Bayly Construction Limited v Revolution Industries Limited Reference No. MVD 284/2017 [2017] NZMVDT 184 (20 November 2017)

Last Updated: 20 December 2017

BEFORE THE MOTOR VEHICLE DISPUTES TRIBUNAL
		[2017] NZMVDT 184 Reference No. MVD 284/2017
	IN THE MATTER	of the Motor Vehicle Sales Act 2003
	AND
	IN THE MATTER	of a dispute
	BETWEEN	BAYLY CONSTRUCTION LIMITED
		Purchaser
	AND	REVOLUTION INDUSTRIES LIMITED
		Trader
MEMBERS OF TRIBUNAL
B R Carter, Barrister – Adjudicator
S Haynes, Assessor
HEARING at Auckland on 1 November 2017
DATE OF DECISION 20 November 2017
APPEARANCES
Mrs L Bayly, for the Purchaser
Mr N Bayly, Witness for the Purchaser Mr B Morrison, Witness for the Purchaser Mr C R McKeown, for the Trader Mr R van der Riel, Witness for the Trader

ORDERS

1. Bayly Construction Limited’s application to reject the vehicle is upheld.
2. Revolution Industries Ltd shall, within 10 working days of the date of this decision, pay $5,500 to Bayly Construction Limited.

DECISION

[1] The Consumer Guarantees Act 1993 (“the Act”) applies to this transaction. Although Bayly Construction Limited is in trade, and purchased the vehicle for use in its business, the parties have not validly contracted out of the Act.
[2] The vehicle has structural corrosion in its rear cross members, engine bay firewall, door surrounds, roof and A pillars. The corrosion is a fault that breaches the acceptable quality guarantee in s 6 of the Act.
[3] The corrosion amounts to a failure of a substantial character for the purposes of s 21 of the Act. Accordingly, Bayly Construction Limited is entitled to reject the vehicle and obtain a refund of all amounts paid in respect of the vehicle.

REASONS

Introduction

[4] On 17 January 2017, Bayly Construction purchased a 1991 Toyota Hilux, registration number RH5654, for $5,500 from Revolution Industries Limited. The vehicle had an odometer reading of 144,009 kms at the time of sale. Bayly Construction purchased the vehicle for use in its construction business, and in particular to transport its employees to and from the Waiheke ferry terminal and a building site on Waiheke Island.
[5] In July 2017, the vehicle failed a warrant of fitness inspection. Relevant to this case, the vehicle was found to have structural corrosion in its rear cross members and left side door surround, roof and A pillar.
[6] Bayly Construction then rejected the vehicle and sought a refund of all amounts paid in respect of the vehicle. Revolution Industries does not accept that Bayly Construction is entitled to reject the vehicle.

The Issues

[7] The issues requiring consideration in this case are:

• (a) Have the parties contracted out of the Act?
• (b) Does the vehicle’s corrosion breach the guarantee of acceptable quality in s 6 of the Act?
• (c) Is the corrosion a failure of a substantial character entitling Bayly Construction to reject the vehicle?

Have the parties contracted out of the Act?

[8] Although it was not the main thrust of its defence, Revolution Industries suggested that the Act may not apply to this transaction, because both parties were in trade, and Bayly Construction used the vehicle as part of its business.
[9] Parties who are in trade may contract out of the Act, provided the provisions in s 43(2) of the Act, which sets out the rules for contracting out of the Act, are complied with:

“43 No contracting out except for business transactions

(2) However, despite subsection (1), parties to an agreement may include a provision in their agreement to the effect that the provisions of this Act will not apply to that agreement, provided that—

(a) the agreement is in writing; and

(b) the goods or services are, or (in connection only with the guarantee of acceptable quality in section 7A) the gas or electricity is, supplied and acquired in trade; and

(c) all parties to the agreement—

(i) are in trade; and

(ii) agree to contract out of the provisions of this Act; and

(d) it is fair and reasonable that the parties are bound by the provision in the agreement.

(2A) If, in any case, a court is required to decide what is fair and reasonable for the purposes of subsection (2)(d), the court must take account of all the circumstances of the agreement, including—

(a) the subject matter of the agreement; and

(b) the value of the goods, services, gas, or electricity (as relevant); and

(c) the respective bargaining power of the parties, including—

(i) the extent to which a party was able to negotiate the terms of the agreement; and

(ii) whether a party was required to either accept or reject the agreement on the terms and conditions presented by another party; and

(d) whether all or any of the parties received advice from, or were represented by, a lawyer, either at the time of the negotiations leading to the agreement or at any other relevant time.”

[10] This agreement complies with many of the requirements in s 43(2) of the Act. For example:

• (a) The agreement was in writing – as evidenced by the Vehicle Sales Agreement dated 17 January 2017.
• (b) The vehicle was supplied and acquired in trade. Both parties are in trade. Revolution Industries is a motor vehicle dealer and Bayly Construction is a construction company and the vehicle was acquired as part of the business activities of both companies.

[11] I have reservations as to whether the parties have agreed to contract out of the provisions of the Act as required by s 43(2)(c)(ii) of the Act. The Vehicle Sales Agreement contains a clause which seeks to exclude all representations or warranties (whether statutory, expressed or implied) except any which may not be excluded. This clause does not expressly exclude the Act, although it is certainly arguable that, given its very broad terms, the Act is excluded.
[12] Although I am inclined to the view that the parties have not agreed to contract out of the provisions of the Act, because the Vehicle Sales Agreement does not expressly contract out of the Act, I do not need to resolve whether this clause in the Vehicle Sales Agreement amounts to an agreement to contract out of the Act. That is because, even if it did, I am not satisfied that it is fair and reasonable that the parties should be bound by the exclusion clause.

Is it fair and reasonable that the parties are bound by the exclusion clause?

[13] When determining what is fair and reasonable for the purposes of s 43(2)(d) of the Act, I must consider the criteria set out in s 43(2A) of the Act.

The subject matter of the agreement

[14] The subject matter of the agreement is a 1991 Toyota Hilux. This vehicle is of a kind ordinarily acquired for personal, domestic or household use, which Bayly Construction acquired principally to use in its business operation.

The value of the goods

[15] Bayly Construction paid $5,500 for the vehicle. I consider this to be a neutral factor in my consideration of whether it is fair and reasonable that the parties should be held to have contracted out of the Act.

The respective bargaining power of the parties

[16] I am satisfied that there was an imbalance in the bargaining power between Revolution Industries and Bayly Construction. The agreement was in Revolution Industries’ standard form, and its terms do not appear to have been subject to negotiation. Further, Revolution Industries is a registered motor vehicle dealer, whereas Bayly Construction does not have the same experience in dealing with, or negotiating, motor vehicle sale and purchase contracts.

Whether the parties received legal advice

[17] Neither party sought legal advice, although I acknowledge that it would be unusual for a buyer or seller to seek legal advice before purchasing a $5,500 motor vehicle. However, it is relevant to my assessment of fairness and reasonableness that the purchaser received no advice, either from a lawyer or the trader, on the existence and effect of the exclusion clause.
[18] Revolution Industries knew of the existence and effect of the exclusion clause. It is contained in the Vehicle Sales Agreement, which is the trader’s own standard form agreement. Bayly Construction did not have this extent of familiarity with the content of the Vehicle Sales Agreement. In those circumstances, I am satisfied that there was a real risk that, by signing the Vehicle Sales Agreement, Bayly Construction did not realise that it was agreeing to exclude the protections in the Act.
[19] Ultimately, the Act is consumer protection legislation. Bayly Construction is a consumer – it purchased a vehicle of a kind ordinarily acquired for personal, domestic or household use. Given the imbalance in the respective bargaining power of the parties and the absence of clear evidence that Bayly Construction has knowingly agreed to contract out of the provisions of the Act, Bayly Construction is entitled to the protections contained within the Act. I am therefore satisfied that the parties have not validly agreed to contract out of the Act and that the protections of the Act apply in this case.

Does the vehicle’s corrosion breach the acceptable quality guarantee in s 6 of the Act?

[20] Section 6 of the Act imposes on suppliers and manufacturers of consumer goods "a guarantee that the goods are of acceptable quality." Section 2 of the Act defines "goods" as including vehicles.
[21] The expression "acceptable quality" is defined in s 7 as follows:

“7 Meaning of acceptable quality

(1) For the purposes of section 6, goods are of acceptable quality if they are as—

(a) fit for all the purposes for which goods of the type in question are commonly supplied; and

(b) acceptable in appearance and finish; and

(c) free from minor defects; and

(d) safe; and

(e) durable,—

as a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects, would regard as acceptable, having regard to—

(f) the nature of the goods:

(g) the price (where relevant):

(h) any statements made about the goods on any packaging or label on the goods:

(ha) the nature of the supplier and the context in which the supplier supplies the goods:

(i) any representation made about the goods by the supplier or the manufacturer:

(j) all other relevant circumstances of the supply of the goods.

(2) Where any defects in goods have been specifically drawn to the consumer's attention before he or she agreed to the supply, then notwithstanding that a reasonable consumer may not have regarded the goods as acceptable with those defects, the goods will not fail to comply with the guarantee as to acceptable quality by reason only of those defects.

(3) Where goods are displayed for sale or hire, the defects that are to be treated as having been specifically drawn to the consumer's attention for the purposes of subsection (2) are those disclosed on a written notice displayed with the goods.

(4) Goods will not fail to comply with the guarantee of acceptable quality if—

(a) the goods have been used in a manner, or to an extent which is inconsistent with the manner or extent of use that a reasonable consumer would expect to obtain from the goods; and

(b) the goods would have complied with the guarantee of acceptable quality if they had not been used in that manner or to that extent.

(5) A reference in subsections (2) and (3) to a defect means any failure of the goods to comply with the guarantee of acceptable quality.”

[22] In considering whether or not goods meet the guarantee of acceptable quality, the Tribunal must consider the quality elements as set out in s 7(1)(a)-(e) of the Act as modified by the factors set out in s 7(1)(f)-(j), from the perspective of a “reasonable consumer”. The test is an objective one; it is not a view of those factors from Bayly Construction’s subjective perspective.

The vehicle has structural corrosion

[23] I am satisfied that the vehicle has structural corrosion.
[24] On 19 July 2017, the vehicle underwent a warrant of fitness inspection at Oneroa Automotive Limited. The vehicle failed the inspection, due in part, to corrosion in the left side door surround, roof and A pillar, and the centre cross members.
[25] The vehicle had passed a warrant of fitness assessment conducted by Albany Hill Auto (2007) Limited shortly before it was sold to Bayly Construction. Bayly Construction complained to the New Zealand Transport Agency (“NZTA”), alleging that the vehicle should not have passed that warrant of fitness inspection, given the corrosion that was present in the vehicle. NZTA investigated Bayly Construction’s complaint, and in addition to the corrosion identified by Oneroa Automotive, found corrosion in the lower edge of the rear window, right side roof gutter and A pillar and in the engine bay and firewall.
[26] The parties have also provided photographs that show corrosion in the areas identified by Oneroa Automotive and NZTA.
[27] I am satisfied that this evidence establishes that the vehicle has structural corrosion in it rear cross members, engine bay firewall, door surrounds, roof and A pillars.

The corrosion existed when the vehicle was sold to Bayly Construction

[28] Revolution Industries did not appear to dispute that the vehicle had corrosion in its cross members when it was sold to Bayly Construction. However, Revolution Industries denied that the remaining corrosion was present when the vehicle was sold.
[29] Revolution Industries noted that the corrosion was not visible when the vehicle was sold to Bayly Construction. Revolution Industries provided photographs of the vehicle taken shortly before the vehicle was sold to Bayly Industries, none of which showed any signs of corrosion.
[30] Revolution Industries also pointed to a letter from NZTA to Nicholas Bayly, a Director of Bayly Construction, where NZTA was unable to conclude whether the corrosion (other than the corrosion in the cross members) was “present and/or visible” at the time the vehicle was sold to Bayly Construction. Revolution Industries submitted that the NZTA report supported its view that, other than the cross-member corrosion, the corrosion in the vehicle was not present when the vehicle was sold to Bayly Construction. Revolution Industries says that the corrosion must have developed during Bayly Construction’s ownership and was possibly a result of the vehicle being kept on Waiheke Island, with the salt air causing advanced corrosion.
[31] Having considered the evidence presented in this case, I am satisfied that the corrosion was present when the vehicle was sold to Bayly Construction.
[32] Mr Haynes says that the photographs of the corrosion provided by the parties after the hearing shows advanced corrosion, which in some areas has bubbled through the paintwork. Mr Haynes says that corrosion to this extent could not have developed during Bayly Construction’s ownership. Instead, Mr Haynes considers that the corrosion has been present for some time.
[33] Mr Haynes also says that at least some of the corrosion damage has previously been repaired and painted over. Mr Haynes notes that NZTA found that the corrosion in the right-side roof gutter and A pillar and the left side roof gutter had previously been repaired with filler, and that the repair and filler had been painted over. I consider that the presence of filler in corroded parts of the vehicle shows that the corrosion existed when the vehicle was sold to Bayly Construction, but this corrosion was not visible because it had been painted over.
[34] Bayly Construction alleged that Revolution Industries was aware of the corrosion and painted the vehicle to hide the corrosion. I am satisfied that Revolution Industries did not repair the corrosion or paint the vehicle. Instead, I consider that the vehicle was repaired and painted before it was sold to Revolution Industries, and that Revolution Industries had no knowledge of the repair, or of the extent of corrosion in the vehicle.
[35] Ben Morrison, a Director of the previous owner of the vehicle, gave evidence by telephone. Bayly Construction had claimed that it was told by Mr Morrison that the vehicle had been sold to Revolution Industries because it had extensive corrosion. Mr Morrison’s evidence was quite different from Mrs Bayly’s recollection of her discussion with him, with Mr Morrison being unable to provide much in the way of detail about the vehicle, its history, or whether it had previously had corrosion.
[36] I found Mr Morrison to be evasive and vague in his evidence. I also found his absence of any useful recollection of the vehicle or of any faults it may have had, to be particularly surprising given Mr McKeown, the Director of Revolution Industries, had telephoned him the day before to discuss the case. Consequently, I put Mr Morrison’s evidence to one side when determining the condition of the vehicle when it was sold to Bayly Construction. Looking to the other evidence presented in the case, I consider it likely that the previous owner of the vehicle performed repairs on the corrosion and then painted over those repairs before selling it to Revolution Industries.
[37] Mr Haynes considers that this repair and repaint explains why the corrosion in the door surrounds, roof and A pillars was missed during the warrant of fitness assessment by Albany Hill Auto. Mr Haynes says that a warrant of fitness inspection is a visual one – and if corrosion cannot be seen, the warrant of fitness inspector is not allowed to perform invasive testing to determine whether corrosion is present. Mr van der Riel from Albany Hill Auto confirmed that he did not perform invasive testing when inspecting the vehicle.
[38] Revolution Industries pointed to the NZTA conclusion that much of the corrosion was unlikely to have been “present and/or visible” when the vehicle was inspected by Albany Hill Auto as evidence that the corrosion was not present when the vehicle was sold to Bayly Construction. I do not interpret the NZTA letter this way. Instead, I consider that, in light of the other evidence I have heard, the NZTA letter confirms that much of the corrosion was not visible because it had been repaired and painted over.
[39] I am therefore satisfied that the significant structural corrosion existed when the vehicle was sold to Bayly Construction.

Did Bayly Construction’s use of the vehicle cause the fault?

[40] Revolution Industries says that the corrosion was caused by Bayly Construction’s use of the vehicle, and in particular the fact that the vehicle was exposed to corrosive salt air on Waiheke Island.
[41] Section 7(4) of the Act provides that goods will not fail to comply with the guarantee of acceptable quality if the goods are used in a manner or to an extent which is inconsistent with the manner or extent of use that a reasonable consumer would expect to obtain from the goods. I must therefore consider whether Bayly Construction’s use of the vehicle has caused the fault.
[42] As above, I am satisfied that the corrosion existed when the vehicle was purchased by Bayly Construction. It follows that Bayly Construction’s use of the vehicle has not caused the corrosion. The exposure to salt air may have expedited the spread of the corrosion, but it has not caused it.
[43] I am therefore satisfied that this vehicle had a pre-existing structural corrosion that breached the acceptable quality guarantee in s 6 of the Act. I consider that a reasonable consumer would not expect a vehicle of this price, age and mileage to have structural corrosion that will cost more than $2,000 to repair.

Are the faults a failure of a substantial character?

[44] Bayly Construction seeks to reject the vehicle because its faults amount to a failure of a substantial character. A failure of a substantial character is defined in s 21 of the Act:

“21 Failure of substantial character

For the purposes of section 18(3), a failure to comply with a guarantee is of a substantial character in any case where—

(a) the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or

(b) the goods depart in 1 or more significant respects from the description by which they were supplied or, where they were supplied by reference to a sample or demonstration model, from the sample or demonstration model; or

(c) the goods are substantially unfit for a purpose for which goods of the type in question are commonly supplied or, where section 8(1) applies, the goods are unfit for a particular purpose made known to the supplier or represented by the supplier to be a purpose for which the goods would be fit, and the goods cannot easily and within a reasonable time be remedied to make them fit for such purpose; or

(d) the goods are not of acceptable quality within the meaning of section 7 because they are unsafe.”

[45] The question I must answer is whether the faults with this vehicle are such that a reasonable consumer, fully acquainted with the true nature and extent of the faults, would not have purchased the vehicle.
[46] I am satisfied that the structural corrosion in this vehicle is a failure of a substantial character. The vehicle was not of a warrant of fitness standard when it was sold to Bayly Construction because of the structural corrosion. I consider that a reasonable consumer would not have paid $5,500 for a 25-year-old vehicle that had travelled a little more than 144,000 kms at the date of purchase if it knew that it had pre-existing structural corrosion that would cause it to fail a warrant of fitness inspection, and require repairs costing more than $2,000.

What remedy is Bayly Construction entitled to under the Act?

[47] Section 18 of the Act sets out the remedies under the Act. Section 18 provides:

“18 Options against suppliers where goods do not comply with guarantees

(1) Where a consumer has a right of redress against the supplier in accordance with this Part in respect of the failure of any goods to comply with a guarantee, the consumer may exercise the following remedies.

(2) Where the failure can be remedied, the consumer may—

(a) require the supplier to remedy the failure within a reasonable time in accordance with section 19:

(b) where a supplier who has been required to remedy a failure refuses or neglects to do so, or does not succeed in doing so within a reasonable time,—

(i) have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred in having the failure remedied; or

(ii) subject to section 20, reject the goods in accordance with section 22.

(3) Where the failure cannot be remedied or is of a substantial character within the meaning of section 21, the consumer may—

(a) subject to section 20, reject the goods in accordance with section 22; or

(b) obtain from the supplier damages in compensation for any reduction in value of the goods below the price paid or payable by the consumer for the goods.

(4) In addition to the remedies set out in subsection (2) and subsection (3), the consumer may obtain from the supplier damages for any loss or damage to the consumer resulting from the failure (other than loss or damage through reduction in value of the goods) which was reasonably foreseeable as liable to result from the failure.”

[48] Bayly Construction is entitled to reject the vehicle and obtain a refund under s 18(3)(a) of the Act as the corrosion amounts to a failure of a substantial character.
[49] Accordingly, I order that Revolution Industries must, within 10 working days of the date of this decision, pay $5,500 to Bayly Construction Limited.
[50] In reaching this conclusion I reiterate that there is no evidence to show that Revolution Industries knew of the structural corrosion before the vehicle was sold to Bayly Construction. However, the obligations under the Act apply irrespective of whether Revolution Industries knew of those defects.

DATED at AUCKLAND this 20th day of November 2017

B.R. Carter
Adjudicator