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L.A. Inspection Services Limited v Penrose Enterprises Limited t/a Finclear Wholesale - Reference No. MVD 012/2017 (Auckland) [2017] NZMVDT 41; [2017] NZMVDT Auckland 41 (24 April 2017)

Last Updated: 23 May 2017

BEFORE THE MOTOR VEHICLE DISPUTES TRIBUNAL

[2017] NZMVDT Auckland 41

Reference No. MVD 012/2017

IN THE MATTER of the Motor Vehicle Sales Act 2003

AND

IN THE MATTER of a dispute

BETWEEN L.A. INSPECTION SERVICES LIMITED

Purchaser

AND PENROSE ENTERPRISES LIMITED TRADING AS FINCLEAR WHOLESALE

Trader

MEMBERS OF TRIBUNAL
B R Carter, Barrister - Adjudicator

R C Dixon, Assessor

HEARING at Auckland on 28 March 2017

DATE OF DECISION 24 April 2017
APPEARANCES

Mr L M Hindt, Director of the purchaser

Mr T Moreton, Sales Manager for the trader


ORDERS

The Tribunal makes the following orders:

  1. The trader shall, within five working days of the date of this decision, pay the purchaser $10,235.41.

DECISION

[1] The parties have not validly contracted out of the Consumer Guarantees Act 1993 (“the Act”). The Vehicle Sale and Purchase Agreement (“VSPA”) between the parties contained an exclusion clause where the purchaser agreed that the provisions of the Act do not apply. The existence and effect of the exclusion clause was not made clear to the purchaser and it is not fair and reasonable that the purchaser be bound by the exclusion clause. See paragraphs [15] to [35].

[2] The vehicle did not comply with the guarantee as to acceptable quality in s 6 of the Act. The vehicle had a latent defect at the time of sale – it had a leaking head gasket which had not been remedied during earlier repairs. See paragraphs [36] to [41].

[3] The head gasket fault was a failure of a substantial character. See paragraphs [42] to [43].

[4] The purchaser is not entitled to a remedy under s 18(2) of the Act. It did not give the trader a reasonable opportunity to repair the head gasket fault. However, the purchaser is entitled to a remedy under s 18(3)(b) of the Act, as set out in the orders above. See paragraphs [44] to [55].


REASONS

Introduction

[5] On 6 October 2016, L.A. Inspection Services Limited (“the purchaser”) bought a 2009 Land Rover Range Rover Sport, registration number KAY322 (“the vehicle”) for $57,395 from Penrose Enterprises Limited, trading as Finclear Wholesale (“the trader”). The vehicle had travelled 28,057 kms at the time of sale.

[6] The vehicle had an almost immediate fault with its engine. The purchaser has repaired the vehicle and has applied to the Tribunal for an order that the trader compensate it for the cost of the repairs.

[7] The following issues arise:

(a) Did the trader validly contract out of the Act?
(b) Did the vehicle comply with the guarantee of acceptable quality?
(c) Was the vehicle’s failure of a substantial character?
(d) What remedy under s 18 of the Act is available to the purchaser?

Background

[8] The purchaser is an inspection company. Its director, Luke Hindt appeared and gave evidence before the Tribunal on behalf of the purchaser.

[9] Within a week of purchasing the vehicle, Mr Hindt noticed a warning light on the vehicle’s display. He established that the vehicle was losing coolant fluid, so he put more coolant fluid in the vehicle. The problem recurred a week later. He again topped up the vehicle’s coolant levels.

[10] Two weeks later, the vehicle’s warning light came on again. Mr Hindt decided to take the vehicle to Stag Spares & Services Limited (“Stag”), a Land Rover specialist, to have the vehicle assessed. Mr Hindt says he took the vehicle to Stag because, as a condition of an Autosure New Zealand mechanical warranty (“the mechanical warranty”) he had purchased for the vehicle, repairs to the vehicle could only be performed by an “authorised repair facility”. Stag was an authorised repair facility.

[11] Stag identified that the coolant leak was coming from the engine. The purchaser then made a claim against the mechanical warranty. Autosure New Zealand assessed the vehicle. Autosure New Zealand concluded that the left hand gasket in the vehicle’s engine was leaking (“the head gasket fault”). Autosure New Zealand considered that the head gasket fault was present at the time the purchaser bought the vehicle and that substandard repairs had previously been performed in an attempt to fix the fault. On the basis that the damage was caused by a pre-existing fault, Autosure New Zealand declined to cover the cost of repairs.

[12] The purchaser then instructed Stag to repair the vehicle. Stag carried out a full assessment of the dismantled engine and then had the cylinder bores honed and the short block reassembled with new rings. The cylinder heads were checked for hardness and the surface machined. The engine was then reassembled and installed in the vehicle using the necessary parts and fluids.

[13] Stag completed repairs in January 2017 and invoiced the purchaser a total of $12,906.37 for that work. The purchaser has paid that invoice and now applies to the Tribunal for an order that the trader compensate it for that amount.

[14] The trader submits that the purchaser should not be entitled to a remedy under the Act:

(a) The Act does not apply to this transaction – the purchaser has contracted out of the Act; and

(b) The purchaser has lost the right to a remedy because it did not give the trader a reasonable opportunity to repair the vehicle.

Did the trader validly contract out of the Act?

[15] In his response to the purchaser’s claim Mr Moreton, the trader’s Sales Manager, submitted that the vehicle was bought by L.A. Inspection Services Limited and the Act does not apply because of the following clause in the VSPA (“the exclusion clause”):

“7.2 I am acquiring the vehicle for business purposes, and agree that the Consumer Guarantees Act does not apply.”

[16] The trader says that, by signing the agreement, the purchaser has agreed that the Act does not apply.

Relevant Law
[17] Section 43 of the Act sets out the rules for contracting out of the Act:

“43 No contracting out except for business transactions

(1) Subject to this section and to sections 40, 41, and 43A, the provisions of this Act shall have effect notwithstanding any provision to the contrary in any agreement.

(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.

(3) Section 56 of the Sale of Goods Act 1908 shall be read subject to the provisions of this section.

(4) Every supplier and every manufacturer commits an offence against section 13(i) of the Fair Trading Act 1986 who purports to contract out of any provision of this Act other than in accordance with subsection (2) or section 43A.

...”

[18] Section 43(1) contains a general rule that parties cannot contract out of the consumer protections provided by the Act. There are limited exceptions to this general rule set out in s 43(2).

The parties have not contracted out of the Act

[19] Although most of the requirements of s 43(2) are satisfied in this case, I am not satisfied that it is fair and reasonable that the parties be allowed to contract out of the Act.

[20] In terms of s 43(2)(a) of the Act, the agreement between the purchaser and the trader is in writing.

[21] In terms of s 43(2)(b), I am satisfied that the vehicle was supplied and acquired in trade. The vehicle was clearly supplied in trade. The supplier is a registered motor vehicle dealer. The issue to be determined is whether the vehicle was acquired in trade.

[22] The definition of acquire in s 2 of the Act in relation to goods, includes to “obtain by way of ... purchase”. I am satisfied that the purchaser has acquired the vehicle for the purposes of the Act – it obtained the vehicle by way of purchase.

[23] Did the purchaser acquire the vehicle “in trade”? The definition of trade in s 2 of the Act is “any trade, business, industry, profession, occupation, activity of commerce or undertaking relating to the supply or acquisition of goods or services”. The purchaser is in trade. It is an inspection company that provides inspection services and I am satisfied that the purchaser acquired the vehicle in connection with its business activities. Mr Hindt confirmed this.

[24] In terms of 43(2)(c), both the purchaser and trader are in trade, and the VSPA records that the parties agree to contract out of the Act.

[25] However, in terms of s 43(2)(d) I am not satisfied that it is fair and reasonable in the circumstances that the parties should be bound by the exclusion clause. I assess each of the s 43(2)(d) criteria below.

Subject matter of the agreement

[26] The subject matter of the agreement is a 2009 Land Rover Range Rover Sport. This vehicle is of a kind ordinarily acquired for personal, domestic or household use.

The value of the goods

[27] The purchaser paid $57,395 for the vehicle. I am satisfied that this is a substantial amount of money for the purchaser.

The respective bargaining power

[28] I am satisfied that there was an imbalance in the bargaining power between the trader and purchaser. The agreement was in the trader’s standard form, and its terms, other than price, do not appear to have been subject to negotiation. Further, I am satisfied that the trader is an experienced motor vehicle dealer, whereas the purchaser (and Mr Hindt personally) does not have the same experience in dealing with, or negotiating, motor vehicle sale and purchase contracts.

Whether the parties received legal advice

[29] Neither party sought legal advice, although I acknowledge that it would be unusual for a buyer or seller of a $57,395 motor vehicle to seek legal advice before signing a VSPA.

[30] 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.

[31] The trader knew of the existence and effect of the exclusion clause. It is contained in the VSPA, which is the trader’s own standard form agreement. The purchaser did not have this extent of familiarity with the content of the VSPA. I consider that, where there are terms and conditions in the VSPA that seek to significantly limit the protections a consumer would otherwise have under the Act, the trader runs a risk that those clauses will not be upheld where the existence and effect of those terms and conditions are not clearly explained to consumers.

[32] I am satisfied, in this case, that the existence and effect of the exclusion clause was not made clear to the purchaser, or explained to it, despite the trader knowing of its existence and effect.

[33] Mr Moreton gave evidence that he explained the effect of the exclusion clause to Mr Hindt, and advised him to purchase an extended warranty because the Act did not apply. Mr Hindt gave evidence that no such conversation occurred. Mr Hindt said he had no idea that he had agreed to contract out of the Act. Mr Hindt says he would not have signed away such a valuable right had he known about the exclusion clause.

[34] I am satisfied that the purchaser did not understand that it had contracted out of the Act. The VSPA contains no express acknowledgement from the purchaser, such as a signature or initials beside the exclusion clause, that it has knowingly contracted out of the Act, and I accept Mr Hindt’s evidence that he would not have knowingly signed away such a valuable right.

[35] Ultimately, the Act is consumer protection legislation. The purchaser is a consumer – it purchased a vehicle of a kind ordinarily acquired for personal, domestic or household use. The existence and effect of the exclusion clause, which purported to exclude important consumer protections, was not made clear to the purchaser. I am satisfied that, in the circumstances, it is not fair and reasonable that the purchaser be bound by the exclusion clause.

Did the vehicle comply with the guarantee of acceptable quality?

Relevant law

[36] Section 6 of the Act imposes on a supplier and the manufacturer of consumer goods "a guarantee that the goods are of acceptable quality." Section 2 of the Act defines "goods" as including vehicles.
[37] 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.”

[38] 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 the purchaser’s subjective perspective.

[39] In Stephens v Chevron Motor Court Limited,[1] the District Court held that the correct approach to the Act was first to consider whether the vehicle was of acceptable quality. If the vehicle was not of acceptable quality, the next point to consider was whether the purchaser required the trader to remedy any faults within a reasonable time in accordance with s 19 of the Act. If the failure to comply with the guarantee of acceptable quality is of a “substantial character” within the meaning of s 21, or if the faults cannot be remedied, the Tribunal is directed to ask whether the purchaser exercised its right to reject the vehicle within a reasonable time.

The vehicle was not free from minor defects or durable

[40] The vehicle did not comply with the guarantee of acceptable quality in s 6 of the Act because it was not free of defects at the time of sale and was not durable. The vehicle had a latent defect at the time of sale – it had a leaking head gasket which had not been remedied during earlier repairs. There is no evidence to suggest that the trader knew of this fault. It seems the earlier repairs were performed before the vehicle came into the trader’s possession.

[41] The purchaser paid $57,395 for a seven year old vehicle with low mileage. I consider that a reasonable consumer would not expect a vehicle of this price, age and mileage to have a defect of this nature with its engine at the date of purchase.

Was the vehicle’s failure of a substantial character?

Relevant law

[42] Section 21 of the Act defines the circumstances in which a failure to comply with the guarantee as to acceptable quality will be regarded as being a failure of a substantial character for the purposes of s 18(3) of the Act. Section 21 of the Act provides as follows:

“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.”

There was a failure of a substantial character

[43] The vehicle’s defects are of a substantial character in terms of s 21(a) of the Act. The vehicle was sold with a faulty head gasket, which has been expensive to repair. I am satisfied that a reasonable consumer would not have purchased this vehicle, for the price paid by the purchaser, if it was aware of the nature and extent of this defect.

What remedy under s 18 of the Act is available to the purchaser?

Relevant law

[44] Section 18 of the Act provides as follows:

“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), he 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.

The purchaser is not entitled to a remedy under s 18(2) of the Act.

[45] The purchaser seeks to recover from the trader the reasonable costs of the head gasket repair. Although I have found that the vehicle was not of an acceptable quality because of the head gasket fault, the purchaser is not entitled to a remedy under s 18(2) of the Act. This is because the purchaser did not give the trader a reasonable opportunity to repair the vehicle.

[46] In Acquired Holdings Ltd v Turvey,[2] the High Court concluded that under s 18(2) of the Act, the consumer must first give the supplier an opportunity to remedy the failure within a reasonable time.

[47] The purchaser gave three reasons for not giving the trader an opportunity to repair the vehicle:

(a) It was a condition of the mechanical warranty that all repairs were to be performed by an authorised repairer. The trader was not an authorised repair, so allowing the trader to perform the repairs would have invalidated the mechanical warranty.

(b) The purchaser considered the vehicle to be a “premium vehicle”. He wanted to ensure that all repairs on the vehicle were being performed by a suitably qualified repairer.

(c) The purchaser did try to contact Mr Moreton before the repairs were performed, but without success.

[48] Although I do not think the purchaser made sufficient effort to contact the trader and give it an opportunity to repair the vehicle, I have some sympathy for the purchaser. It was between a rock and a hard place when a decision had to be made as to who would repair the vehicle. On one hand, the mechanical warranty required the use of an authorised repairer and the purchaser wanted to ensure that the repair was being performed by a suitably qualified repairer. On the other, Acquired Holdings requires that the purchaser give the trader, who was not at that stage authorised by Autosure New Zealand, the opportunity to repair the vehicle.

[49] I am bound to apply Acquired Holdings, and as such, conclude that the purchaser is not entitled to recover the cost of the repairs under s 18(2) of the Act.

The purchaser is entitled to a remedy under s 18(3) of the Act

[50] The purchaser is however entitled to a remedy under s 18(3)(b) of the Act. The head gasket defect was a failure of a substantial character, so the purchaser is able to obtain from the trader damages in compensation for any reduction in value of the goods below the price paid by the purchaser for the goods.

[51] I am satisfied that the head gasket defect caused a reduction in value of the vehicle below the price paid by the purchaser. I consider that the reasonable cost of repair is an indication of the reduction in value caused by the head gasket defect. I am satisfied that if the purchaser had tried to sell the vehicle without repairing the head gasket defect, the cost of repairing the defect would have been taken into account by any prospective buyer.

[52] In determining the reasonable cost of repair, I accept the trader’s submission that there is “some betterment” in the repairs performed by the purchaser, and that some of the parts used cannot be said to relate directly to repairing a faulty head gasket and cylinder bore damage.

[53] The Tribunal’s assessor advises that the following repairs were not, in his opinion, necessary to remedy the head gasket fault and have resulted in betterment:
R/H Rocker cover 421.29
Primary belt 71.46
Secondary belt 56.61
Belt tensioner pulley 89.19
Belt tensioner 348.66
Belt idler pulley 94.77
Water pump 314.50
Top Radiator hose 58.36
Bottom Radiator hose 159.98
Timing Chain Tension 505.62
Timing Chain Guide 202.14

2,322.58
GST 348.38
2,670.96

[54] Excluding the cost of those repairs, I am satisfied that the reasonable cost of repairing the head gasket fault is $10,235.41.

[55] Accordingly, the trader should within five working days pay the purchaser $10,235.41 being the reasonable cost of repairing the head gasket fault.

DATED at AUCKLAND this 24th day of April 2017

B.R. Carter
Adjudicator


[1] Stephens v Chevron Motor Court Limited [1996] DCR1.

[2] Acquired Holdings Ltd v Turvey [2007] NZHC 1251; (2007) 8 NZBLC 102,107.


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