10.1 Layby Sales

A layby sale takes place when a consumer pays instalments towards the cost of a good but does not take possession of the good until the full cost has been paid. Layby (or lay-by, or lay-away in the United States) sales date back many years.

The Layby Sales Act 1971 applies to sales of goods in this manner up to $7,500, excluding motor vehicles.

For consumers, layby sales are a means of managing payments for goods that may not be affordable in a single transaction. They are a fairly popular sales form for young people and women. The National Consumer Survey 2009⁵⁷ indicated that 17% of total consumers and 22% of female consumers used layby sales in the previous two years. By age breakdown, 25% of under 30 year olds used layby sales (and just 6% of the 65 years and older group).
The inherent risks to the parties to layby sale agreements are as follows:

To the seller:

• that a consumer may not return to make a final payment and meanwhile the goods have depreciated.

To the consumer:

• the supplier may not own the goods that are being put aside;
• the supplier may sell the goods to someone else;
• goods may be lost or damaged before the consumer takes possession;
• the supplier may refuse to pay back instalments if the consumer no longer wants the goods; and
• the supplier may become insolvent.

The Layby Sales Act aims to reduce these risks by:

• clarifying that the risk in the goods remains with the seller until the buyer has possession of the goods (section 6);
• giving the buyer the right to request a statement of the purchase price, the estimated costs if the buyer cancels the sale, the amount outstanding and other details (section 7);
• providing specific rules in the event that the buyer wishes to cancel the layby sale, including rights for the buyer to recover the instalments paid, less the seller’s “selling costs” (sections 8 and 9);
• allowing the seller to cover any depreciation in the value of the goods by retaining any reduction in the retail value of the goods (section 9);
• giving the buyer the right to complete the transaction if the seller becomes insolvent (as long as the goods are available) (section 10); and
• giving the buyer a preferential claim to get back the instalments paid if the seller is insolvent and the layby sale is unable to be completed (section 11).

History of the Layby Sales Act

The Layby Sales Act is technically part of the Sale of Goods Act 1908, and was developed before the Fair Trading Act 1986 and the Consumer Guarantees Act 1993.

Before the Layby Sales Act was passed in 1971, layby sales existed as a special type of contract, but they were not governed by any specific rules.

While the majority of businesses handled layby sales in a fair and equitable manner, two issues arose in the 1960s that led to the practice being reviewed. The first was a number of complaints that some traders were refusing to refund money when a consumer cancelled a layby. These traders regarded deposits and instalments they had received on cancelled layby sales as a windfall, and consumers were left out of pocket.

The second issue was the insolvency of several businesses, mostly linen stockists, leading to significant losses for their consumers, the majority of whom were young women (who not only lost their goods, but also their money given to the seller). The young women were only unsecured creditors of the insolvent sellers with a low likelihood of recovering their money. Many of the items they had put on layby were not physically present in the shops, and even if the goods had been found, title under the terms of the agreement would not have passed unless all instalments had been paid.

The Layby Sales Act was passed in recognition that, while this form of trading is a valid and acceptable practice, it was open to exploitation by dishonest traders. An advantage of the Layby Sales Act is that although it is technically part of the Sale of Goods Act, sellers cannot contract out of the consumer protection provisions.

Ongoing relevance

As noted, the National Consumer Survey 2009 found that layby sales are still a fairly popular form of transaction. This was an interesting result as the expectation had been that with the wide availability of other credit options layby sales may not have been very prevalent. In comparison with credit, however, layby sales do not attract interest charges (but you do not get the goods immediately).

The risks addressed by the Layby Sales Act are still relevant today. Businesses may still be tempted to treat the instalments received on cancelled layby sales as a “windfall”, and there continue to be instances of retailers becoming insolvent.

Some online businesses are also offering layby, with scheduled deductions from a nominated bank account before the item is shipped to the customer. This is a relatively new application of the layby sale form of trading.

The National Consumer Survey 2009 showed there appear to be few problems with layby sales (only 2% of consumers reported problems). Because of the low numbers of people who had problems the following is indicative only: Of those who had problems (23), most people went back to the seller if they had a problem and most (81%) were satisfied with the redress they got from the seller.

If sellers regard layby sales as too onerous, or if they prefer other options for credit sales which do not involve the seller retaining possession of the goods, then sellers are free to do business on that basis. To that extent, compliance with the Layby Sales Act can be seen as voluntary on the part of sellers, and the practice remains relatively common.

In summary, the information which is available suggests the Layby Sales Act continues to fulfil a useful function, and that it would be a retrograde step to repeal it without putting replacement provisions in place. Layby sales law, however, does not need to stand alone or continue to be read as part of the Sale of Goods Act. It would be appropriate to consolidate it into other existing consumer law in accordance with the consumer law objective.

The provisions of the Fair Trading Act and the Consumer Guarantees Act also have general application to layby sales. Considering these as possible options, it would be most logical to include modernised layby sales provisions in a revised Fair Trading Act because the Layby Sales Act includes rules that apply to layby sales rather than “guarantees”. The Consumer Guarantees Act would continue to apply generally to layby sales if layby sales provisions were consolidated in the Fair Trading Act.

Option going forward: Incorporating layby sales provisions into the Fair Trading Act

Scope of layby sales legislation

If the layby sales provisions are included in a revised Fair Trading Act, there is an issue as to whether all the current elements of the Layby Sales Act should be retained.

Australia has recently considered layby sales law as part of its major Australian Consumer Law reforms. The proposals related to layby sales regulation in the Australian Consumer Law centre around requiring layby sales agreements to be in writing and transparent (they must be expressed in reasonably plain language, legible and clearly presented), and limiting the right of suppliers to retain a “termination charge” which must be agreed, and must be no more than the supplier’s reasonable costs. The new Australian proposal considerably simplifies the provisions dealing with layby sales which are currently found in state-level legislation in New South Wales, Victoria and the Australian Capital Territory, and says nothing about risk in the goods, the provision of statements to the buyer, or the insolvency of the seller. The State provisions are very similar to the New Zealand Layby Sales Act which provides for:

• risk remaining with the seller until the buyer has possession;
• the buyer can request a statement from the seller;
• rights on cancellation, including the seller keeping the selling costs and any depreciation in the retail value of the goods; and
• buyers’ rights on insolvency of the seller.

The simplified Australian Consumer Law proposal for layby sales regulation is not in itself a compelling reason for New Zealand to follow suit, but it is a good reason for the policy underlying the elements of the New Zealand legislation to be scrutinised and tested. The following discusses whether the above elements would need to be included in layby sales provisions covered in a revised Fair Trading Act.

Risk in the goods

Section 6 of the Layby Sales Act provides that the risk in goods purchased by layby sale remains with the seller until the buyer gets possession of the goods. The problem section 6 originally addressed was based on an inference from the Sale of Goods Act that title (and risk) in goods may pass before the goods are paid for or the buyer receives possession.
Section 6 modifies this possible inference and says risk stays with the seller. This seems to be fair, because the buyer has no control over the goods in the possession of the seller, and the seller is best placed to insure the goods and otherwise take care of them.

It is questionable whether section 6 is necessary in the current legislation. Under the Sale of Goods Act sellers can contract out of title passing to the buyer until full payment for the goods occurs and sellers are likely to always retain title in goods on layby until they are paid for in full. The proposed Australian Consumer Law does not include an equivalent provision to section 6. If layby sales provisions are included in an enhanced Fair Trading Act, then retailers would not be able to contract out of the provisions and thus an equivalent of section 6 would be unnecessary.

Statements

The Layby Sales Act requires sellers to provide statements on request by layby buyers specifying the purchase price, the amount owing and the estimated costs if the agreement is cancelled (section 7, Layby Sales Act). This requirement clearly increases transparency and provides buyers with full information about the cost to them if they decide to cancel a layby sale.

The Act also specifies a 25 cent cost for the seller issuing a statement (section 7(1)) and a $10 limit for layby sales where a statement can be requested (section 7(5)). These are very detailed provisions that are outdated.

There is an obvious compliance cost for sellers preparing statements which include information such as the current retail value of the goods and an estimate of the selling costs. The complexity of the information required for the statement is linked to the complexity of the calculation of the amount outstanding under a cancelled layby sale under section 8 of the Act.
Records of the initial price of the good and payments made by the consumer are good practice for any retailer, and are likely to be kept regardless of the legislation. It seems likely that the requirement to calculate the estimated cost if the agreement is cancelled is not being followed by sellers or buyers due to the effort required and ignorance of the requirement. The ongoing need for equivalent provisions to section 7 to be carried forward to a revised Fair Trading Act is not established. There is no point in retaining a provision which is not given effect in practice.

Buyer cancellation

The buyer has an unconstrained right to cancel a layby sale under section 8 of the Layby Sales Act, but the seller has the statutory right to compensation under section 9. The rules in section 9 are relatively complex, and they allow the seller to retain the costs of sale and any reduction in the retail value of the goods from the instalments paid by the buyer. A seller can adjust the retail value of the goods under a cancelled layby sale if the sale is cancelled more than one month after it is entered into, but the seller cannot make that adjustment if the layby sale is cancelled after less than one month or if the sale is not of specific goods (section 9(4)). The buyer is entitled to recover the amount of the instalments paid over and above the costs of sale of the seller and any adjustment to the retail value of the goods. The buyer might be required to pay more than the instalments they have already paid, but not if they have only paid one instalment by way of a deposit.

These rules are an example of prescriptive, rather than principles-based, legislation. A more principles-based approach would be to simply say the buyer is entitled to receive back any instalments paid on a cancellation, less the reasonable selling costs and losses incurred by the seller. The seller would then have to demonstrate that any reduction in the retail value of the goods is a cost to the seller, without the legislation necessarily spelling this out.

rinciples-based regulation may or may not specify whether a buyer might be liable for more than the amount of the instalments paid, depending on whether or not that possibility is either likely or important.

The proposed Australian Consumer Law approach is to have principles-based legislation which does not contain rules which are as detailed as those under the New Zealand Layby Sales Act, although the Australian proposal is to provide that buyers may be liable for more than the amount of the instalments they have paid if the seller’s costs in relation to the agreement exceed the amount of the instalments the buyer has paid.

A complex calculation of the seller’s costs under section 9 was determined to be unnecessary by the High Court in Wood v Universal Fur Co Ltd [1985] 1 NZLR 640 which states that the method of calculation is irrelevant as long as it is reasonable. The solution provided for in the Australian Consumer Law is elegant and achieves the same outcome. It provides that a “termination charge” can only be applied if the agreement includes that such a charge will apply when a consumer cancels the layby agreement (and the supplier has not breached the agreement), and the charge is not more than the supplier’s reasonable costs in relation to the agreement.

Layby sales provisions in the revised Fair Trading Act need to retain the equivalent of section 8 to provide for the unrestricted ability of a consumer to cancel the layby agreement.

Regarding compensation to the retailer for a cancelled layby sale, rather than providing very prescriptive law equivalent to section 9, the preferred option is a more principles-based provision regarding a “termination charge” if a consumer cancels the agreement, along the lines of the Australian provision.

Seller cancellation

The current Layby Sales Act does not expressly provide for sellers to cancel the contract, leaving it up to general contract law, including the Sale of Goods Act. There seems to be no reason why the cancellation rights of sellers should not be included in the new legislation to provide greater clarity for both sellers and consumers. One option is to list the circumstances where a seller may cancel, such as breach of the agreement by the consumer, insolvency, or unavailability of the goods specified in the agreement. In this case, all instalments paid by the consumer should be reimbursed. This reflects the proposed Australian Consumer Law approach.

Insolvency

The layby buyer’s first right on the receivership or liquidation of the seller is to complete the transaction, even if the goods have not been specifically ‘ascertained’ as would normally be required under the Sale of Goods Act (section 10, Layby Sales Act). This is designed to avoid the situation where layby purchasers become unsecured creditors for the amount of the instalments they have paid, in which case they are likely to lose their money without receiving the goods.

The practical reality is likely to be that the goods will be subject to a prior charge to the seller’s secured creditors, and the goods may not be at the seller’s premises anyway. The Layby Sales Act recognises this in part by providing a first-in-time rule if there are insufficient goods to meet layby claims, and providing for competing claimants to draw lots where they entered into layby sales contracts on the same day (section 10(2)). Buyers who have not made an instalment for 3 months and non-arms length buyers are excluded from the right to complete the transaction under section 10(3).

If a buyer is unable to complete a layby sale on the receivership or liquidation of the seller, the buyer has a claim for the amount owed by the seller as a “preferred creditor” (section 11). The claim ranks behind secured creditors and some other preferred creditors (Inland Revenue Department in relation to PAYE deductions and GST and employees’ holiday pay), but ahead of ordinary unsecured trade creditors. This may provide some confidence to consumers that they have a better chance than unsecured creditors of getting their money back on the insolvency of the seller, but the likelihood of their receiving their instalments back in full on the insolvency of the seller probably remains remote.

There is therefore an option to remove the “preferred creditor” status of layby purchasers. In the case of insolvency, layby creditors would become unsecured creditors. This would more accurately reflect the reality of their situation, and does not misleadingly imply rights and remedies that are unlikely to benefit layby purchasers.

Other issues with the Layby Sales Act

Definition of deposit

One issue that has arisen is whether a deposit paid for goods ordered by a consumer (for example, a kitchen bench) is an “instalment” under a layby sale. There is a problem that transactions might technically be layby sales when the parties had not necessarily intended them to be. When the buyer pays a deposit and the balance of the purchase price is paid in one further instalment, the transaction is technically a layby sale under the Act, even though the seller and the buyer may not be intending to enter into a layby sale.

The problem arises if the consumer cancels the contract. If the money paid is a “deposit”, then the supplier would not need to refund the deposit to the consumer. If the money paid is an instalment, then the Layby Sales Act provisions could apply. Retailers argue that paying a deposit is a separate contract to the contract of sale for goods and that the deposit should not be refundable as for a layby sale.

On the other hand is the view that the “deposit” is a part-payment towards the final price rather than an at-risk deposit to secure the goods.

An option to prevent these transactions being caught as layby sales, when they are probably not intended to be, would be to amend the definition of “layby sale” to provide that a sale by instalments with less than three instalments (including the deposit) is not a layby sale (unless specified in the agreement). This is the approach being recommended in the proposed Australian Consumer Law. It also provides the opportunity to clarify that any deposit paid is taken to be an instalment.

Selling costs

There have been concerns over the definition of “selling costs” which may be retained by a seller on the cancellation of a layby sale. The Layby Sales Act has no definition of “selling costs” and it appears to be ambiguous. It could refer to the costs incurred by the supplier for the layby element of the sale, i.e. costs of recording and taking payments. Alternatively, it could include all costs involved in selling the item, such as the salesperson’s salary and advertising costs.

In Wood v Universal Fur the High Court held that the fact that the term “selling costs” is followed by the words “in respect of the layby sale” is simply to identify the sale to which the subsection applies, not to restrict the recovery of costs to those involving the layby elements of that sale. In effect the High Court authorised sellers to retain all their costs of sale when the buyer cancels a layby sale. There has been comment that this wide interpretation may result in double compensation for the seller if the item is resold to another customer, as the general selling cost is already built in to the price of the good. Selling costs for both the layby elements and the general selling costs are recoverable from the layby customer, and when the goods are sold a second time, the seller recovers the general selling costs a second time.

The Ministry of Consumer Affairs view is that the policy behind retaining “selling costs” was not to provide the broad catch-all for costs as interpreted by the High Court. Rather compensation should be to allow the retailer to recover the basic costs associated with the layby transaction and therefore not to be out of pocket or disadvantaged. Selling costs should not allow for double recovery of general selling costs. This accords with the general principle set out in the proposed Australian Consumer Law regarding retaining “termination costs”.

Enforcement and redress

The Layby Sales Act creates legal rights which are enforceable by sellers and buyers who enter into (or cancel) layby sales, but the Layby Sales Act does not include any general enforcement provisions. It is not an offence, for example, for a seller to over-recover the reasonable costs of sale on a cancellation of a layby sale.

If the Layby Sales Act is repealed and replacement provisions are consolidated in the revised Fair Trading Act then the enforcement provisions of the Fair Trading Act could apply.

Consumers can enforce the provisions of the Fair Trading Act on a civil basis, and if the Layby Sales Act was incorporated, it would be within the jurisdiction of the Disputes Tribunal as layby sales are limited to those goods under the value of $7,500. As the National Consumer Survey indicates that very few problems occur with layby sales, this option would be advantageous to those who wish to take a complaint and receive a cheap, speedy resolution.

Given the impetus for the Layby Sales Act was a run of insolvencies and traders taking advantage of consumers by retaining their instalments, an option is to also allow the Commerce Commission to take action if they believe inappropriate conduct is happening on a widespread scale.

In summary:

The Australian Consumer Law provides a model that could potentially be adopted by New Zealand for layby sales. This model provides for regulation of layby sales using a principles-based approach under the general consumer law as a form of consumer transactions. In a New Zealand context, this would mean including such regulation in the Fair Trading Act. This approach fits well with the consumer law reform objective to simplify and consolidate consumer law and to have law that is principles-based. Alignment with the Australian Consumer Law provisions also accords with the single economic market principles for harmonisation of business and consumer regulation where appropriate. This is the preferred option for future regulation of layby sales.

Questions

Footnotes

57 National Consumer Survey 2009

58 Ibid.