Business purchases and the Consumer Guarantees Act 1993

Commercial | Print Article

[Autumn 2013]

Businesses may be asked to sign agreements which purport to ‘opt out’ of the provisions of the Consumer Guarantees Act 1993 (‘the CGA’). This article considers the applicability of the CGA to business purchases, the consequences of contracting out, and the effect of planned reforms to consumer legislation.

When is a business a ‘consumer’?

The Consumer Guarantees Act 1993 (‘the CGA’) defines ‘consumer’ as a person who ‘acquires from a supplier goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption’, provided they are not being purchased for:

  • resupply in trade;
  • consumption in the course of production or manufacture;
  • repairing or treating in trade other goods or fixtures on land.

Outside these exceptions, a business will be a consumer depending on the kind of goods and services being purchased. Business transactions are not automatically excluded by the CGA. If commercial parties want to contract out of the CGA they must do so in writing.

Goods ‘of a kind ordinarily acquired for personal, domestic, or household use or consumption’?

Whether or not a business is a ‘consumer’ hinges on the nature of the goods or services.

The Court of Appeal in Nesbit v Porter [2000] 2 NZLR 465 said the purchase of a four-wheel drive utility vehicle brought a business within the scope of the CGA. The evidence was that around 80% of buyers obtained the vehicle for commercial purposes, with about 20% being exclusively for private use. This was enough for the vehicle to be ‘ordinarily’ acquired for personal, domestic or household use – in the sense that it was not ‘out of the ordinary’.

Each product or service will need to be considered on a case by case basis. The focus is not on what is the dominant use, but what is ordinary.

So, for example, business purchases of laptops or computers would likely be covered by the CGA, but not purchases of commercial-scale printers or photocopiers. Many types of legal and accountancy services are likely to fall within the reach of the CGA, whereas auditing services will probably not.

Statutory guarantees

If a business purchase comes within the scope of the CGA, the statutory guarantees in the Act will apply.

In respect of goods, the implied guarantees are that:

  • goods will be of acceptable quality;
  • goods will be fit for the particular purpose for which it is known that they are needed;
  • goods will match their description;
  • clear title to the goods will be given;
  • spare parts and repair facilities will be made available for a reasonable time.

In respect of services, the following guarantees apply:

  • services will be provided with reasonable care and skill;
  • services will be fit for the particular purpose for which it is known they are needed;
  • services will be provided within a reasonable time;
  • if no price has been agreed in advance, the price must be reasonable.

There are a range of remedies available under the CGA. At one end of the scale, the manufacturer or supplier may be required to remedy the failure or pay the reduction in value of the goods or services. Where the failure is of a substantial character, a consumer may be able to reject the goods and get a full refund. Compensatory damages may also be available.

Contracting out

The guarantees in the CGA can only be excluded by contracting out, in writing, and only if the consumer is acquiring the goods for the purposes of a business.

The situation under the Sale of Goods Act 1908 is different; implied terms can be excluded as a result of a course of dealing between parties. But the CGA makes it clear that a course of dealing will not be an effective means of contracting out – a written agreement is required.

This means that a supplier cannot ‘opt out’ of the CGA simply by including a clause to this effect in the terms of their trade on the back of their invoice. The business consumer needs to have signed a document or written agreement incorporating the exclusion clause.

If it has contracted out of the CGA, a business consumer could find itself in a vulnerable position. If the CGA applies to a transaction, the equivalent implied warranties and conditions under the Sale of Goods Act will not apply (section 56A).

There is no case law dealing with this situation, but it seems that if the CGA applies to a business purchase and the parties have contracted out of the CGA, then the business consumer will not be able to fall back on the Sale of Goods Act implied warranties and conditions – for example, the implied conditions as to fitness and quality. Unless these warranties and conditions can be shown to have been incorporated into the contract between the parties by some other means, there is a risk a business consumer with defective goods may have fewer legal remedies.

By contracting out of the CGA a business may be limiting its remedies against the manufacturer as well as against the supplier. A manufacturer might argue that the ‘contracting out’ provision conferred a benefit upon it which is enforceable at its suit (refer section 4, Contracts (Privity) Act 1982).

‘Fair and reasonable’

The Consumer Law Reform Bill, if passed, will introduce a further requirement that it must be ‘fair and reasonable’ that the parties are bound by provisions contracting out of the CGA. This amendment to the CGA is intended to align New Zealand’s consumer laws with those of Australia.

The Commerce Committee recommended the Bill also include the following specific indicators which the court would consider when deciding whether or not it is fair and reasonable for the parties to be bound by an ‘opt out’ clause, including:

  • the subject matter of the agreement;
  • the value of the goods or services;
  • the respective bargaining power of the parties, including the extent to which a party was able to negotiate the terms of the agreement;
  • whether the parties received legal advice.

This ‘fair and reasonable’ requirement may provide some comfort to business purchasers, but its scope remains untested and consequently uncertain. Suppliers may respond by tightening up the terms of their contracts or introducing procedures in an attempt to ensure that their contracting provisions are enforceable.

In summary

Businesses may have the protection of the CGA where the goods or services purchased are of a kind ordinarily acquired for personal, domestic or household use. A supplier cannot rely on an ‘opt out’ clause in its terms of trade to avoid its obligations to business consumers under the CGA; a written agreement between the parties is required. Planned amendments to consumer legislation will impose further requirements on businesses wishing to contract out of the CGA.

If you are a business consumer, care should be taken before agreeing to contract out of the CGA – you may not be able to fall back on implied conditions and warranties in the Sale of Goods Act, and might inadvertently limit your claims against manufacturers.

If you are a business supplier, you should review your current contracts or terms of trade to ensure that any opt out clauses are enforceable and will continue to be so following enactment of the Consumer Law Reform Bill.