25 July 2006

Cliffe Dekker examines the landmark Consumer Protection Bill

Cliffe Dekker examines the landmark Consumer Protection Bill, which aims to provide a legal framework for consumer protection in South Africa.

The Department of Trade and Industry (dti) embarked on a review of the consumer legislative framework that culminated in a draft green paper on consumer policy in September 2004. The policy seeks to promote a coherent and consistent framework for the regulation of consumer "business interaction". The first draft of the Consumer Protection Bill was published for information and comment on 15 March 2006.

The Bill is a milestone in South Africa as it aims to provide a legal framework for consumer protection. By attempting to codify the common law with specific regard to the rights of consumers and the obligations of those providing services and products to them, South Africa is following in the footsteps of most first world countries.

The UN guidelines for consumer protection were broadened in 1999, requiring that governments develop and maintain strict consumer protection policy and protect consumers from contractual abuses such as one-sided contracts and unconscionable conditions of credit.

The complex Bill is wide-ranging and ambitious. It draws on a number of pieces of existing legislation (the Business Names Act, the Sale and Services Matters Act, the Price Control Act, the Trade Practices Act, the Consumer Affairs Act and the Businesses Act), forming a consumer matrix that will ultimately be policed by a national consumer regulator.

Regulating businesses that evade the National Credit Act

The Bill was published simultaneously with the promulgation of the National Credit Act.

Every person (juristic and natural) that does business with individuals or small (in turnover size) juristic persons is compelled to comply with one of these pieces of legislation.

The way to avoid the application of the National Credit Act is to stop charging interest and not to charge for deferred payment on goods and services. When this occurs, a purchase agreement is no longer classified as a credit agreement in terms of the Act. But the dti warns that it is a mistake to attempt to avoid the Act and, with the draft Bill, has plugged all possible loopholes the Act might have presented to credit grantors. Thus, if a credit grantor manages to sidestep the Act, the chances are that that particular escape will be covered under the Bill.

In essence, if goods or services are delivered or rendered, payment is deferred and a charge is levied on such deferred payment, then the agreement is a credit agreement and the National Credit Act must be complied with. If the transaction is a cash transaction or no interest or fee is charged on the deferral of such payment, then the Consumer Protection Bill applies.

The only exclusions to the application of the Bill (which coincide largely with the exclusions to the Act) are where –

• the credit grantor rendering the service or selling the goods is the state or an organ of state;

• the recipient of the goods, services or credit is a juristic person, other than a franchisee or potential franchisee of the supplier, and has an annual turnover of more than R1 000 000, or its asset value exceeds this amount;

• the value of the transaction is larger than R1000 000; or

• the transaction is an employment contract.

If the Act applies to a particular transaction, then the Bill does not. In other words, it might not be prudent for suppliers to stop charging interest on deferred payments so as to avoid the ambit of the Act.

Of course, most businesses do not exclusively operate on either a cash or credit basis and could be compelled to comply with both the Act and the Bill. All businesses that do not exclusively trade with juristic persons must decide which body of legislation applies to them: the Act, the Bill, or both. They should take immediate steps to comply with the relevant legislation.

Directors of companies who fail to take such steps could be considered reckless and held personally liable for damages resulting from, for instance, the National Credit Regulator revoking the company's registration as a credit provider or fining the company up to R1 000 000.

An entirely new way of doing business

One of the major effects of the Bill, should it be enacted in its current form, is that South Africa's common law will be replaced by the codified principles detailed in the Bill.

Established ways of conducting every day commercial transactions will be altered and in a number of respects the proposed changes will remove the current protections afforded to suppliers when dealing with unscrupulous consumers.

There is also a real danger that the proposed principles will not adequately cater for every business eventuality and that the uncertainty created through the removal of established common law principles will result in increased litigation and a lack of confidence in South Africa's economy. Some of the more contentious provisions are dealt with below.

Acceptance of goods

In terms of section 20 of the Bill, a consumer is deemed to have accepted goods when –

• the consumer expressly or implicitly communicates acceptance of the goods to the supplier;

• the goods have been delivered and the consumer acts in a way that is inconsistent with the supplier's ownership of the goods; or

• after a reasonable time has elapsed, the consumer retains the goods without intimating to the supplier that the consumer has rejected them.

The effect of these provisions is that the time period for the return of goods is substantially widened and suppliers will be considerably exposed where goods have been used or damaged, or where goods are perishable or not capable of return for health or hygienic reasons.

Unsolicited goods

Section 21 of the Bill provides that if a consumer receives unsolicited goods from a supplier, the consumer may retain the goods without having to pay for the goods or return them to the supplier. Loss or damage to the goods while in the possession of the consumer is to be borne by the supplier, unless the supplier notifies the consumer within 10 business days after receipt that they were delivered in error and arranges to recover the goods, at its own expense. Where the supplier fails to take these steps, ownership in the goods will pass unconditionally to the consumer. This section undermines the right granted to the owner of goods to institute action for the return of goods under circumstances where there was no intention to transfer ownership due to fraud, theft or mistake.

Committed delivery dates

The Bill places an onerous burden on suppliers who commit to supply goods or services on a specified date. Where a supplier fails to supply goods and services on a committed delivery date, the supplier will be liable to –

• refund to the consumer any amount paid together with interest at the prescribed interest rate;

• compensate the consumer for breach of contract in an amount equal to the full price of the committed goods or reserved services; and

• pay the consumer consequential damages in an amount equal to the total of any economic loss, and loss of anticipated use or enjoyment, sustained by the consumer as a consequence of the supplier's breach of the contract.

These provisions significantly alter the common law remedies available for breach of contract and the basis for awarding damages. There is also no separate right to claim for the loss of enjoyment and use in goods and services under South African common law.

Exclusion of liabilities

The Bill impacts upon notices or agreements which limit the liability of a supplier. In order to be effective, any exclusion of liability must be drawn to the attention of the consumer, including the fact, nature and effect of the provision. The provision must also be in plain language and signed and initialled by the consumer where the provision is in a written agreement. If the exclusion is in respect of a hazard which the consumer could not have reasonably contemplated or could result in serious injury or death, the exclusion, nature and effect of the potential hazard must be specifically drawn to the attention of the consumer and must be signed or initialled by the consumer. Suppliers are also obliged to ensure that consumers are able to read and comprehend the exclusion.

The exclusion of liability provision will impact upon the practice of posting terms and conditions on websites and suppliers will have to ensure that written agreements are concluded in respect of telephonic or electronic transactions. This provision could conceivably also extend to user manuals, pamphlets, package inserts and warnings placed on products, which will render compliance impossible. It will also be impractical for suppliers to ensure that the provisions of this section are complied with where exclusion of liability notices are posted at the entrances to retail outlets, shopping malls, places of entertainment, schools or sports stadiums.

Liability for patent and latent defects

Section 61 provides that consumers are entitled to receive goods which will be useable and durable for a reasonable period of time and that are free of any product failure, defect or hazard that would render the utility, practicability or safety of the goods to be less than persons are generally entitled to expect, regardless as to whether a product failure, defect or hazard is patent or latent. The subjective manner in which "defects" are defined in the Bill is contrary to the common law which regards a defect as being any non-conformity with the manufacturer's specifications or any abnormal attribute which destroys or impairs the utility of goods for the purpose for which they have been sold. The alteration of established principles in respect of liability for patent and latent defects as well as the implied exclusion of voetstoots sales will lead to legal uncertainty and increased litigation.

Strict liabilities for damages

Under section 71, producers, distributors or suppliers of goods, in addition to being liable for consequential damages, will be strictly liable for any damages in respect of goods where such damages arise due to product failure, defect or hazard or as a result of inadequate instructions or warnings. As strict liability is not even imposed on manufacturers under South African common law, it is unfair and prejudicial to hold suppliers or distributors liable for acts or omissions where suppliers are not the manufacturers of goods and are thus not in a position to exercise any control over the instructions or warnings associated with supplied goods. The imposition of strict liability or no fault liability will open the door to limitless claims and an increase in litigation against producers, distributors or suppliers of goods. This will inevitably result in an increase in insurance costs and generally in an increase in the costs of doing business in South Africa.

Consumer protection institutions and enforcement of consumer rights

The Bill provides for the establishment of a National Consumer Protection Commission, which is designed to be the watchdog of consumer protection issues and the first port of call for the lodging of complaints. It is also within the mandate of the Commission to report to the Minister of Trade & Industry on consumer affairs in general and to give advice concerning consumer protection policy, including advice in respect of required amendments to legislation.

Complaints of alleged infringements of consumer rights may be lodged with the Commission and it will then investigate such complaints, if investigation is merited. In addition to the fact that the Commission must investigate or resolve all complaints of prohibited conduct lodged with it, the Commission also has the authority to initiate investigations itself, in its own name.

When a complaint is lodged, the Commission may issue a notice of non-referral if it has concluded that the complaint is unfounded or frivolous. If the complaint does not fall within this category, the Commission may elect to refer the matter to an appropriate dispute resolution channel, including competent ombudsmen, a provincial consumer authority, a consumer court or an alternative dispute resolution agent.

The Commission's inspectorate has considerable investigative powers and can order the production of any book or document or that any person must appear before the Commission to be interrogated in respect of a matter under its investigation.

At the conclusion of any investigation, the Commission may, if it is satisfied that there are grounds to do so, elect to refer the matter for adjudication before a consumer court or the Consumer Tribunal, or it may issue notices of compliance or enter into a consent order with the party under investigation.

Proceedings of the Tribunal will be akin to those of a court, where the Commission or the referring party will act as prosecutor and the respondent business as defendant.

Conduct referred to the Tribunal for determination may attract a penalty of up to 10% of the guilty party's turnover for the preceding financial year, subject to a maximum of R1 000 000.

Promotional competitions

Currently, all competitions which involve the promotion of goods or services are regulated by section 54 of the Lotteries Act and its regulations. Those regulations have been controversial, to say the least, as they contain prohibitions which are ambiguous and extremely restrictive.

Some of the uncertainty surrounding those regulations is removed by the provisions of section 42 of the Bill, which repeals section 54 of the Lotteries Act, but not without consequence.

As with the Lotteries Act, the Bill defines a promotional competition as "any competition, game, scheme, arrangement, system, plan or device for distributing prizes by lot or chance". "Prize" is given a wide definition which includes rewards, price reductions, concessions, enhancements or discounts. The Bill's application is limited to those competitions that are conducted in the ordinary course of business for the purpose of promotion and where the prize exceeds a threshold to be prescribed by the Minister charged with this portfolio.

While section 54 of the Lotteries Act does not apply to competitions where no payment or other consideration is required for the right to compete, there is no such explicit saving in respect of section 42 of the Bill. In fact, these provisions as currently drafted substantially lack clarity on whether or not it is permissible to charge any consideration in respect of participation in a promotional competition. While one section justifiably outlaws the practice of requiring the purchase of goods or services and charging more than the price ordinarily charged for such goods or services, other sections seem to prohibit the purchase of goods or services as a requirement for the participation in the competition. This issue needs to be clarified, as making such a common practice unlawful would effectively make it impossible to conduct most types of promotional competitions.

What does seem clear is that competitions where participants are required to enter via SMS, post, email or telephone, will become illegal as a result of the provision that the payment of any consideration for access to the competition will be unlawful. This will severely restrict the manner in which competitions are conducted and more than likely reduce marketing opportunities.

It is also illegal to offer a prize that is subject to a previously undisclosed condition or to require the winner to pay further charges for the prize after the results of the competition have been announced. It is therefore necessary to advise participants upfront of any requirements they will need to meet for the enjoyment of a prize, such as being in possession of a driver's licence where a car is the prize, or where certain necessary costs are excluded from the prize.

The most abhorrent provision, possibly, is the requirement that every "promoter" (being a person who directly or indirectly promotes, sponsors, organises or conducts a promotional competition, or for whose benefit such a competition is promoted, sponsored, organised or conducted) file an abstract of the competition rules in the prescribed manner and form with the National Consumer Commission established in terms of the Bill no later than the date on which the competition is first offered to the public. For organisations that run numerous promotions at any one time, this is a very onerous requirement. .

Equally alarming is the provision that all offers to participate in a promotional competition and advertising material related to the competition must, among other things, state the odds of winning the prize. This will be impossible to predict at the outset of the competition, and could result in incorrect statistical information being given to the public. In addition, the Minister is given the power to prescribe the minimum odds for prizes or categories of prizes offered in terms of any promotional competition. How any promoter can be expected to comply with such a prescription is not understood, unless the promoter limits the number of entries, which in itself can impact unfairly on a consumer.

It is appreciated that some attempt has been made to clarify issues which arise from section 54 of the Lotteries Act, but the task has not been entirely successfully executed. Where there was clarity before, there is now confusion. In addition, those involved in marketing endeavours are throwing their hands up in horror at what is to be expected of them under this new regime.

The retrospective application of the legislation

There is a presumption in South African common law against retrospective application of legislation, which has a long history. Despite this, the Bill proposes that its application be extended to agreements that were entered into prior to its promulgation and which will still be valid on or after the second anniversary date of the Bill's promulgation and where –

• there is any pre-payment or services, deposit for right to a refund under that agreement;

• the property of the consumer is held by the supplier on or after the promulgation of the Bill; and

• any action, forbearance, obligation or right contemplated in that agreement will be performed or enjoyed on or after the promulgation of the Bill.

The retrospective application of the Bill may have undesirable consequences for both the consumer and the supplier. Most pre-existing agreements will be unlawful as they are likely to contravene the Bill on its promulgation. The Bill has not provided for a transitional period within which pre-existing agreements should be required to comply with its requirements. Such a provision would avoid automatic contraventions of the Bill and would also afford suppliers time to amend their pre-existing contracts.

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