Hi there. That sounds like a challenging and upsetting position to be in. Unfortunately because it is not clear what kind of business you are in or the details of the issue, we are only able to give you very general information. As you already know, your dealings with your customer and your legal obligations will be contained in the terms and conditions. However, in addition to these terms and conditions there may be some implied rights and obligations which the law requires in all consumer contracts. All consumer sales are governed by the Australian Consumer Law (ACL). These additional obligations include such things as “merchantable quality”. This means that regardless of the terms and conditions of a sale contract, if an item is not fit for its purpose than a refund must be given.

In addition to this the ACL provides for the quality of goods and the general requirements and obligations of business owners when serving customers. We recommend that you go to the Australian Competition and Consumer Commission (ACCC) website and and learn a little bit more about your obligations to customers. The ACCC have an online publication available on their website which aims to help small businesses understand their rights and obligations under the Competition and Consumer Act 2010 and the Australian Consumer Law:https://www.accc.gov.au/publications/small-business-the-competition-and-consumer-act

This will allow you to feel more confident about your position, and so will inform your negotiations with the customer.