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

JurisdictionNew Zealand
CourtSupreme Court
JudgeO'Regan J
Judgment Date12 May 2016
Neutral Citation[2016] NZSC 53
Docket NumberSC 40/2015
Date12 May 2016

[2016] NZSC 53

IN THE SUPREME COURT OF NEW ZEALAND

Court:

Elias CJ, William Young, Glazebrook and O'Regan JJ

SC 40/2015

BETWEEN
Sportzone Motorcycles Limited (In Liquidation)
First Appellant
Motor Trade Finances Limited
Second Appellant
and
Commerce Commission
Respondent
Counsel:

D J Goddard QC, I J Thain and C M Moody for Appellants

S J Mills QC, K C Francis and P J L Arnold for Respondent

Appeal against a Court of Appeal (CA) decision which upheld a High Court (HC) decision which found some fees charged by the appellants were unreasonable under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) — a subsequent HC decision quantified the extent to which the fees were unreasonable — the appellants provided finance to consumers in connection with the purchase of motorcycles from the first appellant — whether the CA erred in finding that the fees charged were unreasonable for the purposes of s41 CCCFA (unreasonable credit fee or default fee) — what approach should be taken to the assessment of the reasonableness of fees for comparing credit offerings by competing credit providers — whether the fees should be assessed on a per transaction basis or by reference to the activities undertaken by the creditor — whether one of the purposes of the CCCFA was flexibility in pricing models and the encouragement of innovation by creditors.

The issues were: whether one of the purposes of the CCCFA was flexibility in pricing models and the encouragement of innovation by creditors; what approach to the assessment of the reasonableness of fees provides the best basis for comparing credit offerings by competing credit providers; whether fees should be assessed on a per transaction basis or by reference to the activities undertaken by the creditor and what measure of costs should be adopted.

Held: Section 41 CCCFA addressed four different types of fees: establishment fees, prepayment fees, other credit fees and default fees. Such fees could not be “unreasonable”. That assessment involved the court considering, in the case of s42 CCCFA (establishment fees), “reasonable costs” or “average reasonable costs”; in the case of s43(1) CCCFA (prepayment fees), a “reasonable estimate” of the creditor's loss (including the creditor's “average reasonable administration costs”); and in the case of s44 CCCFA (other credit fees under), reasonable compensation for any cost incurred by the creditor and a reasonable estimate of any loss incurred by the creditor, as well as “reasonable standards of commercial practice”.

Section 3 CCCFA (purpose) stated the Act provided for protection of the interests of consumers in connection with credit contracts and for the disclosure of adequate information to consumers to enable them to distinguish between competing credit arrangements. Promotion of efficiency and the facilitation of pricing flexibility were factors driving the reform. But it was notable that neither of those factors was mentioned in s3 CCCFA.

Section 42 CCCFA referred to two alternative cost bases for determining the reasonableness of establishment fees. The first referred to the creditor's costs “in connection with the application for credit, processing and considering that application, documenting the consumer credit contract and advancing the credit”. Section 44 CCCFA contained similar indications: for example s44(1)(a)(ii) CCCFA referred to the loss incurred by the creditor as a result of the debtor's acts or omissions. That could not sensibly be seen as referring to acts and omissions of debtors generally or even debtors of a particular class. Rather it focused on the individual debtor on whom the fee was levied.

In light of the transaction-specific focus of ss41—44 CCCFA, the approach should have to identify what steps were undertaken in relation to particular aspects of the provision of credit under a consumer credit contract and calculate the costs of taking those steps. Where averaging was permitted, this should be done for a representative sample of transactions so that the average cost per transaction can be assessed. Costs incurred in carrying on MTF's business that were not referable to the identified steps were not recoverable in fees, but were still recoverable in the interest rate charged to debtors. That accorded with the overall scheme of the CCCFA which provided for no limit on the interest rate that could be charged but limited fees to those that were reasonable both in nature and extent. The CCCFA could be seen as starting from the premise that charges would be levied as interest, with the exception of fees that were subject to the reasonableness limitation.

Cost recovery was an important component in the assessment of reasonableness of fees, because both s42 CCCFA and s44 CCCFA specifically referred to cost as a mandatory relevant consideration. Other factors, such as the level of fees charged by other providers might be relevant to the determination of reasonableness, assuming the fees charged by others were, themselves, at a reasonable level.

The cost of capital was a general cost of the business structure. It was not in any way related to specific transactions. It was appropriate to require MTF to recover the cost of capital in its interest rate.

MTF argued the treasury costs should be able to be recovered in the establishment fee because they were costs necessarily incurred in order to have money to lend — without them, no loan could be established. However, Treasury costs constituted a general cost of the business of lending rather than particular costs associated with individual transactions. There was no absurdity in allowing some banking and credit facility costs to be included in the calculation of the establishment fee but not for general treasury costs. The former were connected to the transaction for which the fee was charged. The latter were not connected to any particular activity, but were rather the costs of funding the overall business.

The wording of s42 CCFA and s44 CCFA indicated a transaction-specific approach to the setting of fees. It was not permissible to take all operating costs (or virtually all) and allocate them to one fee or the other. The consequence of that was that many costs incurred by a credit provider would not be referable to particular credit transactions and would therefore have to be recovered in the interest rate.

In applying s42 CCCFA and s44 CCCFA in order to determine whether a fee was reasonable in terms of s41 CCCFA, the focus was on the costs incurred by the creditor in relation to the steps to which the fee related (or the losses relating to a default). The transaction-specific nature of fees meant that general overheads should not be recoverable. The reference to “reasonable costs” in s42(a) CCCFA and the requirement that a credit fee “reasonably compensates the creditor for … any cost” in s44(1) CCCFA both signalled a need to ensure that fees were not set at a greater level than necessary to cover the transaction-specific costs incurred by the creditor.

The appeal was dismissed.

  • A The appeal is dismissed.

  • B The appellants must pay the respondent costs of $25,000 plus reasonable disbursements (to be determined by the Registrar in the absence of agreement between the parties). We certify for two counsel.

JUDGMENT OF THE COURT

REASONS

(Given by O'Regan J)

1

This appeal addresses the provisions of the Credit Contracts and Consumer Finance Act 2003 (the 2003 Act) regulating fees charged by financiers to consumers under consumer credit contracts.

2

The appellants, Sportzone Motorcycles Limited (in liquidation) (Sportzone) and Motor Trade Finances Limited (MTF), provided finance to consumers in connection with the purchase of motorcycles from Sportzone. Sportzone assigned each consumer credit contract to MTF under an arrangement between Sportzone and MTF. MTF then became the creditor under the assigned contracts.

3

The respondent (the Commission) alleged that the fees provided for in these consumer credit contracts were unreasonable for the purposes of the 2003 Act. After an eleven day hearing in the High Court, Toogood J delivered a judgment in which he found that the fees were, in some respects, unreasonable (the HC liability judgment). 1 In a subsequent judgment (the HC quantum judgment), Toogood J quantified the extent to which the fees were unreasonable. 2

4

Sportzone and MTF appealed to the Court of Appeal which dismissed the appeal against both the HC liability judgment and the HC quantum judgment. 3

5

This Court gave Sportzone and MTF leave to appeal on the following question: 4

Did the Court of Appeal err in finding that the fees charged by [Sportzone and MTF] were unreasonable for the purposes of s 41 of the Credit Contracts and Consumer Finance Act 2003?

6

Sportzone and MTF also sought leave to appeal on a second question. However, leave to appeal on that question was declined. 5

The financing arrangements and the fees charged
7

As its name suggests, MTF provides funding facilities for motor vehicle dealers. Sportzone was one of these dealers. In 2004 Sportzone purchased 10,000 shares in MTF and entered into an MTF dealer agreement. Under that agreement,

Sportzone was authorised to provide intending purchasers of motorcycles with finance for periods between one and five years with security taken over the relevant motorcycle to secure the obligations of the debtor. The present case relates to 39 transactions under which Sportzone provided funding to debtors (who were purchasing motorcycles from Sportzone) under a document called an “MTF Credit Contract”. Sportzone then drew down from MTF an advance of a sum equal to the amount advanced by Sportzone to the debtor and assigned its interest in the credit contract and the security interest over the motorcycle to MTF. 6 We will call these advances from MTF to Sportzone “MTF loans”.
8

MTF funded its operations...

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