New consumer protection laws impact lines companies

Peter Castle, Partner | Tuesday 15 July 2003

Introduction

On Monday 7 July, the much heralded Consumer Protection (Definition of Goods and Services) Bill 2001 became law. The new legislation has significant implications for lines companies:

• It brings all products and services ordinarily supplied for domestic consumer use, including electricity, under consumer law.
  
  
• It exposes suppliers who do not have direct contractual relationships with end-consumers to liability for losses suffered (including consequential losses) as a result of the supplier failing to meet certain implied warranties.

The amendments

In the 1998 decision Electricity Supply Association of New Zealand Incorporated vs Commerce Commission, the High Court held that electricity and associated line function services were neither goods nor services for the purposes of the Consumer Guarantees Act 1993 (the Act).

Since then, there has been doubt whether electricity, associated line function services and other utility products and services were covered by the Act, the Commerce Act 1986 or the Fair Trading Act 1986.

The new Bill amended all three acts to clarify that they do apply to those goods and services, by:

• amending the definition of "supplier" in the Act so that it applies to all those who supply services to "consumers" (i.e. those supplied with goods and services that are ordinarily used for personal, domestic or household use or consumption), even if they do not have a direct contractual relationship with the consumer;
  
  
• including electricity in the definition of goods in the Act (it was already specifically included in the Commerce Act and the Fair Trading Act); and
  
  
• adding electricity line function services into the definitions of services in all three acts.

Use of system agreements

Before the amendments, only suppliers of goods and services who contracted directly with consumers could be responsible under the Act.

This is no longer the case - upstream suppliers of services, such as lines companies that have "Use of System" agreements in place with retailers, are now liable directly to consumers.

Electricity as "goods"

Adding electricity to the definition of goods in the Act will mean that the Act's guarantees applying to goods will now apply to electricity.

Lines companies can be liable as manufacturers of goods because they "process" electricity received from generators, by converting voltage and frequency.

The most relevant guarantee is that the electricity supplied is of acceptable quality. This will be based on an objective test from the perspective of the reasonable consumer (who is likely to be a consumer who understands that electricity is subject to momentary fluctuations, prone to interference by environmental factors and the actions of third parties, and may not be supplied at all due to planned shutdowns or emergencies).

Electricity line function services as "services"

Lines companies will now be responsible to consumers as suppliers of electricity line function services, as well as in their capacities as providers of services ancillary to the supply of electricity as goods, to perform the services in accordance with certain implied guarantees, including a guarantee that they will perform with reasonable care and skill.

So, for example, a lines company could conceivably have exposure under the Act if it failed to maintain appropriate frequency and a power surge or a blackout resulted, which in turn damaged a consumer's property.

Consequential losses are recoverable under the Act where the guarantees are not met, so if a consumer's collections of expensive antique furniture, modern art and antique cars were lost or damaged, and its large chest freezer full of gourmet meats defrosted, the liability could be high.

Even if consumers do not approach the relevant lines company direct to recover such losses, their insurers will no doubt try to pass on any liability they have to consumers under their insurance policies - and lines companies' own insurers may well now seek to exclude liability under the Act.

Events beyond control

Suppliers will not be responsible for failures to meet the implied warranties under the Act that result from the acts of third parties or events beyond human control, provided that they manage the risk of that occurrence adequately.

For example, lines companies would be expected to ensure that:

• their networks meet all statutory requirements including those relating to safety, are designed to withstand worse than normal weather conditions and earthquakes, are reasonably tamper-proof and are appropriately maintained; and
  
  
• contractors are suitably qualified and experienced, obliged to use at least reasonable skill and care, and subcontractors are appropriately supervised.

Contracting out

It is important to note that upstream suppliers may (as may direct suppliers) exclude the provisions of the Act if the supply is made to a business consumer, as long as certain notice requirements are met.

No other contracting out is permitted, and any attempt to do so will result in a breach of the Fair Trading Act. So, for example, suppliers cannot disclaim liability for consequential losses.

Impact

The Bill serves as a timely reminder for lines companies to consider reviewing their supply, connection and use of system arrangements to ensure that they are as well protected against these new risks as possible.

Information and advice

For further information or advice on this issue, please contact:

Garry Downs
Partner