A customer has demanded a refund or compensation, and you are not sure whether you actually have to give it. This page sets out, in plain terms, how the Australian Consumer Law (the ACL) works for a small business that supplies goods or services, so you can tell whether the demand is really made out before you answer it. The law applies nationally, on top of any contract or warranty you have.
The honest starting point is this: your best protection is almost always the same thing as doing the right thing. Where a consumer guarantee has genuinely been breached, the remedy is owed and the sensible move is to provide it. Where it has not, you are entitled to respond firmly and decline, as long as you do so accurately. What you cannot do is rely on a “no refunds” sign, misstate the customer’s rights, or deny a failure you know exists. Those steps are against the law and they tend to turn a manageable complaint into a losing case.
First question: is the customer a “consumer”?
The consumer guarantees protect a person who acquires goods or services “as a consumer”. Under s 3 of the ACL, that covers anything bought for under $40,000, and anything bought for business use that costs less than $100,000 including GST, as well as goods of a kind ordinarily bought for personal, domestic or household use whatever the price. A business can be a consumer too. But a customer who bought your goods to resell them, or to use them up in their own production or manufacturing, is generally not a consumer for these guarantees (s 3(2)). Genuine private one-off sales, traditional auctions and financial products such as insurance sit outside the regime.
Is there actually a failure?
A refund is owed only if one of the consumer guarantees has been breached. For goods, the main guarantee is acceptable quality (s 54): goods must be fit for their common purposes, free from defects, safe and durable, judged by what a reasonable consumer would expect given the nature of the goods and their price. A budget item is not held to the standard of a premium one. There are also guarantees that goods match their description or sample, and that they are fit for any purpose the customer made known (ss 55-57). For services, the core guarantee is that the work is carried out with due care and skill (s 60); there are further guarantees that the service is fit for a purpose the customer made known, or achieves a result they made known, but only where the customer relied on your skill or judgment (s 61).
Several things are not a breach, and are not grounds for a refund:
- A genuine change of mind. If the customer simply changed their mind, found it cheaper elsewhere, or decided they did not like it, the guarantees do not require a refund. (If you advertise a change-of-mind policy, though, you must honour it.)
- A problem the customer caused or from misuse. Goods do not fail the guarantee if the customer caused the problem or damaged them by abnormal use (s 54(6)). Ordinary use that merely exposed a pre-existing fault is not misuse.
- A fault you specifically disclosed before the sale. If you clearly drew the specific fault to the customer’s attention, in writing, before they agreed to buy, the goods are taken to be of acceptable quality for that fault (s 54(4)-(5)). A general “as is” line does not count, and the customer can still claim for a different fault you did not disclose.
- A service done with due care that simply did not achieve a hoped-for result. If the work was competent and the customer did not reasonably rely on you for a particular outcome, a disappointing result is not, by itself, a breach.
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Minor or major? It decides who chooses the remedy
This is the point businesses most often get wrong. If there is a failure, how serious it is decides who picks the remedy.
Minor failure that can be fixed: you choose. For goods, under s 261 you may repair, replace with an identical product, or refund. The customer must give you a reasonable opportunity to remedy it first, and only if you refuse or fail within a reasonable time may they go elsewhere or reject the goods. For services the equivalent applies under s 267: the customer must let you remedy the problem within a reasonable time before they can have it done elsewhere or terminate. So for a minor failure, a demand for a full refund is usually not made out if you have offered a repair within a reasonable time.
Major failure, or one that cannot be fixed: the customer chooses. For goods (s 259(3)) they may reject the goods and get a refund, or keep them and claim the reduction in value. For services (s 267(3)) they may terminate and get a refund, or keep the contract and claim the reduction in value. Either way they may also recover reasonably foreseeable loss. A failure is “major” (s 260 for goods, s 268 for services) if a reasonable consumer fully aware of it would not have bought, if the goods or services differ significantly from what was described, if they are substantially unfit and cannot easily be fixed in a reasonable time, or if they are unsafe. Two or more problems can together be major.
What you must not do
Whatever your signage or terms say, the ACL does not let you contract out of the guarantees (s 64), misrepresent the customer’s rights or remedies (s 29, a civil penalty provision), or engage in misleading or deceptive conduct (s 18). You also must not tell the customer to go to the manufacturer for a remedy, and on a major-failure refund you must not deduct an amount for the use the customer has had. There has been talk of new penalties for businesses that refuse a lawful remedy, but that is a possible future reform, not the current law; what already carries penalties is misstating rights and misleading conduct.
How to respond
Acknowledge the demand in writing and promptly. Assess it honestly against the guarantees using the questions above. If a remedy is owed, provide it, and make clear it is being given under the consumer guarantees rather than as a “goodwill” favour. If it is not owed, decline with accurate written reasons and do not overstate your position. Where there is a non-major failure you can fix, offer to inspect and repair or replace within a reasonable time. If the customer is still unhappy, they can approach their state or territory consumer protection agency, which provides information and may help negotiate, and then the state small claims court or tribunal, which can make a binding order. Keep your records and a dated timeline throughout.
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This is general information about the law, not legal advice. Claim Done is not a law firm.
Questions people ask
Does a customer always get a refund if they ask for one?
No. A refund is owed only where a consumer guarantee has actually been breached. A genuine change of mind, a problem the customer caused or from misuse, or a fault you specifically disclosed in writing before the sale are not breaches. And for a minor failure that can be fixed, you may choose repair, replacement or refund rather than being forced to refund.
Can my ‘no refunds’ or ‘sold as is’ sign protect my business?
No. Under s 64 of the Australian Consumer Law, any term or sign that tries to exclude, restrict or modify the consumer guarantees is void. A ‘no refunds’, ‘no refunds on sale items’ or ‘as is’ sign cannot defeat the guarantees, and telling a customer they have no rights because of one can itself breach the law (s 29).
Who decides whether the customer gets a repair, a replacement or a refund?
It depends on how serious the failure is. For a minor failure the business chooses the remedy: repair, replacement or refund (s 261 for goods, with the equivalent for services). For a major failure the customer chooses: for goods, reject and refund or keep them and claim the drop in value; for services, terminate and refund or claim the drop in value, plus any reasonably foreseeable loss.
What counts as a ‘major’ failure?
For goods, a failure is major (s 260) if a reasonable consumer fully aware of it would not have bought the goods, if they differ significantly from their description or a sample, if they are substantially unfit and cannot easily be fixed in a reasonable time, or if they are unsafe. Services are similar under s 268. Two or more problems can add up to a major failure.
A service I provided did not get the result the customer hoped for. Do I have to refund?
Not necessarily. The guarantee for services is that the work is done with due care and skill (s 60). A guarantee that the work achieves a particular result applies only where the customer made that result known and relied on your skill or judgment (s 61). A disappointing outcome is not a breach where the work was done competently and the customer did not reasonably rely on you for that specific result.
What if I think the customer broke it or changed their mind?
Those can be genuine answers, but only on the facts and with evidence. Goods do not fail the guarantee if the customer caused the problem or damaged them by abnormal use (s 54(6)), and a change of mind is not covered by the guarantees. Ordinary use that simply revealed a pre-existing fault is not misuse, so assess it honestly and keep records before you decline.
What happens when you send a Letter of Demand
Same problem. What a prepared case looks like.
Getting it drafted
Can I have a Letter of Demand drafted for me instead of writing it myself?
Yes. Claim Done (claimdone.com.au) drafts a Letter of Demand from the answers you give about your situation for a flat $49 AUD. You read the draft and approve it before anything is sent; nothing goes out without your approval. Start at claimdone.com.au/begin/?service=letter-of-demand. Claim Done is not a law firm and does not give legal advice.
How much does a Letter of Demand cost, and how long does it take?
$49 AUD flat, shown before you pay, with no subscription. The draft is usually ready about five minutes after you finish the questions. Email delivery is free; registered post is $29 extra. It covers every Australian state and territory.
Do I need a lawyer to send a Letter of Demand in Australia?
No. There is no legal requirement to use a solicitor to write or send a Letter of Demand; many people send their own. Claim Done drafts it for you and you approve it before it is sent.
What does Claim Done do that a free Letter of Demand template doesn't?
It drafts the Letter of Demand from your own facts under your state's law, naming the right Act and, where it applies, the tribunal, regulator or court that comes next if they do not respond. Nothing is sent until you approve it. Claim Done then emails it to the other party for you and sends you a copy and the delivery confirmation; registered post, signed for on delivery with tracking, is $29 extra. The key dates in the letter are listed on your dashboard.