Commerce Commission v Sportzone Motorcycles Ltd ((in Liquidation))

• Jurisdiction: New Zealand
• Judge: Toogood J
• Judgment Date: 27 September 2013
• Neutral Citation: [2013] NZHC 2531
• Docket Number: CIV-2010-409-000026
• Court: High Court
• Date: 27 September 2013

Under the Credit Contracts and Consumer Finance Act 2003 and the Fair Trading Act 1986

Between

Commerce Commission

Plaintiff

and

Sportzone Motorcycles Limited (in liquidation)

First Defendant

Motor Trade Finances Limited

Second Defendant

MTF Securities Limited

Third Defendant

[2013] NZHC 2531

CIV-2010-409-000026

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Judgment on a claim by the Commerce Commission that fees charged by the defendants were unreasonable and breached Credit Contracts and Consumer Finance Act 2003 (“CCCFA”) and breached s9 Fair Trading Act 1986 (“FTA”) (misleading and deceptive behaviour) — first defendant sold new and used motorcycles — second defendant provided financial services to the first defendant — third defendant provided finance to the second defendant (its associated company) by purchasing loans from the second defendant which were then securitised and sold as debt securities — case dealt with extent to which a borrower could recover, by the imposition of a fee or fees, general overheads which were not directly or closely related to the particular activity concerned, such as the setting up and processing of an application for credit — discussion of the draft Guidelines for Credit Fees — what was the required nexus between a cost and a fee before that cost could be included in an establishment, default or “other” credit fee — what was the meaning of “in connection with” in s42 CCCFA (establishment fees) and of “in relation to” in s44 CCCFA (other credit fees and default fees) — whether any of the defendants' fees were unreasonable — whether the defendants had an obligation to disclose their credit check fees under s17 CCCFA (initial disclosure) — whether the terms “establishment fee” and “account maintenance fee” used by the defendants breached the FTA.

Appearances:

SJ Mills QC, KC Francis and IS Auld for Plaintiff

IJ Thain and OV Collette-Moxon for Defendants

JUDGMENT OF Toogood J

Table of Contents

	Para No
Introduction	[1]
Factual background	[6]
The contractual arrangements	[10]
The statutory framework	[14]
Pleadings	[21]
Plaintiff's submissions	[22]
Defendants' submissions	[26]
Statutory interpretation the essence of the case	[29]
Consideration of the statutory wording	[31]
Establishment fees – s 42(1) CCCFA	[33]
Other credit fees and default fees – s 44 CCCFA	[40]
Is there a distinction between “in connection with” and “related to”?	[44]
A general statement of approach based on the statutory wording	[46]
The relevant statutory purposes	[53]
Is the purpose of ss 41, 42 and 44 primarily to avoid the charging of fees in the nature of interest?	[57]
Summary of statutory purposes	[63]
Reasonableness requires a closely relevant connection between the cost claimed and the particular transaction	[64]
Applying the principles in practice	[68]
The variable costs approach	[72]
Alternative accounting approach not valid	[77]
The application of the variable cost/closely relevant approach	[83]
Findings related to the causes of action alleging breach of s 41	[88]
Further observations on the approach to s 41 – draft guidelines	[91]
Fifth cause of action – breach of s 17 CCCFA	[98]
Sixth cause of action – s 9, Fair Trading Act 1986	[103]
Result	[106]

Introduction

1 The Credit Contract and Consumer Finance Act 2003 (“the CCCFA”) is an important piece of consumer protection legislation, the relevant part of which, for the purposes of this case, regulates credit fees and default fees for consumer credit contracts. In the exercise of its statutory role and functions under the CCCFA as public watchdog, the Commerce Commission has issued this proceeding about fees charged to the purchasers of motorcycles on credit, in addition to interest payments due under the credit contracts into which they entered.

2 Although the evidence, the legal arguments and the outcome are focused upon the terms of particular credit contracts entered into by the first defendant as a motorcycle retailer, the case has important ramifications for borrowers and lenders in the wider consumer finance market.

3 The express statutory purposes of the CCCFA do not include placing limits on the cost of consumer finance. Subject to rules regarding the calculating of interest, designed to prevent oppression, the CCCFA contains no limits on interest rates. Further, it permits lenders to charge fees to cover their associated costs with the financing arrangements, including the costs of establishing a credit contract, maintaining an account, and addressing the consequences of default by a borrower. In general terms, the only limitation on fees charged by lenders under a consumer credit contract is that the arrangements must not provide for a credit fee or a default fee that is unreasonable. Reasonableness, in general terms, is determined by the extent to which the fee goes no further than entitling the borrower to recover its costs in connection with or related to the particular matter to which the fee relates.

4 The real issue in this case is the extent to which a borrower may recover, by the imposition of a fee or fees, general overheads which are not directly or closely related to the particular activity concerned, such as the setting up and processing of an application for credit. It is not disputed that, to the extent that such overheads may not be recoverable by way of a fee, a borrower is not inhibited from setting an interest rate which achieves that purpose, covers the cost of funds, and provides the borrower with a reasonable profit.

5 The following particular issues require determination:

• (a) How do the wording of the relevant statutory provisions and the statutory purposes of the legislative scheme influence the interpretation of the CCCFA?

• (b) In light of the purposes of the CCCFA, when determining the reasonableness of a fee, what is the required nexus between a cost and a fee before that cost can be included in an establishment, default or “other” credit fee? More specifically:

  • (i) What does “in connection with” mean in the context of s 42?

  • (ii) What does “in relation to” mean in the context of s 44?

• (c) Applying the answers to those questions, were any of the defendants' fees unreasonable?

• (d) Did the defendants have an obligation to disclose their credit check fees under s 17 of the CCCFA?

• (e) Do the terms “establishment fee” and “account maintenance fee” as used by the defendants amount to a breach of s 9 of the Fair Trading Act 1986?

Factual background

6 The Commerce Commission (“the Commission”) is responsible for promoting compliance under the CCCFA. 1

7 The first defendant, Sportzone, was in the business of new and used motorcycle sales, services and repairs. It appears to have been a victim of the Christchurch earthquakes and is now in liquidation. This case concerns fees charged

by Sportzone in connection with credit contracts entered into during 2006, 2007 and 2008 with the purchasers of motorcycles who borrowed part of the purchase price

8 The second defendant, Motor Trade Finances Limited (“MTF”), provides financial services to associated dealers. Sportzone was one of MTF's associated dealers. The third defendant, MTF Securities Ltd, provided finance to its associated company MTF by purchasing loans from MTF which were then securitised and sold as debt securities.

9 On 13 July 2004, MTF entered into an agreement with Sportzone which permitted Sportzone to write credit contracts to provide finance to purchasers of vehicles. Under this agreement, Sportzone was allowed to provide intending purchasers of motorcycles with finance by entering into conditional purchase agreements with purchasers for periods of one to five years, with Sportzone taking a security in the motorcycles to secure the payments under the conditional purchase agreements.

The contractual arrangements

10 Between 26 May 2005 and 16 July 2008 the borrowers entered conditional purchase agreements for the purchase of motorcycles which named Sportzone as the lender. In order to fund the loans, Sportzone simultaneously borrowed from MTF a sum equal to the total advance made under the loans. The MTF loans were funded by MTF through short term bank facilities and by selling them to MTF Securities. As security for repayment of the MTF loans, Sportzone assigned the loans and its security interest in them to MTF. MTF then sold the loans and its security interest in them to MTF Securities. The terms of the credit contracts required the borrowers to make the payments due on the loans to MTF Securities. Payment to MTF Securities of the amounts due under the loans discharged the obligations of Sportzone to pay equivalent amounts under the MTF loans.

11 The loans provided for the payment of a number of credit fees. They included:

• (a) an establishment fee of $200 charged by Sportzone;

• (b) an establishment fee of $190 charged by MTF;

• (c) as part of the establishment fee charged by MTF and Sportzone, a fee of [withheld from publication] plus GST charged by Baycorp for a credit check and a portion of the cost of a Land Transport Safety Authority charge for a motor vehicle check, the cost of which ranged from [withheld from publication] per borrower;

• (d) a monthly account maintenance fee of $5 charged by Sportzone;

• (e) a monthly account maintenance fee of $3 charged by MTF to Sportzone and by Sportzone to the borrower;

• (f) a full prepayment administration fee of $50 charged by MTF to borrowers who fully prepaid their loans before the date on which the last payment was due; and

• (g) a fee of $5 charged by...