13 Sep 2010

"Acceptable quality" under the Australian Consumer Law: The NZ perspective

by Peter Stubbs, James Varcoe

In New Zealand, "acceptable quality" is a composite and context-specific attribute.

The Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 (ACL) has recently been given royal assent. While the ACL will not commence until 2011, attention is turning to the guarantee of acceptable quality in section 54 and how "acceptable quality" will be interpreted in Australia. In particular, there are questions about the difference from "merchantable quality" under the Trade Practices Act 1974.

The New Zealand Consumer Guarantees Act 1993 (CGA) contains an "acceptable quality" guarantee. The Australian guarantee of acceptable quality may be interpreted using the New Zealand interpretation from the CGA. This article examines the meaning of "acceptable quality" in the CGA context.

Consumer law in New Zealand

New Zealand's consumer protection laws are contained primarily in two statutes: the Fair Trading Act 1986 (FTA) and the CGA.

The FTA is concerned with pre-contractual conduct and representations. The FTA makes certain business practices unlawful, as well as generally prohibiting misleading or deceptive conduct in trade, and false and misleading representations.

The CGA imposes a number of statutory guarantees in transactions where goods and services are supplied to consumers. The statutory guarantees relate to title, quality, fitness, and performance (sections 5-13). Suppliers cannot contract out of the guarantees under the CGA (suppliers can contract out of the CGA where the purchaser acquires the goods for business purposes). The CGA also provides rights of redress against suppliers and manufacturers if the statutory guarantees are breached.

The guarantee of "acceptable quality"

Section 6 of the CGA states that where goods are supplied to consumers there is a guarantee that the goods are of acceptable quality (Guarantee). Where the goods are not of acceptable quality, the consumer may have a right of redress against the supplier or manufacturer.

Section 7 deals with the meaning of acceptable quality. Section 7(1) states:

"For the purposes of section 6 of this Act, goods are of acceptable quality if they

are as–

(a) Fit for all the purposes for which the goods of the type in question are commonly supplied; and

(b) Acceptable in appearance and finish; and

(c) Free from minor defects; and

(d) Safe; and

(e) Durable,-

as a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects, would regard as acceptable, having regard to –

(f) The nature of the goods:(g) The price (where relevant):

(h) Any statements made about the goods on any packaging or label on the goods:

(i) Any representation made about the goods by the supplier or the manufacturer:

(j) All other relevant circumstances of the supply of the goods."

Section 7(2) states that where any defects in goods have been specifically drawn to the consumer's attention, goods will not fail to comply with the Guarantee only by reason of the defects. Further, section 7(3) states that listing the defects in writing displayed with the goods will be deemed to be drawing the defects to the consumer's attention.

Lastly, section 7(4) says that abuse or misuse of the goods by the consumer will invalidate the Guarantee.

The Guarantee involves strict liability (Contact Energy Ltd v Jones [2009] 2 NZLR 830 (HC)). This means that a supplier or manufacturer can take all due care or not have reasonably avoided the adverse event, yet still breach the Guarantee.

Elements that make up "acceptable quality"

Section 7(1) lists five elements that make up "acceptable quality".

Fitness for purpose

Goods must be fit for all the purposes for which the goods are commonly supplied. So as long as the purpose is common, a consumer does not need to make the purpose known. Fitness for purpose is discussed in more detail below.

It is unclear whether an unusual, but not uncommon, purpose is covered by the Guarantee.[2]

Acceptable in appearance and finish

In Norton v Hervey Motors Ltd [1996] DCR 427 (DC), the Court accepted that with very complicated and complex machinery such as vehicles, unless a consumer is prepared to pay very large sums for vehicles of a very high standard, then the reasonable consumer must be taken to expect that there may well be some matters which will require remedy.

Free from minor defects

The specific inclusion of "free from minor defects" makes it clear that minor defects can render a good in breach of the Guarantee. However, this is subject to the reasonable consumer test for "acceptable quality" (discussed below). This means that the existence of minor defects does not necessarily mean the goods are in breach of the Guarantee (see, for example, Norton v Hervey Motors Ltd).

Safe

"Safe" does not mean absolutely free from risk (Contact Energy Ltd v Jones). This is because the reasonable consumer test applies. While this test is discussed further below, the reasonable consumer may find, having regard to a range of factors, an element of risk acceptable.

Durable

Durability is a context and product specific concept. This means that durability is linked closely to what is a reasonable time for the product to remain durable.[3] "Reasonable time" is defined in the CGA in relation to the right to reject good.

"Reasonable time" is defined in section 20(2), and has regard to:

"(a) The type of goods:

(b) The use to which a consumer is likely to put them:

(c) The length of time for which it is reasonable for them to be used:

(d) The amount of use for which it is reasonable for them to be put before the defect becomes apparent."

"Acceptable quality" v "merchantable quality"

The New Zealand Sale of Goods Act 1908 (SOGA) and the Trade Practices Act refer to goods being of "merchantable quality". What difference then is there between "acceptable quality" and "merchantable quality"? The difference revolves around fitness for purpose.

A closer look at fitness for purpose

It is necessary to look closer at fitness for purpose under "acceptable quality" and "merchantable quality".

There are two types of fitness for purpose under the CGA. The first is fitness for common purposes. This comes from section 7, as goods are of "acceptable quality" if "they are fit for all the purposes for which goods of the type in question are commonly supplied". The second is fitness for the individual consumer's particular purpose under section 8.

Fitness for common purpose does not require the consumer to inform the seller of the purpose for which the goods are going to be used. So as long as the purpose is common, a consumer does not need to make the purpose known.

The SOGA implies, in certain circumstances, a condition of merchantable quality (section 16(b)). Merchantable quality in New Zealand means that the goods are of:

"such a quality and in such a state and condition as to be saleable in the market, as being goods of that description, to buyers who are fully aware of their quality, state, and condition, and who are buying them for the ordinary purposes for which goods so described are bought in that market." (Taylor v Combined Buyers [1924] NZLR 627 (SC))

The difference between "merchantable" and "acceptable"

The difference between "merchantable" and "acceptable" quality is focussed on "fitness for purpose". The difference was emphasised by the Court of Appeal in Nesbit v Porter [2000] 2 NZLR 465 (CA):

"Goods are of merchantable quality if of use for any purpose for which the goods which complied with the description under which they were sold would normally be used; if fit for any such purpose they are regarded as sellable under that description … [G]oods are of acceptable quality only if fit for all purposes for which the goods of the type in question are commonly used and they meet the other standards referred to in s 7(1) … This test is quite dissimilar to the test in s 16(b) of the Sale of Goods Act." [emphasis in original]

The focus on fitness for all purposes means that the "acceptable quality" guarantee has a much wider coverage than "merchantable quality". It follows that the guarantee of "acceptable quality" is the consumer-friendly cousin of the implied condition of "merchantable quality".

The "reasonable consumer" test for "acceptable quality"

"Acceptable quality" is determined by the "reasonable consumer" test (section 7(1)). The test is an objective standard and a "construct by whose standards the Judge is required to evaluate the quality of the goods."[4]

The test is what a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects, would regard as acceptable. The reasonable consumer has regard to the factors listed in section 7(1):

"(f) The nature of the goods:

(g) The price (where relevant):

(h) Any statements made about the goods on any packaging or label on the goods:

(i) Any representation made about the goods by the supplier or the producer:

(j) All other relevant circumstances of the supply of the goods."

This means that while the test for "acceptable quality" is objective, it is applied to the particular goods and circumstances. It is therefore a context-specific test.

"Any representation made about the goods by the supplier"

In Cooper v Ashley & Johnson Motors Ltd [1997] DCR 170 (DC), the supplier made two representations that were relevant to the Guarantee. The District Court considered that the supplier's representation that the vehicle was "a good one" and that the relatively low odometer was correct "as far as the dealer was aware" strengthened the consumer's case.

"All other relevant circumstances"

In Norton v Hervey Motors Ltd, the District Court held that the reasonable consumer purchasing a new vehicle takes into account the existence of a manufacturer's warranty.

High-level principles

The High Court has recently said that because of the context-specific nature of the test, it is not possible to catalogue in abstract the things that the reasonable consumer must take into account, or the weight that must be assigned to any one of them (Contact Energy Ltd v Jones). However, some generic high-level principles do come out of the few "acceptable quality" cases that have proceeded to court.

The existence of defects does not, of itself, breach the Guarantee. In the decision In the Matter of the Motor Vehicle Dealers Act 1975,[5] a consumer sought a replacement for her new car. The car had a minor defect causing the engine to overheat. The manufacturer remedied the defect at a cost of $71.11. The Motor Vehicle Disputes Tribunal held that there was no breach of the Guarantee in relation to this minor defect, as it did not lead to further mechanical problems with the engine. A reasonable consumer would have regarded the vehicle as acceptable.

The High Court held in Contact Energy Ltd v Jones that:

  • the Guarantee is not designed to ensure continuous improvement in quality;
  • it does not impose minimum quality standards;
  • the reasonable consumer test has regard to the price and the nature of the goods; and
  • by linking quality expectations to price, the Guarantee contemplates that consumers may choose to buy bad goods cheaply.

As discussed above, a reasonable consumer may find a level of risk or defect broadly appropriate (Contact Energy Ltd v Jones). This is because acceptability is a fact-specific guarantee, dependant on the fitness for purpose and corresponding safety of the good.

Summarising these principles, each case involves a fact-specific inquiry. The reasonable consumer will determine acceptability taking into account a range of facts, with a focus on the nature, price, and purpose of the goods.

Summary

The CGA imposes a guarantee of "acceptable quality" on goods supplied to consumers. "Acceptable quality" means the goods must be fit for all purposes for which goods of that type are commonly supplied. Further, the goods must be free from defects, safe, and durable. Whether goods are of acceptable quality is determined by what a reasonable consumer would regard as acceptable. The reasonable consumer takes into account the nature of the goods, the price, and any statements or representations made by the supplier or manufacturer about the goods.

The guarantee of "acceptable quality" is a consumer friendly version of the implied condition of "merchantable quality". This is because of the wider coverage of "fitness for purpose".

Acceptable quality is a composite and context-specific attribute. This means that it is not possible to formulate a more specific test than set out in section 7.


[1] Thomas Gault (ed) Gault on Commercial Law (online looseleaf ed, Brookers) at [CG7.04].

[2] Ibid.

[3] Ibid at [CG 7.08].

[4] Contact Energy Limited v Jones at [85], quoting from Jewson Limited v Boyhan [2003] EWCA Civ 1030 at [78].

[5] In the Matter of the Motor Vehicle Dealers Act 1975 23/2/1999, decision WN7/99, MVD 199/98 (MVDT). This is a decision of the Motor Vehicles Disputes Tribunal. This Tribunal has jurisdiction over the CGA in the context of motor vehicles. The decisions of the Tribunal can be appealed to the District Court.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.