I. POLICY OF GENERAL REVIEW

3.1 Earlier in this Paper¹ the view was put that there should be special legislation to regulate sale of goods contracts entered into by consumers. So far as possible the legislation should reflect the legitimate expectations of consumers and provide protection from defective goods and unfair contracts. The present Act does not achieve these goals and it would be difficult to make amendments within the existing framework which satisfy both commercial and consumer buyers and sellers.

3.2 In developing the proposal for separate legislation for consumer contracts, the Commission will consider the relationship of the new legislation to the existing law, including the Trade Practices Act 1974 (Cth). Ideally, uniform consumer contract legislation could be enacted throughout Australia, as was done for sale of goods law generally. Such uniform legislation would be the exclusive repository of consumer rights in relation to most consumer sale of goods contracts.

II. DEFINITION OF CONSUMER

3.3 In New South Wales the question of how a consumer should be defined can be approached from two perspectives. The first concerns itself with philosophical policy considerations and the second with the more pragmatic perspective of whether there should be uniformity with the Trade Practices Act 1974 (Cth).

3.4 Section 62 of the Sale of Goods Act 1923 (NSW) defines a consumer sale as a sale (other than by auction) in the course of business where the goods are of a kind commonly bought for private use or consumption and the buyer is a “person who does not buy or hold himself out as buying” in the course of a business. In order to fall within the consumer protection provisions of the Trade Practices Act 1974 (Cth), it is sufficient that the price of the goods is not greater than $40,000 if acquired from a corporation, provided the person does not acquire (or hold himself or herself out as acquiring) for the purpose of resupply or using them up in trade or commerce. Thus the purchase of a sophisticated piece of commercial machinery from a corporation for $39,000 might be a consumer purchase, but only within the Federal Act, whereas the purchase of a coffee percolator for $50 from a sole trader would be a consumer sale only under the State Act.

3.5 The Commission invites comment on the appropriate criteria for bringing the operator of a small business within the protections of consumer legislation. The small business person who purchases a television receiver for the business is as much a consumer as the ordinary householder. Without statutory protection, neither can insist on reasonable undertakings in relation to the quality and condition of the goods. If all sales which are not for the purpose of re-supply were treated as consumer sales, the concept may be wider than necessary (by, for example, embracing the purchase of machinery for factory use). However, we favour the use of this concept as the basis for identification of consumer transactions, perhaps with a ceiling (not applicable to motor vehicles or farm machinery) of $20,000.² A further possible restriction, would be to exclude those who trade in goods of the description purchased.

3.6 An alternative to a wide definition of consumer would be narrow definition couched in terms of goods not purchased in the course of a business or not for re-supply. Adoption of such a narrow definition would make it even more important to introduce some mechanism to control unfair terms in commercial sales. We would not favour this approach.

3.7 A third alternative, preferable to the second, is to afford to small business some aspects only of the protections offered by consumer sales legislation in respect of goods purchased in the course of a business. So, in relation to exclusion clauses, reliance on “reasonable” exclusions could be permitted. Damages recoverable for commercial losses such as lost profit might need to be governed by the Sale of Goods Act rather than the consumer legislation.

III. INTERACTION WITH TRADE PRACTICES ACT 1974

3.8 Three issues in particular arise when considering the interaction between consumer sales legislate on and the Trade Practices Act 1974 (Cth). First there is the problem raised in para 3.3, namely the extent to which the concept of “consumer” should be uniform. Secondly, there is the question whether the State Act should extend, like the Federal Act, beyond sales to supply of goods generally, and to services. Thirdly, decisions need to be made as to the obligations to be imposed by implied terms.

3.9 Ideally there should be uniformity in the concept of consumer. The obstacle to this is in the limited scope of the Federal Parliament’s legislative power in relation to sales. The operation of the Trade Practices Act depends mainly on the supply being by a corporation. Whilst most consumer sales are no doubt by corporations, this fact is not necessarily relevant to the reason for protection. The consumer is entitled to expect a degree of protection whenever goods are purchased, and the purpose of consumer sales legislation is to provide that protection irrespective of whether the goods have been purchased from a sole trader, partnership, corporation or any other body engaged in selling goods. Notwithstanding the virtues of uniformity, we see no rational basis for restricting the definition of consumer to purchases from corporations. On the other hand, it can be argued that, in its operation to consumer sales, the State Act should be as wide as the Federal Act. In order to achieve that the definition of consumer sale would need to encompass all sales of goods at a price not greater than $40,000. This does not conform to the Commission’s tentative views.

3.10 The proper scope of the State consumer Act and the scope of the implied terms are larger issues considered in paras 3.11-3.15 and Chapter 4.

IV. IMPLIED TERMS

3.11 Under the Sale of Goods Act implied terms relate to the title of the seller (s17), the compliance of goods with their contractual description.(s18), the fitness of the goods for any particular purpose communicated by the buyer (s19(1)), the quality of the goods (s19(2)) and, in the case of a sale by sample, their conformity with sample (s20). These terms might not be present in some contracts. The contract of sale might not be “by description” and so, for example, s18 would not apply. The great difficulty with these provisions is that they are framed with a commercial sale in mind. As explained in para 1.11, this is particularly evident in the quality provision which uses the concept of merchantability. Nevertheless, these terms are reproduced, with some important modifications, in the Trade Practices Act 1974 (Cth).

3.12 In the Commission’s view the implied terms in consumer legislation should be straightforward in their application and intelligible to consumers. We therefore favour simplification of the present provisions. We are also of the view that established obligations of the seller should be expressed in the Act and by reference to the rights of the buyer rather than as implied conditions or warranties. Under the present Act the operation of ss17-20 determines the terms of the contract. The consumer is more interested in his or her rights. The Act should reflect this and not require the consumer to go further and to distinguish between a condition and a warranty.

3.13 Thus, in order to decide the obligations of the seller, consideration must be given to the rights a consumer is entitled to expect and to the circumstances in which these rights should be enforceable. The two principal rights under the present law are termination of the performance of the contract and damages. In ss17-20 the right to terminate arises only in relation to breach of condition, but the right to damages arises even if the term breached is merely a warranty. In the vast majority of cases a consumer is concerned only with the right to terminate, which for present purposes can be treated as equivalent to rejection or return of the goods.

3.14 In the Commission’s view, the best way to give effect to consumer rights, and to promote the supply of goods of a quality which the consumer is entitled to receive, is to make the right to terminate the principal consumer right. This implies that it should be available more often than is currently the case. The difficulty is to identify a concept which can be used as the “key” to termination. A concept of “acceptable” quality has been used in the Saskatchewan Consumer Products Warranties Act 1977. This could be supplemented by provisions relating to title. Alternatively, the consumer could be given the right to reject “defective” goods. The concept of “defective goods” could be defined by reference to the terms of the contract, reasonable quality, and the utility and durability of the goods. Again there would be a right to reject goods to which the seller did not have title.

3.15 Of course, the economic impact of these changes to the law would need to be considered. However, even though the situations in which a consumer is entitled to return goods to a seller would be greatly increased, we do not believe that the impact on major retailers would be substantial because of the present practice of allowing consumers to return goods even when there is no right to do so. One virtue of the change mooted above would be to place existing practices on a secure legal footing. Moreover, the right to terminate should be considered in conjunction with our views on restrictions on exercise of the right,³ and the right to damages.⁴

V. RESTRICTIONS ON THE RIGHT TO TERMINATE

3.16 In principle, the right to terminate should be exercised by rejection of the goods and should, except in cases where it is unreasonable to do so, involve return of the goods to the seller. Although there is no obligation to return under the present Act,⁵ it seems reasonable to require this if the situations in which the contract may be terminated are to be increased, as suggested in this Paper. In any event, consumers almost invariably do seek to return goods to the seller. Specifying restrictions on the right to terminate is a more complex matter.

3.17 Under the Sale of Goods Act there are two restrictions on the right to terminate: the passing of property in specific goods, and “acceptance”. Our earlier Report recommended removal of the first restriction.⁶ The restriction would have no operation in a consumer sales Act. “Acceptance” was also dealt with to some extent in our earlier Report.⁷ Acceptance is a technical concept defined in s38. We see no role for this provision in the consumer Act.

3.18 We tentatively propose that the main restriction on the right to terminate should be one of time. In the vast majority of consumer transactions the consumer discovers the defect in the goods within a short space of time. The Commission suggests that, except for perishable goods, the first business day one calendar month after purchase should be the last day for termination. The consumer should be allowed the opportunity to test the goods, and reasonable use for that purpose should not be regarded as a bar to termination. The buyer should not be prejudiced by giving the seller an opportunity to remedy the defect in the goods, and the time for rejection should in such cases be extended to one month after the time the goods were returned to the consumer. It is implicit in this that common law concepts of election and estoppel should be excluded. On the other hand, misuse of the goods should be regarded as a bar to termination in cases where the goods are defective primarily because of that misuse. At the same time, however, misuse should be narrowly defined, so as not to allow a seller to say that goods have been misused merely by reason of, for example, use of a cleaning substance otherwise appropriate for the goods although not the brand recommended by the retailer or manufacturer.

3.19 One problem for consumers is the practice retailers have of requiring return of dockets with goods. Usually these are no more than cash register receipts easily mislaid. The Commission sees no justification for allowing sellers to impose such a restriction provided that the consumer is able to give proof of purchase. This need be no more than production of the price label if ‘it is proved to have been attached to the goods by the seller.⁸

VI. THE PRESENT PART VIII

3.20 Enough has already been said to indicate that Part VIII of the Act, dealing with “Consumer Sales”, is inadequate to meet the needs of consumers. The main purpose of Part VIII was to deal with attempts to exclude the operation of ss18-20 (except s19(4)) in consumer contracts. Under the consumer legislation outlined above those provisions would be replaced by more appropriate measures. The problem of exclusion clauses would remain and is dealt with in paras 3.21-3.23. Other matters dealt with in Part VIII are discussed later in this Paper.⁹

3. 21 We agree that there should be a prohibition on the use of exclusion clauses except perhaps in relation to goods purchased for business use. The major weakness of the present provision (s64) is that it does not apply to express terms. if a seller undertakes express contractual obligations these should not be limited by exclusionary provisions. There should, therefore, be a provision in the Act which extends not only to rights conferred by the consumer legislation itself (or rights which would, but for the exclusionary provision, be conferred) but also to express undertakings by the seller. Moreover, the legislation should make it clear that obligations may not be imposed on the consumer which are in derogation of rights conferred by the Act.

3.22 Under the Trade Practices Act 1974 (Cth) exclusionary provisions are to a limited extent permitted in relation to goods which are not of a kind ordinarily acquired for personal, domestic or household use. Subject to the need for consistency between the consumer legislation and the Trade Practices Act, we see no reason for allowing exclusionary provisions in relation to these goods. It is, in any event, simpler to have a blanket prohibition.

3.23 The Commission is of the view that the use of exclusionary provisions should attract a penalty in order to prevent consumers from being misled by the insertion into the contract of provisions which are void. However, we would prefer such provisions to be contained in the fair trading legislation, rather than in an Act dealing with civil rights and obligations.

VII. DAMAGES

3.24 The next issue is the extent to which a consumer should be entitled to claim damages. Under the Sale of Goods Act there is a right to damages for non-delivery (s53). Damages are also available where the contract is lawfully terminated for breach or repudiation by the seller. In addition there is a right to damages for breach of warranty (s54) which also applies to the breach of a condition or an intermediate term in cases where the contract has not been terminated. By and large these provisions reflect the remedies available to a commercial buyer. Thus, s53(3) states a prima facie measure based on the difference between market price and contract price.

3.25 In order to examine the situations in which damages should be recoverable it would be helpful to identify the types of loss in respect of which a consumer might seek compensation. First, if the contract is terminated the consumer might wish to purchase substitute goods. Secondly, if the contract is not terminated the consumer might wish to obtain a sum of money sufficient to have the goods repaired. Thirdly, the consumer might seek to recover damages for consequential loss.

3.26 Ordinarily a consumer who terminates the performance of a contract by returning the goods does not seek to recover damages. In the Commission’s view, the quid pro quo for the increase in rights of termination which would be conferred t)y the consumer legislation¹⁰ should be the satisfaction of the consumer’s claim by the return of the money paid.

3.27 In the case of defective goods retained by the consumer there should be a right to damages. The legislation should express the measure of these damages in clear terms. This should not be, as in s54(3), simply a statement of the first limb of the rule in Hadley v Baxendale.¹¹ An obvious possibility is to state that the reasonable cost of having the goods repaired may be recovered, together with such consequential loss as was reasonably foreseeable at the time the contract was entered into.

3.28 “Consequential” losses are of two main kinds. First, the consumer may suffer economic loss, as where a defective freezer results in the loss of goods stored. Secondly, the consumer may suffer loss by reason of physical injury caused by the defective goods. Such consequential losses should be recoverable, even where the contract is terminated, but they should be subject to the defence of contributory negligence. In such cases there should be apportionment of responsibility under the Law Reform (Miscellaneous Provisions) Act 1965 (NSW). It may, however, be appropriate to introduce a restriction in respect of losses suffered in the course of a business. Such losses could be regulated by the Sale of Goods Act. There is a third, and less important, kind of consequential loss. In recent times the law of contract has taken steps towards a more general acceptance of the right to recover damages for mental distress.¹² Although these claims have not generally succeeded in sale of goods cases¹³ the Commission favours their inclusion within the concept of “consequential” loss.

VIII. PRIVITY

3.29 One advantage for the consumer of proceeding in an action in contract in relation to defective goods is that contractual liability is strict. Liability can be established without proof of negligence. By way of contrast, if the defendant is sued in tort, not only must the consumer prove a duty of care, but it must also be shown that the defendant failed to exercise reasonable care. When a consumer purchases goods from a retailer the contract is with that person, and the manufacturer is not privy to it. Privity of contract precludes any action against the manufacturer in contract. Similarly, if defective goods injure a member of the consumer’s household that person has no contractual action because of the absence of privity of contract with the retailer or the manufacturer. For such persons proof of negligence is essential to any damages claim.

3.30 A minor amendment to the privity rule was made in 1974 when s64 was added to the Sale of Goods Act. Section 64(5) allows the court to add the manufacturer of the goods to the proceedings in an action in respect of unmerchantable goods. If the court is of the opinion that the defect in the goods should be remedied by the manufacturer it may require the manufacturer to pay the consumer an amount equal to the estimated cost of remedying the defect. Alternatively the court may require the manufacturer to remedy the defect. Although this provision is of assistance to d consumer where the retailer has insufficient funds to meet the liability, it is really only a token reform of the law because it does not allow recovery of damages for personal injury in the case of unmerchantable goods. Moreover, the court has no power to make orders against the manufacturer in respect of defects in the goods which do not render them unmerchantable.

3.31 A more substantial amendment to the law occurred when Division 2A was added to Part V of the Trade Practices Act 1974 (Cth) in 1977. The existence of these provisions, which do allow for the recovery of damages for personal injury, makes it necessary to reconsider s64 of the Sale of Goods Act. The only real issue for the Commission is to determine how closely the State provisions should mirror the Federal provisions. It may be that the provisions of the Trade Practices Act are too complex.

3.32 Sometimes the manufacturer expressly undertakes responsibility to the consumer, for example, by a warranty card, or through advertising. In all cases where the manufacturer purports to confer some benefit or right on the consumer against the manufacturer, the absence of privity of contract should not be a barrier to enforcement by the consumer. In such situations, and notwithstanding the possible absence of consideration moving from the consumer, the manufacturer should be deemed to be contractually responsible for the benefit or right conferred.

3.33 In cases where there is no question of the manufacturer having expressly undertaken responsibility, the manufacturer should, as under the present law, have no contractual liability to the consumer. However, the consumer should be entitled to recover damages from the manufacturer in respect of personal injuries suffered by reason of a defect in the goods present at the time of purchase by the consumer. Damages should be assessed by reference to causation and reasonable foreseeability but there should be no need to prove negligence by the manufacturer. The defence of contributory negligence should be available.

3.34 In order to deal with the problem where the consumer has given the goods to another person, or allowed a member of his or her household to use the goods, we are inclined to proceed as follows. First, any warranty or undertaking packed or included with the goods should ensure for the benefit of donees. Secondly, the manufacturer should bear responsibility for personal injury suffered by reason of a defect in the goods present at the time of purchase by the consumer, provided that the injury was reasonably foreseeable. It might, however, be reasonable, in the second situation, to allow the manufacturer to raise a defence of reasonable care. The possibility of increased insurance liabilities which might result from extending liability beyond purchasers of the manufactured goods must be borne in mind. Further, our proposals on damages generally are subject to what may be shown to be the likely economic impact of such changes.

IX. SECOND-HAND GOODS

3.35 Section 64(9) of the Sale of Goods Act limits the liability of a seller of second-hand goods in proceedings for breach of the condition of merchantable quality (s19(2)) to the cash price of the goods. The basis for this very substantial limitation is not readily apparent.

3.36 Under the present Act a seller of second-hand goods is subject to implied obligations of title (s17) and liable for non-correspondence with description in cases where the goods are sold by description (s18). But it would seem that the conditions implied by s19 (fitness for purpose and merchantable quality) are present in the contract only if the sale was made in the course of a business. This seems to be the effect of the requirement in s19(1) that the goods be “of a description which it is in the course of the seller’s business to supply” and the similar requirement in s19(2) that the seller “deals in goods of that description.” Thus, the effect of s64(9) is to limit the liability of a commercial seller and we can see no justification for this.

3.37 Our tentative view is that only the liability of sellers of second-hand goods who do not sell in the course of a business should be limited, that this limitation should be to the cash price of the goods sold and that this should be so in respect of all breaches of contract except those arising from a failure to confer the title provided for by the contract.

X. ENFORCEMENT OF CONSUMER RIGHTS

3.38 Government is more aware these days of the need to draft consumer legislation in “plain English”. The existing Sale of Goods Act is not drafted in this way, and gives rise to serious problems of interpretation. There should be legislation in “plain English” and an education programme aimed at both sellers and buyers.

3.39 The Commission would welcome information on the adequacy of the present procedures to ensure the enforcement of consumer rights arising from sale transactions. Notwithstanding the existence of legislation such as the Consumer Claims Tribunal Act 1974 (NSW) it may be that even where a consumer has a genuine grievance the expense of litigation still provides too great an obstacle to the enforcement of rights. One reason for suggesting that rejection of goods should become the main consumer right is that it is, to a certain extent at least, a matter of self-help. It does, however, leave open the question of the seller who refuses to take back goods which the consumer is entitled to return.

1. See paras 1.6-1.9.

2. Cf Fair Trading Act 1987 (NSW), s5.

3. See paras 3.16-3.19.

4. See paras 3.24-3.28.

5. Section 39.

6. New South Wales Law Reform Commission Sale of Goods: Second Report (LRC 51, 1987), para 1.7.

7. Id, Chapter 6.

8. See also paras 3.29-3.34 dealing with privity of contract.

9. See paras 3.29-3.36.

10. See para 3.14.

11. (1854) 9 Ex 341, 156 ER 145.

12. K Mason, “Contract and Tort: Looking Across the Boundary from the Side of Contract”, (1987) 61 ALJ 228, at 238, 239.

13. See, for example, Falko v James McEwan and Co Pty Ltd [1977] VR 447.