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Does your business manufacture, distribute or supply products to consumers? If so, you may find yourself in a difficult position where the consumer goods you make available are faulty. It is possible to limit your liability to a certain extent through express clauses in warranty documents and supply or distribution agreements. However, your business has certain statutory obligations to consumers that you cannot contractually exclude and you must comply with the Australian Consumer Law (ACL). This article explains when your business may be liable for product defects. 

What Is Product Liability?

Product liability refers to the legal responsibility borne by businesses who make products available to the public, where a defective or dangerous product:

  • is allowed to reach a consumer; and
  • causes injury, damage or loss.

Product liability affects businesses at every stage of the supply chain.

For example, it may be an issue for manufacturers, distributors, suppliers and retailers. 

Where Is a Manufacturer Liable for Product Defects?

In Australia, the Competition and Consumer Act 2010 (previously known as the Trade Practices Act 1974) protects consumers. Schedule 2 sets out the full text of the Australian Consumer Law (ACL). Consumer rights and guarantees apply regardless of whether the business providing the product has provided the consumer with a formal warranty. Generally, a manufacturer is liable where a product (whether a good or a service) does not meet Australian standards, meaning it:

  • is not of acceptable quality (for example, it breaks quickly);
  • does not match its description as advertised by the manufacturer, including additional promises made about performance, condition and quality;
  • has a ‘safety defect’; 
  • does not have spare parts (and spare parts and repairs are otherwise unavailable) for a reasonable period after supply; or
  • has led to a breach of an express warranty. 

Where Do Consumer Guarantees Not Apply?

Consumer guarantees under the ACL do not apply in a number of limited situations. For example, this includes where the consumer:

  • simply changed their mind;
  • misused the product in a way that caused the problem (or where the product was damaged after the goods were supplied and in circumstances outside the control of the manufacturer, such as during the delivery process); 
  • knew of or was made aware of the defects before they bought the product; or
  • was unclear about what they wanted (in the case of services).

I Am a Retailer or Supplier. When Am I Liable for Product Defects?

If your business retails or supplies products to consumers, but does not manufacture the products, there are still a wide range of circumstances under which you may still be liable for defects.

If you hold yourself out to be the manufacturer of the product or present yourself to the public as such (e.g. by allowing your branding to be applied to the goods or services in question), you may be liable for defects. Likewise, where you are importing goods into Australia, you may be liable where you breach the consumer guarantees below if the manufacturer does not have a place of business in Australia. 

Suppliers are liable where certain consumer guarantees are breached, including the guarantee that the goods will:

  • be of acceptable quality;
  • be fit for any purpose disclosed before sale;
  • match their description; and
  • match the sample or demonstration model.

Suppliers must also guarantee that the:

  • supplier will honour any express warranties;
  • consumers have title to the goods;
  • consumers have undisturbed possession of the goods; and
  • goods are not subject to any undisclosed securities.

Finally, a supplier may be held liable for defects where it is not possible to identify the manufacturer of the products. If a consumer approaches your business to provide the details of the manufacturer of a defective product, you have 30 days to provide this information. After this time elapses, you will be deemed to be the manufacturer and will be held liable as such. 

How Can I Protect My Business?

Regardless of where your business sits in a supply chain, there are a number of ways to limit your liability by reducing exposure to claims. Some of these ways are set out below.

Passing on risk in contracts

You should ensure that you minimise risk exposure through contractual arrangements with other parties in the supply chain where appropriate. For example, this may include a clause in your contracts where the other party agrees to indemnify your business against any product liability claims. 

Internal policies related to product reviews and quality assurance

Your business should have policies in place regarding product reviews and quality assurance. Doing so can help to minimise the risk of problems emerging with your products. You should implement and update policies from time to time and include regular product testing and reviews to ensure the products meet Australian standards. These policies should also include directions for prompt action where necessary. For example, you may need to initiate a product recall quickly.

Marketing and packaging

Your products should have clear directions on labelling and packaging, indicating proper use and potential dangers associated with improper use.

Product liability insurance

Many insurance companies offer product liability insurance as either a standalone product or part of a business pack. Subject to exclusions in any given policy, product liability insurance should protect your business against most product liability claims. 

Perform due diligence on your manufacturers

If you are a distributor, make sure that you are aware of who your manufacturers are and obtain Good Manufacturing Practice (GMP) certificates where appropriate. 

Maintain comprehensive records

Record-keeping is essential, as product issues may not arise until a significant amount of time has passed. In Australia, consumers must commence defective goods action or action for non-compliance with a consumer guarantee within three years of the date on which the consumer was made aware, or should have reasonably been made aware, that the product was defective.

Key Takeaways

Launching a business can come with risks, particularly where you are providing products to consumers. Therefore, it is important that you take every step to:

  • minimise the risk of product liability; and 
  • protect your business from such claims. 

LegalVision has an experienced team of lawyers that can assist you with product-specific regulatory and compliance advice, as well as drafting comprehensive manufacturer, distribution and supply agreements to limit liability. Contact LegalVision’s competition lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is the ACL?

In Australia, schedule 2 of the Competition and Consumer Act 2010 sets out the full text of the Australian Consumer Law (ACL). The ACL protects consumers of goods and services.

Do the consumer guarantees apply for a change of mind?

The consumer guarantees do not apply for a change of mind. They also do not apply where the consumer is responsible for, or was aware of, the damage or defect.

As a retailer, am I responsible for product defects?

As a supplier, you may be responsible for product defects. For example, this may be the case if you hold yourself out to be the manufacturer of the product or where you are importing goods into Australia.

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