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A Lacuna in Cyberspace

By Michelle Cooper,2014-06-22 09:24
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A Lacuna in Cyberspace

    A Lacuna in Cyberspace;

    Implied Terms in Consumer Contracts

     *Bruce Gordon

    Online shoppers are little different from ordinary shoppers, at least when viewed from the perspective of consumer protection legislation. The basic consumer protection laws 1applicable to both „ordinary‟ and online shoppers, in New South Wales, are contained in 2the Sale of Goods Act, 1923 (NSW) (“Sale of Goods Act”), the Fair Trading Act, 1987 3(NSW), and the Trade Practices Act, 1974 (Cth) (“Trade Practices Act”).

    Both the Sale of Goods Act and the Trade Practices Act contain terms that may be implied into contracts for the supply of goods or services, regardless of whether the goods or services are purchased in the „ordinary‟ or online environment.

    In respect of a supply of goods, the Sale of Goods Act relevant implied terms are:

    ; Correspondence with description (s. 18),

    ; Fitness for purpose (s. 19(1)),

    ; Merchantable quality (s. 19(2)), and

    ; Sale by sample (s. 20)

    The relevant Trade Practices Act implied terms, contained in Part V Division 2, are, in respect of a supply of goods, very similar to the Sale of Goods Act‟s terms, being:

    ; Correspondence with description (s. 70),

    ; Fitness for purpose (s. 71(2)),

    ; Merchantable quality (s. 71(1)), and

    ; Sale by sample (s. 72)

    The primary difference, apart from that discussed below regarding the characteristics of the seller, between the two sets of implied terms in respect of goods is the absence of the requirement of proof of sale by description in respect of the implied term of merchantable quality in the Trade Practices Act, which is require by the section 19(2) of the Sale of Goods Act. That this is so is of little consequence in respect of online purchases as an online display of a photograph, video and/or word description of the product offered would always satisfy the sale by description requirement of section 19(2). It would be an

     * Lecturer, School of Business Law and Taxation, University of New South Wales; Member, Fair Trading Tribunal (NSW) 1 New South Wales is chosen for simplicity. All the States and Territories of Australia have similar legislation. 2 Similar legislation is: Queensland Sale of Goods Act 1896; South Australia Sale of Goods Act 1895;

    Victoria Goods Act 1958; Western Australia Sale of Goods Act 1895; Tasmania Sale of Goods Act

    1896; Northern Territory Sale of Goods Act 1972; A.C.T. Sale of Goods Act 1954 3 Similar legislation is: Queensland Fair Trading Act 1989; South Australia Fair Trading Act 1987;

    Victoria Fair Trading Act 1999 (replacing the 1985 Act of the same name); Western Australia Fair

    Trading Act 1987; Tasmania - Fair Trading Act 1990; Northern Territory Consumer Affairs and Fair

    Trading Act 1990; A.C.T. Fair Trading Act 1992

    extraordinarily unusual site indeed that did not use some literary or visual device to describe its offered products.

     4In respect of a supply of services, the Trade Practices Act implied terms, also contained

    in Part V Division 2, are:

    ; Services are rendered with due skill and care and associated materials (goods)

    supplied are fit for their purpose (s. 74(1))

    ; Services (including associated materials (goods) supplied) are fit for purpose or

    are of such a nature and quality that they might reasonably be expected to achieve

    a desired result (s. 74(2))

    The method adopted by both the Sale of Goods Act and the Trade Practices Act to ensure that these implied terms are available to protect consumers is to make the terms non-excludable in circumstances where a „consumer‟ may be identified as contracting to purchase the goods or services.

    In the Sale of Goods Act, section 57 permits an express term in an agreement for the sale of goods or “the course of dealing between the parties, or . . . usage, if the usage be such as to bind both parties to the contract” to exclude any implied terms. However, section

    64, which is the centerpiece of Part 8 Consumer Sales, renders void any term of a

    contract which has the effect of excluding or restricting the terms implied by sections 18, 19 or 20.

Section 68 of the Trade Practices Act has similar operation to that of section 64 of the 5Sale of Goods Act. Section 68(1) operates to make void any contract term that has the

    effect of excluding, restricting or modifying any of the Part V Division 2 implied terms or section 75A. Section 75A is a little discussed, but very useful, consumer remedy which grants a statutory right of rescission to consumers where, in a supply of goods, the seller has breached a term implied by Part V Division 2. To obtain entitlement to the statutory right of rescission, the consumer is required to either:

    ; serve a timely notice in writing on the seller advising of the particulars of the breach

    of implied term, or

     4 The terms implied by section 74 in respect of services are stated to be warranties only, whereas the terms contained sections 70, 71 and 72 in respect of supply of goods are stated to be implied conditions. The Sale of Goods terms in sections 18, 19 and 20 are stated to be implied conditions.

    5 68 (1) Any term of a contract (including a term that is not set out in the contract but is

    incorporated in the contract by another term of the contract) that purports to exclude,

    restrict or modify or has the effect of excluding, restricting or modifying:

     (a) the application of all or any of the provisions of this Division;

     (b) the exercise of a right conferred by such a provision;

     (c) any liability of the corporation for breach of a condition or warranty implied by

    such a provision; or

     (d) the application of section 75A;

    is void.

    ; return the goods to the seller and give either oral or written advice of the particulars

    of the breach of implied term.

    Each of the Sale of Goods Act and the Trade Practices Act contain a definition of “consumer sale” or “consumer” which attracts the operation and non-excludability of the

    implied terms. In the Sale of Goods Act the term used is „consumer sale‟ and section 62 defines this as:

    a sale of goods (other than a sale by auction) by a seller in the course of a

    business where the goods:

     (a) are of a kind commonly bought for private use or consumption; and

     (b) are sold to a person who does not buy or hold himself or herself out as

    buying them in the course of a business.”

    Paragraph (b) would clearly catch buyers using business to business sites (B2B) from entitlement to the consumer sale definition and the benefit of the non-excludability of the implied terms. Section 18, 19 and 20‟s terms may still be implied into a B2B contract for

    the sale of goods, but the seller may exclude the terms by an express term to that effect. Paragraph (a) of the definition permits change to occur over time as to what goods will be considered of kind commonly bought for private use or consumption. Fifteen years ago computers and software would not have been commonly bought for private use or

    consumption and may not therefore have attracted protection even if purchased for that reason, however today it would be common for such products to be purchased for private use.

     6The Trade Practices Act uses the definition of „consumer‟ in section 4B to attract the

    operation of Part V Division 2‟s implied terms. Section 4B (1)(a) for goods and (1)(b)

6 4B Consumers

     (1) For the purposes of this Act, unless the contrary intention appears:

     (a) a person shall be taken to have acquired particular goods as a consumer if, and

    only if:

     (i) the price of the goods did not exceed the prescribed amount; or

     (ii) where that price exceeded the prescribed amountthe goods were of a

    kind ordinarily acquired for personal, domestic or household use or

    consumption or the goods consisted of a commercial road vehicle;

     and the person did not acquire the goods, or hold himself or herself out as

    acquiring the 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; and

     (b) a person shall be taken to have acquired particular services as a consumer if,

    and only if:

     (i) the price of the services did not exceed the prescribed amount; or

    7for services each set a monetary threshold value on the cost of acquisition, currently

    $40,000. If the cost of acquisition is below that threshold, the goods or services are deemed to have been purchased by a consumer. If the cost is greater than $40,000, the goods or services may still attract the definition of a consumer, if the goods or services are “of a kind ordinarily acquired for personal, domestic or household use or consumption” or “the goods consisted of a commercial road vehicle”. With respect to

    services the two limbs are the entire test for consumer status. For goods, there is an additional requirement that must be considered before goods can be said to have been acquired by a consumer. To be classified as a consumer when acquiring goods, the purchaser may not have acquired the goods for the purpose of reselling them, or using the goods as raw materials in a business that involves the production, manufacturing, repair or treatment of goods or fixtures.

    Of the two definitions regulating consumers and consumer sales, the Trade Practice Act definition is clearly the easier to satisfy, requiring only a price of less than $40,000 regardless of the type of goods and only a very specific business purposes purchase negates a consumer acquisition. A business may therefore, for example, purchase a computer and software for use in the business other than for resale and acquire these products as a consumer. This is because the computer and software are not used up or transformed when used in a business, even if the computer controls or regulates a manufacturing or production line producing other goods. The very same purchase of goods would not attract the definition of consumer sale in section 64 of the Sale of Goods Act because of paragraph (b) of that definition the purchaser is buying the goods in the

    course of a business. This anomaly is of concern in that it represents a loophole which well-advised sellers may exploit. This anomaly is not, however, the biggest anomaly that exists in the pastiche of consumer protection legislation that exists in Australia.

    A larger anomaly exists because of the division of powers that forms the backbone of Australia‟s federal system of government. The Commonwealth Parliament is given very 8limited exclusive powers of legislation in the Commonwealth of Australia Constitution with the reminder of Commonwealth legislative power shared concurrently with the States. The concurrent powers of the Commonwealth and State parliaments are enumerated in section 51 (i) through (xxxix) of the Federal constitution. Any legislative power not expressly set out in sections 51 and 52 of the Federal constitution belong, if they exist at all, exclusively to the States. The States‟ legislative competence arises from their state constitutions, which uses a plenary power requiring a nexus or connection between the subject matter of the legislation and the “peace, order and good government” of the particular State. All that is required for a constitutionally valid exercise of legislative power by a State Parliament is to demonstrate the nexus with “the peace, order

    and good government” of the state and to ensure that the legislation is not invalid

     (ii) where that price exceeded the prescribed amountthe services were of a

    kind ordinarily acquired for personal, domestic or household use or

    consumption. 7 Section 4B (2)(a) sets the amount at $40,000 however also allows the regulations to prescribe a greater amount. 8 Contained in Section 52 of the Commonwealth of Australia Constitution Act

    pursuant to section 109 of the Federal constitution because it is a State exercise of a concurrent power contained in section 51 which is in conflict with a Commonwealth 9statute on the same subject matter.

    Unfortunately for consumers, neither section 51or 52 of the Commonwealth of Australia Constitution contains a head of power enabling the Commonwealth Parliament to legislate in respect of “consumer protection”. Instead, when the Commonwealth enacted the Trade Practices Act in 1974, it was forced to draw upon a number of disparate powers contained in section 51 and the territories power contained in section 122. The primary section 51 heads of power used are:

    s. 51 (i) Trade and commerce with other countries [foreign trade] and among the

    States [interstate trade]

    s. 51 (v) Postal, telegraphic, telephonic and other like services

    s. 51 (xx) Foreign corporations, and trading and financial corporations formed within the

    limits of the Commonwealth [corporations power]

    The result of these constitutional limitations on the legislative power of the Commonwealth can be seen in the Trade Practices Act‟s ability to imply consumer protection terms into contracts for the supply of goods and services. All of Part V Division 2‟s implied terms are predicated upon a corporation supplying goods or services in the course of a business, thus relying upon the corporations power for primary legislative competence. Section 6 of the Trade Practices Act provides for the additional operation of the Act. In essence section 6 was a drafting device employed to take advantage of the heads of power other than the corporations power to ensure the Act could survive constitutional challenge to the breadth of the corporations power. As Miller states:

    “This section [s. 6] is a machinery provision designed to expand the

    operation of the Act, while at the same time preserving the legislation from

    constitutional invalidity if any of the provisions of the section transgress the

    boundaries of constitutional competence.

    The Act is based primarily on the corporations power, but s. 6(2) provides

    an alternative based on the trade and commerce power and the territories 10power in case the corporations power is held insufficient for the purpose.”

     11The effect of section 6(2)(c) therefore is to buttress the use of the corporations power and not to eliminate the Part V Division 2 sections‟ requirement for a corporation to be

     9 Section 109 of the Commonwealth of Australia Constitution Act states:

    When the law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid. 10th Miller‟s Annotated Trade Practices Act, 20 edition, page 88, para [1.6.10 1.6.15], LBC Information

    Services, 1999

    11 6(2) This Act, other than Parts IIIA and X, has, by force of this subsection, the effect it would

    have if:

    . . .

    (c) any reference in Division 2 of Part V to a contract for the supply of goods or services

    and any reference in Division 2A of that Part or in Part VA to the supply of goods,

    the supplier of goods or services. The use of s. 51 (v) postal, telegraphic or telephonic services power to expand the operation of the Act to persons not being a corporation in section 6 (3) does not extend to the provisions of Part V Division 2. So too the use of the territories power to extend the operation of the Act to individuals rather than corporations in s. 6 (4) does not extend to Part V Division 2 sections.

    The end result is that the Part V Division 2‟s implied terms are implied only into consumer contracts when the seller is a corporation. If the seller is a natural person (an individual or sole trader) or a partnership, then no Trade Practices Act statutory terms are implied into the contract. Statutory implied terms will however be available if the supplier is an individual or a partnership and the supply is a supply of goods as the Sale of Goods Act will imply terms into such a contract. Provided the goods are of a kind commonly bought for private use or consumption and the buyer is not purchasing in the course of a business, as discussed above, the Sale of Goods Act implied terms may not be excluded. If however the contract is for the supply of services rather than goods, then the Sale of Goods Act is of no assistance to the consumer nor is the Trade Practices Act. In this circumstance, there are no statutory implied terms available to assist the consumer. Figure 1 is a simplified diagrammatical representation of this state of affairs.

     Goods Services

    Sale of Goods Act

    Goods only Supply of Trade Practices Act Sole traders services Goods and services Partnerships Sole traders or Corporations Corporations Partnerships

    were, by express provision, confined to a contract made, or the supply of goods, as

    the case may be:

    (i) in the course of, or in relation to, trade or commerce between Australia and

    places outside Australia;

    (ii) in the course of, or in relation to, trade or commerce among the States; or

    (iii) in the course of, or in relation to, trade or commerce within a Territory, between

    a State and a Territory or between two Territories;

    Figure 1

    Having identified a gap in consumer protection coverage created by statutory implied terms, it is useful to attempt to determine how large that gap is. The size of the gap will be determined in large part by the definition of “goods” and “services” in the Trade Practices Act and the Sale of Goods Act.

    Of particular interest in the online world is the classification of software licences in the dichotomy of goods and services, as the archetypal web site is a software distribution / sales site. A software licence would be caught by the Trade Practices Act definition of “services” in section 4:

    services includes any rights (including rights in relation to, and interests in, real or

    personal property), benefits, privileges or facilities that are, or are to be, provided,

    granted or conferred in trade or commerce, and without limiting the generality of the

    foregoing, includes the rights, benefits, privileges or facilities that are, or are to be,

    provided, granted or conferred under:

     (a) a contract for or in relation to:

     (i) the performance of work (including work of a professional nature),

    whether with or without the supply of goods;

     (ii) . . . or

     (iii) the conferring of rights, benefits or privileges for which remuneration is

    payable in the form of a royalty, tribute, levy or similar exaction;

     (b) . . . (c) . . . (d) . . .

    but does not include rights or benefits being the supply of goods or the performance

    of work under a contract of service.

    In particular paragraph (a)(iii) exactly describes the situation of a software licence which confers rights created pursuant to the Copyright Act (intangible personal property) to the buyer of the licence in exchange for remuneration, the licence fee.

    Can software also be classified as “goods” under either of the Sale of Goods Act or the Trade Practices Act definitions? Both Acts utilise inclusive definitions for “goods”. The Sale of Goods Act definition of “goods” in section 5 includes “all chattels personal other

    than things in action and money. . . .”. Regardless of arguments that software may be

    protected by both copyright and patent, both copyright and patent statutory regimes create protection which is in the form of personal property, “chattels personal”, which are intangible in nature (are not capable of possession). These intellectual property rights are classified as choses or “things in action” and it is these rights that are the subject of contractual licences when software is “sold” to consumers. Software, i.e. the mere collection of digital electric signals, without something more would not attract the definition of “goods” in the Sale of Goods Act. However Rogers, J in Toby 12Constructions Products Pty Ltd v Computa Bar (Sales) Pty Ltd found that hardware

    and software sold together (bundled as a single product) were goods for the purpose of the implied terms in both the Sale of Goods Act and Trade Practices Act. As part of the

     12 [1983] 2 NSWLR 48

    reasoning in his decision, Rogers, J referred to the “longstanding distinction which exists in the law of contract between agreements for the sale of goods and for [agreements] for 13work to be done and materials provided.” The classic example of this distinction is that

    of an artist‟s production of a portrait, the end result of which can be argued to be “goods”or materials in the form of oil on canvas streched over a wooden frame. Contract

    law requires an examination of the substance of the contract which results in the materials supplied (oil, canvas and wooden frame) being incidental to the skill and experience of the artist, which is the true substance of the contract. Rogers, J. concluded this part of his decision with:

    “The substance of the contract was the sale of a total system to be supplied to the

    plaintiff. It would be too simplistic altogether to say that the supply of the system

    was a sale of goods merely because the bulk of the cost related to the hardware.

    Rather I think it is necessary to look at all the features of the object of the sale and

    the various ingredients such as price, the nature of the material which was to be

    supplied, the terms for installation, and the work which the system was designed

    to effect. Again it is too simplistic to say that hardware will not work without

    software, and therefore the contract should somehow be evaluated in the light of

    that proposition. At the end of the day what weighs with me is that the system,

    software included, whilst representing the fruits of much research and work, was

    in current jargon off the shelf, in a sense mass produced. There can be no

    comparison with a one off painting. Rather is the comparison with a mass 14produced print of a painting.”

Section 4 of Trade Practices Act defines goods as:

    “includes: (a) ships, aircraft and other vehicles;

     (b) animals, including fish;

     (c) minerals, trees and crops, whether on, under or attached to land or not;

    and

     (d) gas and electricity.”

     15In ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) the Full Federal Court

    considered the definition of “goods” in the Trade Practices Act and found that the inclusion of the word „electricity‟ did not have the result that encoded electrical signals were goods. The Full Federal Court, after specifically referring to the judgement of Rogers, J in Toby Constructions, left open the question of whether computer programs 16are goods.

In the English Court of Appeal decision of St Albans City and District Council v 17International Computers Ltd the precise question of whether a computer program was

    classifiable as „goods‟ for the purposes of the UK Sale of Goods Act was before the Court. St Albans Council had contracted to licence a computer program written by

     13 Ibid., at page 50F-G 14 Ibid., at page 51F-G 15 (1990) 27 FCR 460; 97 ALR 513; (1991) ATPR 41-069 16 (1991) ATPR 41-069 at 52,054 17 (1996) 4 All ER 481

    International Computers Ltd (“ICL”). The computer program was designed to compute the new poll tax revenue that the Council would collect, however an error in the program caused the calculation to be larger by a factor of more than 10.

    In his decision, Sir Iain Glidewell stated that the intellectual property rights that constituted the software supplied pursuant to the contract remained with the author (ICL) and St Albans Council merely received a licence to use the software. He distinguished the program itself and the physical medium upon which the program was encoded or stored, and stated that “goods” would include the physical medium of storage, but not the program if the program was independent of the physical medium. Because the software program had been installed directly onto St Albans Council‟s computer by ICL personnel rather than delivered to St Alban‟s on a disk for installation, Sir Iain Glidewell found there was no transfer of “goods”, the software was not “goods” on its own and therefore the Sale of Goods Act (UK) did not operate to imply statutory based terms of fitness for purpose or quality in respect of the supply of the software by ICL.

    Sir Iain Glidewell did imply a term from common law (contract) in respect of fitness for 18purpose on the standard test that both parties must have intended for there to be such a term, in the absence of any express term or statutory implied term. This term had been breached by the supply of faulty software and ICL was liable for the damage.

    It should be noted that although the St Albans Council case had a happy ending despite the absence of statutorily implied contract terms, this case may be distinguished on the basis that the software involved was bespoke or commissioned software, not „off the

    shelf‟ software that most online sites offer. It is doubtful that the courts would find a common law implied term in the case of downloaded „off the shelf‟ software and more likely that the site may have an express term in the licence agreement that negates the fitness for purpose type term implied by Sir Iain.

    The size of the lacuna of statute based consumer protection implied terms can now be stated to include, at least, any downloadable software from an online site operated and supplied by an individual or a partnership. To be protected in the online software supply environment the consumer must know whether the supplier of software is either an individual human being or partnership or a corporation, as only corporate suppliers will attract the operation of the Trade Practices Act, Part V Division 2. The supply of software by online download is already an acceptable method of distribution and predictions are that online supply of software will become the preferred method of

     18 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 15 ALR 363 at 376

    “… for a term to be implied, the following conditions (which may overlap) must be satisfied:

    1. the term must be reasonable and equitable;

    2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the

    contract is effective without it;

    3. it must be so obvious that it “goes without saying”;

    4. it must be capable of clear expression; and

    5. it must not contradict any express term of the contract ”

    19distribution within a short time. It is suggested that protection determined on the

    corporate status of a supplier is too random an indicia for the useful protection of consumers. The problem is not restricted to the online environment. For example, a panel beater who operates as a partnership and fails to properly prepare a vehicle prior to repainting is supplying services which are not the subject of any implied terms as to fitness for purpose. So too is the hairdresser, operating as a sole trader, who supplies services in cutting or colouring hair not the subject of any implied terms as to care and fitness for purpose.

    The solution to close the lacuna is relatively simple and easily achieved. It is suggested that the solution lies in the States mirroring the Part V Division 2 implied terms in their Fair Trading legislation. The creation of the Fair Trading legislation of the States was an exercise in cooperative federalism in the late 1980‟s that saw each of the States and

    Territories mirror, at a minimum, Part V Division 1 of the Trade Practices Act. By replacing the word “corporation” in the Trade Practice Act Division 1 sections with the word “person” in the Fair Trading mirror provisions, the States‟ legislative competence to

    catch all forms of suppliers, not just corporations, was thereby utilized and any gaps that existed as a result of the Commonwealth Parliament‟s legislative restrictions were eliminated. The result is uniform legislative coverage in respect of Division 1‟s

    misleading and deceptive and related conduct achieved through out Australia. Unfortunately only Western Australia and the Northern Territory mirrored both Division 1 and Division 2 of Part V of the Trade Practices Act. What the remaining States and Territories need to do to provide uniform and complete consumer protection coverage of implied terms in both the online and „ordinary‟ service supply environment is mirror Part V Division 2‟s provisions in their respective Fair Trading Acts, replacing the word

    “corporation” with the word “person” when referring to the supplier of services or 20goods.

    Until this lacuna is filled, purchasers‟ consumer rights will be dependant upon where the supplier is located, what status incorporated or unincorporated the supplier has chosen

    to conduct trade and what terms the supplier expressly includes in the contract for supply of services. In Australia‟s increasingly service oriented market place, this level of legal sophistication and knowledge is not, on the part of consumers, commonplace. As a result consumers buying services are disadvantaged when compared with the implied conditions they have come to expect and enjoy when buying goods.

     19 Duncan Martell, Forget those CD-ROMs: it’s on the Web, stupid. The age of going to the shop to buy

    software is almost over. Sydney Morning Herald, October 24, 2000, IT supplement, p 4 20 It is suggested that the Western Australian provisions serve as the preferred model as section 33(3) of the Fair Trading Act 1987 (WA) provides for the supremacy of the Fair Trading Act implied terms over those of the Sale of Goods Act 1895 (WA) terms to the extent that they are inconsistent. This eliminates the anomaly of business sales referred to above. The Northern Territory legislation does not deal with the potential of conflict between the N.T.‟s Consumer Affairs and Fair Trading Act 1990 and Sale of Goods

    Act 1972.

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