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Everyone knows about the Consumer Guarantees Act 1993 (CGA), which provides a “consumer” with remedies if a business has failed to provide goods or services to a reasonable standard. But what happens if you are a business purchasing goods? The answer is not found in the Consumer Guarantees Act 1993; it is found in the Contract and Commercial Law Act 2017 (the CCLA). The CCLA implies seven conditions and/or warranties in a contract for the sale of goods: right to sell; conformity with description; fitness for purpose; merchantable quality; conformity with samples; rights of examination, and; acceptance. Not every breach of contract allows for rejection, but a trivial breach of a condition does. This means that a buyer can return goods supplied to a seller. Importantly, whether a term is a condition or a warranty depends on the construction of the sale of goods contract. An important implied condition is “fitness for purpose”. This means that goods must be reasonably fit for purpose. But, unlike the CGA, this condition will only apply where the buyer makes known to the seller the particular purpose for which the goods are required, and that the goods are of a description that it is in the course of the seller’s business to supply. What this means is that when a buyer of a vehicle makes known to the seller that they will be using a vehicle to tow a caravan, then there is an implied condition that the vehicle is fit for that purpose; towing a caravan. This was the case in Finch Motors v Quinn (No 2) [1980] 2 NZLR 519. Mr Quinn, the buyer, told the seller that he wanted a car for towing a boat on extended trips. The seller, Finch Motors, told Mr Quinn they had the ideal car for the job. Not long after the sale, Mr Quinn used his car to tow the boat when it overheated. This, the Court found, was a breach of the implied condition that goods are fit for purpose. There is also an implied condition that goods are of a “merchantable quality”. This is similar to “acceptable quality” under the CGA. The test for whether goods are of a “merchantable quality” is found in an old case, Taylor v Combiner Buyers [1924] NZLR 627. In that case, the Court asked the following question: Are the goods of such a quality and in such a state and condition as to be saleable in the market, as being goods of that description, to buyers who are fully aware of their quality, state, and condition, and who are buying them for the ordinary purposes for which goods so described are bought in that market? Unlike the CGA, the CCLA allows contracting parties to vary or exclude the implied conditions and/or warranties. This includes fitness for purpose and merchantable quality. To do this, the contract must be clear as to the conditions and/or warranties that it purports to vary or exclude. In Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 (HL), for example, the seller’s terms and conditions stated that there is “no warranty express or implied”. The Court found that this did not exclude implied conditions, only implied warranties. If the seller wanted to exclude the implied conditions, including fitness for purpose and merchantable quality, they had to do so expressly. Holland Beckett has experience advising buyers and sellers. This is a complex area of law and Holland Beckett is available to assist.

It is not an easy time to be selling a small business. High inflation and waning consumer demand has lead to compressed margins and reduced revenue for many. Uncertainty in the global markets due to wars, protectionism and the changing geopolitical landscape has blunted the confidence of prospective purchasers. Closer to home, sub 3% interest rates are now a fading memory and house prices have come off their peak, so fewer aspiring business owners can easily ‘top up their mortgage’ to fund the purchase of a business. How can sellers respond? Business owners looking to sell and wanting to achieve the best price for their business may need to consider options to reduce a purchaser’s reliance on third party finance to fund the acquisition of their business. This may include: Asset restructuring: Premises, plant and equipment are restructured to reduce the capital investment required by a purchaser. For example, valuable machinery could be retained by the seller and leased to the purchaser, meaning that the purchaser does not have to finance the upfront cost of purchasing that asset. Vendor finance: The seller advances a portion of the purchase price to the purchaser to be repaid by the purchaser over time. Vendor loans vary widely in terms of whether they bear interest, whether they are amortising (repaid gradually over the term) or repaid in a lump sum on a fixed date. Earn Outs: The purchaser agrees to pay part of the purchase price in instalments contingent on the business achieving certain financial targets. Payments could be fixed or adjusted based on the level of revenue generated by the business. Vendor Shares: The vendor retains shares in the business. The vendor might give the purchaser options to acquire 100% of the shares over time. Objectives and Risks From a seller’s perspective, the most common objective of using any of the above mechanisms is to achieve a better price for their business. Compared to fully bank or finance company debt funded transactions, vendor funded transactions generally expose the seller to risk of purchaser default over a longer period. This is because repayment of vendor loans or achievement of earn-out targets depend on the success of the business under new ownership. These risks can be reduced by, for example: Requiring the purchaser to pledge security to the seller (mortgages, personal guarantees, registered security interests). Giving the seller a right to appoint a director for so long as they continue to hold shares in the business. Contractual provisions that exclude artificial reduction of gross profits for the purposes of earn out calculations. Complexity and Cost If not managed well, transactions that include vendor funding mechanisms can be more complicated and take longer to negotiate than similar deals that are not vendor funded (and increased legal costs as a result). Also, the downstream consequences of vendor funding arrangements need to be carefully thought through to avoid unforeseen negative consequences. For example, if the vendor registers a security interest in the business assets, how will that affect the purchaser’s ability to raise finance or obtain trade credit moving forward? In our experience, the best outcomes typically start with a well-designed structure. Convoluted and legally complicated structures are generally less effective in practice than more straight forward, logical structures. Complexity can often be avoided if the transaction is properly designed from the outset. Business owners considering vendor funding options should: Discuss potential structures with their business broker or lawyer to identify fit-for-purpose options that could be offered to potential purchasers; Focus on the characteristics of the business and the specific circumstances and objectives of the seller and buyer when designing a transaction structure - do not start with a particular structure in mind and adapt it to fit the circumstances (this is a recipe for legal complexity); and Try to aim for a structure that makes commercial sense and avoids risks being transferred to a party who cannot control it or who would not naturally be exposed to it. A well designed vendor funding structure should be easy for all parties to understand and give the purchaser sufficient freedom and control to ensure the business remains successful while minimising the default risk faced by the seller. Our commercial team at Holland Beckett is experienced in business sale transactions from $50,000 to $100 million including vendor funding arrangements of all types and would be happy to discuss how to make the sale of your business a success for you and your purchaser.

The Consumer Guarantees Act 1993 (CGA) provides a consumer with remedies if a business has failed to provide them with goods or services to a reasonable standard, regardless of whether the consumer has a written warranty or guarantee from the supplier or manufacturer. The CGA is intended to foster a trading environment in which consumer’s interests are protected, businesses compete effectively, and consumers and businesses can participate confidently. Does the CGA affect me? If you supply products or services as a normal part of your business, you are likely to be considered \'in trade\' and the CGA will apply to your business transactions. The CGA will affect you if you are a manufacturer of products that are subsequently supplied to consumers, even if those products are indirectly supplied through distributors and/or retailers. Parties to business-to-business transactions can (and regularly do) agree to exclude or modify some or all of the default guarantees and remedies under the CGA, but such an agreement must be in writing and the parties will only be bound if it is fair and reasonable.  A manufacturer of a product could exclude the CGA in a contract with a distributor, but that will not affect the rights of an end consumer of that product under the CGA against the manufacturer. What are my obligations under the CGA? As a business or person in trade, any goods or services you manufacture or supply must meet the minimum requirements outlined in the CGA. Goods must: Be sold with clear title free from security interests Be of acceptable quality Be fit for purpose Match their description Comply with samples Be reasonably priced, if there is no predetermined price If delivered by the supplier, be delivered on time Have spare parts or repairs available Services must be: Performed with reasonable skill and care Fit for purpose Provided within a reasonable time Priced reasonably, if there is no predetermined price For more detail on these obligations, see the guidance available on the Consumer Protection website. When might I be liable to claims under the CGA? If a supplier has breached a guarantee under the CGA, the consumer may have remedies including requiring the supplier to repair, replace or refund the purchase price. The consumers remedy will depend upon the severity of the breach and the type of product or service concerned. For smaller claims, if a consumer is unable to resolve the matter directly with a supplier, a cost effective approach may be to make a Disputes Tribunal claim. If you are would like to understand more about your rights or responsibilities under the Consumer Guarantees Act, Holland Beckett can provide you with advice and guidance.