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149 IN CHAPTER 5 of our preliminary paper we raised potential difficulties arising out of section 11 of the Act. Section 11 of the Act provides:
11. Consumer arbitration agreements—
(1) Where—
(a) A contract contains an arbitration agreement; and
(b) A person enters into that contract as a consumer,— the arbitration agreement is enforceable against the consumer only if—
(c) The consumer, by separate written agreement, certifies that, having read and understood the arbitration agreement, the consumer agrees to be bound by it; and
(d) The separate written agreement referred to in paragraph (c) discloses, if it is the case, the fact that all or any of the provisions of the Second Schedule do not apply to the arbitration agreement.
(2) For the purposes of this section, a person enters into a contract as a consumer if—
(a) That person enters into the contract otherwise than in trade; and
(b) The other party to the contract enters into that contract in trade.
(3) Subsection (1) applies to every contract containing an arbitration agreement entered into in New Zealand notwithstanding a provision in the contract to the effect that the contract is governed by a law other than New Zealand law.
...
(6) Nothing in this section applies to a contract of insurance to which section 8 of the Insurance Law Reform Act 1977 applies.
150 The questions raised by us, in relation to consumers, are summarised below:
151 We received six submissions dealing with the consumer issues. One of those, from the Ministry of Consumer Affairs (the Ministry), was primarily directed to deal with matters affecting consumers.195 We deal with issues in this chapter as follows:
152 Section 11(2) of the Act provides that, for the purposes of section 11, a person enters into a contract as a consumer if he or she enters into the contract otherwise than in trade and the other party to the contract enters into that contract in trade. The question is whether that definition is appropriate to meet the needs of consumers in the context of contemporary New Zealand society.
153 The Ministry of Consumer Affairs criticised the current definition on two bases:
(a) that it is expressed negatively: that is, a person must have entered into a contract “otherwise than in trade”;
(b) it focuses, in part, on the capacity of the other party to the agreement: that is, whether that party entered the contract in trade.
154 The Ministry of Consumer Affairs recommended partial adoption of the definition of “consumer” to be found in Article 7 of the Draft Convention on Jurisdiction and Recognition of Foreign Judgments which is in the course of preparation by the Hague Conference on Private International Law.196 The definition it suggests is in the following terms:
A natural person who concludes a contract primarily for personal, family or household purposes.
155 The Ministry of Consumer Affairs submitted to us that this definition is:
156 Alternatively, the Ministry of Consumer Affairs refers us to the definition of “consumer” in the Consumer Guarantees Act 1993. Section 2(1) of that Act defines the term “consumer” as a person who:
(a) Acquires from a supplier goods or services of the kind ordinarily acquired for personal, domestic, or household use or consumption; and
(b) Does not acquire the goods or services, or hold himself or herself out as acquiring goods or services, for the purpose of –
(i) Resupplying them in trade; or
(ii) Consuming them in the course of a process of production or manufacture; or
(iii) In the place of goods, repairing or treating in trade other goods or fixtures on land.
The Ministry pointed out that this definition could cause difficulties in the context of the Arbitration Act 1996 as it is likely to capture businesses which purchase goods or services of a kind ordinarily acquired for personal, domestic or household consumption. Accordingly, the Ministry favours a definition, which addresses the dominant purpose of the consumer.
157 Other submissions made the following points:
(a) The term “consumer” should be defined in a way that expressly excludes lessees under Glasgow leases of residential properties and under cross-lease arrangements entered into before 1 July 1996.
(b) The current definition is too wide. Reference was made to a judgment of Wild J in Marnell Corrao Associates Inc v Sensation Yachts Ltd197 where it had been argued that a large corporation which signed a contract for the building of a $20 million yacht was, for the purposes of the Act, a “consumer”. While Wild J held against that submission, the opportunity for the submission to be made is said to raise a law reform issue. It is suggested that it would be preferable to redraft section 11 to address directly Parliament’s intention to protect consumers who are genuinely uninformed. It is suggested that section 11, in its departure from the principle of party autonomy, should be restricted to situations in which parties genuinely require legislative protection.
After the closing date for submissions, another decision was delivered which provides a striking example of the potential width of section 11. In Bowport Ltd v Alloy Yachts International Ltd198 the purchaser of a $7 million yacht, a company, was held to be entitled to rely on the section 11 protection, despite the fact that the owner of the company was legally advised, and aware of the arbitration clause. Elias CJ distinguished Marnell Corrao on the basis that, in that case, the evidence was that the intended use of the yacht was for corporate entertainment; in contrast, in Bowport, Elias CJ accepted the evidence of the company’s owner that the yacht “was always and remains primarily a sailing vessel for my own and my children’s personal use”.199 Accordingly, the company had entered into the contract “otherwise than in trade” and was a consumer. Elias CJ, however, appeared to have doubts as to the justice of permitting the company to avoid arbitration:200
It may be thought a curious result of a consumer protection clause designed to protect “genuine and uninformed consumers” and to “ensure a reasonable degree of informed consent to arbitration” [NZLC R20, paragraph 245] that a company acquiring a $7 million yacht, advised as to its execution of the building contract containing the arbitration clause by solicitors, with acknowledged understanding of the existence of the arbitration clause and an acceptance that it would be appropriately invoked for matters of warranty, can avoid the clause for non-compliance with the requirement of separate written agreement. But in my view that result is required by s11(2). Bowport entered into the transaction ‘otherwise than in trade’ and is therefore a consumer.
(c) Two submitters suggested that the value of the transactions undertaken that would come within the consumer exception should be limited to $25,000; one submitter suggested that any limitation should be in the context of adoption of the definition of “consumer” from the Consumer Guarantees Act 1993.
(d) Another submitter suggested that, in its present form, the definition of “consumer” could conceivably apply to substantial enterprises such as schools, local authorities, churches, sport organisations and the like whenever contracts were entered into which were not in trade. One suggestion made, in that regard, was that transactions to which section 11 applied be limited to those where the consumer was unable to reclaim goods and services tax (GST).
158 Criticisms of the current definition can be broadly categorised under two headings: First, it fails to target adequately genuine consumers. Second, other models are more accessible to consumers, in terms of being easier to understand. We consider these criticisms now. We will consider more specific suggestions separately.
159 With respect to the definition of not properly targeting consumers, we understand the force of the submission that only parties who genuinely require legislative protection should be covered by the definition of “consumer” for the purposes of section 11. We think, however, that it will be too difficult in practice to achieve a workable definition which will truly address those who genuinely require protection. Consumer law recognises that, in some circumstances, those who are better off than others will receive a protection even though they might be expected to bring more business acumen to a transaction. That recognition is based primarily on pragmatic considerations. In order to protect those who require protection it is necessary to ensure that the term is defined sufficiently widely.
160 On balance, we consider that the existing definition is adequate with regard to this particular issue, particularly given the wide interpretation of the term “in trade” in relation to section 9 of the Fair Trading Act 1986. Further, we are not persuaded that the alternatives overcome the problem of targeting any better than the present definition. For example, an experienced businessperson buying a $20 million yacht for recreational purposes would still seem to come within the definition suggested in paragraph 154.
161 With respect to the lack of accessibility in the present definition, we do not consider that it is overly difficult for consumers to understand. And, as stated above, traders and judges should be familiar with the term “in trade” as a result of its prominence in the Fair Trading Act 1986. We agree with the Ministry’s point that it is undesirable that definitions are expressed in negative terms. However, this has been done to ensure that transactions between consumers are not caught. We consider that this is appropriate. The object of the consumer protection provision is to provide protection to consumers who may be vulnerable when dealing with businesses in a stronger bargaining position. If two consumers wish to enter into a private contract, and also wish to agree to arbitrate any disputes, they should be free to do so without legislative interference or form requirements being imposed. As it stands, the definition suggested in paragraph 154 would require a proviso to exclude such transactions, which would reduce the accessibility of that definition.
162 In summary, we consider that the basic definition of consumer is adequate and do not recommend any fundamental change.
163 We are not persuaded that it would be appropriate to insert a monetary limit on the value of the transaction in question. In essence, we consider that a set monetary limit is too crude an instrument to distinguish properly true consumer transactions from others. Further, fixing a value would, necessarily, require adjustment of that value periodically.
164 We do think it appropriate to amend the definition of the term “consumer” to ensure that it refers only to natural persons. This meets the objection that, as currently framed, the definition may reach too far and include bodies such as schools, churches and local authorities. Such a definition would also have resulted in the purchaser being bound by the arbitration clause in Bowport Ltd v Alloy Yachts International Ltd.201
165 We also agree that it would be desirable to exclude leases from the ambit of the definition because of the difficulties which arise if a consumer declines to participate in an arbitration under a lease. The entire agreement may fail for lack of a working machinery in respect of the arbitration.202 Rather than seeking to define particular types of leases (such as the Glasgow lease or cross-lease arrangements) we prefer to exclude all leases on the basis that residential tenancies are adequately protected by the mechanisms to be found in the Residential Tenancies Act 1986.
166 Theoretically, it is possible that other types of contract could be entered into by consumers resulting in similar consequences as we have described with leases. But, in the context of the consultation which we have undertaken, no other examples have been drawn to our attention. We have been unable to identify any other class of contract that would raise these issues. In those circumstances, we do not recommend exclusion of contracts beyond leases.
167 We do not recommend any changes to the present definition of consumer, other than:
168 We raised in our preliminary paper the question whether or not the requirement in section 11 of the Act for the consumer to sign the agreement to arbitrate at the same time as entering into the main contract was an adequate protection.203 This was the main area under this heading upon which submissions were received. The specific issue considered was whether section 11 should be amended so that an arbitration agreement between a consumer and a business only took effect if arbitration had been agreed as a method of dispute resolution after the dispute arose.
169 In its submission, the Ministry reminds us that:
(a) Arbitration is not necessarily the most cost-effective way for consumers to resolve disputes; often the Disputes Tribunal will be the forum of choice for consumers. An arbitration agreement cannot oust the jurisdiction of the Disputes Tribunal.204
(b) The purpose of consumer protection is to ensure that consumers are not placed at a disadvantage because of their lack of knowledge and experience of the arbitral process.
170 The Ministry takes the view that arbitration agreements should only be binding if signed by consumers after a dispute arises. While acknowledging that arbitration may well be beneficial to consumers, the Ministry considers that consumers must be given time to assess how to resolve their disputes. The Ministry also points out that it is undesirable for consumers to be required to seek external advice on dispute resolution clauses prior to entering into low value transactions. We see merit in that submission.
171 Other submitters accept that consumer agreements should be treated differently from other arbitration agreements. Some considered existing protections to be adequate while another suggested enactment of a “cooling off” period.
172 There is a tension between the party autonomy principle and the need to protect consumers. We see that tension best resolved by viewing the issue as one affecting the viability and integrity of the arbitral process. If the arbitral process works well for those who wish to use it and does not harm those who inadvertently come within its purview then it is likely that the reputation of arbitration as a method of dispute resolution will be enhanced.
173 We have real doubts whether the current provisions contained in section 11(1)(b), (c) and (d) afford the degree of protection required. The Commission agrees with observations made by Commissioner Dugdale in response to the 1991 Law Commission report where he said:
What happens in real life is that the nice kind salesman says “sign here, here and here”, and the consumer like a lamb signs there, there and there without any clear idea of what he is signing or why.205
174 Because we consider that some reform is needed, the next issue is the form that it should take. Prior to the enactment of section 11 of the Arbitration Act there were, in existence, two statutory provisions governing arbitration agreements in relation to consumers. The first, section 16 of the Disputes Tribunals Act 1988 provides that an arbitration agreement cannot oust the jurisdiction of the Disputes Tribunal. The second, section 8 of the Insurance Law Reform Act 1977 provides that arbitration agreements are not binding on the insured unless the insured agrees to submit a dispute to arbitration after it arises. Section 8 of the Insurance Law Reform Act 1977 was expressly saved by section 11(6) of the Arbitration Act.
175 We take the view that it is desirable to have a consistent approach to the enforceability of arbitration agreements with consumers. We prefer the approach set out in section 8 of the Insurance Law Reform Act 1977 because it enables arbitration to proceed if the parties are both satisfied that is the most appropriate dispute resolution forum after the actual dispute has arisen.
176 Equally, it seems to us that if a consumer and a business enterprise execute an arbitration agreement after a dispute has arisen then that agreement to arbitrate should oust the jurisdiction of the Disputes Tribunal. We therefore recommend an amendment to the Disputes Tribunals Act 1988 to ensure consistency of approach.
177 We are also asked by the Ministry of Consumer Affairs to reconsider section 11 in the context of increasing online contracts. In particular:
178 It is submitted that an explicit provision to this effect would help limit the risk of compromising New Zealand consumer protection through inadvertently requiring mandatory arbitration with an overseas business in circumstances where the arbitration agreement would be invalid if it had been entered into in New Zealand.
179 This submission raises difficult conflict of laws issues. Without the benefit of further submissions and research we are not prepared to make any recommendation.
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