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The Consumer Protection Act and SMEs: Significant challenges

7th November 2011

By: Creamer Media Reporter

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The Consumer Protection Act, 2008 (“CPA”) entered into force in full on 31 March 2011. It has introduced new consumer rights, whilst strengthening existing rights at the same time.

In the past, consumers had limited recourse against suppliers and there was a general lack of regulation. The CPA has now shifted the power balance back to the consumer. However, this has significant implications for businesses and the impact upon SMEs cannot be ignored.

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When does the CPA apply?

The CPA applies to the sale of goods and the provision of services. It only applies to transactions in the ordinary course of trade. This means that if an individual sells his family car, the CPA will not apply to that transaction.

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The CPA will also not apply if the consumer is a juristic person (company or close corporation) which has an annual turnover or asset value that exceeds R2 million.

Where do SMEs fit into this?

If an SME sells goods or provides services, the SME will need to comply with the CPA like any other business. Larger businesses might have enough resources and capacity to ensure that they comply with the CPA. They might also be in a better position to deal with disputes and claims under the CPA. But, some SMEs will face a tougher challenge if finance and resources are not readily available.

The CPA has introduced new obligations on suppliers, and compliance normally comes at a price. SMEs will have to make sure that their terms and conditions of sale or supply are in line with the CPA. They will need to ensure that there labelling is up to standard. It is also necessary to review return and exchange policies. Since the CPA has introduced strict liability, increased insurance coverage will become essential. Some of these issues will be dealt with in more detail below.

However, the CPA also has an upside for some SMEs. If an SME’s annual turnover or asset value is below R2 million, the SME will qualify as a consumer under the CPA. This means that such an SME would be able to enforce the rights that individual consumers have in terms of the CPA.

Noteworthy changes

Prior to the introduction of the CPA, very little legislation was aimed specifically at the protection of consumers in South Africa. For instance, suppliers were allowed to sell products without making any warranties regarding the goods. When it came to product liability, consumers had to prove negligence or intent in order to claim damages for harm caused by goods. This has now changed.

Standard product warranties

The CPA contains standard product warranties. All suppliers are deemed to give those warranties for their products. The warranties may not be excluded (except in limited instances). The warranties include consumers’ rights to receive good quality, usable and durable goods that are reasonably suitable for their purposes.

If a product does not comply with the warranties, the consumer may return it to the supplier within 6 months after delivery of the goods. At the consumer’s discretion, the supplier must then repair or replace the goods; or refund the purchase price paid by the consumer for the goods.

Controversial product liability provisions

The CPA introduces strict liability for products supplied to consumers. This means that the supplier will be liable if a product causes harm to a consumer, whether or not the supplier was negligent. This will be the case if harm was caused as a consequence of:

• supplying any unsafe goods;
• a product failure, defect or hazard in any goods;
• inadequate instructions or warnings were provided to the consumer regarding any hazard arising from or associated with the use of the goods.

It is also important to note that all parties in the supply chain (including the producer, importer, distributor or retailer) can be held liable. This means that if an SME sells a product that causes harm, the consumer can claim against the SME, even if the defect was caused by the manufacturer. However, under South Africa’s common law, the SME might afterwards have recourse against the manufacturer. This could be the case if the SME had to pay out the consumer’s claim as a result of a defect caused by the manufacturer.

The CPA’s product liability provisions pose significant risks and the CPA only provides for limited exceptions. As such, SMEs need to take steps in order to mitigate against the risks. Here are some of the steps that can be taken:

• Check that adequate insurance coverage is in place.

• Quality control processes and policies need to be reviewed. Proper quality control might reduce the number of claims received.

• Monitor the supply chain and be on the lookout for issues that arise. Claims should be investigated in a timely manner. If it is necessary to take further steps (such as recall campaigns), this should be done without delay.

• Purchase components from reputable suppliers and obtain indemnities from those suppliers to protect against claims that arise from defective components.

• Educate retailers and sales staff about the use of the products and any risks involved.

Labelling has become more important

Section 61 of the CPA specifically states that a supplier can be held liable for providing inadequate instructions or warnings regarding any hazards relating to goods. SMEs will therefore have to review their product labels, instruction manuals and the like to make sure that the instructions and warnings are comprehensive.

If proper instructions are given, the supplier might also avoid abusive warranty claims from consumers. This will particularly be the case if a consumer insists that the supplier must repair or replace goods, or refund the purchase price, if the consumer used the goods incorrectly or for the wrong purpose.

Other important provisions

The CPA contains many new provisions relating to the marketing of goods and services. In particular, it provides for a standard cooling-off period if goods or services were promoted by way of direct marketing. The act also regulates promotional competitions and loyalty schemes in detail.

Steps to take

SMEs should determine how the CPA impacts upon their particular business and what needs to be done. Here are some action items that can be considered:

• Take the necessary steps to mitigate against the product liability risks, as discussed above.

• Educate staff about the implications of the Act and make sure that they know what is expected of them.

• Review terms and conditions, product literature, packaging and other documentation that might be governed by the CPA and make the necessary changes.

• Consider how the business markets its goods and services and whether it complies with the CPA’s requirements.

• If the company has warranty, repair or exchange policies for its products, it may be necessary to update them to bring them in line with the CPA.

Conclusion

The CPA has added a new burden on businesses that already have to comply with other onerous legislation. This might ultimately have an impact on prices paid by consumers. Businesses can also expect more complaints and may need to be involved in lengthy dispute resolution procedures.

By: Danie Strachan
Senior Associate
Adams & Adams
danie-s@adamsadams.co.za
012 432 6291

 

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