Tuesday, 16th of January, 2018

Consumers, Money, and Debts

Australian Consumer Law

Acknowledgment

We would like to thank Dr Nicholas Seddon and the ACT Law Handbook for contributing this section on Contract Law.

Introduction to the ACL

Consumer transactions form a contract between a retailer and a purchaser. These relationships are governed by the Australian Consumer Law (ACL), located in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA) (formerly the Trade Practices Act (TPA)) and has been adopted in all States and Territories.

Some parts of the ACL came into effect on July 1 2010 and the rest, including State and Territory adoption, came into effect on 1 January 2011. The name of the TPA was changed on 1 January 2011 to the Competition and Consumer Act 2010.

Who is bound?

The ACL applies generally to persons but also applies to corporations under CCA section 131. The ACL binds each government only ‘in so far as it carries on a business’ (s2As14Australian Consumer Law (Tasmania) Act 2010 (Tas). Case law has shown that governments do not carry on a business in respect of almost all of their commercial activities (that is, principally procurement). The result is that each government is very substantially exempt from the ACL.

Consumer Guarantees - What you need to know

Minimum Standards for Retail Sales of Goods or Services

The Australian Consumer Law (ACL) contains consumer guarantees which are automatically incorporated into consumer contracts in addition to any other warranty a purchaser may have. These consumer guarantees are adaptations of what is found in the Sale of Goods Act 1896 (Tas) (SGA). If for one reason or another the ACL does not apply, then the same conditions and warranties will probably apply under the SGA. Important differences between the implied terms under the ACL and the SGA are:

  • the terms implied under the SGA apply to any goods purchases not just to consumer purchases;
  • the terms implied under the SGA can be excluded by express provision in the contract whereas this is not possible under the ACL (subject to one exception); and
  • the ACL covers services as well as goods.

The Sale of Goods Act is not covered here.

The first question to ask is: does a contract exist? Most transactions that consumers complete will amount to a contract, whether they are for a good (for example, a toaster) or a service (for example, dry-cleaning). If no contract exists no terms will be implied.

Second, only a party to the contract may rely on the implied terms for protection. Someone who receives something as a gift from the person who purchased the goods is usually not covered by the legislation. However, there is an important exception to this under the manufacturers' warranties provisions of the ACL which enables a consumer to sue a manufacturer directly (see Who is a consumer?).

The ACL implies these protections into contracts covered by the legislation. The ACL then provides very extensive remedy provisions which give the customer the right to replacement, repair or possibly rejection of the goods or services and recovery of the price.

In any consumer purchase it is very important to keep a record of the purchase. The sales docket is more important than the so-called 12-month warranty. The fact that a particular retailer supplied goods or services triggers the various protections under the ACL. It is therefore important to be able to prove where the goods or services were purchased.

The ACL provides that the supplier must provide proof of purchase where the price is $75 or more or, where the price is less than $75, must provide proof of purchase if requested to do so by the consumer (s100). Proof of purchase will usually be satisfied by:

  • a tax invoice;
  • a cash register receipt so long as it identifies the goods or services purchased;
  • a credit card or debit card statement;
  • a handwritten receipt;
  • a lay-by agreement;
  • a confirmation or receipt number provided for a telephone or internet transaction.

A consumer also has the right to demand an itemised bill for services (s101).

The 12-month warranty

It is important to note that these statutory, non-excludable guarantees override any ‘warranty’ provided by a retailer or manufacturer. The ubiquitous 12-month warranty provided with new goods gives the impression that a defect that appears more than 12 months after purchase cannot be the subject of a consumer’s complaint (it is ‘out of warranty’). This is not correct. The implied terms discussed below say nothing about the time that the terms last for. If, for example, a DVD player breaks down 15 months after purchase (assuming that it has been used normally), it is not fit for purpose or of merchantable quality. The consumer therefore has rights and the ‘12-month warranty’ is irrelevant. What is important in order to invoke the various protections provided by the ACL is to be able to prove who supplied the goods or services.

Some retailers will try to resist a consumer’s complaint about unsatisfactory goods by claiming that the consumer is out of warranty. The retailer should be told politely, but firmly, about the ACL. It is also misleading conduct for the retailer to use the 12-month warranty to resist a consumer complaint. The maximum penalty for this is $1.1 million (s151(1)(m)). The ACCC has responsibility to prosecute this kind of behaviour.

Extended Warranties

Extended warranties usually involve the customer being persuaded to purchase a longer warranty. These should be treated with caution because they may only provide the same protection as is already provided under the legislation. Further, they are usually outsourced, that is, the retailer does not take responsibility for the extended warranty and the customer finds he or she is dealing with a completely different company. The extended warranty terms should be examined closely. The fine print may provide the company with excuses not to meet any claim under the extended warranty.

The ACL section 29(1)(n) provides that a supplier of goods or services must not make a false or misleading representation concerning a requirement to pay for a contractual right that is wholly or partly equivalent to any condition, warranty, guarantee, right or remedy, including the consumer guarantees discussed here. This section is clearly aimed at extended warranties.

The ACL provides for the possibility of regulations being passed to prescribe the requirements for warranties against defects (that is, 12-month or extended warranties) (s102). If and when such regulations are passed, suppliers must comply with them (s103).

What Sorts of Contracts do the ACL Consumer Guarantees Apply to?

The ACL applies to contracts for the sale of goods (including a lease of goods) or for the supply of services by a supplier in the course of its business to a consumer. In short, this legislation applies to all retail consumer purchases. It also covers some business purchases.

What are the limitations of the ACL?

The ACL guarantees do not apply to the supply of gas, electricity and telecommunications services (s65(1)(b)).

The most important guarantees from the consumer’s perspective (acceptable quality and fitness for purpose) do not apply to auction sales.

What suppliers are bound?

The ACL applies to ‘persons’ which includes companies and unincorporated sole traders. The supply must be ‘in trade or commerce’ and so private sales are not covered.

Governments are bound by the ACL only in so far as they carry on a business. If a government body is selling either goods or services then it is almost certainly carrying on a business and so would be bound by the consumer guarantees.

Who is a consumer?

The ACL section 3 defines a consumer of goods or services as:

  • a person who purchases goods or services costing less than $40,000; or
  • in the case of goods or services costing more than $40,000, a person who purchases goods or services which are of a kind ordinarily acquired for personal, domestic or household use or consumption (for example, a car, a painting, a kit home; but not factory machinery, or elaborate electronic equipment for a business); or
  • a purchaser of a commercial road vehicle
  • so long as the person did not acquire goods, or hold himself or herself out as acquiring goods, for the purpose of re-supply or for the purpose of using them up or transforming them, in trade or commerce, in the course of a process of production or manufacture or of repairing or treating other goods or fixtures on land.

A commercial road vehicle means a vehicle or trailer acquired for use principally in the transport of goods on public roads.

The effect of this is that anyone or any business who acquires goods or services costing less than $40,000 will be a consumer provided that they did not acquire them for the purpose of reselling them (for example, a milk bar owner purchasing stock) or using them up in production or manufacture or repair (for example, a shoemaker purchasing leather for shoes). This means that business transactions under $40,000 are covered, for example, the purchase by a business of a computer for $25,000. If the price is less than $40,000 the goods or services do not have to be used for personal, domestic or household use of consumption to be covered by this legislation.

Although not free from doubt, the $40,000 limit applies to each item. If a business bought 5 computers for a total of $125,000 but each computer cost $25,000, then this would be a consumer purchase.

Section 3 deals with circumstances where goods or services are bought as part of a mixed supply (that is, along with other goods or services) and the particular price is not stated for the individual item in which case a deemed price is attributed to the item.

If the goods or services cost more than $40,000, then they must be of a kind that are bought for personal, domestic or household use or consumption for the implied guarantees to apply. A person who bought a large industrial lathe for personal use probably would not come within the definition of ‘consumer’ because the goods were not of a kind ordinarily acquired for personal, domestic or household use or consumption. On the other hand, a business that purchased very expensive furniture (over $40,000) probably would be protected.

The consumer includes a person who received goods as a gift from the purchaser of the goods (s266). This means that the remedies can be used by the gift recipient against the retailer.

Can the protection afforded by the ACL be excluded?

The protection provided by the ACL is dependent upon whether the sale is of:

  • goods or services ordinarily acquired for personal, domestic or household use; or
  • goods or services ordinarily acquired for other purposes (usually this will be in the course of business).

In the first situation, where the ACL implies terms into a contract, any term of the contract which attempts to exclude, restrict or modify the protections offered by the ACL is void and of no effect (s64). This covers nearly all situations where the consumer is a person buying goods for personal use.

Remember that the definition of ‘consumer’ includes goods or services which may be used for business purposes so long as the price is $40,000 or below. It is legitimate in a business sale of goods or services covered by the ACL for the seller to limit its liability to the cost of replacement or repair of goods or the re-supply of services (s64A). This must be done by express provision in the contract. Further, it must be fair and reasonable in the circumstances of the case for the supplier to rely on the express provision. The onus is on the purchaser to establish that it is not fair and reasonable. Some guidance on the factors to take into account in determining whether reliance on the limitation of liability clause is reasonable are set out in section 64A(4).

Under section 139A of the Competition and Consumer Act 2010 (Cth) it is possible for recreational service providers to exclude liability for death or personal injury except where death or injury was caused by reckless conduct. This section was added as an ill-considered response to the so-called ‘insurance crisis’. Recreational services means a sporting activity or a similar leisure-time pursuit; or any other activity that involves a significant degree of physical exertion or physical risk which is undertaken for the purposes of recreation, enjoyment or leisure.

What protection does the ACL provide?

Goods: statutory guarantees in consumer contracts

The principles of protection in relation to goods provided by the ACL are:

  • that the seller has good title to the goods the subject of the sale (s51);
  • that the buyer will have undisturbed possession (s52);
  • that the goods are free from any security, charge or encumbrance (s53);
  • that the goods are of acceptable quality unless bought at auction (s54);
  • that the goods are fit for the purpose for which they are purchased unless bought at auction (s55);
  • that the goods bought or hired on the strength of a description conform to that description unless bought at auction (s56);
  • that, where sale is by sample or demonstration model, the goods correspond with the sample or demonstration model unless bought at auction (s57);
  • a guarantee that the manufacturer of the goods will take reasonable action to ensure that facilities for the repair of the goods, and parts for the goods, are reasonably available for a reasonable period after the goods are supplied unless the goods were bought at auction (s58);
  • a guarantee that the manufacturer or supplier of the goods will comply with any express warranty given or made by the manufacturer or supplier in relation to the goods (s59).

What goods are covered by the ACL?

In the ACL, ‘goods’ has the meaning normally attributed to that word including second-hand goods, including used cars, and also includes items such as vehicles, animals and computer software (s2) but not, for the purpose of consumer guarantees, gas or electricity (s65). The definition of goods includes, but is not limited to:

  • ships, aircraft and other vehicles; and
  • animals, including fish; and
  • minerals, trees and crops, whether on, under or attached to land or not; and
  • computer software; and
  • second-hand goods; and
  • any component part of, or accessory to, goods. (s 2, ACL)

What if the seller does not have the right to sell goods?

It can happen in consumer transactions that the owner of the goods agrees to sell them (or agrees that at some future time to sell them, as occurs in hire-purchase transactions) but in fact does not have the right to do so, that is, does not have title to the goods.

Where another person has a right to the goods and the seller neglects to tell the buyer, the seller will be in breach of contract.

For example, this often occurs in the sale of second-hand motor cars, when it may turn out that the person selling, or purporting to sell, the car does not have the right to do so. When the true owner comes along to claim the car, the consumer will lose it. The ACL section 51 makes it a condition of all contracts of sale, or agreements to sell on hire purchase, that the person supplying the goods under the contract has the right to sell. This does not necessarily mean that the consumer will be able to retain the goods, but it does mean that if the supplier does not own the goods and as a result of this the consumer loses what has been bought, the consumer will be able to sue the supplier for any loss suffered as a result (usually the purchase price plus any other damage suffered).

Undisturbed possession

The ACL section 52 guarantees that the buyer will enjoy undisturbed possession of the goods. This would be so even if the goods were leased or bought on hire purchase and title remained in the supplier.

Free from any security, charge or encumbrance

The ACL section 53 guarantees that the goods are free from any security, charge or encumbrance unless the supplier has disclosed a security, charge or encumbrance or it has been created with the consumer’s consent.

Goods must be of acceptable quality (merchantable quality)

Where a person supplies goods to a consumer in the course of business, there is an implied condition that the goods supplied are of acceptable quality (s54). This means that the goods must be as:

(a) fit for all the purposes for which goods of that kind are commonly supplied; and
(b) acceptable in appearance and finish; and
(c) free from 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 of the goods), would regard as acceptable having regard to the following:

(a) the nature of the goods; and
(b) the price of the goods (if relevant); and
(c) any statements made about the goods on any packaging or label on the goods; and
(d) any representation made about the goods by the supplier or manufacturer of the goods; and
(e) any other relevant circumstances relating to the supply of the goods.

These criteria provide a flexible test that caters for different circumstances. Second-hand goods, for example, cannot be expected to be in the same condition as one would expect for brand new goods.

One question to ask is whether a reasonable person who wanted goods of that type would be prepared to accept the goods in that condition. It will not always be sufficient that the goods are fit to perform the purpose for which goods of that sort are normally used. For instance, if a consumer purchases a new car and the car arrives with scratched paintwork, then a reasonable person would not accept the car. The car is therefore not of acceptable quality, even though it is fit for the purpose for which cars are used.

The guarantee of acceptable quality will not apply in the following situations:

  • where defects in the goods have specifically been drawn to the consumer's attention before a contract is made; or
  • if the consumer examined the goods before the contract was made, and a reasonable examination ought to reveal that they were not of acceptable quality; or
  • the goods were bought at auction.

Goods must be fit for a particular purpose (unfit for purpose issues)

Where the seller is made aware by the consumer of the purpose for which goods are required or the seller represents that the goods are reasonably fit for a particular purpose, then the goods must be reasonably fit for that purpose (s55). This applies whether or not the goods are commonly supplied for that purpose. This guarantee does not apply where the consumer has not relied on the skill and judgment of the person selling the goods or where it would be unreasonable to do so. Nor does it apply if the goods are bought at auction.

For people purchasing goods from a seller in the course of the seller's business, the purchaser must show that:

  • the particular purpose for which the goods are required was made known to the supplier, either expressly or by implication, or the supplier volunteered that the goods were suitable for a particular purpose; and
  • the purpose was made known to the supplier in such a way as to show that the supplier’s skill and judgment was relied upon.

Although at first sight these requirements appear rather onerous, the courts have taken a liberal approach which is favourable to consumers. In the case of goods which only have one particular purpose, requirement (1) will be satisfied by merely placing an order for the goods.

In consumer cases, requirement (2) will be satisfied, for example, by the fact that the consumer went into the supplier’s shop. In effect the consumer is said to rely on the seller's skill in selecting the goods.

Sale by description (goods as described)

The ACL provides that where a person, in the course of a business, supplies goods to a consumer by description (other than at an auction) there is an implied condition that the goods correspond with the description (s56).

Many consumer transactions are by description, that is, the consumer does not actually see the goods being purchased. This may occur in two ways:

  • goods are ordered from a distance, for example, by telephone, without ever seeing them; or
  • more commonly, a consumer may, for instance, ask for a tin of fine-ground coffee, or select a tin labelled fine-ground coffee from a supermarket shelf.

Both of these are sales by description. In the latter case it can be argued that the consumer relies on the description on the label (compared with the situation where the tin is opened and the contents examined). If the tin does not contain fine-ground coffee then the consumer may take advantage of the protection offered by the ACL. Note that section 56(2) provides that supply of goods is not prevented from being supply by description merely because a consumer selects goods exposed for sale or hire.

If the sale is by reference to a sample as well as by description, then it is not sufficient that the goods correspond to the sample if they do not also correspond with the description (s56(3)).

Protections when goods are bought by sample

A few consumer transactions are of the type where the consumer buys by reference to a sample of the goods or a demonstration model. For example, a consumer may buy carpet by reference to a sample shown in a samples book. In this case, the ACL section 57 provides that where this is done in the course of the seller's business (other than by auction) it is a condition of the contract that

  • the bulk of the goods will correspond with the sample in quality;
  • the consumer will have a reasonable opportunity of comparing the bulk with the sample; and
  • the goods will be free from any defects rendering them unacceptable that would not be apparent on a reasonable examination of the sample.

In the example given, if the sample of the carpet shown to the consumer was a pure wool carpet and the bulk of the carpet delivered to the consumer turned out to be a blend of wool and synthetic, the consumer will be entitled to reject the carpet delivered.

It is most important that the consumer reject the goods as soon as the defect is discovered and preferably not accept the goods at all. If the goods are accepted, the right to terminate the contract may be lost, and the consumer will be forced to rely on a remedy for damages. This of course may not be satisfactory because the court will award damages on the basis of the difference between the price of, in this example, a wool carpet and the carpet of wool and synthetic material. A consumer who does not wish to accept a wool and synthetic carpet under any circumstances but nonetheless accepts delivery of the goods may have to accept the carpet and be content with what can be gained by way of damages.

Repairs and spare parts

Section 58 guarantees that the manufacturer will take reasonable action to ensure that facilities for the repair of the goods, and parts for the goods, are reasonably available. This guarantee is given by the retailer in the usual case. It is difficult to know what action can be taken against the retailer if this guarantee is not honoured, apart from suing the retailer for damages. An action for damages can also be brought against the manufacturer (s271(5)) but often this is not practical.

Express warranties

Under section 59 of the ACL any express warranties given by the retailer or the manufacturer must be honoured. This applies to, for example, the 12-month warranty. That must be honoured but it is in addition to the rights provided by the ACL. It is not a substitution for those rights.

The same applies to an extended warranty that is purchased by the consumer.

What remedies are available?

The remedies available under the legislation are much more generous than under the law of contract. A person complaining of misleading conduct may:

  • seek compensatory damages (s236);
  • seek an injunction (principally applicable to advertising cases) (ss232-235); or
  • seek various other remedies (a long list of options available to a court, including rescission of contract in whole or in part, modification of a contract and ‘such order or orders as (the court thinks appropriate’) (ss237 and 243), including: 
    infringement notices, substantiation notices, public warning notices, disqualification notices, non-party consumer redress.

It is not possible to claim damages in respect of misleading or deceptive conduct if the person misled suffered personal injuries or death (ss137C137D and 137E, CCA). This measure was introduced in the wake of the so-called insurance crisis after the collapse of HIH. There is no such limitation under the Australian Consumer Law 2010 (Tas).

Remedies against the retailer

The ACL sections 259-277, which came into effect on 1 January 2011, brought about very major changes to the remedies available to consumers when goods or services are unsatisfactory, that is, they do not conform to the consumer guarantees. The following remedies are available.

In respect of defective goods, the consumer may:

  • reject the goods for a major failure and obtain a refund;
  • ask for repair of the goods;
  • ask for replacement of the goods;
  • sue for damages.

In respect of defective services the consumer may:

  • ask for defective services to be remedied;
  • terminate the services contract if response is unsatisfactory;
  • claim damages.

An important concept is that of ‘major failure’ in respect of goods and services (s260 (goods) and s268 (services)). A major failure is where:

  • goods or services would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or
  • goods depart in one or more significant respects
    (i) if they were supplied by description—from that description; or
    (ii) if they were supplied by reference to a sample or demonstration model—from that sample or demonstration model; or
  • goods or services are substantially unfit for a purpose for which goods of the same kind are commonly supplied and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or
  • goods or services are unfit for a disclosed purpose that was made known to
    (i) the supplier of the goods; or
    (ii) a person by whom any prior negotiations or arrangements in relation to the acquisition of the goods were conducted or made;
    and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or
  • in the case of services
    (i) the services, and any product resulting from the services, are not of such a nature, or quality, state or condition, that they might reasonably be expected to achieve a result desired by the consumer that was made known to the supplier; and
    (ii) the services, and any of those products, cannot, easily and within a reasonable time, be remedied to achieve such a result; or
  • the goods or services are not of acceptable quality because they are unsafe.

Goods - rights to repair, replace, or reject and refund and damages

Where a defect in goods can be remedied and the defect is not a major failure (see above), the customer, or a person to whom the customer has given purchased goods (s266), can require the retailer to remedy the defect within a reasonable time (s259(2)) so long as the defect was not due to some independent event that occurred after the goods left the retailer’s control. This means that the retailer must (s261):

  • repair the goods;
  • replace the goods; or
  • refund the price.

If the retailer refuses, or fails to respond within a reasonable time, the consumer may (s259(2)):

  • have the goods repaired elsewhere and recover the cost from the retailer; or
  • reject the goods.

If the defect cannot be remedied or the defect is a major failure, the customer, or a person to whom the customer has given purchased goods (s266), can either reject the goods or claim damages measured by the difference between the price paid and the value of the defective goods (s259(3)).

It is also possible for the consumer to sue the retailer for damages for any consequential losses incurred because of the defective goods (for example, if a defective toaster caused a fire) (s259(4)). However, because of the definition of ‘consumer’, business purchases under $40,000 are covered and it is permitted under section 64A for a business to limit its liability to the cost of replacement or repair in respect of goods purchased for business and not domestic purposes.

The consumer may take action under against the retailer whether or not the goods are in their original packaging (s259(7)).

Whenever goods are replaced, the same consumer guarantees apply to the replacement goods (s264).

Rejection of goods

The consumer may reject the goods if they have a major failure, they cannot be repaired or the retailer has not responded by offering repair or replacement.

To do so, the consumer must return the goods explaining why they are being rejected (s259(3)(a) and s263(2)  ACL) or must notify the retailer to come and collect them if the goods are not transportable (s263(2)(b)). The retailer must then refund the price of the goods or replace them (s263(4)). The retailer cannot require the consumer to buy other goods in lieu of a refund (s263(5)).

Defective goods cannot be rejected (s262) if:
(a) the rejection period (see below) for the goods has ended; or
(b) the goods have been lost, destroyed or disposed of by the consumer; or
(c) the goods were damaged after being delivered to the consumer for reasons not related to their state or condition at the time of supply; or
(d) the goods have been attached to, or incorporated in, any real or personal property and they cannot be detached or isolated without damaging them.

The rejection period is the period within which it would be reasonable to discover the defect having regard to:
(a) the type of goods; and
(b) the use to which a consumer is likely to put them; and
(c) the length of time for which it is reasonable for them to be used; and
(d) the amount of use to which it is reasonable for them to be put before such a defect becomes apparent.

If goods are rejected and a refund is paid, then any service contract that goes with the goods can be terminated (s265). The customer should notify the service provider if that party is a separate entity from the retailer. The customer is then entitled to a refund representing the remainder of the unused services.

Services - remedies

If the defective services can be remedied and the defect does not constitute a major failure, the customer can require the service provider to remedy the failure (s267(2)(a)). If the service provider fails to respond or respond within a reasonable time, the customer can have the defective services remedied by another service provider and recover the cost from the original service provider (s267(2)(b(i)) or terminate the service contract (s267(2)(b)(ii)).

If the defective services cannot be remedied or they constituted a major failure, the customer can terminate the services contract or recover damages measured by the difference between the price paid and the value of the defective services (s267(3)). The customer can also recover damages for any consequential losses, for example, a fire caused by defective installation of roof bats (s267(4)).

To terminate the contract the customer should, so far as possible, notify the service provider. Once terminated, the customer is entitled to a refund of the price for any unused services (s269(3)).

If a services contract is terminated any associated contract for goods can be terminated also. The goods must be returned to the supplier (or, if too difficult to transport, the supplier should be notified to come and collect them) and a refund must be paid by the supplier (s270).

Remedies against the manufacturer

Minimum standards for goods are enforceable against manufacturers. The ACL provides a right of action to a ‘person affected’ (which means the purchaser or a person who has received the goods as a gift) against a manufacturer who supplies faulty products, that is, goods that are not of acceptable quality, do not conform to a description, do not have spare parts or repair facilities or are in breach of an express manufacturer’s warranty (s271). Under the law of contract the purchaser has no rights directly against a manufacturer because there is no contract with the manufacturer. The legislation provides a statutory right to enforce minimum standards of quality against the manufacturer.

‘Manufacturer’ is extensively defined in section 7 and includes an importer and a supplier whose brand appears on the goods.

The person affected can seek damages against the manufacturer (ss271-2) or, if the manufacturer has given an express warranty (usually a 12-month warranty), require the manufacturer to replace or repair the goods. If this does not happen, then the person can sue for damages for breach of the express warranty. The damages claimable include the cost of returning the goods to the manufacturer. The right to damages may be sought whether or not the goods are in their original packaging (s271(7)).

When goods have been purchased for business purposes, the manufacturer’s liability to pay damages to the business consumer is not limited in the way that the retailer may be able to limit its damages, namely, to the cost of replacement or repair.

A claim for damages must be brought within three years of the date on which the defect became obvious or should have been detected (s273). Note this is not within three years of purchase.

Any attempt by the manufacturer to exclude these provisions is void (s276).

If a retailer has to incur expense to meet a claim, the retailer has a right of indemnity against the manufacturer (s274). If the indemnity claim relates to goods not of a kind ordinarily acquired for personal, domestic or household use or consumption, the manufacturer’s liability to the retailer is limited to the cost of replacement or repair of the goods unless such limitation of liability would not be fair or reasonable in the circumstances (s276A).

A separate Part of the ACL provides rights against a manufacturer in respect of dangerous goods that cause injury, death or property damage.

The right to claim against a manufacturer is usually not very useful because the manufacturer may not be close to hand whereas the retailer will usually be in the locality. So it is usually simpler to complain of faulty goods or services to the company that supplied them.

Rights against Manufacturers in respect of Dangerous Goods (product liability)

Part 3-5 (ss138-150) of the ACL deals with liability of manufacturers and importers for goods which have a safety defect that causes injury. In contrast to the consumer guarantees discussed above, Part 3-5 is about dangerous goods rather than goods that do not perform properly. Section 9 defines goods as having a safety defect if their safety is not such as persons generally are entitled to expect, having regard to such matters as their marketing, packaging, price, instructions that come with the goods and their normal use.

Who can claim?

An individual who has suffered personal injuries (s138) or a person dependant on the injured person (s139) can claim against a manufacturer (which includes an importer) for damages. In addition if goods are defective and cause damage to a person’s goods (s140) or real property (s141) an action for damages can be brought. If a person dies as a result of injuries caused by defective goods, the cause of action survives for the benefit of his or her estate under State and Territory legislation (s145).

If the injuries are covered by worker’s compensation, then no liability arises under these provisions (s146).

Unknown manufacturer

If the manufacturer is unknown, the consumer can require the retailer to provide the name of the manufacturer. If the retailer fails to do this, then the retailer is taken to be the manufacturer (s147).

Defences

The manufacturer may defend a claim in the following ways (s142):

  • the defect did not exist at the time of supply by the manufacturer;
  • the defect existed only because there was compliance with a mandatory standard for the goods;
  • the state of scientific or technical knowledge at the time when they were supplied by their manufacturer was not such as to enable the defect to be discovered;
  • the goods were incorporated as part of other goods and those other goods were defective.

If the reason why the goods were defective was because of compliance with a Commonwealth mandatory standard, the Commonwealth can be made liable for damages (s148).

Damages may be reduced to the extent that the injured party was at fault in failing to safeguard his or her own safety (s137ACCA).

Time limits

An action must be brought within three years of the plaintiff becoming aware, or ought reasonably to have become aware, of the alleged loss, the defect and the identity of the person who manufactured the goods (s143(1)). A claim cannot be brought more than 10 years after the supply by the manufacturer of the goods (s143(2)).

No exclusion

Any attempt to exclude or modify the operation of Part 3-5 is void (s150).

Services

What services are covered by the ACL?

Services are widely defined in section 2 of the ACL and include most things normally thought of as services and include contracts for work (but not employment), including professional work, provision of recreational and amusement facilities, a contract between banker and customer and a contract for the lending of money.

Specifically excluded are services involving the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored and insurance (s63).

What protection is offered in relation to services?

In every contract for the supply of services in the course of a business there will be an implied warranty that the services will be rendered with due skill and care (s60).

When a consumer expressly or by implication makes known to the service provider any particular purpose for which the services are required, or the result that is desired to be achieved, there is an implied guarantee that the services supplied under the contract, and any product resulting from the services, will be reasonably fit for that purposes (s61). However, where the circumstances show that the consumer does not rely on the supplier’s skill or judgment, or it is unreasonable to do so, this term does not apply (s61(3)). Nor does this guarantee apply in respect of services of a professional nature by a qualified architect or engineer (s61(4)). If the time for delivery of the services is not expressly fixed, then the service provider must supply the services within a reasonable time (s62).

Misleading or Deceptive Conduct under the ACL

The ACL section 18(1) (formerly TPA s52(1)) provides that ‘A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.’ In addition to applying to persons generally, this section applies as a Commonwealth law to the conduct of corporations (s131, CCA).

The section merely imposes a standard on the market place. Remedies for misleading conduct are found elsewhere in the legislation and include damages, injunction, rescission of contract and other measures. This section has had a profound effect on Australian commerce. It has generated a vast case law.

Although section 18 appears in the Australian Consumer Law, the section is not limited to consumer transactions or dealings. Many of the cases on misleading conduct are business-to-business cases.

In addition it is a very useful law for consumers to use when an over-enthusiastic sales person has persuaded the consumer to buy with statements that turn out not to be correct. The remedies available for misleading conduct are in addition to, and independent of, the remedies available for breach of consumer guarantees.

The concepts of misleading or deceptive conduct have been taken at face value by the courts. ‘Deceptive’ requires an intention to deceive (fraud) and so is of little relevance because proving fraud is difficult. But ‘misleading’ requires no intention or particular state of mind. In fact the prohibition of misleading conduct imposes a strict liability not to lead another into error in commercial and consumer dealings. Case law has established that an innocent (non-fraudulent and non-negligent) statement may generate liability.

It is also possible to be liable for what was not said if the failure to speak up was in context misleading. This usually arises when a person has made a statement but fails to qualify it sufficiently.

The impact of section 18 (and its former manifestation s52, TPA) has been very wide. False advertising is caught by this legislation and it is possible for anyone to put a stop to a misleading advertisement, but this is usually left to the ACCC or sometimes a rival trader. This treatment focuses on the contract-related effect of the legislation, that is, usually misleading conduct in the lead-up to a contract or during the running of the contract.

The courts have been wary about allowing statutory misleading conduct in effect to displace the law of contract. Consequently it has been held that making a promise and then later not keeping it is not misleading conduct unless the promise was not genuinely made in the first place (that is, it was fraudulent which is difficult to prove). Even so, some types of promises, for example about the performance or capability of a product, have generated liability under this legislation.

In trade or commerce

The allegedly misleading conduct must occur in trade or commerce. This has been interpreted very broadly by the courts and covers any kind of commercial activity, including the dealings before a contract is made. It is easier to state where the legislation does not apply than to discuss the huge number of case where it does apply. It does not apply to:

  • private, one-off sales, for example, the sale of a car after having advertised it in The Mercury;
  • internal communications within an organisation, such as a company or government department;
  • regulatory activity by government bodies;
  • provision of information by government in a non-commercial context, for example, information about pension rights; or
  • political statements.

The conduct of tenders by government is in trade or commerce as are ordinary procurement activities but governments are immune unless they are carrying on a business. Procurement is not carrying on a business.

Strict liability

Mention has been made already of the strict liability imposed as a result of the word ‘misleading’ (but not ‘deceptive’ which requires a guilty mind). This is one of the most remarkable things about the legislation. It is not to the point for a person accused of misleading conduct to say that he or she did not know that the information was incorrect or that he or she took all due care when preparing the information. The only question is: was it misleading? Did it lead the other party into error? An innocent person can be found to have engaged in misleading conduct.

The strict liability principle in relation to misleading conduct has two possible exceptions:

  • If the misleading conduct consists of making a statement about the future, the person making the statement can defend by proving that he or she had reasonable grounds for believing that the prediction was correct (s4, ACL);
  • A person who acts as a ‘mere conduit’ for information that turns out to be incorrect can defend an action based on misleading conduct. It must be clear that the provider of the information is not in any way responsible for it and is just passing it on for what it is worth.

Contributory fault

If the person complaining of misleading conduct was in part to blame for the loss or damage suffered then, under the Commonwealth CCA, damages can be reduced (s137B, CCA). Note that this section is not in the ACL itself and so State or Territory adoption of the ACL does not adopt this provision. The State and Territory Fair Trading Acts have no such provision which means, according to High Court authority that a person who engaged in misleading conduct must bear the full loss even though the misled party was partly to blame for some of the loss suffered. The misled party should sue under the State or Territory Fair Trading Act if there is a chance that damages could be reduced. However, if the defendant is a corporation, it is bound by the Commonwealth CCA and so reduction of damages for contributory fault can apply.

No exclusion

It is not possible to draft a clause in a contract that effectively removes potential liability for misleading conduct. There have been many attempts and almost universal failure. This is not because there is any section in the legislation which prohibits contracting out, as is common in other legislation discussed in this chapter. Instead, the courts take the view that parliament has set a standard of conduct by legislation and it is not possible to contract out of that. So long as a person has been misled in trade or commerce, no contractual device can remove this fact. This applies no matter what form the clause takes.

However, it is possible to qualify the information so as to make it not misleading if it turns out to be wrong. The High Court held that an inaccurate survey diagram, included in a real estate agent's brochure for an expensive house, was not misleading because of a disclaimer in the brochure that stated that information provided may not be accurate and that potential buyers should check for themselves. Note that this was a disclaimer in the brochure which contained the misleading information. It is still true after this decision that an exclusion clause buried in the fine print of the contract will not be effective.

Time limit

An action based on misleading conduct must be brought within 6 years of the accrual of the cause of action (ss 236(2) and 237(3)).

Unconscionable Conduct under the ACL

Unconscionable conduct is the subject of provisions in the ACL.

There are three different types of unconscionable conduct under the ACL:

  • unconscionable conduct under the ‘unwritten law’ (s20);
  • unconscionable conduct affecting consumers (s21); and
  • unconscionable conduct affecting small business (s22).

Unconscionable conduct under the unwritten law

Section 20 of the ACL states that a person (which includes a corporation) must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law from time to time. The purpose of this section is principally to widen the range of remedies available to the victim of unconscionable dealing. It also enables the ACCC to investigate unconscionable conduct and, if necessary, bring legal action on behalf of the person who has been treated unconscionably.

Section 20 appears to refer to the doctrine of unconscionable dealing as it has been interpreted in case law. However, the words are perfectly general and the courts have not yet settled on what constitutes unconscionable conduct under ‘the unwritten law’ and it may go beyond the doctrine of unconscionable dealing to include other equitable doctrines (for example, equitable estoppel).

Unconscionable conduct affecting consumers

The ACL section 21 provides that a person (which includes a corporation) must not, in trade or commerce, in connection with the supply, or possible supply of goods or services to a person, engage in conduct that is, in all the circumstances, unconscionable.

This provision protects ‘persons’ but the general definition of ‘consumer’ in section 3 in connection with consumer guarantees does not apply. Instead the protection provided by section 21 is only available in respect of goods or services ‘of a kind ordinarily acquired for personal, domestic or household use or consumption’ (s21(5)). The significance of this is that the $40,000 limit does not apply. The effect of that limit was that business purchases under $40,000 were deemed to be consumer purchases. Under section 21 there is no monetary limit but the goods or services must be of a kind ordinarily acquired for personal, domestic or household use or consumption. This would cover some business purchases (for example a microwave for the staff kitchen). Other business purchases or sales are covered by section 22.

Considerations to be taken into account

Section 21(2) of the ACL provides some guidance as to what amounts to unconscionable conduct. In other words, the meaning of unconscionable conduct is not left to the general law (as in s20 . The subsection lists a number of considerations to which the court may have regard. In brief, they are:

a) the respective bargaining strengths of the parties;
b) whether the consumer was required to comply with conditions not reasonably necessary for the protection of the other party;
c) whether the consumer understood documents relating to the transaction;
d) whether any undue influence or unfair tactics were used against the consumer; and
e) the price and circumstances under which the consumer could have acquired the goods or services from a third party.

These factors are only a guide and the list is not exhaustive. Conduct may be considered to be unconscionable where there has been serious misconduct or unfairness.

Unconscionability requires that the party alleged to have acted unconscionably was aware of the other party's vulnerability and then took advantage of that vulnerability by proceeding with a transaction. How does this apply to a corporation whose various employees may be dealing with a customer? In ACCC v Radio Rentals Ltd (2005) it was held that it is not possible to aggregate the dealings of various employees of a corporation which together could be seen as exploitative but where each employee was unaware of the disability of the customer and had no reason to know of it. In other words, it is not possible to build a case of unconscionable conduct against a corporation by notionally aggregating the states of mind of its various employees.

As with misleading or deceptive conduct, the prohibition applies to any conduct, not just conduct at the time of entering into a contract.

A clause in a contract can also be declared unconscionable, even if there was no unconscionable conduct in the way the contract was signed. For example the Victorian Supreme Court has held that a clause in the fine print of a contract that created an onerous obligation was unconscionable.

However, the majority of the case law to date has dealt with procedural unfairness, that is, in relation to matters leading up to the formation of a contract, rather than with the substantive unfairness of a contract itself.

Unconscionable conduct affecting small business

ACL section 22 prohibits misleading conduct affecting small business. This is not, however, apparent from the section itself which makes no mention of small business. Section 22 provides:

(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to another person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from another person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.

 

At the time when this section (formerly s 51AC of the TPA) was introduced into parliament, it was said that it was designed to protect small business, such as franchisees or small shopkeepers in large shopping malls when dealing with big business. This is done somewhat crudely by limiting the ‘victims’ of unconscionable conduct: they must not be listed public companies. Other than that, there is no guidance as to its intended application to small business transactions.

Subsections 22(2) and (3)  like section 21(2)  include a list of factors that may amount to unconscionable conduct where the small business is either a consumer or a supplier of goods or services. The list is somewhat more extensive than that in section 21. In addition to the factors listed above in connection with sections 21 and 22 includes:

  • the extent to which the supplier's conduct towards the business consumer was consistent with the supplier's conduct in similar transactions between the supplier and other like business consumers;
  • the requirements of any applicable industry code (for example, the code applying to franchise contracts);
  • the extent to which the supplier unreasonably failed to disclose to the business consumer:
  • any intended conduct of the supplier that might affect the interests of the business consumer; and
  • any risks to the business consumer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer);
  • the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer;
  • whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the business consumer for the supply of the goods or services; and
  • the extent to which the supplier and the business consumer acted in good faith.

As with section 21, these factors are merely guides and are not definitive of what amounts to unconscionable conduct.

Time limit

An action based on unconscionable conduct must be brought within 6 years of the accrual of the cause of action (ss 236(2) and 237(3)).

Unfair Contract Terms

The ACL includes a new unfair contract terms part (Part 2-3) under which the terms of standard form contracts can be challenged as unfair. A successful challenge results in the term being declared void. In addition, if a court declares a term or terms to be unfair under section 250 additional remedies are available for a consumer who has suffered loss as a result of the declared term being used.

It will be seen below that the path to making a successful challenge to a contract term involves multiple concepts. If one of these is not established, then the challenge will fail. It will accordingly be very difficult for an individual to mount a successful case, particularly as the other side will probably be a well-advised corporation. This part of the ACL is not consumer friendly and would usually require the assistance of lawyers.

Standard form consumer contracts

Part 2-3 applies to consumer contracts which are standard form contracts (s23(1)), A consumer contract is a contract:

  • where the consumer is an individual; and
  • goods, services or an interest in land are acquired wholly or predominantly for personal, domestic or household use or consumption.

A contract is presumed to be a standard form contract unless the supplier adduces evidence to the contrary (s27(1)). If a court has to decide whether a contract is a standard form contract, it must consider (s27(2)):

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract;
  • whether the terms of the contract (other than the terms referred to in section 26(1) take into account the specific characteristics of another party or the particular transaction.

Meaning of ‘unfair’

A term of a standard form consumer contract is unfair (s24(1)) if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

It is presumed that a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term unless that party proves otherwise (s24(4)).

In deciding whether a term is unfair a court may consider any matters that are relevant but must take into account (s24(2)):

  • the extent to which the term is transparent; and
  • the contract as a whole.
  • The test of whether a term is transparent (s24(3)) is whether the term is:
  • expressed in reasonably plain language; and
  • legible; and
  • presented clearly; and
  • readily available to any party affected by the term.

In addition to these criteria there is a ‘grey list’ that is similar in purpose to the lists of what could constitute unconscionable conduct under sections 21 and 22  that is, the examples are guides but not definitive of what would be held to be unfair.

Remedies

If a court decides that a term is unfair the term is void (s23(1)). So far as possible the rest of the contract should continue to operate (s23(2)).

Voidness is the only result of a successful challenge to a term of a standard form contract. There is no right to damages or other remedies following a challenge.

It is possible for a court to make a declaration that a particular term of a standard from agreement is unfair under section 250. Presumably this would usually only be done at the behest of a regulatory body such as the ACCC. Once a section 250 declaration has been made, further remedies are available. On application by a person who has suffered loss or damage or on the application of the regulator, a court can grant an injunction (s232(3)) or make such orders as the court thinks fit (s237(1)) and can, on application by the regulator, also make orders in favour of non-party consumers who have been affected by the declared unfair term (s239).

Other unfair practices under the ACL

Unsolicited Supplies

There are also provisions dealing with unsolicited supplies. They provide for:

  • prohibition of sending unsolicited credit or debit cards (s39);
  • prohibition on asserting a right to payment for unsolicited goods or services or for making an entry in a directory (ss40 and 43);
  • regulation of the rights of recipients of unsolicited goods (s41) or services (s42);

Pyramid Selling

The ACL section 44 prohibits a person from participation in, or inducing another to participate in, a pyramid selling scheme. These provisions are quite detailed because it is necessary to differentiate between legitimate promotional schemes and prohibited pyramid selling.

A pyramid selling scheme is defined as a scheme with both the following characteristics:

  • to take part in the scheme, some or all new participants must make a payment (a participation payment ) to another participant or participants in the scheme; and
  • the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled to a payment (a recruitment payment) in relation to the introduction to the scheme of further new participants.

Pricing

The Australian Consumer Law deals with various pricing practices. It is prohibited for a person to display multiple prices for goods and not be prepared to sell for the lowest displayed price (s47). It is also required that a single price be displayed in certain circumstances (s48).

Referral selling

Referral selling is prohibited under section 49  Referral selling is where a customer is told that he or she will receive a rebate, commission or other benefit in return for:

  • giving the person the names of prospective customers; or
  • otherwise assisting the person to supply goods or services to other consumers

if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.

Harassment and coercion

Under ACL section 50 a person must not use physical force, or undue harassment or coercion, in connection with:

  • the supply or possible supply of goods or services; or
  • the payment for goods or services; or
  • the sale or grant, or the possible sale or grant, of an interest in land; or
  • the payment for an interest in land.

Unsolicited Consumer Agreements (Door-to-Door Sales and Similar Practices)

Elaborate provisions of the Australian Consumer Law (Part 3-2 Division 2) regulate the practice of door-to-door or telephone selling – called an ‘unsolicited consumer agreement’. These provisions cannot be modified or excluded by contract (s89) nor is a consumer competent to waive rights provided by this legislation (s90). Breaches of these provisions constitute offences under ACL Part 4-2 Division 2.

The legislation deals with the possibility that either the consumer or the supplier may assign its rights under an unsolicited consumer agreement in which case the agreement can be enforced by, or against, the assignee (s91). If goods or services are bought for a third party then that third party has the same rights as the original purchaser (s92).

Definition of unsolicited consumer agreement

An agreement is an unsolicited consumer agreement (s69) if:

  • it is for the supply, in trade or commerce, of goods or services to a consumer (that is, as defined for the purpose of consumer guarantees; and
  • it is made as a result of negotiations between a dealer and the consumer in each other’s presence at a place other than the business or trade premises of the supplier of the goods or services; or by telephone whether or not they are the only negotiations that precede the making of the agreement; and
  • the consumer did not invite the dealer to come to that place, or to make a telephone call, for the purposes of entering into negotiations relating to the supply of those goods or services (whether or not the consumer made such an invitation in relation to a different supply); and
  • the total price paid or payable by the consumer under the agreement is not ascertainable at the time the agreement is made; or if it is ascertainable at that time—is more than $100 or such other amount prescribed by the regulations.

‘Dealer’ is defined in section 71 to mean a person who either enters into negotiations or telephones for the purpose of making a sale. There is a presumption under section 70 that the agreement is an unsolicited consumer agreement if one party asserts that it is and the other party does not prove otherwise.

Negotiating an unsolicited consumer agreement

Sections 73-77 specify certain requirements for the negotiating process.

  • A dealer must not without prior agreement call on a person to negotiate an unsolicited consumer agreement on Sundays or public holidays or before 9.00am or after 6.00pm (5.00 pm on Saturdays) on other days (s73);
  • The dealer must disclose his or her purpose, tell the customer that the dealer will leave on request and provide any prescribed details about the dealer specified in the Regulations (s74);
  • The dealer must leave the premises on request by the customer and must not attempt to contact the customer in the next 30 days (s75);
  • The dealer must tell the customer about the cooling off period before any sale is made and this must be confirmed in writing (whether negotiations are face to face or by telephone) (s76). The form of writing may be the subject of prescription by Regulation.
  • If a dealer acting for the potential supplier other than the dealer breaches these requirements, the supplier is also in breach (s77).

Requirements for unsolicited consumer agreements

Sections 78-81 set out the requirements for securing the sale.

The dealer must provide a copy of the signed written agreement to the customer immediately with a face-to-face sale and within 5 business days (or such longer period as has been agreed) in the case of a telephone agreement. The agreement can be delivered by post, personally or by email if the customer has consented (s78).

Section 79 provides that the agreement itself:

  • must set out in full all the terms of the agreement, including 
    (i) the total consideration to be paid or provided by the consumer under the agreement or,
    (ii) if the total consideration is not ascertainable at the time the agreement is made, the way in which it is to be calculated; and any postal or delivery charges to be paid by the consumer;
  • its front page must include
    (i) a notice that conspicuously and prominently informs the consumer of the consumer’s right to terminate the agreement; and 
    (ii) conspicuously and prominently sets out any other information prescribed by the regulations;
    (iii) and complies with any other requirements prescribed by the regulations;
  • it must be accompanied by a notice that:
    (i) may be used by the consumer to terminate the agreement; and
    (ii) complies with any requirements prescribed by the regulations;
  • it must conspicuously and prominently set out in full:
    (i) the supplier’s name; and
    (ii) if the supplier has an ABN—the supplier’s ABN; and
    (iii) if the supplier does not have an ABN but has an ACN—the supplier’s ACN; and
    (iv) the supplier’s business address (not being a post box) or, if the supplier does not have a business address, the supplier’s residential address; and
    (v) if the supplier has an email address—the supplier’s email address; and
    (vi) if the supplier has a fax number—the supplier’s fax number;
  • it must be printed clearly or typewritten (apart from any amendments to the printed or typewritten form, which may be handwritten);
  • it must be transparent.

Section 80 provides that if the dealer is acting for a supplier in a fact-to-face sale then the dealer’s details must be given to the customer.

Any amendments to the written document must be signed by both parties (s81).

Terminating unsolicited consumer agreements (‘cooling off period’)

The customer has the right under section 82 to terminate, verbally or in writing (no formalities are specified), for no reason (often called a ‘cooling off period’). The time within which this right may be exercised varies but in the ordinary case it is 10 business days from signing in the case of a face-to-face sale or 10 business days from delivery of the written agreement in the case of a telephone sale.

The cooling off period is 3 months if the dealer has contravened section 73 (permitted hours for negotiating an unsolicited consumer agreement), section 74 (disclosing purpose and identity) or section 75 (ceasing to negotiate on request).

The cooling off period is 6 months if the dealer has contravened section 76 (informing consumer of termination period), any of the requirements set out above or section 86 (prohibition on supplying for 10 business days).

The effect of termination is that the contract is taken to have been rescinded by mutual consent and any ‘related contract or instrument’ is void (s83). A ‘related contract or instrument’ includes a guarantee, indemnity or mortgage/charge taken by the supplier but does not include a tied continuing credit contract or linked credit provider arrangement within the meaning of sections 127(2) or (3) of the Schedule to the National Consumer Credit Protection Act 2009).

The customer can terminate even if the goods or services have been partly or wholly consumed or used (s83(3)(b)). This is justified by the prohibition in section 86 on supplying the goods or services or receiving payment for them for 10 business days after contract signing or delivery in the case of a telephone contract. In other words there is a cooling off period on performance of the contract as well.

Once termination is effected, the supplier must refund any money paid (ss84 and 87) and the customer must return any goods not consumed or notify the supplier where they can be collected (s85). If the supplier fails to collect them within 30 days the goods become the property of the consumer. The customer may be liable to compensate the supplier for damage to goods due to lack of care by the customer but not for fair wear and tear. The customer may also be liable to pay for any service delivered after the 10-day cooling off period.

The supplier must not attempt to enforce a terminated contract nor provide the customer’s name as a defaulter or debtor to a credit agency (s88).

Lay-By Agreements under the ACL

Lay-by agreements are regulated under Part 3-2 Division 3 of the ACL. Breaches of these provisions constitute offences under ACL Part 4-2 Division 3.

What is a lay-by agreement?

A lay-by agreement is an agreement between a supplier of consumer goods and a consumer for the supply, in trade or commerce, of the consumer goods on terms (whether express or implied) which provide that:

  • the goods will not be delivered to the consumer until the total price of the goods has been paid; and
  • the price of the goods is to be paid by 3 or more instalments; or if the agreement specifies that it is a lay-by agreement - 2 or more instalments.

Both ‘consumer goods’ and ‘consumer’ are defined in section 2. ‘Consumer’ is the same definition as for consumer guarantees and ‘consumer goods’ are defined to mean goods that are intended to be used, or are of a kind likely to be used, for personal, domestic or household use or consumption.

The seller’s obligations

The seller must provide a written copy of the agreement to the customer and must ensure that the agreement is transparent (s96(1) and (2)). Any deposit paid by the consumer must be treated as an instalment (s96(4)).

Consumer’s right to terminate

The consumer may terminate the lay-by agreement at any time before delivery of the goods (s97). The supplier can charge a termination charge if the consumer terminates so long as the supplier was not in breach, the agreement provided for the termination charge and the charge reflected the reasonable costs to the supplier of the consumer terminating the agreement. The supplier must otherwise return all payments (s99).

Supplier’s right to terminate

If the consumer is in breach of the agreement the supplier can terminate it in which case the payments made by the consumer must be returned (ss98 and 99). It appears that the supplier cannot charge a termination charge in this circumstance because section 97(2) only allows a termination charge if the consumer terminates the agreement.

The supplier can also terminate if the supplier ceases business or the goods the subject of the agreement are no longer available.

Other Consumer Issues

Debt Collectors

Debt collection is a necessary business activity, as creditors and collectors are entitled to collect payment for debts that consumers are legally bound to pay. There are some guidelines for these activities. See ‘Debts’ for more information.

The ACCC asserts that debtors should be treated fairly, with respect and courtesy. The communications with debtors should be reasonable and occur only to the extent necessary. Debt collectors can contact a debtor for a range of reasons. The ACCC sets out a number of situations where communication may be necessary:

  • give information about the debtor’s account;
  • convey a demand for payment;
  • accurately explain the consequences of non-payment, including any legal remedies available to the collector/creditor, and any service restrictions that may apply in the case of utilities (for example, electricity);
  • make arrangements for repayment of a debt;
  • put a settlement proposal or alternative payment arrangement to the debtor;
  • review existing arrangements after an agreed period;
  • ascertain why earlier attempts to contact the debtor have not been responded to within a reasonable period, if this is the case;
  • ascertain why an agreed repayment arrangement has not been complied with, if this is the case;
  • investigate whether the debtor has changed their residential location without informing you, when there are grounds for believing this has occurred;
  • sight, inspect or recover a security interest; or
  • at the debtor’s request

It is not reasonable to frighten, intimidate, harass, demoralise, exhaust, or embarrass the debtor. Consumer legislation on the prohibition of misleading and deceptive conduct, unconscionable conduct, and a general criminal prohibition of the use of physical force, undue harassment and coercion all apply to debt collectors. The ACCC and the Australian Securities and Investment Commission (ASIC) publish a guideline for debt collection.

Bag searches

Stores are entitled to set certain conditions on a customer’s entry into a store. The most common condition (set in an effort to reduce shoplifting) is that a store reserves the right to check a customer’s bags. The store should have a prominent sign at the entrance to the store advising customers of this condition. Entry to a store where such signage is displayed is acceptance of this condition.

The store is only entitled to look at the contents of a customer’s bag; they are not entitled to touch them. A customer may refuse to allow a bag check, but the store may then ask the customer to leave. If the store forcibly conducts a bag search against the customer’s will, they could be committing an assault. If the store forcibly detains a customer who has not in fact stolen any goods, the customer may be able to sue for false imprisonment.

The Australian Retailers Association produces a set of guidelines for the checking of bags and parcels in retail stores. The Tasmanian Consumer Affairs and Fair Trading department publishes these guidelines.

Uncollected Goods

If goods left with another person (e.g. for repair, dry cleaning, engraving or storing) are not collected, that person may have a right to dispose of the goods. This right is either a right under the contract, a right conferred by the Disposal of Uncollected Goods Act 1968 (Tas), or a court order.

Weights and Measures

As with most other consumer issues, weights and measures are now regulated through Commonwealth legislation, the National Measurement Act 1960 (Cth)  and a Commonwealth office – the National Measurement Institute. The National Measurement Act sets the requirements for package information to be displayed on articles packed in advance ready for sale, and creates offences where a person fails to meet packaging requirements (s18JA). Packaging information is required to accurately reflect the measurement of the goods inside. For example, if a product description says ‘Corned beef, 100 gm’ but is in fact only 90 gm, this would be an offence.

Other Consumer Protection legislation

Pawnbrokers

Pawnbroking in Tasmania is governed by the Second Hand Dealers and Pawnbrokers Act 1994 (Tas). A pawnbroker is a person who carries on the business of lending money on the security of an article taken by the person by way of pawn, pledge or as security.

To be able to operate as a pawnbroker, a person is required to give at least one month’s notice in writing of intention to do so to the officer in charge of the police station (s4(2)). The notice must specify the full name, address, date of birth of the applicant and the address of the premises, which propose to carry on that business (s4(3)). The commissioner must be satisfied the applicant is a fit and proper person as approved by the Police and have never been convicted of an offence against the Act or an offence involving dishonesty (s4(5)).

A pawnbroker must not lend to children under 14 or to someone who is drunk (s8(3)).

Pawnbrokers must not receive any goods in the course of business unless the customer produces documentary proof of identity showing his/her correct name and address (s9). Pawnbroker must keep a record of all gods received stating the date of pawn and the date on which the good were redeemed (s10(1)). Pawnbroker must, at the time of taking any goods in pawn, give to the person pawing the goods a notice signed by the pawnbroker specifying the rate of interest payable on the money lent and the total amount of interest payable on redemption of the goods pawned and the date before which the goods pawned may be redeemed.

If pawnbroker has reasonable cause to suspect that the goods are stolen goods, he or she must immediately inform the police or arrest and detain the person offering the goods or seize and detain the goods (s15). Pawnbroker who exercise a power of arrest or seizure must take the necessary action to have the person or goods delivered into the custody of a police office as soon as possible.

If the item is not reclaimed by repaying the money within 6 months (or such longer period as is specifically agreed) it will be forfeited to the pawnbroker and may be sold (s14(1)). It is illegal to agree to a shorter period than 6 months. It is illegal to sell the item before the expiry of the redemption period (s14(2)).

If an item is forfeited and the loan to which it related was more than $100, the item must be sold by auction, notice in writing must be given to the person who is entitle to redeem the goods 14 days before the sale.

If the sale price exceeds the amount owing by the customer, the customer can apply to be paid the excess within 6 months of the sale (s14(5)).

A pawnbroker must keep a record of the sale in a prescribed form in Second Hand Dealers and Pawnbrokers Regulations 2006 (Tas) (s14(3)).

Sale of Motor Vehicles

Sale of motor vehicles by dealers is regulated by the Motor Vehicle Traders Act 2011 (Tas).

Energy and Water Supply

Sale of electricity, gas, water and sewerage services in the Tasmania is regulated by the Electricity Supply Industry Act 1995 (Tas)Gas Act 2000 (Tas)Water and Sewerage Industry Act 2008 (Tas).

Industry Codes of Practice

Under Part 4 of the Australian Consumer Law 2010 (Tas), codes of practice for various activities can be established. Some of these relate to consumers. There are codes of practice for the fitness industry, cemeteries and crematoria, drinking water, sexual services, driving instruction and pet grooming. A consumer of these services can complain to the Director of the Consumer Affair and Fair Trading if not satisfied with the services. The Director may apply to the magistrate for an order if it appears to him/her that a person has contravened the code of practice (s39).

Complaints in Tasmania: Consumer Affairs and Fair Trading

The Consumer Affairs and Fair Trading website provides thorough and excellent resources on consumer rights. They also have a complaints mechanism. Their website provides all details on initiating this process. They will only help if you have attempted to resolve the issue yourself with the seller.

Complaints and Alternative Dispute Resolution Schemes

Direct negotiation with the retailer, service provider or manufacturer

A consumer who has a complaint should first try to resolve the problem themselves with the retailer, service provider, manufacturer, etc. Government agencies, such as the ACCC, Ombudsman Offices, and industry-based dispute resolution schemes will usually only be prepared to provide assistance after the dissatisfied consumer has tried and failed to get the problem sorted out through direct negotiation.

Some points to note when negotiating with traders:

  • don’t delay - make your complaint as soon as possible after the problem arises;
  • identify the best person to make your complaint to. In the case of small businesses this will usually be the owner or manager, bigger operations will often have a customer service or complaints section;
  • define the problem as precisely as possible – be thorough without getting caught up in minor details;
  • be firm but calm – when you first make contact, talk or write as though you assume the problem will be resolved to your satisfaction;
  • indicate how you want the problem solved;
  • refer to relevant advertising material, contracts, receipts, warranties, etc. associated with the transaction;
  • give the trader time to look into the problem and get back to you;
  • especially in situations where the trader seems reluctant to assist, indicate your understanding of your legal rights as they relate to your problem (see ‘Contracts’ and ‘Consumer protection’ section of this volume), and your awareness of the sources of external assistance available to you if the problem cannot be resolved through direct negotiation.

It is often helpful to put the complaint in writing, particularly where the consumer has been fobbed off when they first approached the trader with a problem. One benefit of a written complaint is that if the problem cannot be resolved through direct negotiation and it becomes necessary to take it to an external body, a letter is evidence the consumer has first approached the trader themselves. Similarly, where a trader has agreed verbally to take some action, it is often sensible to write to them ‘confirming’ the arrangement.

Some points to note when writing a letter of complaint:

  • include precise details of the date and place where the problem arose;
  • refer to relevant numbers for accounts, references, contracts, etc.;
  • include your contact details;
  • describe what happened and why you are dissatisfied in sufficient detail for a person not previously involved to understand the situation;
  • use neutral, unemotional language as far as possible;
  • explain what action you have already taken and the response, if any;
  • end your letter with a request that the other party respond promptly, in some cases it will be appropriate to request a written response and/or to indicate a date by which you expect a response to be made;
  • sign and date your letter;
  • keep a copy of your letter – it may also be a good idea to sent the letter by fax or some other means allowing you to retain a record proving the letter has been sent.

Ombudsmen

An alternative to the traditional court/tribunal system is to utilise private dispute resolution schemes. The particular industry you are dealing with might operate such a scheme, for example:

  • Energy Ombudsman Tasmania (and equivalent bodies interstate such as the Energy and Water Industry Ombudsman of NSW) investigates and facilitates the resolution of complaints and disputes by consumers against electricity, gas and water providers;
  • the Financial Ombudsman Service (FOS) investigates and facilitates the resolution of complaints and disputes by consumers against financial service providers, including banks and their affiliates, providers of life insurance, superannuation, funds management, financial advice, stockbroking, investment advice and the sale of financial or investment products.
    FOS operates in five Divisions: Banking & Finance; General Insurance; Insurance Broking; Mutuals; and Investments, Life Insurance & Superannuation, reflecting the business areas of three schemes which merged to form FOS. A complete list of organisations covered by the Financial Ombudsman Scheme is online.
    Jurisdictional limits apply within FOS - banking claims are limited to $280,000; life insurance claims are limited to $280,000; income protection insurance claims are limited to $6,000 per month and claims involving funds management, stockbroking, investment and financial advice are limited to $150,000;
  • the Telecommunications Industry Ombudsman (TIO) investigates and facilitates the resolution of complaints and disputes by consumers against telecommunications service providers, including landline, mobile phone and internet services. The TIO will not investigate complaints that are more than 12 months old (except in special circumstances) or where legal proceedings have commenced;
  • the Superannuation Complaints Tribunal  SCT) investigates and facilitates the resolution of complaints and disputes by consumers in relation to superannuation funds, annuities and deferred annuities and Retirement Saving Accounts. The SCT will initially assist consumers to reach an agreed settlement through conciliation. If the complaint cannot be conciliated the SCT will consider submissions and make a determination. A determination of the SCT is binding on both parties. It is, however, possible to appeal a determination to the Federal Court.

All of these schemes are independent and free-of-charge, and are less formal and generally speedier than tribunals and courts. When resolving a dispute the schemes are required to take account of law, good industry practice and what is fair and reasonable in all the circumstances.

Contacts and Resources

There are many agencies operated by both the Commonwealth and Tasmanian governments responsible for the receipt and resolution of complaints, as well as private, independent industry-based dispute resolution schemes.

Most of these are referred to in the relevant subject chapters of the Law Handbook. Readers are referred to the chapter dealing with their specific area of complaint as well as to the list given here.

The following list deals mainly with areas that are not dealt with in any detail elsewhere in the Law Handbook. Where appropriate, addresses to useful Internet sites have been provided.

General Complaints

Tasmania Office of Consumer Affairs and Fair Trading www.consumer.tas.gov.au

Australian Competition and Consumer Commission www.accc.gov.au. See in particular:
‘Making a Complaint’ at www.accc.gov.au/content/index.phtml/tag/ConsumersMakingAComplaint/; and
ACCC’s Consumer and Business Directory at www.accc.gov.au/content/index.phtml/itemId/8627.

Australian Prudential Regulation Authority (APRA) www.apra.gov.au

Australian Securities and Investments Commission
Search for registered business names: www.asic.gov.au
Search for ACNs and ABNs of Australian organisations: www.search.asic.gov.au/gns001.html

Fido Consumer Website: http://fido.asic.gov.au

International E-Consumer Project www.econsumer.gov

Complaintline www.complaintline.com.au

Complaints and Alternative Dispute Resolution Schemes

Financial Ombudsman Service 1300 78 08 08 www.fos.org.au. This service incorporates the former Banking and Financial Services Ombudsman, Credit Union Dispute Resolution Centre, Financial Industry Complaints Service, Insurance Brokers Disputes Limited, and Insurance Ombudsman Service (itself formerly Insurance Enquiries and Complaints Limited).

Credit Ombudsman Service www.creditombudsman.com.au

Superannuation Complaints Tribunal www.sct.gov.au

Financial Co-operative Dispute Resolution Scheme www.fcdrs.org.au

Telecommunications Industry Ombudsman (TIO) www.tio.com.au Complaint line 1800 062 058

Fair Trading Offices in other States and Territories

Australian Consumer Law homepage www.consumerlaw.gov.au

ACT Office of Fair Trading www.ors.act.gov.au

Consumer Affairs Victoria www.consumer.vic.gov.au

NSW Office of Fair Trading www.fairtrading.nsw.gov.au

New Zealand Ministry of Consumer Affairs www.consumeraffairs.govt.nz

NT Office of Consumer Affairs and Fair Trading www.caba.nt.gov.au

QLD Office of Fair Trading www.consumer.qld.gov.au

SA Office of Consumer and Business Affairs www.ocba.sa.gov.au

WA Department of Consumer and Employment Protection www.docep.wa.gov.au/ConsumerProtection

Useful Documents

Electronic Funds Transfer (EFT) Code of Conduct www.asic.gov.au/fido/fido.nsf/byheadline/Electronic+Funds+Transfer+(EFT)+Code+of+Conduct?opendocument

Other Contacts

AUSIndustry www.ausindustry.gov.au

CITEC Confirm www.confirm.citec.com.au

Licence Recognition www.licencerecognition.gov.au

Contracts

Acknowledgment

We would like to thank Dr Nicholas Seddon and the ACT Law Handbook for contributing this section on Contract Law.

What is a Contract?

A contract is a legally binding agreement between two or more parties (but usually two). The law will consider a contract to be valid if the agreement contains all of the following elements:

  • an intention between the parties to create legal relations;
  • the parties must be parties to the contract and must be recognised legal entities;
  • agreement;
  • consideration;
  • the parties had legal capacity.

An agreement that lacks one or more of the elements listed above is not a valid contract.

What are the Terms of a Contract?

Before entering into a contract, various statements will often be made by the parties. A dispute may later arise as to which of the statements made should be considered a part, or a term, of the contract, and which should be taken as merely pre-contract talk, and therefore not a part or term of the contract. Parties to a contract are bound only by its terms, not by any peripheral statements that may have been made. However, a pre-contractual misrepresentation (that is, it is not a term of the contract) has legal consequences.

If a contract is in writing (either because it is required to be in writing by legislation or because the parties have chosen to put it in writing) then generally it is assumed that the written document is the complete statement of the terms of the agreement. What this means is that if one party then tries to argue that something said during negotiations is part of the contract and it was not included in the written document, then the argument to include that statement will not be successful.

Implied terms

Despite what has just been said, it is important to understand that in certain contracts terms may be implied, that is, read into the contract. This may happen because the parties overlooked something important. Or it may happen because consumer protection legislation prescribes that certain terms will be automatically read into a contract.

By far the most important for present purposes are statutory implied terms – these have been reformulated under the new Consumer legislation as statutory consumer guarantees.

The Effects of Signing a Document

Must Contracts be in Writing?

Under common law principles contracts do not have to be in writing. Legislation provides that some contracts must be in writing or be evidenced by a written document. These include contracts involving interests in land (for example, sale, lease or mortgage) and all contracts regulated by consumer protection legislation.

If a contract is required by legislation to be in writing and it is not, or not sufficiently, then the contract may be void, voidable or unenforceable, depending on what the legislation provides. The contract may be unenforceable by one party (the supplier) but enforceable by the other (the purchaser), particularly under consumer protection legislation.

Under the law of restitution, it may be possible to recover a reasonable remuneration for goods delivered or services rendered even though the contract is legally defective for want of writing. This again depends on the drafting of the relevant legislation that specified a written contract.

However, even if writing is not a legal requirement, it is always advisable to have the terms agreed between the parties written down and attached to, or kept with, any other relevant papers; for example, copies of quotations, brochures, pamphlets, that were supplied at the time the contract was entered into. Receipts for money paid should always be kept. If a dispute arises, these documents may assist in resolving differences between the parties. For example, a private purchase and sale of a car does not have to be in writing but it is a good idea to record the essential terms of the transaction.

A written contract can be drawn up by listing all the terms agreed between the parties and getting each of the parties to sign and date the document at the end.

We have seen that contracts do not have to be in writing unless legislation provides otherwise. Or the parties may choose to use a written document. If a written contract is used, it is very common that it is required to be signed.

When a contract is in writing, the general rule is that a party is bound by all the terms set out in a contractual document if he or she has signed it. This applies whether or not he or she has read the terms or understood them. The exceptions to the general rule are mistakes as to the nature of the document and misleading statements.

Unsigned Contracts - ‘Ticket’ Cases

We have seen that not all written contracts are supposed to be signed. An example is an airline ticket or a public car park docket, or a dry cleaning ticket. The terms may be on a ticket or may be displayed on a sign or wall. The customer is taken to have agreed so long as the customer had an opportunity to read the terms and did not object to them. This rule means that the terms must be available for scrutiny before the contract is made. The rule takes little account of the fact that no-one actually reads the terms or would have almost no time to read them if he or she tried to. Some allowance is taken of this if an exclusion clause is in a ticket.

Elements Necessary for a Contract

Intention to Create Legal Relations

A contract does not exist simply because there is an agreement between people. The parties to the agreement must intend to enter into a legally binding agreement. This will seldom be stated explicitly but will usually be inferred from the circumstances in which the agreement was made.
Intention is simply not an issue in any consumer contract or in any of the ordinary contracts that people make in their lives such as entering into a lease, buying a ticket for a sports event or for travel, selling or buying goods through the internet or a purchase or sale of a car.

Intention can be an issue when domestic or friendly arrangements are made where it may be arguable that they were not intended to be a legally binding contract. For example, a house-sharing arrangement amongst friends may raise this issue. It is usually best to agree on whether such an arrangement is intended to be a contract or just a friendly understanding.

Who are the parties?

It is important, firstly, to make the point that the parties to a contract are the only parties that can benefit from it or are bound by it. It is usually straightforward to identify which parties are parties to a contract but this is not always absolutely clear.

The parties must be recognised legal entities

A party to a contract must be:

  • an individual; or
  • a corporation; or
  • a government.

Offer and Acceptance

A contract is formed when the parties are taken to have agreed. It is the moment of agreement that prior negotiations, preliminary exchange of ideas or proposals, bargaining, discussions become a legally binding contract. This is usually demonstrated when an offer by one party is accepted by the other party.

Offer

An offer must be distinguished from mere willingness to deal or negotiate. For example, X offers to make and sell to Y calendars featuring Australian paintings. Before any agreement is reached on size, quality, style or price, Y decides not to continue. At this stage, there is no legally binding contract between X and Y because there is no definite offer for Y to accept until the essential terms of the bargain have been decided.

An offer need not be made to a specific person. It may be made to a person, a class of people, or to the whole world (such as the offer of a reward). An offer is a definite promise to be bound, provided the terms of the offer are accepted. This means that there must be acceptance of precisely what has been offered.

For example, A offers to sell B a Holden panel van for $1,000, ‘as is’. If B decides to buy the Holden panel van, but insists on a roadworthy certificate from the NRMA being provided, then B is not accepting A's offer. Rather, B is making a counter offer. It is then up to A to accept or reject the counter offer.

A person can withdraw an offer which has been proposed prior to that offer being accepted. For withdrawal to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn. To continue the example above, A may arrange to let B know by lunchtime whether A agrees to B's counter offer. If, while waiting for a reply, B decides not to buy the Holden panel van and tells A of this change of mind, then there can be no binding contract because B's (counter) offer has been withdrawn.

Acceptance

Acceptance occurs when the party answering the offer agrees to the offer by way of a statement or an act. Acceptance must be unequivocal and communicated to the offeror: the law will not deem a person to have accepted an offer merely because he or she has not expressly rejected it.

The most obvious way of committing to a contract is by signing. The law reflects the popular understanding about the significance of signature. If someone signs a contract without reading it, then that person is bound and it is no argument to say that he or she did not realise that the contract contained some clause that is not to their liking.

Conversely, signature is not necessary for commitment to a contract even though there is a document that has a place to sign. Acceptance by conduct has been mentioned above and it is quite possible for a person who did not sign a contract (which was supposed to be signed) to be bound by it if he or she has indicated by conduct that the deal is going ahead.

Not all written contracts are supposed to be signed. An example is an airline ticket or a public car park docket. The terms may be on a ticket or may be displayed on a sign or wall. The law takes a somewhat pragmatic approach to the question whether the customer has accepted the terms. The customer is taken to have agreed so long as the customer had an opportunity to read the terms and did not object to them. This rule means that the terms must be available for scrutiny before the contract is made. The rule takes little account of the fact that no-one actually reads the terms or would have almost no time to read them if he or she tried to. Some allowance is taken of this if an exclusion clause is in a ticket.

Legislative modifications to rules of offer and acceptance

Some legislative modifications to the rules of offer and acceptance have been made to protect consumers. For example some legislation allows a consumer who has accepted an offer (and thus made a binding contract) to nevertheless pull out of the contract (called a ‘cooling-off period’). An example is under the Australian Consumer Law (ACL) provisions applying to unsolicited consumer agreements.

As already noted, it is possible for an offer to be accepted by the conduct of the party to whom it was made. Unscrupulous companies used to take advantage of this by sending unsolicited goods by mail and then, if the goods were used or not rejected, this was taken to be acceptance. This problem is taken care of by section 41 of the ACL which provides that the goods become the property of the recipient free of any obligation to pay 3 months after they have been received. This period can be shortened to 1 month if the recipient sends a notice to the company which sent the goods that complies with section 41(5). The company is also permitted to take back the goods before the expiry of the period.

Consideration

Consideration is the ‘price’ paid for the promise or promises of the other party. Fundamentally, consideration requires that the agreement that has been reached constitutes an exchange between the parties.

The price must be something of value, although it need not be money. As just noted, it usually is the counter-promise or promises provided by the other party. Consideration may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party.

In most contracts consideration is not an issue because there is always an exchange contemplated by the agreement.

So long as consideration exists, the court will not question its adequacy, provided that it is of some value. For example, the promise to pay a peppercorn in return for the lease of a house would be good consideration. Of course, the consideration must not be illegal or impossible to perform.

There is another way to make a legally binding obligation: documents under seal (called ‘deeds’) do not require consideration for there to be a binding promise. However, deeds are used primarily in business and so are not discussed further in this chapter.

Who has Legal Capacity?

The law requires that a party to a contract has capacity to enter a contract. This means that the person is recognised in law as being able to commit to a contract. Most people and companies have capacity and so in the vast majority of contracts this is not a problem. In the following circumstances, capacity to contract may be an issue:

  • people who have a mental impairment;
  • young people;
  • bankrupts;
  • corporations (people acting on behalf of a company); and
  • prisoners.

People who have a mental impairment

Generally speaking, people are free to enter into contracts even though they may have a mental impairment, or be temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place.

People with disabilities

People with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making. This is discussed further at Undue influence and unconscionability.

Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit). The law recognises that people with impaired capacity nevertheless must be able to purchase the necessities of life, for example, food, clothing, accommodation, medical services and so forth. The Sale of Goods Act 1896 (Tas)section 7(1) provides that a reasonable price must be paid for necessary goods sold to someone with a disability. What are ‘necessaries’ and the rules applicable here are dealt with under Young people (because the definition is the same for both groups).

Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if:

  • the other party knew, or ought to have known, of the disability or lack of capacity; and
  • the person with the disability can give back most of the benefit he or she received under the contract, and
  • the benefit received by the disabled person has not been sold to a third party who did not know the previous transaction might not be valid.

Generally, to escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time.

If the contract was made during a period when the person was able to understand it (legally termed a lucid interval), the contract will be binding even though the other party knew of the disability.

Some people with disabilities (temporary or long term) are assisted by a manager appointed under the Guardianship and Administration Act 1995 (Tas). People with disabilities who have a manager appointed to act on their behalf are generally not free to enter into contracts, unless this is approved in writing by their manager or by an order of the Guardianship and Administration Board.

Young people

The term young person is used here to refer to anyone under the age of 18 years (s3Age of Majority Act 1973 (Tas)). Sometimes, legal writing refers to ‘minors’ or ‘infants’, although the latter is now unusual.

The exact capacity of young people to bind themselves and be bound by contract is limited but it is also not clear, because no legislation completely covers this area of law. The law is overly complicated. Only in New South Wales has the law been rationalised in a sensible way.

Bankrupts

Bankrupt people are not deprived of their general capacity to contract. However, there are provisions of the Bankruptcy Act 1966 (Cth) that relate to dealings and contracts by bankrupts. For example, obtaining credit of $4,145 (indexed under s304A) or more without disclosing your bankruptcy is an offence and liable to penalty under section 269 of the Bankruptcy Act.

Corporations

A corporation is an artificial body created by law. The corporation has a legal existence separate from the individual people who comprise it. However, a corporation or company has the legal capacity of a natural person and therefore has the capacity to enter contractual relations (see s124 of the Corporations Act 2001 (Cth) ('the Corporations Act')). This is so even if there is an express provision contained in the company’s constitution which limits the company’s powers. Transactions are not deemed void and beyond the company’s powers simply because the exercise of such powers is in breach of the restrictions placed in the company’s constitution (s125(1)).

A company has capacity to enter into contracts but such contracts are only binding on the company if those acting on behalf of the company do so with the company’s express or implied authority (s126(1)). The courts have been quite liberal in their interpretation of implied authority. A company has to deal with the outside world through its people. The Corporations Act sections 128-9 provide that anyone dealing with a company is entitled to assume that the person they are dealing with has authority to act for the company unless the outsider knows, or has reason to know, that the company representative lacked authority. It is therefore difficult for a company to deny that a person, apparently acting for the company, lacked authority and could not bind the company.

Prisoners

During their imprisonment, prisoners may enter contracts, including contracts to buy and sell property. The usual restrictions about supervision and censorship of anything coming into the prison still apply, so that the permission of prison authorities is required before a prisoner may sign for, deliver or receive any document.

Uncertainty

It is common for the terms of a contract to be uncertain in some respect. There may be terms that contradict each other, a term may be ambiguous or it may be very difficult to decide what a particular term means. A possible consequence of an uncertain term or terms is that the terms are severed from the contract or else the whole contract is void. Hence uncertainty may be a way of getting out of a contract.

The law's approach to interpretation

To avoid this result so far as possible, the law's approach to this common problem is, firstly, to try to give the uncertain clause or clauses a sensible meaning. This is done by applying an objective test: what would a reasonable person consider the problem clause or clauses to mean? This should be a guide to resolving a dispute over the contract's meaning. The objective test is a common sense test. The courts will go a long way to finding a sensible meaning because the alternative is that the contract may be void.

The consequences of uncertainty

If a term is so uncertain that it cannot be given a sensible or any meaning, the term is either severed from the contract or else, if that is not possible, the whole contract is declared to be void which means that it never existed (despite the parties' assumptions and actions).

Severance means that the problem clause or clauses are ‘blue pencilled’ from the contract and the rest of the contract operates without the severed clauses. Whether a term or terms can be severed from the contract depends on whether the contract can operate without the clauses. If the essential purpose and expected outcome of the contract can still be achieved without the problem clauses, then they will be severed.

If severance is not possible, then, as already stated, the contract is declared to have never existed. This does not quite leave the parties in a legal vacuum because the law of restitution provides that goods or services already provided must be paid for at a reasonable market price.

Unfair Contract Terms

Under the Australian Consumer Law it is possible for an individual consumer (as defined) to challenge a term or terms of a standard form contract on the basis that the term or terms are unfair. If the challenge is successful the term is void.

Exclusion of Responsibility Terms

It is possible to have a term in the contract which excludes one of the parties from responsibility for something that may go wrong in the performance of the contract or limits that responsibility. It is called an exclusion clause, an exemption clause or limitation of liability clause. For example, an exclusion from liability for damage done to a lawn by a builder's backhoe might be included in a contract between the builder and a home owner who is having an extension built to their home.

The courts have generally taken the view that exclusion clauses are unfair and have tried to limit their application. Courts will generally interpret an exclusion clause against the party trying to rely on it and, at the least, interpret it narrowly so long as it is capable of being read down. Where a contract is a document signed by the parties, they will generally be bound by the exclusion clause in it.

Where a contract is an unsigned document, the court will look at what a reasonable person would assume the document to contain. Only where a reasonable person would assume the terms to include an exclusion clause will the exclusion clause in the document be able to be relied on. It must also be shown that the exclusion clause was brought to the notice of the other party. For example, if an automatic ticket machine in a car park had printed on it ‘issued subject to the conditions displayed in car park’ and these conditions, or exclusion clauses, were on a pillar opposite the ticket machine, then this could potentially be held to be unreasonable notice of the exclusion clause. The driver may then be entitled to sue despite the exclusion clause in the conditions.

For consumer contracts, the Australian Consumer Law and other consumer protection legislation may imply conditions that cannot be excluded.

When is a Contract not a Contract?

Defective Negotiations

Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. The law recognises that various forms of defective negotiation may provide the ‘victim’ with an excuse which allows that person to cancel the contract (and possibly a right to damages).

Negotiations may be affected by any of the following matters:

  • mistake;
  • misleading conduct or misrepresentation;
  • duress; and
  • undue influence/unconscionability.

Mistake

Only a few types of mistakes will cause the contract to be non-binding on the parties to it: they must be mistakes that go to the very basis of the agreement. For example, where there is a contract for the sale of a car that both parties assume to exist, although in reality it has been destroyed by fire, this contract may be rescinded. By contrast, where the parties are only mistaken about the model of the car, then this contract would be binding.

Another example is when a person signs a written document mistakenly believing that it relates to something entirely different from what in fact it does relate to, in which case the person will not be bound by it. This means that if X is told to sign a document which X reasonably believes to be something like a character reference to assist Z obtain a loan from a finance company, and the document is later discovered to have been a guarantee of the loan contract, then the guarantee will not be held binding on X.

A third example is when Y cannot read, owing to blindness or illiteracy or other disability. Someone else tells Y what is in the document and Y signs it. The document Y signed is not what the other person claimed it was. The document Y signed would not be binding on Y. By contrast, if a person who signs a document believing it to be a contract does not read the terms and conditions, that person will be bound by the contract and will not be entitled to plead mistake.

Other factors may also be relevant to a successful plea of mistake. For instance, whether or not the defence of mistake will be allowed often depends on whether an innocent third party will be adversely affected by a decision that the contract is non-binding. Again, if the signer was careless, failing to take reasonable precautions, the defence will not be allowed to succeed. For these reasons, it is wise to seek legal advice about whether or not a court would hold the contract binding on these grounds.

Misleading or deceptive conduct

The enforceability of a contract may be affected by defective negotiations, in particular if a party has engaged in misleading or deceptive conduct. During negotiations many things may be said or promised. Some of these things end up as terms of the contract. If so, and they are wrong or inaccurate, then there may be a remedy for breach of contract. But many things are said or written which do not end up as terms of the contract. Yet they have a legal effect if they are wrong or inaccurate. These are generally called misrepresentations, that is, statements which turn out to be incorrect which played some part in persuading the other party to enter into the contract.

There is a very powerful legislative provision found in the Australian Consumer Law (ACL) section 18 which states that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’.

This section applies to individuals and to corporations. However it is important to note that the section is not confined to consumer transactions despite appearing in the Australian Consumer Law.

The section is, however, confined to ‘trade or commerce’ and so it does not apply to non-business transactions. For example, if a person misled a potential buyer in the private sale of a motor vehicle, this would not be covered by the ACL section 18 as a private sale would not be regarded as being in trade or commerce.

The effect of this legislation is that a person who has entered into a contract after being misled by the other party may be able to cancel the contract or obtain compensatory damages. There are other remedies available, for example, modification of the contract.

This law also applies to advertisements and it is possible to obtain an injunction under the legislation to put a stop to misleading advertisements. An ordinary citizen cannot afford to do this but can bring the advertisement to the attention of the Australian Competition and Consumer Commission or the TAS Office of Consumer Affair and Fair Trading.

Misrepresentation under common law

If section 18 of the ACL does not apply (for example, in a private sale) then it may still be possible to rescind a contract induced by a misrepresentation. It is possible to rescind a contract under the ACL after the contract has been executed, whereas under common law principles this may not be possible where the misrepresentation was a non-fraudulent one. Under Tasmanian legislation, the common law position on misrepresentation is preserved in contracts for the sale of goods (s5Sale of Goods Act 1896).

It is also possible to seek damages for a misrepresentation under the law of torts: in the tort of deceit if the representation is fraudulent; in the tort of negligence if the representation is negligent. Each of these has its difficulties. Proving fraud is difficult: there must be very clear evidence that the person has lied. Bringing a negligence action for misrepresentation is also not straightforward. It must arise from a situation where the allegedly negligent person owes a duty of care to the other party. This is not readily found by the courts. The circumstance must generally be one where the person providing the information is an expert or is providing it in a business or professional setting. Casual remarks between friends and acquaintances do not usually generate negligence liability.

A pre-contractual misrepresentation is best dealt with, so far as possible, under the Australian Consumer Law section 18 which is far easier to use than the law just described. Any dealings with a trader or business will be covered by this legislation.

Duress

Proper consent may be affected by duress. Duress is held to have occurred where there has been actual or threatened violence either to the other contracting party or to their immediate family, near relatives or close associates. The duress may be made by someone acting under the instructions of the party to the contract. The net effect, though, will have been that a party has been forced into the contract by being deprived of their free will to act.

Duress now extends to contracts entered into as a result of threats to a party’s economic well being, that is, a threat to a person’s business or trade. This form of duress is called economic duress.

The consequence of establishing duress is that the contract is voidable at the election of the wronged party. That is, as discussed above, the wronged party must act promptly or risk losing the right to cancel.

Undue influence

Proper consent may be affected by undue influence. Undue influence is exercised by taking unfair and improper advantage of the weakness of the other party, to the extent that it cannot be said that that party intended voluntarily to enter into the contract.

The main reason for the rule against the use of undue influence is to correct abuses of trust and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.

The consequence of establishing undue influence is that the contract may be voidable at the election of the wronged party who must act promptly if he or she wishes to cancel the contract.

Unconscionability

A contract may be cancelled if it was the product of unconscionable dealing by one of the parties. This is closely related to undue influence (discussed above) but the usual feature of undue influence is the exploitation of a relationship of dependency whereas unconscionability is more general.

Unconscionable dealing, as interpreted in case law, occurs where two requirements are satisfied:

  • one party to a contract or transaction is under a special disadvantage; and
  • the other party takes unfair advantage of the other party's vulnerability, either with knowledge of that vulnerability or where the other party has ‘closed their eyes’ to the vulnerability.

Although not an express requirement, it is apparent that the courts will more readily hold that a party has taken unconscionable advantage of a person where the transaction is extremely disadvantageous to that person.

Individuals and corporations are prohibited from engaging in unconscionable conduct in trade or commerce under the ACL, sections 20-22.

Illegal Contracts

The law will not enforce all contracts. There are some categories of contract to be wary of. Where a contract is illegal, this may affect its enforceability. Contracts may be illegal under common law principles or they may be illegal under legislation.

Contracts illegal under common law

The law regards some kinds of contracts as illegal because they involve moral wrongdoing or reprehensible conduct. Examples are contracts to commit a crime, to jeopardise the revenue, which are a danger to public safety or international relations, which undermine the administration of justice, which are corrupt and so forth. If a party to such a contract seeks a court’s help to enforce, the court will simply refuse to do so.

Contracts illegal under statute

Contracts that are illegal by statute may be regulated as to enforceability by the legislation, so the statute will need to be read and interpreted. Contracts absolutely prohibited by statute will be void, whether the parties know of the illegality or not. However, where one party performs an otherwise legal contract in a manner that breaches legislation, the other party, if having no knowledge of the facts giving rise to the illegality, may still be able to enforce the contract or recover damages for breach of it. Or a court may decide that the contract is unenforceable because of the illegality.

The law about illegal contracts is complex and often difficult to apply. Because there are so many legislative provisions affecting very many aspects of life, it is possible for a contract to be tainted by illegality (perhaps even unknown to the parties). Whether such a contract will or will not be enforced by the courts has generated a great deal of contradictory case law.

Fulfilling or Ending a Contract

A contract may end in any of the following ways.

  • Performance;
  • Agreement between the parties;
  • Impossibility of performance;
  • Termination for breach of contract;
  • Rescission.

Performance

When the parties to the contract completely fulfil their obligations to one another, whether by payment of money or by doing something as agreed in the contract, the contract for most purposes comes to an end.

This does not mean that legally it is at an end. If, for example, goods turn out to be defective, then the contract is still relevant to determine the rights of the purchaser. In fact a contract has a life for six years after it has been performed. This is because the limitation period for breach of contract is six years (s4(1)(a)Limitation Act 1974 (Tas)). This means that if there is a breach of contract, a party has six years to assert his or her rights stemming from that breach.

Agreement Between the Parties

A contract, being the result of agreement, may be terminated by further agreement between the parties to end their contractual relationship.

Impossibility of Performance

If performance of a contract becomes impossible, without fault of either party, there will be an automatic discharge of the contract. Simple lack of ability of one of the parties to perform the contract is not sufficient. The impossibility must be something that renders performance totally impossible or something unexpected which changes the circumstances so radically that the contract would have to become fundamentally different from the original contract.

Termination for Breach of Contract

Breach of contract by one party may entitle the other party to regard the contract as at an end. However, it is rarely as simple as that. There are some breaches of contract which do not give the wronged party the right to end the contract but only entitle a claim to be made for monetary damages to make up for any loss suffered. Other breaches - serious breaches - may provide the other party with the right to terminate. It is often difficult to know whether a particular breach justifies termination unless the contract itself is very clear about this. If the term broken is designated an ‘essential’ term (sometimes called a ‘condition’) then a breach of it will justify termination.

Termination must be acted on. Assuming a sufficiently serious breach has occurred, the non-defaulting party has a choice: to terminate or to carry on with the contract. If that party does nothing this will betaken to be choosing not to terminate. Once that choice is made the right to terminate is lost (unless a fresh serious breach is committed). Accordingly, a party who wishes to terminate a contract needs to act promptly.

The difficulty with termination is to know whether the breach that has occurred is a sufficient trigger for termination. If the non-defaulting party terminates and it turns out that he or she did not have sufficient grounds for termination, then that party has committed a serious breach -- wrongful termination of the contract. The other party may then sue for damages.

If a contract is terminated, it stops as at the time of termination. This means there was a contract but it was never completed. Any accrued rights, that is, rights which fell due before termination, are enforceable. This is to be contrasted with rescission.

It is easy to terminate a contract. All that is required is for one party to indicate clearly, preferably in writing, that the contract is terminated.

Rescission

A person adversely affected by a defective contract may cancel (rescind) the contract. This can be done by way of defence to a claim on the contract or the party can take the initiative and cancel. Because a contract may be cancelled, it is said to be voidable, that is, it is a perfectly good contract unless and until it is cancelled.

Rescission is something that must be done straight away. The contract is legal and effective unless it is properly cancelled. If the purchaser delays, he or she may lose the right to cancel. It must be possible to restore the parties substantially to the pre-contract position. If this is not possible (for example, the goods have been substantially used up or have been sold to a third party), then the remedy of rescission is lost.

With some types of defective negotiation, particularly misrepresentation, it may also be possible to seek damages, either under legislation or under the common law.

Rescission is cancelling the contract as if it had never existed. This is to be contrasted with termination which stops the contract at the time it is terminated. The act of rescission means that the parties are restored to the status quo prior to contract and the contract is treated as never having existed. This means that no rights under the contract exist once it has been rescinded.

It is a pre-requisite of rescission that the status quo can be restored. Goods must be returned and money paid back. If it is not possible substantially to place the parties in the position that existed before the contract was made, then the right to rescind is lost. This rule means that rescission is only available very early in the life of the contract and must be acted on very promptly.

Rescission is one of the remedies available for misleading or unconscionable conduct under the Australian Consumer Law (s243). The remedy is a discretionary remedy which means that the party seeking it is not automatically entitled to it. The court must decide whether in all the circumstances it is a reasonable response to the fact that the contract was induced by either misleading conduct or unconscionable conduct.

There is also a special right to rescind a contract under the consumer guarantee sections of the Australian Consumer Law where goods or services are unsatisfactory.

Rights Outside the Law of Contract

It is important to understand that consumer or commercial dealings between people may attract other legal consequences than those that stem from a contract. If for some reason a contract remedy is not available or is practically unhelpful, it may still be possible to find legal rights through other areas of the law. The most important areas are

  • remedies under the Australian Consumer Law (ACL) (which replaced the Trade Practices Act 1974 (Cth) on 1 January 2011), particularly for misleading or unconscionable conduct; and
  • the law of estoppel.
  • The remedies under the Australian Consumer Law are discussed at various points in this chapter.

The Australian Consumer Law is found in Schedule 2 of the Competition and Consumer Act 2010 (Cth)  formerly the Trade Practices Act 1974 (Cth)). The Australian Consumer Law has been adopted as a law of each State and Territory in place of provisions formerly in each jurisdiction’s Fair Trading Act. With effect from 1 January 2011, there is now one single piece of legislation instead of nine different Acts.

Estoppel

Estoppel is not further discussed but should be kept in mind in any circumstance where someone has ‘blown hot and cold’. The law considers that a person should have a legal remedy if the following has happened:

  • A has made a representation to B or has encouraged B to adopt an assumption;
  • B acted in some material way on the representation or assumption, that is, B relied on the representation or assumption;
  • A then wished to act in a manner that was inconsistent with the representation or assumption and this would adversely affect B because of B’s reliance.

In these circumstances A may be estopped (prevented) from acting inconsistently or else must take the consequences of doing so. It must be unconscionable for A to act inconsistently and this is usually the case if B has relied on the representation or assumption in some material way.

The remedy for estoppel is open-ended. A court must fashion the remedy so far as possible to undo the detriment suffered by B. This may be an order to A to act consistently with the representation or assumption; or it may be an order to pay compensation.

Debt

What is debt? How do you get it? What can be done?

A debt is created when one person owes money to another. The person who owes money is called a debtor; the person to whom money is owed is called a creditor. There are many ways of getting into debt. For example:

  • borrowing money to buy goods or services;
  • buying goods and services on credit;
  • overdue utility accounts;
  • fees owed to a doctor or medical service.

A debt becomes a problem when it is not repaid as required by the loan or credit agreement. The most common reasons are:

  • goods bought on credit were defective so the debtor refused to pay for them;
  • the debtor bought too many goods on credit or borrowed money which the debtor could not afford to repay (that is, an over commitment); and
  • the debtor became over committed  due to a later change in circumstances, such as unemployment.

A debt is a liquidated amount (that is, a certain or ascertainable amount) of money owing by the debtor to the creditor. This does not mean that before a debt can be said to be owing, the debtor and creditor must each agree upon a fixed or specific amount. It is sufficient that the amount of money owing by the debtor to the creditor can be stated precisely and objectively. Two examples follow:

  • A asks B to build a staircase in A’s house and B agrees to do so for $500. There has been express agreement on the amount of money B is to be paid and the debt or liquidated amount owing by A to B is clearly $500.
  • Alternatively, take the situation where A asks B to build a staircase in A’s house and does not discuss with B the price to be charged when the work is completed. Unlike the first example, no fixed price has been agreed upon. Nevertheless, a court would say that it was implied in the agreement between A and B that A would pay B a price which was reasonable in the circumstances. Thus, if B completed the staircase and set a price of $520 for his work and that price was reasonable, then there would be a debt, or a liquidated amount, of $520 owing by A to B.

Over-Commitment

A person may agree to buy or may actually buy goods that he or she cannot afford or may borrow money he or she cannot afford to repay. Sometimes, for example if the goods were bought from a door-to-door salesman, the person may have a right to get out of the contract Under the ACL, a customer has the right to terminate an unsolicited agreement within 10 days (see Part 3-2, Division 2 of the Australian Consumer Law (ACL), in particular s82).

Negotiating repayment terms

Creditors, such as businesses or banks, are often open to negotiating a repayment schedule on a debt. It is best to ask a creditor for this option before the issue becomes so large that court or debt collection intervention is sought.

Temporary Assistance to Debtors

Any debtor who has some temporary inability to pay debts should contact his or her creditors as soon as possible and ask for an extension of time to pay. It is in the interest of the creditor to ensure that a debtor is able to maintain payments over the longer term, and most reputable credit providers will assist with a genuine problem.

Court Resolution

Stages of Debt Collection through Court

There are five possible stages in the process of debt collection and they will be looked at in this order:

  • getting into debt;
  • failing to pay in answer to a letter of demand or other demand for payment;
  • court-ordered mediation;
  • going to court; and
  • recovering the judgment debt.

If a debt is not paid by the due date a creditor can take a debtor to court, but court action can be time consuming and expensive. Usually, before a creditor takes court action the creditor will make several demands for payment, possibly in a letter of demand. If the debtor owes money for goods or hire purchase, the creditor may repossess the goods. A similar situation may arise if the creditor has security over goods, for example by way of a bill of sale or chattel mortgage. If the debt is not repaid on time the creditor may be able to take possession of the goods. Even if goods are seized and sold the debtor may still owe money to the creditor.

If demands for payment do not succeed, the creditor may take court action against the debtor in one of two courts in Tasmania which hear civil claims such as actions for money owing. The courts are the:

  • Supreme Court of Tasmania;
  • Civil Claims Division of the Magistrates Court
  • Minor Civil Claims Division of the Magistrates Court (Also known as the ‘Small Claims Court’).

Creditors are discouraged from taking actions in the Supreme Court which could have been taken in a lower court. A creditor, even if successful, may not recover solicitor’s fees and other costs involved in taking court proceedings against the debtor if the court action could have been taken in the small claims division of the Magistrates Court, or may only recover them at the applicable lower court scale (s13Supreme Court Civil Procedure Act 1932 (Tas)).

The Magistrates Court – Civil Division and Minor Civil Claims

The Civil Division of the Magistrates Court can hear disputes over sums less than $50,000, or more if the parties to the dispute agree. The Minor Civil Claims Court in the Civil Division can only hear matters up to $5,000. The Minor Claims Court is a more informal type of court in which lawyers cannot appear without the agreement of the parties or the approval of the magistrate. Before the magistrate can give his approval he must be satisfied that the other party will not be unfairly disadvantaged if a lawyer appears for one party (s31ADMagistrates Court (Civil Division) Act 1992 (Tas)).

The procedure in the Supreme Court is similar, but there are different documents and different time limits. If a debtor is served a Supreme Court writ he or she should seek legal advice immediately, as the Supreme Court has the jurisdiction to hear disputes over matters that concern sums greater than $50,000. Furthermore, unless a document called an ‘Appearance’ is lodged with the Supreme Court registry within 7 days of service of the writ (rule 98Supreme Court Rules 2000 (Tas)), the creditor may request a default judgment and commence execution proceedings against the debtor (rules 347 and 348Supreme Court Rules). The Magistrates Court gives a defendant 21 days after being served with a notice of a court action (rule 48Magistrates Court (Civil Division) Rules 1998 (Tas)). Within that 21 day period, a defendant has to file a document called a ‘defence’, if they do not file a defence in this time, the creditor may apply to the court for a ‘default judgment’. Only file a defence if you disagree that you owe money, or disagree with the amount that you owe. If you agree that you owe that amount but cannot pay right away, you should contact the creditor to arrange payment in installments.

Time Limits

An action for the recovery of a debt will not succeed unless it is commenced within a period of six years from the date when the cause of action first arose, for example, from the time when the debt was repayable or the debtor defaulted in repayment (s4Limitation Act 1974 (Tas)). Under section 29(4) of the Limitation Act, if the debtor acknowledges the debt in writing or makes a payment the limitation period will recommence from the date of acknowledgement or payment provided it complies with section 30 of the Limitation Act.

The requirements of section 30 are as follows:

  • the acknowledgement must be in writing and signed by the person making the acknowledgement;
  • the acknowledgement or payment must be made to the person or agent of the person whose claim is being acknowledged or in respect of whose claim the payment is being made;
  • the acknowledgement or payment may be made by the agent of the person liable for the debt. 

Alternative Dispute Resolution

Disputes with a money limit of up to $5,000 are dealt with in the Magistrates Court Minor Civil Claims division (or ‘Small Claims Court’). The purpose of the Small Claims Court is to deal with cases as cheaply and efficiently as possible by cutting down on formal legal procedures and encouraging negotiated settlements. Lawyers can only represent people in the Small Claims Division in very rare instances.

Under new rules, civil cases proceed quickly through the Magistrates Court. All minor civil cases go through compulsory mediation with emphasis put on the parties to settle the case or to settle as many issues in the case as possible by means of aggressive case management procedures and cost penalties. Regular civil matters can go through conciliation at the request of the parties involved. This means that going on to court is often no longer the outcome of a dispute as many disputes can be resolved through mediation.

The Letter of Demand

Debtors who have fallen behind in payments will generally receive one or more letters or notices from the creditor and/or from a debt collection agency demanding payment. These letters of demand will usually state that unless the debtor pays by a certain date, court action will be taken. Do not confuse these letters with court documents. They may look like court documents but they are not. If in doubt, seek legal advice.

Debt collection agencies have to be licensed (s4Security and Investigations Agents Act 2002 (Tas)) and must comply with a code of conduct (s38A, Security and Investigations Agents Act 2002 (Tas)). An agency can have its licence suspended or lose its licence if it engages in unsavoury or illegal conduct which shows that the operator of the agency is not a suitable person to hold a licence (ss15 and 16, Security and Investigation Agents Act). Conduct such as sending letters of demand that look like court documents may demonstrate such unsuitability. Court action to revoke a debt collector’s licence may be initiated following the lodging of a complaint with the police, or with the Commissioner for Corporate Affairs through the Office of Consumer Affairs and Fair Trading. If sufficient complaints are received by the police they may commence such an action. In any case before a licence is renewed the Commissioner is to take into account any information or matter that they consider relevant (s8(3), Security and Investigations Agents Act).

In its letter of demand a debt collection agency will often add to the debt a fee called its ’costs’. Generally this fee need not be paid. It is illegal for a debt collection agency to charge the debtor a fee for collection of the debt, or even attempt to do so, unless the debtor is legally liable to the creditor for that fee, for example if the agreement provides for payment of collection costs. Therefore the police should be told if a debt collection agency has made a demand for payment of its costs. It is an offence for which an agency or debt collector may be fined if convicted (s35, Security and Investigations Agents Act). It may also be conduct showing the person is unsuitable to hold a licence, in which case it could be suspended or revoked.

Responding to a Letter of Demand

When a letter of demand is received the following steps should be taken:

  • Check the amount the creditor is claiming. This is essential as the calculation of the total amount owing is often quite complicated and may have mistakes;
  • Write to the creditor (keep a copy) asking for a detailed statement of individual items, interest, term charges and any other costs;
  • When there is a letter of demand from a debt collection agency it is advisable to write to it too, saying a letter has been written to the creditor asking for a detailed statement;
  • When a statement is received, check it carefully or take it to debt counselling advice service where help can be sought;
  • If there are any errors or the account is unclear, write and request a correct statement or clarification;
  • If and when agreement is reached on the amount owing and the debtor is not able to pay, the debtor should attempt to make an arrangement with the creditor. If satisfactory arrangements are not made and the creditor obtains a judgment in his or her favour the debtor will have to pay not only the original debt but also the creditor’s costs;
  • Work out how much of the debt could comfortably be paid each week/fortnight and then write to the creditor offering to pay the debt or some part of it (name the amount) by weekly/fortnightly installments of a certain amount. If you show the creditor that you genuinely cannot pay the full amount at once, but are willing to pay by installments, a creditor will generally accept a reasonable installment offer. Do not sign a new agreement with the creditor for the new repayments if the agreement has a higher interest rate;
  • Investigate the possibility of obtaining a debt consolidation loan, under which all existing creditors can be paid out, leaving only one debt to the new lender. Debt consolidation loans from credit unions are generally available at lower interest rates than those from finance companies. Some finance companies take, as security for such a loan, a bill of sale over all the debtor’s household furniture, which may enable those creditors to exert considerable pressure to ensure that payments are maintained;
  • Do not simply ignore the letter and hope that the problem will go away. Usually it doesn’t and the debtor ends up having to pay extra for costs and interest.

Recovering Debt

The Judgment Debt

If a creditor gets judgment against a debtor, the amount which the court ordered the debtor to pay, the ‘judgment debt’, is payable to the creditor immediately. Where the debtor cannot or does not pay the amount to the creditor straight away the creditor can use the court processes described in this section to ‘enforce the judgment’ that is, recover the money from the debtor.

A person cannot be imprisoned for debt in Tasmania except in certain circumstances, such as:

  • default by trustees, or solicitors;
  • where that person is trying to avoid a judgment debt by leaving Tasmania; or
  • has had since judgment the means to pay the judgment debt or any installment thereof ordered to be paid, and has refused to neglected to do so (ss3 and 5Debtors Act 1870 (Tas)).

However, imprisonment is extremely rare because it will almost always be counter-productive.

Whenever the creditor is paid any or all of the judgment debt, the debtor should obtain a receipt. This applies to payment before and after judgment. A receipt is evidence that the amount of the judgment debt has been paid. A creditor’s record of the payment may be lost, especially if the creditor is a large company dealing with many debts, and the creditor may take or continue proceedings to enforce the judgment as if there had been no payment. Should this happen, the debtor should at once seek a stay of enforcement of the judgment and an order setting aside, or reducing the amount sought by, the execution proceedings, using the receipt as proof of payment.

A creditor wishing to enforce a judgment must do so within 6 years from the date of judgment. Beyond that time, the creditor must obtain the leave of the court before proceeding.

Court Process - Judgment Summons and Oral Examination

A debtor is sent documents telling them that they are required to come to court at a certain date and time (this is called a ‘summons’). The summons may be for an Oral Examination or a judgment summons. If the debtor does not obey the summons for an Oral Examination and come to court, a warrant may be issued for their arrest.

When the debtor comes to court, if they have not already made an arrangement to repay the debt, they will be asked to stand in the witness box and swear on the bible to tell the truth (or affirm, if they are not of a Christian faith there is also Torah and a Qur’an available upon request). The debtor will then be asked questions about their finances, including goods that they own and their budget. This is to ascertain ways that the debtor may be able to pay the judgment debt.

This procedure is the same for both a Judgment Summons and an Oral Examination, except that on an Oral Examination the court is empowered to make an order that the debt be repaid in installments. It makes the process a lot quicker if debtors bring documents like bank statements and a written summary of their budget (incoming and outgoing), etc.

Oral Examination of Judgment Debtor

After judgment has been entered in their favour, a creditor may apply to the court for an order that the judgment debtor be orally examined as to the financial situation of the judgment debtor and what property or means the judgment debtor has of satisfying the judgment. The purpose of the examination is to gain information about the debtor’s financial situation to assist in choosing a method of enforcing the judgment debt. For example, the creditor may examine the debtor to discover the debtor’s employer or bank accounts so that garnishee proceedings can be taken. This procedure is often used in Tasmania. On the hearing of the summons the court has power to order the debtor to attend for oral examination, and to produce any relevant books or documents, such as bank statements, a written summary of their budget, evidence of their outgoing expenses, etc.

If a defendant is summonsed to an oral examination and fails to attend, the magistrate can issue a warrant for their arrest to compel their attendance. 

Judgment Summons

A similar procedure for bringing a debtor before a court to be examined is available under the Debtors Act 1870 (Tas)  It is this procedure which is more commonly resorted to because on the hearing of a judgment summons the court has power to order payment of the debt by installments. A judgment summons must be served not less than four clear days before the day on which the debtor is required to appear. Once served, the debtor is bound to appear to be examined as to his or her means to pay the judgment debt at the time and place set out in the judgment summons. If the debtor fails to appear, the magistrate can deliver a judgment without their presence.

If on the hearing of a judgment summons the court is satisfied that the debtor has, or has had, since the date of judgment, the means to pay the debt and has refused or neglected to pay it, it may commit the debtor to prison for six weeks, or until payment of the sum due (s4, Debtors Act 1870 (Tas)).

In practice, it is a good idea to contact the creditor or debt collection agency before your court date if you want to arrange a repayment. If this occurs at least 3 days before the court appearance, you may be able to avoid coming to court altogether as this will give the creditor time to advise the court that an agreement has been reached.

Order for Payment by Installment

Where agreement is reached for payment of the debt by installments, it is possible for the Small Claims Court to order, with the consent of the creditor, that a debt be paid by installments (rule 76Magistrates Court (Civil Division) Rules 1998 (Tas)). It would also be able to do so where the creditor accepted a consent to judgment containing an installment proposal and applied for judgment (rule 114, Magistrates Court (Civil Division) Rules).

If a debtor fails to pay the debt the court may enter judgment for the claimant (creditor). In granting the judgment the court must have proof that the terms of the debt have been given in writing to the debtor and the debt has not been paid (rule 79, Magistrates Court (Civil Division) Rules). The other situation in which an order for payment by installments can be made is if the court is dealing with a judgment summons under the Debtors Act 1870 (Tas).

Garnishment

The Garnishee Order

A garnishee order is an order to a person who owes money to the debtor (called the ‘garnishee’) to pay that money to the creditor, instead of to the debtor, in satisfaction or partial satisfaction of the judgment debt. A garnishee is usually the employer of the debtor. The debtor has 21 days after being served with a ‘Provisional Garnishee Order’ to make one of two applications to the court. A Provisional Garnishee is served on both the debtor and the garnishee. The first application is an ‘application to set aside the default judgment’ if the debtor wishes to dispute the money owed or the amount. The second is an ‘application to reduce garnishee’ – the staff at the Tasmanian Magistrates Court can provide you with a document to assist you in preparing the application. If the debtor does not file an application within 21 days, a document called a ‘Final Garnishee Order’ is then served on the garnishee only, and the deductions made under the Provisional Garnishee Order will be paid out to the creditor. 

There are two kinds of garnishee order: a ‘lump sum’ order and a ‘wages’ or ‘periodic payment’ order. The most common kind of garnishee order is an order garnishing wages owing to the debtor. Only wages actually earned can be attached by a lump sum garnishee order because the debt must be ‘owing or accruing’ at the time of the garnishee order. However there are provisions in the Rules which permit the attachment of future earnings (rule 129G(3)Magistrates Court (Civil Division) Rules 1998 (Tas)). This allows a garnishee order to be made which requires the debtor’s employer to make deductions from the debtor’s wages each pay day to be paid in reduction of the judgment debt. The amount to be deducted is a specific figure set by the registrar. Generally, this amount will be 20% of the debtor’s net earnings. At any time the debtor may apply to the court for a reduction in the amount of the deductions because of his or her financial situation. This is called an 'Application to Reduce Garnishee'.

If more than one wages garnishee order is made in relation to the same debtor, they take effect in the order in which they were served on the garnishee (rule 129N, Magistrates Court (Civil Division) Rules 1998 (Tas)). If two orders are served on the same day, each has the same order, and the deduction of 20% is to be distributed equally. Orders served later are calculated on the basis of the net earnings of the debtor after the order/s with priority.

Disadvantages of a Garnishee Order

A garnishee order has some disadvantages to the debtor, including the following.

  • The order may be made when the debtor is not present in court. However, the debtor must be served with the Provisional Garnishee Order, so they will not be unaware of the proceedings. This means that there need be no hearing at which the debtor can object to the garnishment before deductions commence (although there is such an opportunity before deductions are paid to the creditor). Normally, the debtor only becomes aware that a garnishee order has been made when the order nisi is received by the employer or when deductions are made from his or her wages. Therefore it may cause financial hardship if the amount which the employer is required to deduct from the debtor’s wages each week or fortnight means that his or her income suddenly and drastically drops to an inadequate level. Although the debtor can apply for a reduction in the amount to be deducted, if his or her circumstances warrant it, this takes time and may involve time off work to attend a court hearing if the creditor cannot be persuaded to agree to the reduction.
  • It may affect the debtor’s relations with the employer as the employer may regard having to make deductions from wages as inconvenient and expensive. At worst the employer may dismiss the debtor, although most employers are unlikely to take such action.
  • A debtor may find it embarrassing or upsetting to have his or her private financial affairs revealed in this way. A garnishee order can be seen as humiliating since it could suggest that the debtor cannot be trusted to pay off the debt. On the other hand some debtors prefer it since it frees them from having to actually make payments, the deductions are made automatically and paid on their behalf, and as the money is not physically received by them it is less likely to be missed.

Action when Wages are Garnished

If the debtor disputes or is not sure that the debt is owed, or that the amount is correct, he or she should immediately contact the creditor and check the facts. This may happen where the creditor’s recovery action was not defended or where the debtor has since repaid some of the debt and the creditor has not taken that repayment into account. It may then be necessary to apply for the judgment to be set aside and for the garnishee order to be stayed in the meantime.

Where the debt is owed the debtor could, if appropriate, apply for a reduction in the amount of the deductions claiming that in view of the debtor’s family circumstances or financial position he or she is entitled to apply for a reduction in the deductions. The debtor may make the application to the court at any time and an affidavit in support of the application would normally be necessary. Obviously this would need to contain sufficient details of the debtor’s financial position to show that a reduction in the amount of the deductions was appropriate.

Once the objection is filed, the court registry will send a copy to the creditor and will give notice of the time and place of the hearing of the debtor’s application. If the garnishee order  was issued from a registry other than the one closest to where the debtor lives (for example, out of the Hobart registry when the debtor lives in Launceston) the debtor may wish to ask for the hearing to take place at the closest sitting of the court. At the hearing the debtor will have an opportunity to argue for a reduction in the amount ordered to be deducted. He or she may also be cross examined by the creditor, and should take full details of his or her financial situation so as to persuade the court that the rate of deductions set by the registrar is inappropriate.

Some debtors who have their wages garnished leave their jobs to avoid the garnishment. This is a risky procedure as the debtor may find it difficult to get another job. It will not prevent garnishment of the debtor’s wages from any new employer as soon as the creditor finds out who the employer is. Therefore it may be rather foolish to go to that trouble and risk simply to avoid repaying to the creditor a debt that is rightfully owed.

If the debtor really has some objection to having a garnishee order operate he or she should ask the creditor to accept an installment arrangement in lieu of the garnishment. Since a garnishment offers the creditor a certain amount of security in that the deductions must be made and paid over by a third party, he will need some assurance that the installment arrangement will be adhered to. For example, a periodic payment authority to a bank or similar in favour of the creditor, or perhaps even a voluntary deduction scheme if the employer will co-operate may provide that assurance. This is almost always a direct debit arrangement and therefore a ‘direct debit authority’. At the very least the creditor will probably seek to have the garnishee order only informally stayed by notice to the employer, to be revived if any installment is not paid on time.

Dismissal Due to Garnishment

Some employers rid themselves of the inconvenience and expense of garnishing an employee’s wages by dismissing the employee. People dismissed in these circumstances should complain to their union. In some cases, the union will be able to negotiate reinstatement. The employer cannot be prosecuted as it is not an offence to dismiss employees because their wages are being garnished for a civil debt. However, it may breach employment laws regarding unfair dismissal, depending on the nature of the debtor’s employment.

Where the judgment debt is for child support under an order of the Family Court or Federal Circuit Court, it is an offence to dismiss the employee. In these cases, a complaint should be made to the Family Court or the Child Support Agency if the order is registered for collection with the Agency. However the Child Support Agency provides easy and practical means or employers to comply with garnishment orders for child support.

Reducing the garnishee order

The Tasmanian Magistrates Court, Civil Division provides full support for individuals wishing to apply to have a garnishee order reduced. It is a simple process, easily followed from the Magistrates Court website.

Attachment of Wages of Public Servants

It is not possible for a creditor to use the normal garnishee procedures to attach the wages or salaries of public servants because of a rule that garnishee proceedings cannot be taken against the Crown. However, an alternative procedure does exist and is regularly used. The creditor obtains from the court a certified copy of the judgment against the debtor, and then sends this document to the department where the debtor is employed, together with a statutory declaration about the amount of the debt still owing. Deductions are then made from the debtor’s pay, and forwarded to the creditor, in the following ways:

  • For Tasmanian public servants the debtor’s paying officer is given a discretion to decide the amount necessary to be deducted to enable the judgment debt to be satisfied. Before doing so the paying officer must give the debtor written notice of the service of the copy judgment and statutory declaration, and require the debtor to advise if he or she claims the judgment has been satisfied (and, if so, to furnish evidence of that) or the amount due under the judgment.
  • For Commonwealth public servants, a similar procedure applies. Once the judgment creditor has served the documents on the paying officer, that officer contacts the public servant and inquires as to whether or not the judgment has been repaid, deductions will be made at the rate of 20% of the net salary (i.e. gross salary less income tax and superannuation contributions). The paying officer has a discretion to deduct smaller amounts if he or she is satisfied that deductions at the normal rate would cause severe hardship to the public servant (regulation 8A.9Public Service Regulations 1999 (Cth)). It is also possible for the public servant to specify a higher rate of deductions if he or she so desires. An administrative fee is payable by the creditor for the use of this deduction system. That fee is $38 (regulation 8A.6, Public Service Regulations), but the creditor, rather than the debtor, must bear this cost (s75Public Service Act 1999 (Cth);  regulation 8A.6, Public Service Regulations).

Centrelink payments

Garnishee orders, or other forms of attachment, are not available in the case of payments made under the Social Security Act 1991 (Cth) (Centrelink payments) except where the debt is to the Commonwealth for overpayment or other benefit-related payment issues (Chapter 5, Social Security Act 1991 (Cth)).

Another Act, the Social Security (Administration) Act 1999 (Cth) provides that: a social security payment is absolutely inalienable, whether by way of, or in consequence of, sale, assignment, charge, execution, bankruptcy or otherwise. However, once a social security payment has been paid into the debtor’s account it is no longer a social security payment under the Social Security (Administration) Act 1999 (Cth). It becomes part of the customer’s funds. A garnishee order on the account, equal to the amount of the customer's payment, is NOT affected by the inalienability provisions. Section 62 of the Social Security (Administration) Act provides for a saved amount to which the garnishee order CANNOT apply. The saved amount is equal to the following:

  • the total amount of the customer's payment, including advances, paid into the account in the 4 week period immediately before the order, minus
  • the total amount withdrawn from the account in the same period.

For more detailed information on debt collection and social security payments see the Financial Ombudsman Service website ‘Debt Collection and social security recipients’.

Private Agreements for Debt Recovery

If your debt comes to court you will have to pay the creditor’s costs of enforcing the judgment, as well as the original debt and the legal and court costs the creditor incurred in getting judgment. In a Minor Civil matter, costs do not apply except in special circumstances: see section 31AF of the Magistrates Court (Civil Division) Act 1992 (Tas) in contrast to Schedules 1 and 3 of the Magistrates Court (Civil Division) Rules 1998 (Tas). Interest on the judgment debt also runs from the date of judgment (s26, Magistrates Court (Civil Division) Act). Therefore, generally, it is to the debtor’s advantage that they pay the judgment debt as soon as possible. If the debtor is unable to pay the full amount of the judgment debt at once, a private agreement with the creditor to pay by installments will save costs and is usually the best method of repayment.

The advantages of paying by installment are as follows:

  • The debtor can work out how much he or she can afford to pay each week or fortnight from his or her weekly or fortnightly income and make a realistic offer to the creditor. If agreement can be reached the debt can be paid off steadily without forcing the debtor into further debt.
  • It does not have the disadvantages of other forms of court enforcement. Attending an examination hearing or judgment summons can cause the debtor inconvenience and loss of a day’s pay. Garnishment (see below) can cause a financial hardship to the debtor and can be embarrassing as the debtor’s employer will know that they are in debt. Seizure of goods under a warrant of execution can result in hardship and force the debtor into further debt to replace the goods seized.

A private agreement to pay by installments is no guarantee that the creditor will not take court proceedings to enforce the debt. It may, however, found an action for a stay of those proceedings. A ‘stay’ is an order that no more action take place on a particular matter until there is a change of circumstances.

Bailiff Powers

Action by a debtor when a warrant of execution is issued

The warrant cannot be enforced if the debtor owns no goods (for example, if everything is on hire purchase or owned by the debtor’s spouse) or land. Again the warrant cannot be enforced if the debtor does not let the bailiff into the house. If the debtor refuses to let the bailiff in, it should be done politely so as not to assault or obstruct him in the performance of his duties, as it is contempt of court to do so . If the bailiff is not allowed in to execute (that is, carry out the order), the creditor may use other means of enforcement, for example, wages garnishment.

A debtor who either does not owe the money, or believes that the amount is wrong, should ask the bailiff to delay a few days while the debtor contacts the creditor to check the facts. If the bailiff or creditor will not co-operate the debtor may be able to apply to the court for a stay of enforcement and an order setting aside the judgment. As soon as an application to set aside the default judgment is made the court will usually (or the debtor can) advise the bailiff of this fact. The bailiff is usually informed that they can still take goods but, that if the judgment is successfully set aside, they will have to return them. In this case, the bailiff will usually wait until the application has been decided to levy on or seize any goods.

Where the debtor does owe the amount claimed, she or he should immediately seek to make a repayment arrangement with the creditor in return for the staying of the warrant. Informal offers to the creditor to pay the debt in installments do not prevent the bailiff seizing the debtor’s property unless the offer has been accepted and the warrant stayed.

If the bailiff wishes to seize property that does not belong to the debtor the following steps should be taken.

  • The debtor and/or the owner (if present) should immediately insist to the bailiff that the goods are not owned by the debtor.
  • Any documents or receipts showing title should be shown to the bailiff.
  • It would appear that, in certain cases, if the bailiff seizes goods which do not belong to the debtor, the bailiff will be liable to pay the owner damages for interfering with goods. An action could be taken against the bailiff for trespass to goods and conversion. Mention this to the bailiff – it might persuade him or her not to seize the goods in dispute.
  • If the bailiff insists on seizing the goods, there is a special procedure called an ‘interpleader’ in which a court decides whether the person who claims to be the owner is in fact the owner of the goods in dispute. The procedure is set out in rule 137 of the Magistrates Court (Civil Division) Rules 1998 (Tas). To start the procedure, the owner of the goods (claimant) should advise the plaintiff, preferably in writing, of his claim to the goods. If the creditor does not accept the claim, the bailiff will then invoke the interpleader process. Usually the claimant will be required to appear and make his or her claim before the court, which will then resolve the competing claims.

Seizure

A bailiff executes the warrant by taking possession of (seizing) the debtor’s goods and selling them. Seizure gives the bailiff what is called ‘special property in the goods’, and the creditor the right to have them sold for his benefit, although legal title remains in the debtor until they are sold. The goods can be seized without actually packing them up and taking them away. An indication of an intention to take possession, often by placing a mark on the goods is sufficient.

Often it is convenient to leave the goods at the debtor’s house while a sale is arranged. In such cases the bailiff will take notional possession, called ‘walking possession’. This is done by obtaining the agreement of the debtor not to remove the goods, and a written undertaking to that effect. Although seizure of property is made under all the warrants in the possession of the bailiff, they are satisfied in the order in which they were delivered to the bailiff.

What Property Can be Seized?

The bailiff can seize personal property such as money, furniture, a TV or radio, electrical appliances or a car, as well as ‘choses in action’ such as cheques, promissory notes and such like. The property seized must belong to the debtor. Anything on hire purchase, anything rented (for example a TV) and anything belonging to anyone else, such as the debtor’s spouse or other relatives, cannot be taken.

The debtor’s house or land can also be seized but only if there is insufficient personal property to satisfy the judgment and costs of execution. Where land is to be seized the warrant has to be registered under section 61 of the Land Titles Act 1980 (Tas) before it can be sold.

Examples of Property that Cannot be Seized

When executing a warrant of execution issued out of the Magistrates Court the bailiff cannot take any clothes or bedding, even if they belong to the debtor, if they are being used by the debtor or a member of the debtor’s family. Nor can the bailiff take the debtor’s tools or implements used by the debtor in his or her trade up to a value of $3000 (Rule 131Magistrates Court (Civil Division) Rules 1998 (Tas)) A bailiff must wait 7 days from the date of seizure before offering the property for sale (Rule 132, Magistrates Court (Civil Division) Rules). The delay is to give the debtor an opportunity to apply to the court for the restoration of the goods to him or her. If the effect of taking the goods would be to deprive the debtor, or any essential requirements of living for the maintenance of health, the court may order that they be restored to the debtor; otherwise it can give leave for the execution to proceed in respect of those goods (Rule 133, Magistrates Court (Civil Division) Rules).

  • A judgment debtor drives a new car. If the debtor has finished paying off the car and so owns the car in law, the bailiff can seize it under the warrant. Where the car is still on hire-purchase, however, the bailiff cannot take it, though he may levy on the debtor’s interest in it if the hire purchase agreement does not provide that the debtor’s interest becomes terminable if execution is levied.
  • The judgment debtor’s lounge room is furnished with a lounge suite but the suite came with the house when it was rented and belongs to the landlord. The bailiff cannot take it.
  • A judgment debtor has borrowed a washing machine. The bailiff cannot seize the washing machine. 
  • The judgment debtor owns a sewing machine which is used in his or her business as a home-dressmaker. The bailiff may not be able to seize the sewing machine, depending on the value of the sewing machine (see Rule 131, Magistrates Court (Civil Division) Rules).

The Powers of the Bailiff

The bailiff cannot forcibly enter the debtor’s house by, for example breaking a lock, but can enter if all he or she has to do is open an unlocked door. The debtor can refuse entry and is entitled to use reasonable force to stop the bailiff getting in. This only extends to the outer door of a dwelling house; once inside he may break open inner doors. Furthermore it gives no protection against forcible entry of a bailiff into other buildings on the debtor’s property that are not physically connected to the dwelling house (for example, a barn or garage), or other buildings such as a shop used only as a place of business.

The bailiff may also enter the house of a stranger to execute the warrant, but does so at his own risk. If the goods of the debtor are not there the bailiff is a trespasser and liable to an action. It seems the bailiff may also break in if the debtor’s goods were taken there to avoid a lawful execution.

Lawful and Unlawful Execution

It is important to remember that even if execution is made following an illegal entry, the validity of the execution is not affected. The debtor’s only remedy would lie in an action against the bailiff for trespass. Fortunately bailiffs rarely exceed their powers as they are reluctant to behave in a manner for which they would be personally liable.

After the bailiff has been let in and has seized goods, he can forcibly re-enter the second time to take them away. He may also, if necessary, break open a door in order to carry away goods that have been seized.

If the debtor has no property which can be seized, or insufficient property to pay the debt, the creditor will be so advised. As the writ may be in force for 12 months from the date of issue, the creditor can apply to the registrar who issued the warrant to have it sent back to the bailiff for another attempt at execution, that is, at getting more goods or money to pay the debt in full. The creditor may also decide to try other enforcement procedures, such as garnishment or a judgment summons if the writ is returned unsatisfied.

Compared to the number of warrants issued, it is not common for goods to be seized and sold under a warrant. Often, where the debtor has no property which can be taken and the bailiff is reluctant to take household goods, the debtor and creditor come to some arrangement.

If property is seized it must be advertised for sale in a local newspaper not less than 3 days before the sale is held, (Rule 132, Magistrates Court (Civil Division) Rules). The sale may be conducted at the debtor’s house. Sale proceeds of goods seized will often be far less than the value of the goods to the debtor or their replacement value. For this reason the debtor should avoid such sales, for example, by making an arrangement with the creditor before matters reach that stage, if possible.

Lawful Entry

Bailiff B is refused entry into D’s house. B surveys the premises and discovers a garage in D’s backyard, about 5 meters from the rear of the house. The door of the garage door is locked, so B breaks it down, enters the garage and executes the judgment debt on D’s car and other items of value. 

Unlawful Entry

Bailiff B, on being refused entry into D’s house, breaks open the garage door and executes the judgment debt on D’s boat. The garage and the dwelling house share a common wall and are thus physically connected.

Warrant of Execution

A warrant of execution is an order to the bailiff to seize and sell goods or land of the defendant debtor to satisfy the judgment debt unless the amount in the warrant is paid. A creditor can apply for such a warrant to the Registrar of the court in which the judgment was entered at any time without leave within 6 years after judgment. This is done by preparing and filing the warrant for the registrar to sign, seal and deliver to the bailiff. A warrant remains in force for twelve months from the date of its issue. After 6 years the leave of the court is needed to issue a warrant, unless there has been some payment into court under the judgment within the previous 12 months.

The delivery of a warrant to the bailiff binds the debtor’s goods so they are available to satisfy the judgment debt. This means the debtor cannot dispose of them, and if he or she does, the goods can be followed and seized (subject to the rights of a bona fide purchaser for value with no notice of the warrant). However, in order to bind the debtor’s interest in land held under the provision of the Land Titles Act 1980 (Tas) it is necessary for the warrant to be recorded by the Recorder of Titles on the copy of the title kept at the Land Titles Office. Once that is done the warrant binds the land but only for three months (section 61, Land Titles Act (Tas)). See the contact section for contact details for the Land Titles Office.

To execute a warrant a bailiff generally goes to the defendant’s house and explains that if the debtor does not pay the amount on the warrant his or her goods or land will have to be seized and auctioned to pay off the debt. Generally, bailiffs are reasonable and will allow the defendant a short time to get the money or negotiate a repayment arrangement with the creditor. Of course, if the defendant has no money or goods, the bailiff can do nothing.

In Tasmania, a warrant is a very common first port of call for creditors in order to persuade the judgment debtor to pay or come to some arrangement with the creditor. A debtor should be careful not to be frightened into hasty arrangements for payment that cannot be afforded.

Payment of the judgment debt can be made to the bailiff at any time, even after goods have been seized, provided they have not yet been sold. On paying the debt the sale is stopped and the goods returned. If the debtor pays the judgment debt after the goods have been seized, the debtor will have to pay any costs of seizing, advertising and arranging for sale. Even if nothing has been seized, the debtor will have to pay the costs of the warrant.

Debt Collectors

What can a debt collector legally do?

With the new Consumer Protection legislation, which came into effect on 1 January 2011, the Debt Collection Guideline for collectors and creditors is under review for republication, due to changes in the protections available under legislation. It is currently available online, but may change in the future. It is not reasonable to frighten, intimidate, harass, demoralise, exhaust, or embarrass the debtor. Consumer legislation on the prohibition of misleading and deceptive conduct, unconscionable conduct, and a general criminal prohibition of the use of physical force, undue harassment and coercion all apply to debt collectors.

Debt collectors can contact a debtor to:

  • give information about the debtor’s account;
  • convey a demand for payment;
  • accurately explain the consequences of non-payment, including any legal remedies available to the collector/creditor, and any service restrictions that may apply in the case of utilities (for example, electricity);
  • make arrangements for repayment of a debt;
  • put a settlement proposal or alternative payment arrangement to the debtor;
  • review existing arrangements after an agreed period;
  • ascertain why earlier attempts to contact the debtor have not been responded to within a reasonable period, if this is the case;
  • ascertain why an agreed repayment arrangement has not been complied with, if this is the case;
  • investigate whether the debtor has changed their residential location without informing you, when there are grounds for believing this has occurred;
  • sight, inspect or recover a security interest; or
  • at the debtor’s request.

Remedies are available through the Security and Investigations Agents Act 2002 (Tas) where a licensed Tasmanian debt collector has behaved in a manner that demonstrates that they are unsuitable to hold a license under that Act. Complaints should be directed to the Department of Consumer Affairs and Fair Trading (CAFT). You can also inform the Magistrates Court of a bailiff’s behavior if they have acted inappropriately, as the Magistrates Court are the body that license bailiffs. 

Harassment by Debt Collectors

Harassment of debtors or other persons while collecting debts is one ground for revoking or refusing to renew a debt collector’s licence. For the purposes of the Security and Investigations Agents Act), ‘harassment’ means any act or conduct that tends to intimidate, embarrass, ridicule or shame any person (s3, Security and Investigations Agents Act). It includes:

  • any conduct (including the positioning of a vehicle) from which it might reasonably be inferred by a person visiting or passing any premises that an occupant of the premises is being visited or under surveillance by an agent (for example, leaving the debt collectors car at or outside the debtor’s home);
  • unduly frequent visiting of premises or communication with the occupants of premises (for example, unreasonably frequent phone calls);
  • any statement or suggestion made to, or intended to be communicated to, a debtor that, if he or she fails to pay any debt, action may be taken that would embarrass or shame him or her, or prejudice him or her in his or her employment (for example, sending the debtor a letter threatening to leave an embarrassing document).

A debtor who has been harassed by a debt collector in any of these ways may be able to one or both of the things set out below.

Complain to the Police or CAFT

Serious harassment (such as violence or threats of assault) is a criminal offence for which the person harassed or the police can prosecute the debt collector. The police in the area where the debt collection agency does business should be notified of this conduct so they can begin proceedings to have the licence revoked, as described under ‘Letter of Demand’ above. For more minor types of harassment debt collection agencies may be subject to a fine (s22, Security and Investigations Agents Act).

An exception from the requirement to have a license exists for some creditors including banks, real estate agents and accountants (s41, Security and Investigations Agents Act) ensuring that they have less to fear when they harass debtors. However, if the creditor is a company or is using the phone or postal service to harass the debtor, it is possible for the debtor to complain to the Commonwealth agencies – the Australian Competition and Consumer Commission (ACCC) and/or the Australian Securities and Investments Commission (ASIC). Another alternative is the Tasmanian Department for Consumer Affairs and Fair Trading (CAFT). Under the Australian Consumer Law (ACL) it is an offence for a company to harass a consumer (ss50 and 168, ACL).

Bankruptcy

What is Bankruptcy?

Bankruptcy is a legal status conferred under the Bankruptcy Act 1966 (Cth). The Act applies Australia wide. A person declared bankrupt is able to have most of their property (exceptions include household furniture, personal injuries compensation and certain vehicles) made available for distribution amongst creditors (s58). A bankrupt also has certain restrictions placed upon them although one advantage is that creditors, in most instances, are unable to pursue them further for payment (s58(3)).

Bankruptcy was originally designed to prevent people who could not pay their debts being imprisoned. It provides a method by which some control can be taken over the debtor’s affairs to ensure that the entire financial disaster can be brought to an end, and that the debtor and creditor are allowed to make a fresh start. When people become bankrupt, most of their property is taken over by either a registered trustee or the Official Trustee (or the office of the Official Receiver). All bankrupts must supply any relevant information that is requested by the trustee. Bankrupts who are paying contributions to their bankrupt estate may not travel overseas unless they have the permission of the court. The trustee can sell property, carry on a business, sue for any debts owed to the bankrupt and generally take over the financial affairs of the bankrupt in order to pay creditors.

The bankruptcy generally continues until discharge or annulment takes place. This can be when the bankrupt deceased’s estate has been fully administered (see below) or when all debts have been paid, or it can be automatic after three years though in certain circumstances it can go longer.

Who can be made bankrupt? Who should consider bankruptcy?

Who Can Be Made Bankrupt?

Only natural persons can be made bankrupt. Where there is a partnership or persons trading under a business name, it is not the firm which is made bankrupt, but the individual or individuals who make up that firm. Companies cannot become bankrupt under the Act (section 7 of the Bankruptcy Act 1966 (Cth)) although there are similar provisions (called administration and winding up) for them under the Corporations Act 2001 (Cth) (ss435C and 440A).

A person under the age of 18 (a minor) can only be made bankrupt if there is an enforceable debt which has not been paid, although minors can enter bankruptcy voluntarily. In most cases, only contracts for necessary goods or services are enforceable against persons under 18. The legal definition of necessaries is complex although it appears in practice that the trustee decides whether goods or services are necessary. A trustee might consider food, clothing and accommodation to be necessaries but other items, such as cars, or even trade debts, may not be.

People who are not insolvent (that is, who do have sufficient money or property to enable them to pay their debts) can be made bankrupt if they do not take action when a bankruptcy notice or petition is issued against them. It may be that after bankruptcy, the bankrupt can arrange to pay all of the debts or obtain annulment. Even so, there are still disadvantages from having been made bankrupt. The trustee in bankruptcy charges for administering the bankruptcy and some fees would have to be paid to the Registrar.

Who Should Consider Bankruptcy?

While a person may be the subject of a creditor’s action to bring about bankruptcy, others may choose bankruptcy themselves. Remembering the advantages and disadvantages of bankruptcy, and giving careful thought to advice taken before a person chooses to become bankrupt, for some people bankruptcy may be the most desirable course of action. Such people may include:

  • single parents who do not own a house, whose household goods are on credit (but not on hire purchase or under a bill of sale), who are receiving a pension or benefit, who are unlikely to be earning other substantial income in the near future, and who are being harassed by creditors;
  • deserted wives or widows who have debts of their own, and who are otherwise in the same position as the single parents just described. However, many debts for household goods may be the responsibility of the husband;
  • persons on pensions who own houses or goods bought with money awarded as compensation for personal injury; or
  • wage earners on low wages, especially if they have a large family, pressing debt problems and heavy, additional expenses, such as, a sick or handicapped child.

If the debtor would not benefit from bankruptcy, it may be possible to come to an arrangement with the creditors to pay all or part of the debts by installments over a particular period of time. However, the debtor should be warned that such agreements do not prevent a creditor from taking bankruptcy action against the debtor. Should the debtor subsequently become bankrupt, any money paid to creditors may be recovered later by the trustee because such payments gave a ‘preference’ to some creditors over others (s122Bankruptcy Act 1966 (Cth)).

Some Basics of Bankruptcy

Proceedings

A person can become bankrupt under the Bankruptcy Act 1966 (Cth) in the three following ways:

  • voluntary bankruptcy: the debtor files a debtor's petition (approximately 80% of bankruptcies);
  • forced bankruptcy: the creditor(s) files a creditor's petition; or
  • deceased bankruptcy: either the legal personal representative of the deceased or the creditor can petition for an order that treats the deceased person as a bankrupt.

The Bankruptcy Act is a Commonwealth Act; therefore it applies in all states and territories. The relevant courts are the Federal Court of Australia, General Division, and the Federal Circuit Court. The Family Court of Australia also has jurisdiction under the Bankruptcy Act where the trustee is a party to family law property or spousal maintenance proceedings. Furthermore, both the Federal Court and the Federal Circuit Court are empowered to transfer proceedings to the Family Court under the Bankruptcy Act (ss35 & 35A).

The Basics of Bankruptcy

There are a few basic points that you should know about bankruptcy:

  • The two main purposes of bankruptcy are to give the debtor a fresh start by wiping most of their debts; and to fairly distribute the debtor’s assets amongst creditors.
  • the minimum amount that a debtor must owe before a creditor can obtain a bankruptcy notice or bankrupt the debtor is $5,000 (effective from 11 August 2010);

Only people can be made bankrupt, not businesses or companies. Where a partnership or persons trading under a business name are insolvent, it is not the business that is bankrupted but the individual or individuals who run that business. The Bankruptcy Act does not cover companies (s7).

A person under the age of 18 years can be made bankrupt (s7(1A)), but not if the debts which are the trigger for the bankruptcy are unenforceable due to the person's age.

The Australian Financial Security Authority (AFSA) undertakes the roles of Inspector-General in Bankruptcy, Official Receiver and Official Trustee in Bankruptcy. When a person becomes bankrupt all their "divisible property" vests in (ownership rights are moved to) the Official Trustee in Bankruptcy or in the registered trustee if there is a private trustee. The trustee can require a bankrupt to provide all financial documents and any other information relevant to the bankruptcy. The trustee might require the bankrupt to hand over their passport. A trustee in bankruptcy also has the power to:

  • investigate the conduct and dealings of the bankrupt and the reason for bankruptcy; and
  • seize and sell certain assets and distribute the proceeds. AFSA in its role as the Official Trustee in Bankruptcy is the trustee of about 86% of bankruptcies, the remainder are under the control of private registered trustees.

The Effect of Bankruptcy on Debts: Provable and non-provable debts

The effect of bankruptcy is that the bankrupt is released from almost all ‘provable’ debts. However, a bankrupt is not released from ‘non-provable’ debts. A ‘provable’ debt allows a creditor to lodge a proof of debt and will then be paid a proportion of the money after the bankrupt’s property is sold. Most debts incurred by a bankrupt will be provable. Exceptions do exist however. Provable debts that the bankrupt will still have to pay include those incurred by fraud; those that are under a child support maintenance order and those that relate to a bond or to some other types of criminal law penalty. Non-provable debts are those are not released by bankruptcy. Such debts include those incurred after the date of bankruptcy; court fines and those debts claimed by a creditor for damages which have not been fixed by formal agreement or by the court (these are known as unliquidated damages).

Creditors

Secured creditors

Secured creditors have security over your assets, which entitles them to sell them in order to recuperate a debt. Examples are:

  • banks with a mortgage over a house
  • finance companies with a chattel mortgage, lease or bill of sale over a car, furniture or electrical goods
  • hire purchase arrangements where you have not paid the full amount
  • creditors secured by government legislation over houses and land, such as council/shire rates and water rates.

Unsecured creditors

Unsecured creditors generally have no right to recover where a person becomes bankrupt, which is why alternatives to bankruptcy are in their interest. Examples of unsecured creditors include:

  • banks, finance companies and credit unions for personal loans, credit cards and store cards
  • service providers, doctors, lawyers and tradespeople.

Advantages and Disadvantages of Bankruptcy

Bankruptcy should only ever be considered as a last resort. While every debtor’s particular circumstances will vary there are advantages and disadvantages that should be weighed when making a decision about whether or not to proceed with bankruptcy. For insolvent non-business debtors with little or no valuable property bankruptcy provides an opportunity to start afresh without continual harassment and the threat of legal action. However, for the insolvent business debtor with high standing in the community or for those insolvent non-business debtors with valuable assets bankruptcy may be devastating. Loss of assets, income and status are some of the detrimental affects that may flow from bankruptcy.

It is strongly recommended that all debtors contemplating bankruptcy make an appointment with a financial counsellor or accountant to discuss how bankruptcy will affect them and whether there are more appropriate alternatives.

Advantages

  • Discharge from bankruptcy clears most debts.
  • Once a debtor is declared bankrupt, most unsecured creditors are unable to pursue further legal action (although in rare cases the courts have allowed creditors to continue with court action).
  • When a person who has a number of debts is being harassed by creditors to pay these debts, the pressure on the debtor can be almost unbearable at times. Generally speaking, the harassment will stop once the person enters bankruptcy. All further communications regarding the debts should take place between the creditors and the bankrupt’s trustee in bankruptcy.
  • A bankrupt with no dependents and an income of less than $47,693.10 net per annum (indexed – see contacts and resources section for link to index table) cannot have any of that income taken off of them to pay their debts. Low income earners can make voluntary payments to their bankruptcy trustee but are not required to pay contributions.
  • The Bankruptcy Act 1966 (Cth) grants significant protections to superannuation payments (Part IV, Division 3, Subdivision B), life assurance payments (s116(d)(i)) and compensation payments for personal injuries (s116(g)(i)). The Act also grants some protection to assets bought with these payments. However, these payments and assets are not protected if the debtor is not bankrupt and the creditor is successful in having a court order payment of a debt.

Disadvantages

  • The ability to access credit will be difficult to obtain for a period of time after bankruptcy. This is partly because a record of the bankruptcy is added to the debtor’s credit report and stays there for seven years.
  • A permanent record of a debtor’s bankruptcy is kept with the Inspector General in Bankruptcy. For a fee, anyone can access these records on an electronic index known as the National Personal Insolvency Index (NPII).
  • The bankrupt may be required to hand over their passport and must obtain permission from their trustee to leave Australia (s272, Bankruptcy Act). Penalties apply for attempts to defeat or delay creditors by leaving the country.
  • Trustees are able to investigate bankrupt’s past dealings and in some instances will recover property that the trustee has transferred up to five years before the date of the bankruptcy.
  • Obtaining credit above $5,043 - including the hiring of goods or writing cheques- is a criminal offence if the person extending the credit is not informed about the bankruptcy (sections 149D(1)(c)269(1)(a), and 304A(1)(g), (h) & (j), Bankruptcy Act).
  • Bankrupts will not be able to seek employment in particular areas because of the rules and legislation that governs those types of employment. This is not a matter under the Bankruptcy Act, but that of particular industry associations and licensing authorities. Employment difficulties will be encountered for those bankrupt debtors seeking work as a lawyer, accountant, police officer, estate agent, company director or anyone wanting to work in a managerial setting. This list is not exhaustive and it is strongly recommended that a person considering bankruptcy make enquiries regarding the type of work they want to be employed in.
  • If a bankrupt does not co-operate with the trustee and fulfill certain duties (such as notifying details of earnings and changes of address), he or she may be dealt with by the courts.
  • Bankrupts will lose most of their valuable property.

The Bankrupt's Property

Non-divisible property

The property which a trustee cannot take from a bankrupt is set out in section 116 of the Bankruptcy Act 1966 (Cth) and Bankruptcy Regulations 1996 (Cth), Regulations 6.036.03A and 6.03B. This list includes:

  • necessary household property such as beds and fridges;
  • property of the bankrupt’s that is used to earn income such as the tools of their trade; their plant and equipment and; reference books not exceeding $3500 (indexed) in value and such other discretionary items as the creditors or court may allow;
  • a motor vehicle valued at less than $7050 (indexed);
  • the interest that a bankrupt has in a regulated superannuation fund, or a payment from such a fund received on or after the date of bankruptcy (s116(d)(iii)).
  • the proceeds of certain damages claims for compensation and any property purchased with, or substantially with, the proceeds of such a claim (s116(g)).

Divisible Property

In determining whether or not to seize and sell certain assets, the trustee must consider the costs of seizing and selling the asset in relation to its value (Reg 6.03(4)(e)). The trustee must take into consideration any special or health or medical needs of the bankrupt and/or the bankrupt’s household as well as whether the property is reasonable necessary for the functioning of the household (Reg 6.03(4)).

Divisible property is that which can be taken by the trustee and includes houses, land and motor vehicles worth over $7050 (indexed). Generally, all property owned by the bankrupt at the time that bankruptcy takes place or that is acquired during the bankruptcy is divisible and ‘vests’ in the trustee. The trustee thereby becomes the legal owner of the property ensuring that it is paid off in order to distribute the proceeds to the creditors. Generally, any part share that the bankrupt has in jointly owned or mortgaged property will be sold if commercially practicable.

Offering to Buy an Asset from the Trustee

The trustee may sometimes ask the bankrupt whether they know of anyone who may want to purchase the asset. This may occur, for example where the bankrupt has equity in a house or in those instances in which the asset is unlikely to attract a good price.

Property acquired during Bankruptcy

Any property which comes to the bankrupt during the period of bankruptcy (for example, lottery winnings, an inheritance or a gift) may also be sold or made available by the trustee for payment to the creditors.

The Home

If a bankrupt owns a house subject to a mortgage or is purchasing it on a long-term purchase contract, the bankrupt’s interest in the house would generally have to be realised. If the house is in the bankrupt’s name, or if the husband and wife are joint owners and are both made bankrupt, the trustee will normally sell the house, unless it is mortgaged by the Defence Service Homes Division where the Secretary of the Department of Defence will rarely give permission for the sale to take place (s45A(1)(b)Defence Service Homes Act 1918 (Cth)). If only one spouse becomes bankrupt and owns a house jointly with the other, the trustee will register as joint owner of the house with the non-bankrupt spouse. While the trustee is a joint owner, mortgage payments will not have to be made by the trustee, but the registration of the trustee does not prevent the mortgagee selling the property if the payments fall into arrears. A spouse has three choices:

  • s/he has first option to buy the bankrupt husband’s interest or share in the house from the trustee. The bankrupt’s interest is valued at the time of sale and is paid in cash;
  • if the spouse cannot afford to buy the other spouse’s share, s/he may join with the trustee in a sale of the house, both usually receiving equal shares of any money left over after the payment of expenses and the mortgage;
  • if the spouse refuses to co-operate, the trustee can apply to the Supreme Court, the Federal Circuit Court, or the Federal Court for an order that the house be sold and the proceeds divided.

It is important to find out where the proceeds used to buy the house came from. As mentioned earlier (see ‘Advantages and Disadvantages’), if the house was built with, or substantially with, money from a worker’s compensation award or settlement, with damages awarded in a third party action or with money received on account for personal injury done to the debtor, the debtor’s family or the debtor’s spouse, the house may be protected under the Act and may not be taken and sold to pay the creditors (s116Bankruptcy Act).

Essential Household Services

Policies of different utility and telecommunications agencies vary. In general, bills relating to the period up to the date of bankruptcy will not have to be paid although a continuation of the service after that date will still have to be paid. Often, these agencies will open a new account after the date of bankruptcy and may impose a service restriction. For example Telstra may disconnect its service and then reconnect with a bar on STD calls.

The Car

A bankrupt is able to retain a motor vehicle where the aggregate vale does not exceed the prescribed amount of $7050 (indexed). The court or the creditors may determine that the bankrupt person can retain a vehicle or other property having a value greater than the prescribed amount before the trustee sells the property. The bankrupt must use the vehicle primarily as their means of transport meaning that if it unregistered and not being used as a form of transport the bankrupt will not be able to keep it. If the trustee sells the bankrupt’s car which is valued in excess of the prescribed amount he or she must pay to the bankrupt the prescribed amount.

Income

Bankrupts who earn above a certain income will be required to make contributions to their trustee. The level is dependant on a number of factors including the amount of income and the bankrupt’s number of dependents. Income is defined broadly in the Bankruptcy Act 1966 (Cth) and includes payments from superannuation funds and fringe benefits such as subsidised rent or use of a company car.

The net income that a bankrupt can earn before being required to make contributions to their trustee is called the Actual Income Threshold Amount (AITA). A bankrupt with no dependents as at 1 January 2006 was able to earn AITA of $47,693.10 per year. A dependent is defined in section 139K of the Bankruptcy Act 1966 (Cth) as someone who lives with the bankrupt, is wholly or partly dependent on the bankrupt and does not earn more than ‘the prescribed amount’ which as of 1 July 2012 is $3,181. If the bankrupt has one dependent, their income threshold is increased by 18 percent; by 27 percent for two dependents, by 32 percent for three by 34 percent for four and by 36 percent for more than four dependents.

The AFSA website keeps an updated table showing the current AITA amounts. The amounts are updated quarterly and sometimes twice yearly – 20 March and 20 September. The AITA is updated twice yearly.

Rent

Bankruptcy removes rent debts. Despite this, landlords are still able to evict tenants for non-payment of rent.

Public housing through Housing Tasmania generally does not exclude people who have declared bankruptcy from applying for public housing assistance. However, where a person has declared bankruptcy to avoid a debt to Housing Tasmania the person may be excluded from having an application assessed for up to 6 months. There is no definite course of action, and each case is assessed on a case-by-case basis. For more information, contact the Tenants Union.

Goods on Hire Purchase and Lease

As goods under hire purchase and lease contracts are not owned by the debtor until the end of the agreement, they cannot be taken by the trustee. The trustee may, with the agreement of the owner (usually a finance company), sell the goods for more than the amount owed under the contract and apply the surplus to the bankrupt estate. However, it is common for the finance company to repossess goods when a person becomes bankrupt if the installments are in arrears. If there is money still owing to the finance company after it has sold those goods, that debt will be added to the trustee’s list. However, should the amount still owed by the debtor be small, it may well be that the company will be obliged to refund the balance of the proceeds of the sale of the goods, after the debt has been paid in full.

Goods Subject to a Bill of Sale or other Security

Finance companies often secure loans with a bill of sale or other security over all the household goods of debtors. When a person becomes bankrupt, the company holding the bill of sale has a kind of mortgage over the goods and will normally seize them if payments are in arrears. This can be disastrous for the debtor, who faces losing all of his or her household goods. Although the Act specifically protects such goods, a Bill of Sale or other security overrides that protection.

Money Received by Bankrupt during Bankruptcy

At any time during the bankruptcy, the trustee may take any money or other items which the bankrupt receives, such as gifts, lottery winnings, or money received under a will. If the bankrupt accumulates a significant amount of money and buys some possessions, they may also be taken by the trustee.

Petitions for Bankruptcy

Debtor’s Petition

There is no minimum amount that has to be owed before a debtor can file a petition for bankruptcy. In order to file for bankruptcy a debtor must complete three documents:

  • a debtor’s petition for bankruptcy; and
  • a statement of affairs

All documents can be obtained from the Australian Financian Security Authority (AFSA) office or website as well as a ‘prescribed information’ booklet.

Upon completion of the documents the debtor must submit them within 28 days of signing to the Official Receiver at the Office of AFSA, email the documents or send them to AFSA by post. Information on the process is available on the AFSA website.

When the Official Receiver receives the petition and allocates a bankruptcy number, the debtor becomes bankrupt. The bankruptcy takes effect from midnight of the night before the petition is accepted.

Free assistance is available from financial counsellors to assist in the completion of the statement of affairs. Financial counsellors will also be able to assess whether options other than bankruptcy may exist. See the Contacts and Resources section for details of financial counsellors in Tasmania.

Following lodgement of documents with AFSA and once the debtor is declared bankrupt, the trustee may ask that they attend an interview. Consumer bankrupts with no assets will generally not be required to attend such an interview. At this interview, the trustee may require of the bankrupt that they provide copies of contracts ad other documents relating to the debts. They may also ask that the bankrupt hand over their passport. Generally, these measures will not be required of a consumer bankrupt with no assets.

Creditor’s Petition

If a debtor owes $5000 or more to a creditor, the creditor is able to enforce the debt by taking bankruptcy proceedings against the debtor. If a debtor has many debts which cannot be paid in full, it is sometimes advisable to go into bankruptcy voluntarily, or to make formal arrangements, short of bankruptcy, to consolidate all the debts with creditors. In order for a creditor to begin bankruptcy proceedings, the creditor must file a creditor’s petition in either the Federal Court or the Federal Circuit Court.

The first step requires that the creditor have a court judgment against the debtor indicating that there is debt of greater than $5000 owing to them from the debtor. The creditor must then obtain a bankruptcty notice from AFSA demanding payment of money owed within 21 days. Failure to pay within that time then allows for a creditor to petition the court, as failure to pay is an act of bankruptcy.

If a bankruptcy notice is served on a debtor and they are unable to comply with the notice within the time prescribed, the debtor can apply to the court or to the Registrar for an extension of time. This extension of time however will only be granted if the time for compliance has not expired; and either:

  • proceedings to have the judgment or order set aside have been instituted; or
  • an application to set aside the bankruptcy notice has been filed with the Registrar (ss41 and 6B of the Bankruptcy Act 1966 (Cth)).

The debtor will be given an opportunity to be heard at a bankruptcy hearing. At the hearing of the creditor’s petition the creditor must establish that the debtor committed an ‘act of bankruptcy’ within the six month period preceding the petition being filed in court. An ‘act of bankruptcy’ is an action of a debtor that shows an inability to pay their creditors. Section 40 of the Bankruptcy Act lists over 20 actions that are considered acts of bankruptcy. The most common act of bankruptcy used by creditors is a failure to comply with a bankruptcy notice (s40(1)(g)). The court may then make an order (called a sequestration order) making the debtor a bankrupt.

If a sequestration order is made, the debtor must file a statement of affairs with the Official Receiver. This must be done in the prescribed form within 14 days of being notified of the bankruptcy and verified by affidavit. A copy must be given to the trustee (s54).

Examination of the Bankrupt

There are three main ways in which a bankrupt can be examined under the Bankruptcy Act 1966 (Cth). These are:

  • the Court or a Registrar can at any time, whether before or after the end of the bankruptcy, summons the bankrupt, or an ‘examinable person’ to be examined in public in relation to the bankruptcy (s81, Bankruptcy Act). An ‘examinable person’ is defined broadly as ‘a person who might be able to give information in relation to the bankruptcy’.
  • a bankrupt or any other person can be required by written notice to ‘give evidence’ to the Official receiver (s77C, Bankruptcy Act).
  • the trustee can require a bankrupt to attend a meeting of creditors. The meetings can be held at the request of the creditors or at the discretion of the trustee (s77(1)(d), Bankruptcy Act).

Examinations – Hidden Property or Assets

If it is suspected that a bankrupt is attempting to hide property, the trustee has powers under sections 77 and 81 of the Bankruptcy Act to make an examination to discover hidden assets. If the trustee detects evidence indicating that an offence may have been committed under the Bankruptcy Act the trustee may refer the matter to the Fraud Investigation section within AFSA. If following investigation the Fraud Investigation section within AFSA believe the offence can be substantiated the matter will be referred to the Director of Public Prosecutions. The public prosecutor will then ultimately decide whether to proceed with the prosecution. It is a criminal offence to hide property or assets when bankrupt.

Alternatives to Bankruptcy

Informal Arrangements

Options exist for debtors that do not involve filing for bankruptcy. Alternatives to bankruptcy are something that unsecured creditors are more interested in than secured creditors, as unsecured creditors have no means of recovering debts except those to which the bankrupt agrees. The alternatives include:

These options should be thoroughly explored with a solicitor, accountant or financial adviser before a person voluntarily enters bankruptcy. A bankruptcy trustee can also help to advise you.

Informal Arrangements

Informal agreements with creditors should be the first option considered by debtors and will usually be suggested by a financial counsellor or, perhaps, an accountant or solicitor. Informal arrangements cost less to administer than more formal arrangements but will not work unless all the creditors agree. If any creditor chooses to take recovery action, rather than agree to an informal arrangement the proposal will be unworkable. If informal agreements are going to be supported by creditors it is important that they set out to achieve realistic goals, as well as being done as soon as is practicable after the debtor is unable to meet their monthly commitments. Generally, once a creditor has commenced recovery proceedings it will usually be too late to put forward an informal agreement as an alternative.

Part IX Debt Agreements

Part IX of the Bankruptcy Act 1966 (Cth) is concerned with debtors entering into legally binding debt agreements with their creditors to repay part or all of their debts. These agreements are a possible means of helping a debtor to retain some of their assets. Debt agreements are available only to people with fairly small debts, few assets and low incomes, and only with the consent of all their creditors. Debt agreements are similar to Part X procedures although one advantage is that it is not necessary for a registered trustee to propose or administer the agreement. Another advantage is that a Part IX debt agreement has similar protections to bankruptcy including a stay on enforcement action against property and relief from harassment.

The Australian Financian Security Authority (AFSA) offers some advice and a summary of the Part IX debt process including fees, forms, set up process and consequences.

Part IX debt agreement fees

While a friend or associate of the debtor may help to establish a Part IX agreement, it is more usual for a Debt Agreement Administrator to be involved in setting up the agreement. Debt Agreement Administrators charge set up fees from $500 - $1900, although if the debt agreement is complex, the fees may be higher. Fees cover services provided to the debtor including:

  • providing information to debtors about the options to deal with their unmanageable debt and the consequences;
  • to help debtors access “hardship assistance” with banks and finance companies;
  • assistance with the debtor’s budgeting;
  • speak to creditors on behalf of debtor’s to get up to date details of their debts for preparing a debt agreement proposal explain the debtor’s circumstances and the reason why the creditors should “vote for” the proposal; and
  • preparing and lodging the debt agreement proposal forms with AFSA from information provided by the debtor.

Fees also attach to the administration of a debt agreement. This is usually in the range of 20% of the debt collected. So, if a payment of $400 comes from the debtor, the administrator will take $80 of that amount as an administration fee.

What the Part IX agreement should be about

Part IX debt agreements should offer a means for the debtor to repay their creditors. The agreements are concerned with any aspect of a debtor’s financial affairs and their attempt to discharge their debts. A proposal for an agreement should contain:

  • Debt Agreement Proposal - identifies the debtor and outlines what the proposal offer is in dollar terms;
  • Explanatory Statement - informs the creditors about their income, expenses, assets and debts, personal circumstances, household expenses and the reasons for financial difficulty;
  • Statement of Affairs – sets out in detail their personal information and circumstances, reasons for financial difficulty, sources of income, assets and debts. The completed form is not sent to creditors and is not a public document.

The forms on which these are to be provided are available on the AFSA website.

Generally, creditors will be satisfied with part payment when the alternative is that they will receive nothing at all. They are therefore likely to be interested in proposals that involve part payment, not moratoriums on transferring property, or undertakings to obtain advice. Other examples of arrangements are:

  • Periodic payments of amounts out of the debtor's income to creditors, equal to or less than the full amount of all of the debtors provable debts
  • Lump sum payment of less than the full amount of all of the debtor's provable debts
  • Payment from the proceeds of sale of property owned by the debtor
  • Moratoriums on payment of some debts

The Part IX agreement should offer a workable solution from the debtor’s income and assets to discharge debts incurred from creditors.

Limitations on Part IX agreements

Part IX debt agreements cannot be entered into by the debtor if:

  • the value of either their unsecured debts or their divisible property is over the indexed limit (s185C(4)(b) & (c)).
  • their after-tax income in likely to be over a set limit (s185C(4)(d)).
  • they have at any time in the past ten years:
    been bankrupt; or
    entered into a Part IX agreement; or
    given an authority to appoint a controlling trustee under Part X.

The proposal should be made as soon as is practicable and while creditors are still prepared to listen. The main selling point is that they will get a better return from a debt agreement than from the alternatives (in most cases, at least some return) because administration costs are much less than for a bankruptcy or a Part X proposal.

Part X Proposals

The third alternative to bankruptcy is a proposal under Part X of the Bankruptcy Act 1966 (Cth), which is administered by either a registered trustee or the Official Trustee. There are three types of proposal available. These are a composition proposal; a deed of assignment proposal and a deed of arrangement proposal. The type of proposal that is adopted is dependent on the debtor’s financial situation.

Composition

A composition proposal is best suited to a debtor with no assets and no substantial income but is in receipt of a lump sum (usually by a relative or friend). This amount is then offered to creditors in full satisfaction of their debts.

Deed of assignment

A deed of assignment will generally be suitable for those debtors with assets but no substantial income. That property which would have been made available if the debtor had been declared bankrupt now becomes available to the creditors. However, money from the sale of the debtor’s assets is the only source of funds available to creditors.

Deed of arrangement

A deed of arrangement will be suitable for those debtors with substantial income and/or assets. Deeds of arrangement are generally conducted as a means by which the debtor proposes to pay a certain amount of their income each month to the trustee for a certain period of time. Some or all of the debtors assets may also be assigned to pay the debt. A debtor running a business should not assign business assets required to generate income.

Once the debtor has decided on the type of proposal the trustee will then send a report to the creditors. This report details the terms of the debtor’s proposal; the expected benefit to creditors and; the alternatives if it is not accepted. Unless the proposal is realistically achievable the creditors will commence recovery action.

Personal Insolvency Agreements

A debtor must be insolvent to propose a Personal Insolvency Agreement (PIA). Unlike Part IX agreements, a PIA is administers by a trustee or a qualified solicitor. The outcomes are similar to Part IX agreements in that there will be a partial or full payment of debts to creditors. Lump sums, transfer of property, or a payment schedule may be the means of discharging the debts of the debtor.

A trustee will examine the debtor’s proposal for repayments, make enquiries into the debtor’s affairs and report to creditors. The next step is a creditors’ meeting.

Creditors’ meeting

Following receipt of the trustees report creditors are invited to a meeting to vote on the proposal. A special resolution must be passed by creditors having at least 75% of the value of the debts, voting in person or by proxy, for it to be accepted. Once the resulting deed is executed by the debtor, it is binding on all creditors. All creditors should attend the meeting, either in person or by proxy, as it allows them to seek further information about the proposal, including the trustees fees which are paid before the creditors receive anything. Trustees usually charge an hourly rate and if the proposal is to operate, for three years for example, than the trustees costs could be substantial. Secured creditors’ debts are not affected by a PIA, it is only unsecured creditors who are affected.

When a proposal has been accepted

Once a debtor executes a deed of assignment or creditors accept a composition, the debtor is released from their provable unsecured debts. The debtor is not released under a deed of arrangement until the terms of the deed have been fulfilled. For more information see the AFSA website.

Offences

The Bankruptcy Act 1966 (Cth) creates criminal offences that are capable of arising both before and during bankruptcy. Prosecutions may result in prison sentences or hefty fines. The range of offences capable of arising under the Bankruptcy Act 1966 (Cth) generally result from acts of fraud or recklessness committed in the lead up to bankruptcy or during the bankruptcy. Generally, the number of bankrupts that are prosecuted is small.

Offences that are capable of arising include:

  • obtaining, after bankruptcy, credit of or above the indexed amount or more without disclosure of the bankruptcy (sections 269(1)(a)304A(1)(j)Bankruptcy Act 1966 (Cth));
  • materially contributing to, or increasing the extent of, insolvency by gambling or hazardous speculation (s271Bankruptcy Act 1966 (Cth));
  • obtaining credit or property by fraud after bankruptcy;
  • leaving Australia with intent to defeat creditors, or without obtaining a court order where required;
  • incurring, within two years before the date of bankruptcy, a debt without any reasonable expectation of repayment (sections 265(8)304A(3) & (5)Bankruptcy Act 1966 (Cth); and
  • concealing property with intent to defraud creditors.

Whether a bankrupt is prosecuted for an offence will in large part depend on a range of factors including the seriousness of the offence and the extent of the bankrupt’s indebtedness. The government approved changes to the Bankruptcy Act, in 2010, which came into effect on 1 October 2010. These changes included:

  • increasing the penalties for some bankruptcy offences to bring them into line with other penalties in the Act, and with penalties for similar offences contained in state and territory crimes legislation;
  • introducing an infringement notice regime for the majority of strict liability offences contained in the Act, as well as introducing limited new offences of strict liability;
  • technical amendments designed to harmonise the offences in the Act with the general principles of criminal responsibility set out in Chapter 2 of the Criminal Code Act 1995 (Cth).

Offences to which penalties apply include:

  • you sign a declaration which is false/ misleading, or you provide your Trustee with false/misleading information regarding your examinable affairs;
  • you fail to immediately notify your Trustee in writing of any change of name, residential address or contact details;
  • you are in business and trade under a business name different to your own name, and you fail to tell everyone you deal with that you are bankrupt.

Other penalties include if you, either alone or with another person:

  • apply for credit or a loan above a set limit and you fail to tell the credit or loan provider that you are bankrupt;
  • buy something by cheque, enter into a hire purchase, lease or hire agreement that is worth more than a set limit*, and you fail to tell the seller or lease provider that you are bankrupt;
  • obtain goods or services over the set limit*, and you fail to tell the provider that you are bankrupt
  • you obtain an amount or amounts over the set limit by promising to supply goods or services, and you fail to notify the payee that you are bankrupt;
  • travel overseas without the written permission of your Trustee. If you attempt to travel overseas without your Trustee’s permission you may be arrested. You must also surrender your passport to your Trustee if requested to do so;
  • conceal, remove or dispose of any property – either prior to becoming bankrupt or after you have become bankrupt (whether in or outside of Australia) that could be used to pay your creditors; or
  • refuse or fail to comply with a direction from your Trustee to deliver to the Trustee property in your possession that is all or part of your property.

Ending a Bankruptcy

Bankrupts will normally be eligible for automatic discharge from bankruptcy three years after filing their statement of affairs. If however, objections have been lodged with the Registrar or the Inspector General in Bankruptcy, the bankrupt may not be discharged for 5 or 8 years depending on the type of objection (s149ABankruptcy Act 1966 (Cth)). The grounds on which objections can be lodged are set out in section 149D of the Bankruptcy Act. The bankrupt may also continue to be liable for fines, or debts incurred by fraud and possibly for debts under a maintenance order. (The court does have the power to release a bankrupt from liability to pay arrears of maintenance (s153). Bankruptcy may be extended to eight years in instances in which the bankrupt fails to pay compulsory income contributions; the bankrupt fails to provide details of property or income; or the bankrupt borrows more than $5,155+ (indexed) without disclosing the bankruptcy.

If a trustee is satisfied that a bankrupt has paid all of his or her debts in full the bankruptcy is annulled. Also, if the court is satisfied that a sequestration order ought not to have been made, or a debtor’s petition accepted, the bankruptcy can be annulled (s153B(2)(c) and (2A), Bankruptcy Act).

Disclaimer

This does not constitute legal advice and the Tasmanian Law Handbook should not be used as a substitute for legal advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person acting or relying on information contained in it or omitted from it.