A major failure is the Australian Consumer Law's label for a serious problem with goods or services that shifts the remedy from the business to the customer. When a problem is minor, your business usually gets the chance to repair it. When it is a major failure, the customer can usually choose the outcome, most commonly a refund or replacement for goods, or cancellation and a refund for services.
This article covers:
- The legal test: what makes a failure major rather than minor
- What changes: why the label decides who picks the remedy
- A worked example: a café and a faulty commercial blender
- The common misconceptions: no refunds signs, repair first policies, and more
- When a lawyer helps: borderline calls, compliant terms, and dispute handling
The guarantees and the major failure rules sit in Schedule 2 of the Competition and Consumer Act 2010 (Cth), which is the Australian Consumer Law (the ACL).
The test: would a reasonable customer have bought it?
s 260 of the Competition and Consumer Act 2010 (Cth) sets out when a failure to comply with a guarantee applying to goods is a major failure. The first limb is the everyday version of the test. A failure is major if the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure. In plain terms, if your customer had known everything about the problem before buying, would they still have bought? If the honest answer is no, the failure is likely major.
The test is objective. It is not about what you intended, whether you were negligent, or how good your quality control is. It is about what the goods are actually like and what a reasonable customer would have done with full knowledge.
Significant departure from description or sample
A failure is also major if the goods depart in one or more significant respects from the description they were sold under, or from the sample or demonstration model the customer relied on (s 260(1)(b)). A small colour difference is not a significant departure. Selling a piece of furniture as solid timber when it is veneer over particle board, in a way that matters to the buyer, can be.
Substantially unfit for purpose
Goods are in major failure territory if they are substantially unfit for a purpose that goods of that kind are commonly used for, and they cannot easily and within a reasonable time be remedied to make them fit (s 260(1)(c)). The same applies where the goods are unfit for a disclosed purpose that the customer made known to you or to the person who negotiated the sale (s 260(1)(d)). A commercial blender that cannot survive normal commercial blending, or a laptop that cannot hold a charge, is substantially unfit for its common purpose. The word "easily" matters: a fault that could be fixed in a day with a standard part is not a major failure, but a fault that needs weeks of waiting for parts, or that recurs after each repair, can be.
Unsafe
Goods that are not of acceptable quality because they are unsafe are a major failure (s 260(1)(e)). Safety does not require an actual injury. A product that overheats, has a live electrical fault, or exposes users to a hazard it should not, fails the acceptable quality guarantee and the failure is major, whatever your repair capacity might be.
The same test for services
s 268 of the Competition and Consumer Act 2010 (Cth) applies a parallel test to services. A service failure is major if the services would not have been acquired by a reasonable consumer fully acquainted with the failure, if the services are substantially unfit for their common purpose and cannot easily and within a reasonable time be remedied, if the services and anything produced by them are unfit for a disclosed purpose and cannot be remedied, or if the services cannot reasonably be expected to achieve a result the customer made known to you. The services limb also covers work that creates an unsafe situation, for example incorrect electrical installation that leaves live wiring exposed.
Delays also matter here, but only where they defeat the purpose of the service. A renovation finished three weeks late is usually an inconvenience. A wedding photographer who delivers the photos three months after the wedding, when the couple's timeline depended on them, can be a major failure.
Multiple small problems can add up
Since amendments that took effect in 2021, two or more failures that are each minor on their own can together be a major failure, if a reasonable consumer fully acquainted with all of them, taken as a whole, would not have acquired the goods or services (s 260(2) and s 268(2)). The failures do not even need to relate to the same guarantee. If a second-hand car dealer sells a car with three separate small defects, none of which is major alone, the combination can still give the customer the full major failure remedies.
A worked example: the café blender
A café buys a commercial blender for $1,800, relying on the supplier's marketing that it is built for continuous café use. Because the price is well under $100,000, the consumer guarantees apply even though the buyer is a business. Within three weeks the motor seizes under normal use. The supplier repairs it, but the same fault returns, and the replacement part is on backorder for six weeks.
Apply the test. The blender is substantially unfit for the purpose for which commercial blenders are commonly supplied, and it cannot easily and within a reasonable time be remedied to make it fit (s 260(1)(c)). A reasonable café owner fully acquainted with the situation would not have bought it. It is a major failure.
The café can now choose the remedy rather than accepting the supplier's repair plan. It can reject the blender and receive a refund or a replacement of the same type and similar value, at the café's election, or it can keep the blender and recover compensation for the drop in value. It can also claim damages for reasonably foreseeable losses, for example the cost of spoiled stock while the blender was out of action. The supplier's obligation to refund or replace, and the mechanics of returning the goods, are set out in s 263 of the ACL.
Contrast that with a $60 home blender whose lid seal is faulty. That is a minor failure. The supplier gets the first chance to remedy it, and under s 261 of the Competition and Consumer Act 2010 (Cth) may choose to repair, replace with identical goods, or refund. The customer cannot demand a refund straight away for a minor problem.
Why the label changes the remedies
The whole reason the major failure label matters is that it decides who chooses the outcome.
Minor failure: the supplier's choice
For goods, if a failure can be remedied and is not major, the customer may require you to remedy it within a reasonable time (s 259(2)). You then choose how to fix it, by repairing the goods, replacing them with identical goods, or refunding (s 261). If you refuse, or fail to do it within a reasonable time, the customer can have the work done elsewhere and recover the reasonable costs from you, or reject the goods (s 259(2)(b)). Services work the same way: the customer can require a remedy within a reasonable time, and can terminate only if you fail to remedy it (s 267(2)).
Major failure: the customer's choice
For goods, if the failure cannot be remedied or is major, the customer may reject the goods or recover compensation for the reduction in value below the price paid (s 259(3)). Rejection leads to a refund or a replacement of the same type and similar value, and the choice between those two belongs to the customer, not you (s 263(4)). For services, the customer may terminate the contract, which entitles them to a refund of what they paid to the extent they have not yet consumed the services (s 267(3) and s 269). The customer can also claim damages for loss or damage that was reasonably foreseeable (s 259(4) and s 267(4)), for example damage a faulty product causes to other property.
This is why a "repair only" or "store credit only" response to a major failure is a problem. The customer is entitled to choose, and a policy that takes that choice away misstates their rights.
The rejection period
The right to reject goods is not open ended. Under s 262 of the ACL, the customer must reject within the rejection period, which is the time within which it would be reasonable to expect the failure to become apparent, having regard to the type of goods, the likely use, and how long it is reasonable for them to last. The customer also loses the right to reject if the goods have been lost, destroyed or disposed of, damaged after delivery for reasons unrelated to their condition at supply, or attached to property in a way that cannot be undone without damage. None of this stops the customer claiming compensation or damages instead.
Common misconceptions
"We acted in good faith, so it can't be a major failure"
The major failure test looks at the goods or services, not at your conduct. There is no fault element in ss 260 and 268. Acting in good faith, or being genuinely surprised by the defect, does not stop the customer's remedies applying. The same is true of the consumer guarantees generally. The customer's rights are automatic, and they apply whether or not you did anything wrong.
"'No refunds' and 'store credit only' are fine as long as we are polite"
They are not. Terms that purport to exclude, restrict or modify the guarantees, the rights they confer, or your liability for failing them, are void under s 64 of the Competition and Consumer Act 2010 (Cth). A blanket no refunds policy that suggests refunds are unavailable even for a major failure is also a false or misleading representation about the existence and effect of the customer's rights and remedies, which breaches s 29(1)(m) of the ACL and can attract a pecuniary penalty. The ACCC's consumer rights guidance is explicit that displaying a no refunds sign, or saying refunds are not available, is against the law where it misleads consumers about their rights. Change of mind returns are different: a customer who simply changes their mind has no automatic right to a refund, and you can choose your own change of mind policy. Just make sure the sign and the policy do not spill over into denying guarantee rights.
"A minor failure means the customer can demand a refund"
No. For a minor failure the remedy is yours to choose first, within a reasonable time. Only if you refuse or fail to remedy the problem does the customer get to escalate, by having it fixed elsewhere at your cost or, for goods, rejecting them.
"Business customers never get guarantees"
Businesses can be consumers. Under s 3 of the ACL, a person acquires goods or services as a consumer if the price is $40,000 or less (a greater amount is prescribed by regulation, currently $100,000 including GST), or if the goods or services are of a kind ordinarily bought for personal, domestic or household use. Goods bought for re-supply, or for use up or transformation in production or manufacture, are excluded. There is a limited escape hatch for business to business supplies: for goods or services not ordinarily acquired for personal or household use, a term limiting liability to repair, replacement or the cost of either can survive, provided it is fair and reasonable (s 64A of the ACL). That is a drafting exercise, not a default position.
"Send them to the manufacturer"
The supplier is the first point of responsibility for guarantee claims. A consumer can enforce the guarantees against the supplier of the goods, and can also pursue the manufacturer separately, but a retailer cannot simply point a customer at the manufacturer and refuse to deal. Your recourse against the manufacturer or your own supplier is a separate matter, and it is worth arranging in your supply agreements rather than discovering it after a defective batch generates a wave of claims.
Where a lawyer helps
The major failure label is a judgement call, and getting it wrong cuts both ways. Refuse a genuine major failure and you risk a regulator complaint, a public review, and a formal dispute over a remedy the customer was entitled to choose. Treat a minor failure as major and you give away a refund you were entitled to avoid by repairing.
A lawyer can help with the borderline cases: assessing whether a particular defect meets the s 260 or s 268 test, and documenting the assessment so your decision is defensible. They can also review the terms that shape this area of your business, including refund and returns policies that state customer rights accurately without handing out change of mind refunds, supply agreements that give you effective recourse against manufacturers, and any s 64A limitation terms for business to business sales. When a complaint escalates, early advice on whether to offer the remedy or stand your ground usually costs far less than the dispute it prevents.
Start with the reasonable customer test
When a customer puts a faulty product on the counter, run the statutory test before you reach for the repair form. If a reasonable customer who knew everything you now know would not have bought the goods, or would not have engaged the services, the failure is major, and the customer chooses the remedy. Answer that question first, record your reasoning, and offer the compliant outcome. The businesses that get burned are the ones that decide the remedy first and look at the law afterwards.
If you are unsure whether a particular situation is a major failure, or you want your refund policies and supply agreements reviewed, contact Artificer Legal for advice tailored to your business.