Key points

• A retailer has been fined NZ$123,500 for failing to comply with extended warranty disclosure requirements.
• The Commerce Commission found the retailer failed to provide a written extended warranty agreement, and failed to outline and compare the customer’s rights and remedies under the Consumer Guarantees Act, in breach of the Fair Trading Act.
• This case serves as an important reminder to retailers that the disclosure requirements for extended warranties are stringent.  Failure to comply may result in significant fines and considerable public backlash.

Background

The retailer sells a wide range of consumer products both nationally and internationally through multiple channels, including e-commerce and direct response television marketing. The majority of the retailer’s sales (87%) are derived from over the phone purchases following TV infomercials.

Between 31 July 2019 and 31 March 2020, the retailer used these various commerce channels to sell 18,114 non-compliant extended warranties to its customers.

Legal requirements

When selling extended warranties to consumers, you must meet certain disclosure requirements prescribed under the Fair Trading Act (FTA). These include making sure the consumer receives, at the time of purchase of the extended warranties, a copy of a written extended warranty agreement which contains all of the information prescribed under s 36U of the FTA. You may also need to verbally inform customers of a five working day cooling off period, where reasonably practicable.

Court findings

The Court found the retailer’s practices around its sales of extended warranties failed to comply with the disclosure requirements under s 36U of the FTA. 

These practices include:

• failing to provide a written extended warranty agreement to its customers at the time of purchase;
• failing to provide a summary comparing a customer’s rights under the extended warranty agreement and the Consumer Guarantees Act (CGA); and
• failing to provide oral notice that a customer was entitled to cancel their extended warranty agreement without penalty, within a period of five working days.

The Court also found that the retailer’s customers were not properly informed of their rights before purchasing the extended warranty agreements. The customers should have been informed that any product they purchased was already covered by guarantees under the CGA.

What does this mean for you?

Retailers can legally sell extended warranties, but they must be in writing, and there are strict legal requirements as to what must be disclosed when selling them.

The Commerce Commission, the regulator of the FTA, has released an outline of what an extended warranty agreement should include, which can be found here. Below is a summary of what should be included on the front page of the written extended warranty agreement:

• a summary of the consumer’s rights and remedies under the CGA;
• a comparison between the relevant CGA and the protections provided by the extended warranty;
• a summary of the consumer’s right to cancel the agreement; and
• the business’ name, street address, phone number and email address.

The agreement must be in plain language, easy to read and clearly presented. There must be no marketing slogans or other promotional statements which may mislead consumers about the benefits of the extended warranty.  

In addition to these general requirements, there are specific requirements that apply depending on the way an extended warranty is purchased. When purchased in person, or over the phone, customers must be verbally informed of their right to cancel the agreement five working days after receiving the written agreement. Where the purchase is made over the phone, the retailer must provide them with a copy of the agreement within five working days.

Complying with these disclosure agreements can be easier said than done. In particular, it requires you to fully understand the consumer’s rights and remedies under the CGA, so they can be summarised in the agreement, and a comparison can be made with the protections provided by the extended warranty.

Get in touch

If you have any questions about your disclosure obligations relating to extended warranties, or need help in preparing or reviewing extended warranty agreements, please get in touch with one of our experts.

Special thanks to Laura Mikkelsen and Christy Alexander for their assistance in writing this article.