CONTRACTING OUT OF THE
CONSUMER GUARANTEES ACT –
A RETURN TO CAVEAT EMPTOR?
Nicholas Drake & Lisa Jarvis
Auckland University of Technology
1. Introduction
The Consumer Guarantees Act 1993 was introduced by Parliament in an attempt to update the
provisions of the Sale of Goods Act, which was perceived as inadequate for consumers. Two
common complaints1 about the Sale of Goods Act were that it did not provide adequate
protection for consumers and that providers of goods to the public could avoid what
protection there was in any event by “contracting out”2.
The Consumer Guarantees Act provided increased protection for consumers and also
provided that suppliers of goods and services to consumers could not contract out of the
provisions of the new Act except in limited circumstances associated with consumers
acquiring goods or services for business use.
It was pointed out at the time of the introduction of the new Act that suppliers would have to
be “re educated”3 in respect of their ability to contract out. This paper looks at some current
examples of supplier’s terms and conditions to see whether this re education has been
successful.
This paper concludes that for some suppliers, re education has not been successful and their
standard terms and conditions are in breach of the Act. These breaches run from quite obvious
breaches to less obvious breaches and finally, at the other end of the spectrum, to a very
sophisticated attempt to “lawfully” avoid the provisions of the Act prompting the thought that
some suppliers yearn for a return to the days of caveat emptor..
The structure of the paper is as follows:
1. Introduction
2. An outline of the consumers rights under the Consumer Guarantees Act
3. An outline of the suppliers right to contract out of the Consumer Guarantees Act for
business use
4. Any attempt to contract out, other than for business use, is of no effect and breaches the
Fair Trading Act
5 Sundry examples of suppliers standard terms and conditions and comment thereon.
6 The car sales case – A return to caveat emptor?
7 Conclusion.
1
For example the Second Reading of the Act in Parliament shows these concerns. The Hon D.A.M. Graham
referred to both deficiencies in his speech on the 29 th of July 1993 recorded in Hansards. Other speakers also
referred to these deficiencies.
2
The Sale of Goods Act can be supplemented or modified by agreement between the buyer and the seller. While
useful between businesses (where the classical assumption of equality of bargaining power may well hold true)
this can cause inequities where the buyer is a consumer. The seller can exclude the protection offered by the
provisions of the Sale of Goods Act from the contract of sale leaving the buyer with no remedy for defective
goods. Such exclusions were common in consumer sales and were usually found in a suppliers standard terms
and conditions of sale (the proverbial “fine print”).
3
The Second Reading of the Act. Various speakers for the opposition referred to the lack of resources for the
Ministry of Consumer Affairs and the question of who would educate business suppliers as to the provisions of
the new Act. See for example the speech of L. Sutherland, 29 th July 1993, recorded in Hansards.
2. An Outline of the Consumers’ Rights Under the Consumer Guarantees Act
The Act provides a number of statutory guarantees for consumers. For example goods must
be of acceptable quality.4 Suppliers of services must provide reasonable care and skill.5
These guarantees will only apply to sales to consumers. A consumer is someone who acquires
goods or services that are ordinarily acquired6 for personal domestic or household use.7
For example a person buys a television from a retailer to use in his home. He or she will be a
consumer under the Act as a television is a good ordinarily acquired for personal domestic or
household use. If the television is not of acceptable quality the consumer will have a remedy
against the retailer.
If the defect cannot be remedied or is substantial then the consumer can choose8 to reject9 the
television and insist on a cash refund 10 or a replacement.11 If the defect can be repaired or is
not substantial then the consumer can require the supplier to fix the defect.12
However what happens if a motel buys a number of televisions for use in its rooms? The
motel will also be deemed to be a consumer as a television is a good ordinarily acquired for
personal, domestic or household use. The retailer however will be exposed to a greater risk.
For example if one of the televisions short circuited and started a fire the retailer may be liable
for the loss of profits of the motel as well as the costs of repairing the damage. The motel is
also better equipped than an individual to negotiate its own terms and conditions. It is for
situations such as this13 that the Consumer Guarantees Act was drafted to allow the supplier to
contract out of the Act where the consumer is acquiring the goods or services for a business
use.
3. An Outline of the Suppliers’ Right to Contract Out of the Consumer Guarantees Act
Section 43(2) of the Consumer Guarantees Act allows the supplier a limited right to contract
out of the Act. The supplier can contract out where the consumer is acquiring the goods or
services:
for the purposes of a business or,
holds him or herself out as acquiring the goods or services for the purpose of a
business.
4
Section 6.
5
Section 28.
6
It does not matter what the consumer intended to use the goods or services for. It is what they are ordinarily
used for that defines a consumer.
7
Section 2 definition of “consumer”. There are other elements to the definition as well. For example the person
acquiring the goods or services must be the end user. This excludes retailers and wholesalers from the definition
of consumer.
8
The consumer can choose other remedies – eg keep the television and obtain damages.
9
Section 18.
10
Section 23(2), so long as cash was paid.
11
Section 23. It is the consumers’ choice whether to take a refund or a replacement.
12
Section 18.
13
Another reason that suppliers wish to contract out is that the consequences of a defect may be graver where the
consumer is a business – ie the supplier may sue for loss of profits. This does not seem to apply to the television
example but may in other situations.
The agreement to contract out, with one exception, must be in writing.14
4. Any attempt to contract out, other than for business use, is of no effect and
breaches the Fair Trading Act
Any attempt to contract out of the Act, other than for the business purpose exception, will be
of no effect.15 The consumer keeps the benefit of the guarantees and remedies under the Act
regardless of what the contract says.
Any attempt to contract out of the Act other than for the business purpose exception will also
be a false representation by the supplier, a criminal offence punishable by a fine. This is due
to the linkage between the Consumer Guarantees Act and the Fair Trading Act. Section 43 of
the Consumer Guarantees Act deems any attempt to contract out of the Act a breach of
section 13(i) of the Fair Trading Act. This section prohibits false or misleading
representations concerning the existence, exclusion, or effect of any condition, warranty,
guarantee, right, or remedy.
So, returning to our example, what if the television retailer had included a provision in the
sale contract with a consumer that there would be “no refunds”? This would be an attempt to
contract out of the Act as the Act gives the consumer a right to a cash refund if there is a
substantial breach of the various guarantees. The “no refunds” provision would be of no
effect. The consumer could still choose to reject the television and claim a refund if the
television proved to be defective in a manner that substantially breached one of the
guarantees. Also the retailer has committed a false representation under the Fair Trading Act
by attempting to contract out and would be liable to a fine upon conviction.
However, a provision by the retailer such as “please choose carefully as we do not provide
refunds if you change your mind” would be unlikely to be seen as an attempt to contract out
of the Act. The Act does not give a consumer a right to a refund simply because he or she has
changed his or her mind.
The case of Trade Practices Commission v Radio World Pty Ltd16 is instructive. Although
this case is Australian, it was decided under legislation that is similar to New Zealand17 and it
is likely that New Zealand Courts would follow the same approach.
That case concerned the following provision by a retailer;
“All purchases made in this store are subject to these conditions and no variations will be allowed (except
to the extent that the Trade Practices Act 1974 imposes any condition, warranty, guarantee, right or
remedy which cannot be modified or excluded). Any goods or items bought here will not be exchanged.
No monies will be refunded under any circumstances. Any goods that are faulty will be repaired under the
terms and conditions set out by the manufacturers’ warranty.” 18
14
The exception is where the supplier is unaware of the acceptance of the consumer at the time of acceptance.
This would not be common. An example would be a vending machine.
15
Section 43 “the provisions of this Act shall have effect notwithstanding any provision to the contrary in any
agreement”.
16
(1989) 16 IPR 407
17
Trade Practices Act 1974, sections 52 & 53.
18
TPC v Radio World Pty Ltd at page 1 of the judgement.
The court found that the sign, notwithstanding the express reference to the Trade Practices
Act, was in such absolute terms that it was a false and misleading representation. The
language would not have conveyed to a consumer, even an astute or intelligent consumer, any
appreciation of the protection afforded to him by the Act.
5. Sundry examples of suppliers’ standard terms and conditions and comment thereon.
The following are some examples of provisions in standard terms and conditions. The writers
searched on the internet and in a very short time found a number of provisions that seemed
questionable. Four are presented here.
Example #1
An apparel company located and trading in New Zealand, but also accepting sales from
overseas. The warranty was obtained from the standard terms and conditions posted on the
internet site.
“All items of clothing from [name of supplier] Ltd come with a full guarantee against faulty workmanship
or materials. As the prints and colours are all applied by hand screen printing it is normal to get small
variations and imperfections. During our quality control inspections we remove all garments with any
visible imperfections, however if upon receipt of your garment you notice an unacceptable printing fault
or any other fault that has slipped through our system then please return it to us for immediate
replacement. If for any reason we are unable to replace the original item then where possible we will offer
an alternative. If for any reason this alternative is not suitable to you then we will issue a full refund…
Generally small consumable items like Glow Sticks, Light Bulbs, Batteries etc. are not returnable.”
A consumer under the Act has the right to choose a cash refund if there is a substantial breach
of one of the guarantees under the Act. Here the warranty is attempting to provide that the
consumer must accept a replacement if one is available. This is an attempt to contract out of
the Act. It is of no effect. The consumer can insist on a cash refund if the goods are faulty to
the extent that there is a substantial breach of one of the guarantees. The warranty is also
deemed to be a false representation under s. 13(i) of the Fair Trading Act since it attempts to
contract out of the Consumer Guarantees Act. The company could be prosecuted and, if
convicted, could be fined.
Example #2
A New Zealand tourism company. The terms and conditions were obtained from the internet.
The relevant warranties clause contains a provision as follows:
“8.3 Nothing in these Terms and Conditions are intended to have the effect of contracting out of the
provisions of the Consumer Guarantees Act 1993 except to the extent permitted by that Act, and these
Terms and Conditions are to be modified to the extent necessary to give effect to that intention”.
But two clauses later one finds the following provision;
“8.5 Notwithstanding anything else contained in these Terms and Conditions, we shall not be liable to the
(sic) you for loss of profits or contracts or any indirect or consequential loss arising from negligence,
breach of contract or howsoever.”
Clause 8.5 is an attempt to contract out of the Consumer Guarantees Act since that Act allows
a consumer to claim for consequential loss arising from a failure by the supplier to comply
with the guarantees set out under the Act.19
The supplier would presumably rely on clause 8.3 to argue that there has not been an
attempted contracting out of the Act. This may technically be correct but there remains the
issue of whether the absolute terms of 8.5 are misleading enough to mean that the clause
amounts to a false representation under s. 13(i) of the Fair Trading Act. There is nothing in
clause 8.3. that puts the consumer on alert that he or she has rights under the Consumer
Guarantees Act. The average consumer reading these clauses would assume that in a situation
involving consequential loss that he or she would have no rights when in fact he or she may
well do. This is particularly so given the emphatic nature of the clause. That is to say clause
8.5 is misleading and clause 8.3 does not rectify the false impression created by clause 8.5.
Example #3
A New Zealand business selling appliances. The Terms and Conditions were obtained from
the internet.
A clause labelled Guarantees and Conditions includes the following provisions:
“11(b). Nothing in these terms and conditions is intended to have the effect of contracting out of the
provisions of the Consumer Guarantees Act 1993 except to the extent permitted by that Act. These terms
and conditions are to be modified to the extent necessary to give effect to that intention.”
But then clause 11 continues as follows:
“ 11(d) The Products and information provided in the Shop are supplied upon the condition that you will
make your own determination as to its suitability for your purposes prior to use. We will not be liable for
any damages, losses or liabilities, including but not limited to, any failure of performance, error,
omission, interruption, defect, delay in operation of transmission, computer virus, or line failure. We will
not be liable for any damages, loss or injury including but not limited to special or consequential damages
that result from the use of or the inability to use, the Products in the Shop.”
Again the absolute terms of clause 11(d) as to the limiting of liability for consequential loss
may be misleading to the point where it is a false representation under the Fair Trading Act.
Again neither clause mentions that the Consumer Guarantees Act gives certain rights to the
consumer.
Example # 4
A major international computer firm trading in New Zealand and worldwide. The terms and
conditions were obtained from its internet site.
The terms were the same worldwide and included several provisions that were inconsistent
with the Consumer Guarantees Act including specified time limits in which consumers could
exercise their rights and a provision that the consumer had to accept a replacement for faulty
goods and could not choose a refund.
19
Section 18(4)
However the supplier had included in the second part of its terms and conditions a number of
provisions that were specific to individual countries.
Included in the main text was a provision as follows:
“These warranties are your exclusive warranties and replace all other warranties or conditions, express or
implied including, but not limited to, the implied warranties or conditions of merchantability and fitness
for a particular purpose. These warranties give you specific legal rights and you may also have other
rights which vary from jurisdiction to jurisdiction. Some jurisdictions do not allow the exclusion or
limitation of express or implied warranties, so the above exclusion or warranty may not apply to you. In
that event, such warranties are limited in duration to the warranty period. No warranties apply after that
period.
The paragraph for New Zealand read as follows;
“Although [name of supplier] specifies that there are no warranties, you may have certain rights under the
Consumer Guarantees Act 1993 or other legislation which cannot be excluded or limited…
Where programs are not acquired for the purposes of a business as defined in the Consumer Guarantees
Act 1993, the limitations in this section are subject to the limitations in that Act.”
The contract is following a similar format to the earlier examples listed earlier in that the first
clause in this example is being stated in absolute terms followed by the second clause in this
example that limits the absolute terms so that they do not result in an attempt to contract out
of the Consumer Guarantees Act.
However this example appears to be much less likely to be seen as misleading or falsely
representing to the consumer in regard to the consumer’s rights. Reading the two provisions
together there is a good argument that the average consumer would understand that they have
rights under the Consumer Guarantees Act that are not affected by the wording of the
contract. The following phrases tend to support this:
“… you may also have other rights that vary from jurisdiction to jurisdiction… some juridictions do not
allow the exclusion of …implied warranties, so the above exclusion… may not apply to you. - …you may
have certain rights under the Consumer Guarantees Act which cannot be excluded or limited.”
The last line of the first clause in this example however is incorrect. The implied warranties
under the Consumer Guarantees Act (referred to in the Act as “guarantees”) will continue to
apply when the express warrantee period is over. The absolute nature of the last line may
mean that it is seen as misleading if these clauses ever came before the court.
6. The car sales case: a return to caveat emptor?
Quite a sophisticated attempt to contract out of the Act came to the attention of the law
teachers at Auckland University of Technology when one of their number agreed to buy a car
from a licensed motor vehicle dealer in February 2000. This man and his wife saw a car they
liked, and agreed to pay $12625.00 for it. They were then asked to sign a very detailed written
contract. It was set out on both sides of a foolscap size piece of paper, with many clauses in
“fine print” in dark ink on one side of the paper, and in faint grey ink on the other.
The purchaser asked why a written contract was necessary; there were no issues relating to
repayments, transfer of ownership, and so on, as they were cash buyers. He was told not to
worry, that it was standard practice. The seller did not offer to go through the contract or
explain any of its provisions. In fact what the purchaser was asked to sign was the Licensed
Motor Vehicle Dealers standard form “Vehicle Offer and Sale Agreement” for new and
second hand vehicles.
The Consumer Guarantees Act 1993 is mentioned in several places in this document. In the
part headed “Classification and Warranty” appear the following two clauses, under “General”:
1. Exclusion of Warranties: Except as otherwise provided in this Agreement and subject to the Motor
Vehicle Dealers Act 1975 and the Consumer Guarantees Act 1993, no warranty or condition will be
implied against the Dealer by any statute, at common law or otherwise and no representation, express
condition or variation of the Terms and Conditions overleaf will be binding on the Dealer unless it is in
writing and signed by the Dealer.
2. Consumer Guarantees Act 1993: Nothing in the preceding section of this Agreement excludes or
limits any rights the Purchaser may have under the Consumer Guarantees Act 1993.
Overleaf, the Consumer Guarantees Act 1993 is referred to again at the bottom of the page of
faintly worded clauses, in slightly darker grey ink, where it is stated:
Nothing in this Act shall limit or abrogate the Purchaser’s rights and remedies under the Consumer
Guarantees Act 1993 except to the extent that:
(a) Contracting out is permitted under that Act; and
(b) That Act is contracted out of in this agreement.
Notice to the Purchaser:
Where the Consumer Guarantees Act 1993 applies to this agreement, that Act provides you with
additional rights and remedies.
Where the Consumer Guarantees Act 1993 applies, nothing in clauses 1 to 12 of this agreement shall limit
or abrogate your rights under that Act.
Clauses 1 to 12 presumably refer to the 12 clauses in faint grey on the reverse side of the
agreement. Note the fact that the statements mention rights “where the Consumer Guarantees
Act 1993 applies…” and also state that the “…rights and remedies under the Consumer
Guarantees Act 1993…” shall not be limited except to the extent that contracting out is
permitted under that Act.
Was contracting out attempted? When the purchaser read through this agreement he found,
under a section headed “Purchaser’s Offer and Agreement”, the following words:
I agree to purchase the Vehicle described on the following basis….
7. Consumer Guarantees Act 1993….
7.2 I agree that I am acquiring the Vehicle for business purposes in terms of sections 2 and 43 of the
Consumer Guarantees Act 1993 and that the provisions of that Act will not apply accordingly.
The limited circumstances whereby suppliers can contract out of the Act have been discussed
earlier. The consumer has to be acquiring the goods or services for the purposes of a business,
or holding himself or herself out as acquiring the goods or services for the purposes of a
business. That is, either the intended use of the goods or services is for a business, or the
consumer has acted in such a way that it seemed to the other party that he or she intended to
use the goods or services for a business purpose. In either case, contracting out of the Act is
permitted so long as the agreement is in writing.
And here was our buyer, being asked to sign a lengthy document covered in a multitude of
clauses, all in very fine print, some in dark and some in faint grey ink, wherein in one clause
he was agreeing that he was acquiring the car for business purposes. How many consumers
would read, much less understand the significance of this clause?
In reality the car was being purchased for personal and domestic use, and not for business
purposes at all. Incensed with what he took to be subterfuge, he took a pen and crossed off the
offending clause, signing his initials beside the deleted clause. But if he hadn’t, would he be
“holding himself out” as acquiring the car for business purposes. If he signed the document as
it was, would he have signed away his rights under the Act? Does the sophisticated wording
of this standard form contract effectively deprive the buyer of his or her statutory rights?
Does this represent in effect a return to “caveat emptor”? This Latin phrase means “let the
buyer beware”; it sums up the traditional attitude from the case law that assumes equality of
bargaining power between contracting parties. Under pre-statutory law, you were normally
taken to have understood and assented to the terms of documents that you signed, regardless
of whether this was actually the case. But the Act was passed to provide better protection for
consumers, who are often not in a position of equal bargaining power with suppliers. For
example, suppliers may hire lawyers to draft standard form contracts, yet consumers are not
usually in a position to engage one to read and advise on them.
As Gault on Commercial Law notes, in the commentary on contracting out in a business to
business transaction, states:
Provisions in standard form contracts which require the consumer to declare that they are in fact acquiring
the goods or services for business purposes will have evidential value only and are unlikely to be
conclusive as to business purpose in the absence of supporting evidence as to business purpose or holding
out.20
The evidence would show here that the car was not acquired for business purposes. Indeed, in
the opinion of the writers, the fact that the clause is standard form really reduces its
effectiveness and evidential value. It might well be that this attempt to contract out of the Act
via the back door, as it were, would be simply ineffective.
It would be surprising if clever drafting combined with unwary consumers could defeat the
purpose of the Act in providing automatic, inescapable guarantees in respect of the relevant
goods and services when they are actually acquired for non-business purposes, no matter what
a document might have stated to the contrary. What about the Fair Trading Act 1986? If this
car sales case represents an ineffective attempt to contract out of the Consumer Guarantees
Act, then it is also a breach of the Fair Trading Act. Arguably, though, even if by some reason
the contracting out in this case is effective as per section 43 of the Act, the overall conduct of
the supplier in this case seems, nevertheless, to be misleading or deceptive, or likely to
mislead or deceive. (A layperson might describe it as a “trick”.) It is also arguably a false or
20
Gault on Commercial Law, Brookers.co.nz, at para CG43.05.
misleading representation about the existence, exclusion or effect of any condition, warranty,
guarantee, right, or remedy, namely, the consumer’s rights to guarantees, rights and remedies
under the Consumer Guarantees Act.
Surely there is a good argument that the average consumer with a complaint about the product
would be likely to be dissuaded from pursuing the complaint in the face of these clauses in a
written document that they themselves had signed and thus “agreed” to.
7. Conclusion
The typical consumer likely does not have a clear cut understanding of their rights under the
Consumer Guarantees Act. (Our experience as teachers would certainly back up this view.)
Therefore the consumer is likely, even highly likely, to be mislead about their rights by the
very official looking, formal sounding clauses in standard form contracts which attempt to cut
back on the consumer’s statutory rights. The typical consumer would be likely to accept,
rather than to question, such statements.
Our buyer in the car sales case above was a lawyer who had been in practice for many years
before turning to the teaching of the law- hardly a typical consumer. He understood very well
what the clause about business purposes was attempting to achieve. How many others simply
signed the contract as asked?
The sophistication of such clauses indicates that much thought has been put into the issue of
contracting out of the Consumer Guarantees Act, at least in certain sectors of the business
community. However, suppliers seem to have overlooked their responsibilities, indeed, their
potential liability under the Fair Trading Act 1986 for misleading and deceptive conduct and
false representations. Some, if not all, of the clauses examined in this paper could represent
breaches of the latter Act, which also provides remedies for consumers.
The re-education of suppliers about the demise of caveat emptor and the advent of the
Consumer Guarantees Act 1993 should include a basic education in their responsibilities as
traders under the Fair Trading Act 1986.