When life gives you lemons, you may also get a refund
Members of the automotive industry should be aware that recent amendments to the Australian Consumer Law (ACL) have expanded the scope of what constitutes a "major" failure under the consumer guarantee regime. A good (which includes a motor vehicle) will be deemed to have a major failure if it:
- is unsafe;
- departs from the description or sample model;
- is substantially unfit for a common or specific purpose, and the defect cannot be easily and quickly repaired; or
- would not have been bought by a reasonable customer knowing the nature and extent of the failure.
Importantly, a consumer's rights to a remedy depend on whether a fault with a good amounts to a major or minor failure. Where the fault is deemed to be a major failure, a consumer has the right to choose whether to have the good repaired, replaced or refunded from the supplier.
Under the new changes, which came into effect on 18 December 2020, multiple minor failures together may now amount to a major failure, if it has a significant impact on the customer's overall use of the product's core functions. The key question is to ask whether a reasonable consumer would still have chosen to purchase the product (either at all or over an alternative) if they had known that multiple defects would occur within the period for which they owned the product. It is not relevant whether repairs have been made for any of the minor failures. The changes reflect similar laws overseas, known as "lemon laws", and have been advocated for by consumer groups in Australia for some time and recommended by the ACCC in its market study into new car retailing in 2017.
To an extent, there were already examples of the Courts taking this approach under the previous law. For example, the Federal Court recently found that an RV with many minor, cosmetic and mostly repairable defects constituted a major failure. These defects included poor joinery, bed supports, missing screws, misaligned lights, poor stitching and a failed lifting apparatus. In a similar case, a customer purchased a second-hand BMW and was entitled to a refund. In this instance, the vehicle had experienced multiple minor failures within the three-month warranty period, including issues with coolant leaks, and the DSC and cruise control functions. In particular, the fact that the coolant continued to leak after it had already been fixed once was sufficient to constitute a major failure. In each case, even though each individual fault was minor, the cumulative effect of the faults over the relevant period was found to have a "significant impact on the customer's overall use of the vehicles" with the effect that the vehicles were deemed to have a major fault entitling the consumer to a full refund of the purchase price of the vehicles.
The amended laws seek to remove any doubt that this approach is what was intended by the Parliament and mean that importers and dealers should expect to see more complaints and requests for refunds from customers. Members of the vehicle industry should update their complaints process, and monitor dealer compliance to avoid breaching the ACL. This may involve updating repair and refund guides to account for multiple minor failures and informing dealers of the changes.
Multiple minor failures together may now amount to a major failure, if it has a significant impact on the customer's overall use of the product's core functions.
Reminder: Countdown to new Road Vehicle Standards legislation (1 July 2021)
From 1 July 2021, the Road Vehicle Standards Act 2018 (Cth) (RVSA) replaces the Motor Vehicle Standards Act 1989 (Cth) (MVSA), implemented through a 12 month transitional period (during which arrangements will be in place that allow some approval holders to continue operating under existing approvals). There are plenty of new processes (and acronyms) for industry to get familiar with and the DITRDC has set up a dedicated implementation page to assist.
The RVSA is accompanied and supported by the Road Vehicle Standards Rules 2019 ("the RVS Rules"). The RVSA will deliver an updated and modernised system to regulate the first provision of road vehicles in the Australian market. All applications and approvals under the RVSA will be integrated under the new online Road Vehicle Regulator system – "ROVER".
The RVCS is being replaced by a new Register of Approved Vehicles (RAV). The RAV is an online, publicly searchable database of vehicles approved for use on Australian roads and includes both models which have been type approved for supply and individual vehicles approved via a SEV pathway. Listing on the RAV replaces the previous system of Identification Plate Approval, and has removed the need for physical identification plates to be affixed to most vehicles.
Entry on the RAV is an essential precondition in providing a road vehicle in Australia for the first time. A person contravenes the Act if they provide a road vehicle to another person in Australia for the first time which is not included on the RAV. The RAV entry must include identification of the "Holder of Approval", who (by submission to the RAV) accepts responsibility for the vehicle's compliance with the Australian Design Rules or relevant standards.
Under the RVSA, the Minister/ Secretary may vary, suspend or revoke an approval at the request of the Holder of Approval, or of their own initiative (including following a request for further information).
Offences under the RVSA
The RVSA also makes it an offence to:
- enter incorrect information on the RAV "dishonestly or improperly": 120 penalty units ($26,640)
- enter incorrect information on the RAV (strict liability): 60 penalty units ($13,320);
- make a false or misleading declaration in an application for approval (including through omission): 60 penalty units ($13,320); or
- import a vehicle which is not of an approved type: 120 penalty units ($26,640)
For certain of these offences which contain a mental element (ie. entering of incorrect information of the RAV "dishonestly or improperly") executive directors of companies can be held personally liable where the officer knew that the offence would be committed, was in a position to influence the conduct of the company and failed to take reasonable steps to prevent the commission of the offence. This provision has extended geographical jurisdiction (Category D) meaning that the offence applies whether or not the conduct constituting the alleged offence occurs in Australia or overseas.
Motor Vehicle Recalls
The RVSA and RVS Rules also introduces specific requirements for motor vehicle recalls, which supplement (but do not replace) the existing consumer goods recall provisions under the Australian Consumer Law. This includes:
- prescribed requirements for the contents of a motor vehicle recall notice;
- compulsory (pre-recall) information gathering powers about a vehicle or component's safety and/or compliance with the applicable vehicle standards through a "disclosure notice"; and
- a specific role for the DITRDC in the context of a motor vehicle recall (noting that the DITRDC has traditionally been an informal technical adviser to the ACCC in recalls of this kind), which includes the power for the DITRDC to initiate a compulsory recall where it appears that a vehicle or component does not (or it is likely that they do not) comply with relevant standards, or may cause injury.
Motor Vehicle Service and Repair Information Sharing Scheme legislation introduced into Parliament
On 24 March 2021, the Competition and Consumer Amendment (Motor Vehicle Service and Repair Information Sharing Scheme) Bill 2021 was introduced into Australian Parliament.
The Bill amends the Competition and Consumer Act 2010 (Cth) to establish a scheme which requires manufacturers/ importers to share motor vehicle service and repair information with all Australian repairers and registered training organisations. This Bill is the latest step in a broader context of establishing a consumer "right to repair" for high-value goods such as motor vehicles (following similar legislation implemented in the EU and certain US jurisdictions) through strengthening access by independent repairers to parts and information held by original equipment manufacturers ("OEMs").
Assuming that the Bill passes, the scheme will come into effect from 1 July 2022 and apply to information for "conducting diagnostic, servicing or repair activities on" models of vehicle manufactured in the previous twenty years (from 1 January 2002).
Where has the Bill come from?
In 2014, a voluntary "Agreement on Access to Service and Repair Information for Motor Vehicles" was introduced, however a market study undertaken by the ACCC in 2017 concluded that the voluntary agreement had not been effective in facilitating the sharing of repair information between OEMs and independent repairers. This lead to the release of a consultation paper in 2019 directed at introducing a mandatory scheme, with 22 submissions received by Treasury from a range of industry players, including the FCAI and the Australian Automotive Dealers Association.
The FCAI and AADA submissions raised a number of fundamental issues with the proposed scheme, including:
- that the scheme imposes a large (and for some impossible) burden on distributors by requiring information to be made available for vehicles up to 20 years old;
- that the scheme's pricing requirement of "fair market value" is ambiguous, and does not expressly account for making a reasonable profit;
- that making this information easily available to repairers is inequitable toward franchised dealers, who have historically outlaid significant investment in training and equipment in order to qualify to receive such information from OEMs;
- that the scheme does not include sufficient safeguards over the distribution of vehicle safety and security information, as it requires data providers themselves to assess who is a "fit and proper" recipient, instead of requiring government registration;
- that the scheme will require OEMs to make information available to repairers who may not be sufficiently trained or equipped to safely and reliably undertake certain repairs;
- that the obligations imposed on data providers by the scheme may conflict with existing obligations relating to copyright, as well as contractual and equitable obligations of confidentiality;
- that the penalties, of up to $10 million, imposed for non-compliance with the scheme are excessive; and
- that the regulatory burden imposed on businesses to comply with the scheme has been underestimated.
At the time of writing, the scheme proposed by the Bill, while not identical to the version put forward in 2019, had not been amended to directly address any of these concerns.
What does the proposed scheme require OEMs to do?
The scheme imposes obligations on data providers (including OEMs, distributors, dealerships and data aggregators) to offer or supply information used for conducting diagnostic, service or repair activities to all Australian repairers and registered training organisations. The scheme will make it illegal for data providers to withhold information when requested by Australian repairers and registered training organisations.
The scheme does not extend to "backyard" enthusiasts and will not apply to information or parts requested by individuals who wish to perform "DIY" motor vehicle repairs. However, it purports to "level the playing field" by requiring that information available to one or more repairers or registered training organisations (for instance, those affiliated within their brand or dealer network), must also be available to all other Australian repairers and registered training organisations.
Information covered by the scheme is all information required to repair a vehicle by fitting or installing a replacement part, and will apply for all models of passenger vehicles supplied in Australia and manufactured on or after 1 January 2002.
Certain types of information are excluded from the scheme, including information which is a "trade secret", a source code version of a program and global positioning system data. There is also an express exemption for "information supplied, or to be supplied, only to a restricted number of Australian repairers for the purposes of developing solutions to emerging or unexpected faults with a scheme vehicle".
Does scheme information need to be provided free of charge?
Scheme information does not need to be provided free of charge, however it does need to be available to all repairers and registered training organisations at a price that does not exceed "fair market value". In the Bill's Explanatory Memorandum, "fair market value" is considered to be "the price a willing buyer would pay a willing seller in a transaction in the open market". However, as raised by the AADA and FCAI (see above), what constitutes a "fair" price is subjective and is not a straightforward concept. The scheme provisions in the Bill also do not make clear whether information must be available to all potential requesters on the same terms and price, or whether this is simply intended to act as a ceiling.
A data provider may choose to offer scheme information to all repairers on a fee-per-request basis, and/or via a time-limited subscription service. If scheme information has been requested from a data provider, the data provider must supply the scheme information within the relevant timeframe. The Bill proposes three timeframes for the supply of scheme information, being:
- immediately delivery: if the information has been supplied before, or is readily accessible and able to be provided in the requested form;
- within two business days: if the information provided includes safety or security information and the data provider needs to consider additional information to assess if an individual is a fit and proper person to receive such information; and
- if the two other timeframes do not apply: within five business days, or as agreed between the parties.
What do we need to do to prepare?
OEMs and distributors should carefully review the proposed scheme and understand to what extent their existing practices will need to change in order to be compliant – in particular:
- rapid turnaround following a request: given the short statutory timeframes proposed for responses, OEMs and distributors should consider what systems and resources will be required in order to meet these requirements (and in particular to track and record where information has been supplied "before" and therefore falls within the "immediate delivery" tier;
- confirming identity of request: data providers may wish to introduce a step which provides confirmation that the requesting entity falls within the definition of a "scheme RTO" or an "Australian repairer" (noting that particular qualifications / licenses apply in some State and Territory jurisdictions);
- identifying excluded scheme information: data providers may wish to consider and identify ahead of time any types of information which they would consider to satisfy the exclusion criteria in section 57BD(2) – in particular information which is commercially sensitive, a "trade secret" and/or intellectual property.
What are the penalties for non-compliance?
If the Bill is assented to, data providers must comply with obligations under the scheme. Failure to comply with obligations under the scheme will be subject to a maximum pecuniary penalty of $10 million for a body corporate and $500,000 for an individual.
The regulatory burdens and behavioural controls already imposed on OEMs are not altered but are codified and the risk of non-compliance increased
ACCC driving for improved consumer outcomes in the auto industry in 2021
The automotive sector is once again in the ACCC's headlights, as it outlined its compliance and enforcement priorities for 2021.
On 23 February, Rod Sims, Chairman of the ACCC, set out the ACCC’s compliance and enforcement priorities for 2021 in his annual speech to the Committee for Economic Development Australia (CEDA).
The particular areas (or "priorities") identified by the ACCC that are relevant to the automotive industry include:
- Empowering consumers and improving industry compliance with consumer guarantees, with a focus on high value goods including motor vehicles; and
- Ensuring that small businesses receive the protections of the competition and fair trading laws, including franchising.
What does a priority mean?
Generally, the ACCC may be more likely to pursue enforcement strategies for conduct falling within a priority area. A priority area may be thought of as a "threshold" or an area "on the ACCC"s radar" that it will look at with greater scrutiny over the next 12 months (or more).
The ACCC will consider certain conduct a priority, that may trigger enforcement action if:
- it is of significant public interest or concern;
- results in substantial consumer or small business detriment;
- is engaged in by large / national traders with an increased likelihood of greater consumer detriment and influence over other market participants;
- it involves a significant new or emerging market issue or where ACCC action is likely to have an educative or deterrent effect; and/or
- taking enforcement action will assist to clarify the law.
According to Mr Sims, despite the pandemic, the ACCC had received a high volume of complaints about motor vehicles consumer guarantee issues in 2020. Mr Sims indicated (without specifying) that the ACCC intended to commence enforcement action against a number of motor vehicle dealers with respect to how they have responded to complaints regarding motor vehicle failures and would leverage "these enforcement outcomes to achieve broader industry behavioural change".
Relevantly, the ACCC will also be advocating for changes to the law with respect to consumer guarantees to make breaches of those provisions illegal, which, if implemented, may expose individuals and companies to criminal penalties.
Further, changes to the law in relation to multiple minor failures have been introduced, which have a similar effect to the long-discussed "lemon laws". That is, amendments to the law now require suppliers of goods that have suffered from multiple minor failures to treat the good as having suffered a major failure, entitling the consumer to choose what remedy, including a full refund, they are entitled to.
See our article "When life gives you lemons, you may also get a refund" in this Snapshot for more information on the changes to the consumer guarantees to address multiple minor failures.
Never far from the ACCC's mind, issues relating to the conduct between parties to franchise agreement have maintained their position in the priority list. Dealer agreements typically fall under the requirements of the Franchising Code of Conduct and in this regard Mr Sims said that the ACCC continues to receive reports about misleading representations made by franchisors about franchises, in particular earnings capacity and the use of marketing funds.
This follows amendments to the Franchising Code of Conduct for new vehicle dealership agreements which came into effect in June last year, impacting how renewal/termination decisions will need to be communicated to dealers and what must be included in new disclosure documents going forward. It also ties in with proposed amendments to the Franchising Code discussed in Dealer agreements reinforced under proposed Franchise Code changes" in this Snapshot.
Bolstering consumer rights on the horizon
Consumer rights in relation to motor vehicles is a hot topic.
In his CEDA address, Mr Sims also indicated that the ACCC will also be advocating for changes to the law in a range of areas, including the introduction of an unfair trading practices prohibition – this has been on the ACCC's radar since 2015, and will likely become law in the not-too-distant future.
Mandatory right to repair information
In addition, the Federal Government recently closed its consultation period in relation to proposed draft changes to the Competition and Consumer Act 2010 (Cth) that would introduce a requirement on national sales companies to provide access to diagnostic, repair and servicing information on fair and reasonable commercial terms to all Australian repairers.
The changes to the law come off the back of the ACCC's market study into new car retailing in 2017 and are intended to promote competition between Australian repairers of passenger and light vehicles by enabling consumers to have their vehicles repaired by an Australian repairer of their choice, and not be restricted to authorised dealers within a brand's network.
Further updates from the Treasury department as to whether and in what form any final legislation may be enacted are still to come.
Consumers' right to repair
Finally, in December 2020, the Productivity Commission released an Issues Paper focused on consumers' ability to repair faulty goods and to access repair services at a competitive price. The paper looks at issues including barriers and enablers of competition in repair markets and the costs and benefits of a regulated "right to repair", including facilitating access to embedded software in consumer and other goods.
The inquiry seeks to address the global concern that repairs of consumer products are becoming more difficult to repair, resulting costly and wasteful outcomes. Enabling a right to repair may involve various policies, including the above mentioned, requirement for manufacturers to make repair information and tools available to third-party repairers, or to produce spare parts for a certain period.
A draft report is due to be published in June 2021 with a final report intended to be published in October 2021.
Dealer agreements reinforced under proposed Franchise Code changes
Regulatory changes have been flagged by the Prime Minister and Minister for Employment Skills, Small and Family Business that may come into force imminently.
The changes come off the back of a year-long Senate inquiry into the demise and exit of Holden from the Australian market. In its report, the Senate Committee made number of recommendations directed to addressing the risks dealers and other parties may be exposed to when a brand exits the market.
However, while the Committee noted that the termination of an entire dealer network was unusual, it was mindful that Holden's subsequent negotiations and compensation arrangements with former dealers were likely to "set a precedent" for how other manufacturers may conduct themselves in Australia. On this basis and taking into account the submissions received during the inquiry, the scope of the Senate inquiry was re-adjusted to also investigate concerns in relation to the regulation of the relationship between car manufacturers and dealership models in Australia, including:
- practices relating to:
- the alignment between capital investment and tenure;
- termination / non-renewal and compensation;
- performance requirements;
- behaviour around warranty claims (including warranty extrapolation) and Australian Consumer Law;
- unfair contract terms;
- compensation for goodwill on termination / non-renewal and consumer data ownership;
- current and proposed business models for selling vehicles, including the recent shift to an agency model by a number of brands and possible offers of compensation; and
- other domestic and international regulatory, self-regulatory and legislative arrangements.
The Government's proposed changes are directed at addressing a perceived power imbalance between dealers and their employees on the one hand, and the multinational OEMs who supply vehicles to, and "dictate" the conduct of, the dealers on the other (which was reflected in the ACCC's comments to the Senate inquiry).
The Committee also noted concerns raised in submissions that neither the Franchising Code nor the ACCC investigative mechanism were helpful in resolving disputes arising from the apparent imbalance of power between the parties.
During the inquiry, a number of legislative changes were proposed by the Federal Government.
These changes do not so much alter the regulatory burdens and behavioural controls already imposed on OEMs, but, rather, more expressly codify those burdens and controls and increase the legal risks and consequences in the event that OEMs do not adhere to them. The Government has foreshadowed three broad changes:
- Increasing available penalties under the Franchising Code:
- seeks to strengthen penalties for wilful, egregious and systemic breaches of the Franchising Code, including unilaterally changing contracts, poor compensation mechanisms in the event of structural changes to the dealer network and reneging on warranties / reimbursements to dealers for consumer law remedies issued to customers;
- aligns the maximum pecuniary penalties available under the Franchising Code more closely with that under the Competition and Consumer Act (under which the Franchising Code is made and which also incorporates the Australian Consumer Law or ACL), which are currently set at:
- For corporations, the greater of:
- three times the value of the benefit received, or
- 10% of annual turnover in preceding 12 months, if court cannot determine benefit obtained from the offence.
- For individuals:
- Transforming the voluntary best practice principles for new car dealership agreements into mandatory obligations under the Franchising Code.
- Ensuring that the Franchising Code explicitly recognises that dealers operating as a manufacturer’s agent in relation to new vehicle sales are still protected by the Franchising Code.
The Government is also set to announce that it will consult on a number of further changes, consistent with its focus on small business protection:
- Ensuring appropriate protections for dealers from unfair contract terms in their agreements with manufacturer;
- Options to achieve mandatory binding arbitration for automotive franchisees, to address power imbalance when there is a dispute; and
- The merits of a standalone automotive franchising code.
We expect that draft legislation giving effect to the above changes will be forthcoming and that the Government will consult and invite submissions on any further draft legislation or proposed changes to the Franchising Code from industry participants.