether it sits in a sign on the counter or deep in your website terms and conditions.

Section 29(1)(m) of the ACL separately prohibits false or misleading representations about the existence, exclusion or effect of any guarantee, right or remedy. This is why "no refunds" and "no refunds or exchanges on sale items" signage is unlawful: it falsely suggests the customer has no rights under the guarantees. Contraventions attract pecuniary penalties under s 224 of the ACL.

Change of mind is different. You are not required to accept returns for change of mind, and the consumer guarantees do not compel you to. But if you advertise a change of mind policy, you must follow it, and it never displaces the guarantees for faulty goods.

If you give a voluntary warranty, often called a warranty against defects, it must comply with s 102 of the ACL and reg 90 of the Competition and Consumer Regulations 2010 (Cth). In practice the warranty must be set out in a transparent document that concisely states what you will do if the goods fail, and it must include the prescribed statement that the goods come with guarantees that cannot be excluded under the Australian Consumer Law. Non-compliant wording carries its own penalties.

If you are the manufacturer or importer

If you manufacture goods, or import them in circumstances where the ACL treats you as the manufacturer, you carry duties beyond those of a retailer:

• Section 58 requires you to take reasonable action to make repair facilities and spare parts reasonably available for a reasonable period after sale.
• Section 271 makes you liable in damages directly to consumers for failures of the acceptable quality, description, repairs and spare parts, and express warranty guarantees.
• Section 274 requires you to indemnify the retailer for the cost of the remedy they gave the consumer where the failure is attributable to you, for example a manufacturing defect. The retailer has three years from payment, or from the consumer's proceeding against them, to claim the indemnity (s 274(4) of the ACL).

Retailers should still protect their position commercially. A supply agreement that sets quality standards, inspection rights and an express indemnity for consumer law remedies makes recovery cleaner, and covers failures outside the statutory indemnity such as defects caused by the retailer's own handling or storage.

Consequences of getting it wrong

A breach of the guarantees exposes you to the customer's own claims: refunds, replacements, compensation and damages. But the enforcement picture is broader. The ACCC and state and territory fair trading agencies can take action, and the penalty regime in s 224 of the ACL is serious.

For a body corporate, the maximum pecuniary penalty for contraventions of the unfair practices provisions, which include s 29 false representations, and for key product safety provisions, is the greatest of $100 million, three times the value of the benefit obtained from the contravention, or 30% of adjusted turnover if the benefit cannot be determined. For an individual, the maximum is $2.5 million.

Some obligations carry fixed, lower caps. Contravening the warranty against defects requirements (s 102(2) of the ACL) carries up to $50,000 for a body corporate and $10,000 for an individual. Failing to report a product-related death or serious injury carries up to $16,500 and $3,300 respectively.

Product safety sits alongside the guarantees. Goods must comply with any mandatory safety standard, and suppliers must report product-related deaths and serious injuries. Non-compliance can lead to recalls, bans and the penalties above.

A compliance checklist for your business

Run through these checks to close the most common exposure points:

• Audit your signs, checkout pages and terms: remove any "no refunds" wording and anything that implies the guarantees can be waived.
• Train staff to classify failures: use the s 260 test to decide minor versus major before promising a remedy, and know who is authorised to approve refunds and replacements.
• Handle refunds correctly: pay in full and in the same form as the original payment for major failures, and reimburse reasonable return costs once a fault is confirmed.
• Keep records: maintain a register of complaints, outcomes and remedial steps; patterns of failure can signal a safety issue that must be escalated.
• Check your voluntary warranty wording against the prescribed requirements before it goes on the product or website.
• Confirm whether your goods are subject to mandatory safety standards, and who in your business is responsible for reporting serious incidents.
• Put back-to-back protection in your supply agreements so you can recover the cost of remedies that originate with your manufacturer.

When a lawyer should be involved

Most of this is operational, but professional help earns its keep at specific points: drafting the returns policy and warranty wording, negotiating supply agreements with indemnity and recovery clauses, responding to an ACCC or fair trading inquiry, deciding whether a borderline failure is major, and managing a recall. A consumer lawyer can also review your terms before launch, which is far cheaper than defending a regulator's action later.

The obligation most suppliers miss

The guarantee that most suppliers overlook is the one they never see coming: the $100,000 threshold means the consumer guarantees attach to many business-to-business sales, and "no refunds" signage is the returns mistake with the heaviest penalty exposure. The first thing to do this week is audit every place a customer sees your return rules, and delete any wording that says or implies the guarantees do not apply. Everything else follows from that.