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    Extended Warranties – A Worthy Investment or an Illegal Sham?

    Earlier this year, the Australian Competition and Consumer Commission (ACCC) as part of its Compliance and Enforcement Priorities for 2016,[1] announced it would be returning its focus to misleading representations made by big businesses about express or implied warranties.

    This begs the question, why are so many warranties considered to be misleading, and what does this mean for you? 

    What exactly is a warranty?

    A warranty is a voluntary promise offered by the company responsible for selling, or manufacturing, a particular product, or providing particular services.

    In the consumer context, warranties generally stipulate that should a product stop working during a set period of time (eg the first 12 months after purchase), you will be entitled to return the product for a full refund, or have it repaired free of charge.

    For an additional fee, businesses may offer extended warranties, which are designed to lengthen the time a consumer will be protected should an item prove to be faulty or defective.

    So I need to purchase an extended warranty if I want to be covered, right?

    Actually, the answer is often no.

    Under the Australian Consumer Law (ACL), consumers have certain rights that exist regardless of what a supplier or manufacturer says or does. These rights are known as “consumer guarantees”, and govern the sale and/or supply of many goods and services.

    One consumer guarantee is the requirement that items sold be of acceptable quality. Should a product prove to be defective or faulty (and therefore not of “acceptable quality”), the ACL states that a consumer will have a right to a refund, repair or replacement, for a “reasonable” time after purchase.

    What is a “reasonable” amount of time will depend on the quality and cost of the product purchased. However, to provide an example, it is clear that if you were to buy an expensive television set for $5,000, a reasonable person would expect to get more than two years use from it before it stopped working.

    Therefore, should the television stop working during this time, you must be provided with a remedy free of charge, regardless of whether any extended warranty has been purchased.

    Does this mean that many extended warranties are not actually legal?

    Yes.

    Businesses that sell extended warranties offering anything less than, or simply mirroring, what a consumer is entitled to under the consumer guarantees, risk misleading consumers into thinking they are receiving additional benefits that they were not otherwise entitled to.

    These types of warranties are illegal, and should be avoided by suppliers and manufacturers at all costs.

    To ensure that consumers are not misled, extended warranties must therefore provide additional rights above those already granted under the ACL.

    Any additional rights offered should be explained to the consumer at the time of the purchase, and no undue pressure or unfair tactics should be employed, simply to ensure an extended warranty is bought.

    Do consumer guarantees still apply to sale items?

    Yes.

    However, goods cannot be returned on the basis that they do not work and therefore are not of “acceptable quality”, if the full extent of the fault or defect is made known to the consumer at the time of the purchase (eg “Item not working, suitable for parts only”).

    This differs from a situation where a consumer is paying a reduced price, but would still reasonably expect the item to work the same as if the full retail price had been paid. For this reason, signs or cash register receipts that state “no returns accepted” or “no refunds on sale items” may be misleading, and should be avoided.

    This is because they create the impression that it is not possible for a consumer to get a refund under any circumstance, even when there is a major problem with the item purchased.

    On the other hand, simply stating that “no refunds will be given for change of mind” is acceptable.

    Does it really matter if the consumer is misled?

    Yes, it does.

    And the penalties for doing so can prove extremely costly.

    The ACCC treats misleading conduct very seriously, and can take court action against businesses that mislead or deceive consumers about any of their statutory rights. This can result in fines of up to $1.1 million for businesses and $220,000 for individuals, per offence.

    In recent years, this has seen many companies such as Hewlett-Packard, Fisher & Paykel and Harvey Norman just to name a few, all have huge monetary penalties imposed.

    The most damning is undoubtedly Hewlett-Packard, who was forced to pay $3 million for what was described by ACCC chairman Rod Sims, as “widespread and systemic” misconduct by the computer giant.[2]

    The findings of misconduct included remedies available to consumers being only available at Hewlett-Packard’s discretion; consumers being required to have their product repaired multiple times before being entitled to a replacement; the warranty period for Hewlett-Packard products being expired; consumers being required to pay for remedies outside the express warranty period; and products purchased online could only be returned to Hewlett-Packard at Hewlett-Packard’s sole discretion.

    Can a business simply choose to repair a product or service instead of replacing it?

    Only in limited circumstances.

    Where there is a “major” fault with a product or service, a consumer is entitled to choose between having the item replaced or receiving a refund. It is only where a fault is considered “minor”, that a supplier has the choice of providing a refund, replacement or repair.

    There is no clear distinction between a “major” and “minor” fault, however a fault will generally be considered major if:

    • the product or service would not have been purchased by a reasonable consumer fully aware of the nature and extent of the issue; and
    • the fault cannot easily be remedied to make the product or service fit for purpose within a reasonable time.

    This is important to understand, given just last month online retailer Ozsale was fined and issued an infringement notice by the ACCC[3] following an investigation into the company's consumer guarantees policies and practices.

    The ACCC issued the infringement notice because it had reasonable grounds to believe that Ozsale had made a false or misleading representation about consumers’ rights to remedies for faulty goods by including the following clause in its terms and conditions relating to faulty products:

    Depending on the fault, you may be offered the choice of refund, repair or replacement of the item (subject to availability)

    The ACCC was concerned that this statement represented that the choice of remedies was at the discretion of Ozsale, which as noted above is not always the case.

    What to do if you have been misled or are worried you might be misleading consumers?

    If you think you may have been misled by an extended warranty, or are unsure if the warranty you offer is misleading, contact us immediately on (03) 6221 4800 for further information.

    Brenton Worth



    [3] The payment of a penalty specified in an infringement notice is not an admission of a contravention of the ACL. The ACCC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.