New Zealand Credit Law Bulletin - Vol 8, No 2, May 2008
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Debt of $1625, legal fees of $7003 – can a creditor recover full legal costs?
Not normally, but creditors operating under the Construction Contracts Act take note! - A restraint of trade case in the collection industry
A little industry gossip - Advice for financiers from the NZ Supreme Court
The pitfalls of getting someone else to get signatures on documents - A verbal guarantee is not worth the paper it’s written on (but what about an indemnity?)
An insight into what ‘dealer recourse’ can mean to a car dealer
1. Debt of $1625, legal fees of $7003 – can a creditor recover full legal costs?
TPS Consulting was the contractor for a building project in Auckland. Auckland Waterproofing provided services to TPS as a subcontractor. Those services came within the scope of the Construction Contracts Act. A written quotation by Auckland Waterproofing set out the price of $5,000 plus GST. The written terms included the fact that producer statements and warranties were to be available only once full payment was received. Producer statements are required in order for a building owner to obtain certificates of compliance from the relevant council.
A final invoice for the work, for the sum of $5,625, was issued on 23 October 2006. Payment was due on 30 October 2006. TPS did not issue a payment schedule under the Construction Contracts Act within 20 working days, as required if it had wished to dispute the debt.
However, TPS only made a part payment of $4,000 and refused to pay the balance of $1,625. There was considerable correspondence over this. APS refused to pay until the producer statement was issued. Auckland Waterproofing refused to issue the producer statement before the money was paid, and threatened “proceedings to recover debt, with all costs recovered on a solicitor/client basis [i.e. actual costs of the lawyers, rather than the lesser, standard costs usually awarded by the court].”
On 23 May 2007 Auckland Waterproofing commenced summary judgment proceedings in the District Court. TPS sought and was granted an adjournment to enable it to file further affidavits, and its own application for summary judgment and counterclaim. On 3 July 2007 producer statements for earlier invoices were sent to the respondent. The final producer statement was still outstanding. However, on 10 July 2007 the respondent sent a cheque for $1,625 as full and final payment of all money owing. Auckland Waterproofing refused to accept this payment as a full and final payment. It wanted payment for its legal and court costs, and interest.
It was clear that the Construction Contracts Act applied and that there could be no defence to the appellant's claim. Once the specified time limit in section 22 has expired, the claim becomes a provable and recoverable debt under section 23. The District Court awarded judgment for $1625 and interest and costs.
The Construction Contracts Act expressly provides for payees to be able to recover actual and reasonable costs of recovery as awarded by the Court against a payer: see section 23(2)(ii). The District Court judge, however, decided that the appellant was not entitled to actual solicitor/client costs. He considered that issuing summary judgment proceedings to recover the sum of $1,625 was an expensive and inappropriate response by the appellant. He said, firstly, that other cheaper forms of payment recovery were preferable, though he did not identify what those forms were. Secondly, he thought that Auckland Waterproofing could easily have avoided the delays in payment by taking the pragmatic approach of making the producer statements available (even though it didn’t have to in law). The costs award was $1862, not the $7003 that Auckland Waterproofing had actually incurred in getting judgment.
Auckland Waterproofing appealed to the High Court.
The High Court said that Parliament has sought to provide contractors and sub-contractors with greater remedies and, therefore, greater protection than is available to creditors under the general law. For example, sub-contractor claimants under the Act can now, in certain circumstances, obtain charging orders against the construction site even where the owner is not a party to the contract. An amount of $7003 did not seem out of the ordinary for a summary judgment application, particularly given that TPS had opposed the application, thereby adding to the cost.
The courts’ general approach to costs has always been to hold back from actual solicitor/client costs awards in normal cases where there is often a genuine dispute about liability and the amount of the debt. The notion that the cost of a chosen court procedure should be in proportion to the amount ultimately recovered has developed under the procedural rules in the High Court and the District Court. However, the High Court judge concluded that these rules did not apply to Construction Contracts Act cases where creditors are seeking to recover indisputable debts under the Act.
If they did apply, they would make recovery of small construction claims uneconomic, particularly where the cost of recovery exceeds the amount of the debt, as here. “Unless actual costs incurred in recovering payment are themselves recoverable there is no benefit in pursuing payment… I do not think [s 23(2)(a)(ii)] permits a court to take into account the reasonableness of the choice of legal process to recover a debt due under s 23.”
The judge in the High Court considered the pros and cons of the alternative to a summary judgment application – an ordinary District Court proceeding. (The Disputes Tribunal is not a court for the purpose of s 23.) An ordinary District Court proceeding can be commenced more cheaply and is much cheaper if the debtor does not defend. However, it is a slower process once a statement of defence is filed, allowing debtors to delay its progress. What at the outset may appear to be a cheap alternative to summary judgment could in the long run be more time consuming and costly. Once a plaintiff commences an ordinary proceeding, leave is required to change to the summary judgment process and a creditor “cannot easily turn to using summary judgment to quickly dispose of the unmeritorious defence.”
Summary judgment has always been recognised as the most speedy and effective way to obtain a judgment when there is no defence to a claim. It allows a plaintiff to put before the Court not only allegations but also the evidence to prove the allegations.
In this case the respondent did try to defend the matter, so using an ordinary proceeding in the District Court would not have made the process quicker or cheaper. There was nothing unreasonable about the appellant's choice of court process.
The judge said, “When I take into account the Act's policy and purpose, I am driven to conclude that Parliament intended all payees to be able to pursue recovery of s 23 debts through court process and, provided the quantum of those costs was reasonable and not excessively high, to obtain the actual cost of doing so. Once the recovery costs are seen to come within the range of amounts usually charged for work of that type they are recoverable under s 23. The appeal is allowed and the judgment of the District Court is set aside. The appellant is entitled to costs in the District Court in the sum of $6,608 plus disbursements of $465.”
Back to top
Information on our current seminars
2. A restraint of trade case in the collection industry
We don’t cover too many employment cases but those in the credit industry may be interested in a restraint of trade case between two debt collection agencies, Credit Consultants Debt Services NZ Ltd (CCDS) and EC Credit Control Ltd, and an employee who worked for one, then the other. The result was injunctions in favour of CCDS and penalties against the employee and EC Credit.
The judgment is set out on the nzlii.org site. If you’re interested, take a look.
Back to top
Information on our current seminars
3. Advice for financiers from the NZ Supreme Court
Dollars & Sense Finance Ltd v Rerekohu Nathan [2008] NZSC 20 (8 April 2008)
This case was summarised in this bulletin in March 2006, when it was heard in the High Court. The case has now made its way to New Zealand’s highest court, the Supreme Court.
In 1996, Rodney Nathan wanted to buy a share of the Settlers Tavern in Whangarei. It was owned by Setz Holdings Ltd. The largest shareholder was Madison Investments Ltd (50%) whose interests in Setz were represented by Mr Peter Harris. A 40% shareholder in Setz agreed to sell some of his shares to Rodney and some to Madison.
Rodney needed to raise $245,000 for the purchase. Dollars & Sense Finance Ltd agreed to lend him the money. Dollars & Sense required that Rodney’s parents should provide security by giving it a mortgage over their jointly owned home at Kerikeri.
Dollars & Sense instructed a lawyer, Mr Thomas, to act for it. It is agreed that he did not act for Rodney in this or any other transaction. At no stage did Thomas or anyone from Dollars & Sense have any direct communication with Mr and Mrs Nathan or seek to do so. Thomas prepared the loan and mortgage documentation and gave it to Mr Harris in a package which he delivered to Rodney. Amongst the documents which Rodney received, without any covering letter and without any express instructions or advice from Thomas or Harris, were the mortgage documents for his parents to sign.
Unbeknownst to Thomas, Mr and Mrs Nathan had been separated for many years. Mr Nathan lived in Kerikeri and Mrs Nathan lived in Gisborne. Rodney got Mr Nathan to sign the documents. Knowing that his mother was unlikely to agree to give the mortgage, Rodney forged her signature.
Thomas, who was unaware of the forgery, registered the memorandum of mortgage under the Land Transfer Act 1952 and loan was made.
When the tavern business failed and Rodney did not pay, Dollars & Sense sought to sell the house. Mr and Mrs Nathan resisted. Mr Nathan alleged that he had been the victim of undue influence or unconscionable conduct. However, Mr Nathan died before the matter came to trial and his interest in the property passed to Mrs Nathan. Mr Nathan’s defence was therefore no longer necessary.
Mrs Nathan argued that Rodney forged her signature (which was accepted), and that he did so as an agent for Dollars & Sense. In general, the information registered on the title is conclusive. However, an exception (ss62-63) is where there is fraud by the person or company registered on the title. Rodney’s forgery was a type of fraud and if Rodney was acting as an agent for Dollars & Sense when he committed the forgery, his fraud in doing so must be treated as the fraud of Dollars & Sense (even though neither Dollars & Sense nor its solicitor knew about it). In that case, the mortgage of Dollars & Sense would be removed from the register.
The Supreme Court confirmed the view of the High Court and the Court of Appeal. Rodney was an agent and the mortgage of Dollars & Sense was removed from the register. Even though Dollars & Sense obviously didn’t authorise Rodney to forge the signature, Rodney was still its agent.
The discussion of agency law in a case where the agent commits a crime is not important for most lenders. The more fundamental issue is that the lender should not have put itself in this position. The Court’s comments are worth noting.
“It may be that it is unsound practice for financiers to leave it to borrowers to organise the signatures of guarantors, with the borrowers in so doing fulfilling the role of agents for the financiers. It is to be hoped that the practice has now become rare for it is fraught with potential peril for the financier and the financier’s solicitor…
“…[W]hat occurred in this case, where the borrower was left to get the guarantors’ signatures, with no direct communication to them of the need to take legal advice, is quite contrary to normal practices. If the practices recommended in [the cases of O’Brien, Etridge, and Wilkinson v ASB Bank Ltd] are followed there is little danger of an allegation of agency of the kind established in this case being successfully made.”
This is a strong message to lenders that if they seek guarantees from third parties, they should make sure they are aware of recent developments in the law and follow best practice.
Back to top
Information on our current seminars
4. A verbal guarantee is not worth the paper it’s written on (but what about an indemnity?)
Arthur Abbott traded as "Southern Car Auctions" selling cars on behalf of owners at auction. He entered into an agreement with Auto Funds Ltd. Auto Funds would provide finance to Abbott to enable him to offer finance to buyers with recourse against Abbot. That is, if the buyers didn’t pay their debts, Abbot was liable. The arrangement was set out in a document entitled ‘Memorandum to Dealers’. The terms were discussed but apparently no documents were signed. The judgment doesn’t explain why this was so, but it seems likely to have been an interim arrangement while Abbot waited for his registration as a motor vehicle dealer to be approved.
Between 11 September 2002 and 13 March 2003 one hundred and ninety hire purchase agreements were completed to a value of $1,288,730.00.
In March 2003 Abbott told Auto Funds that his application to the Motor Vehicle Dealers Association had been declined, and the arrangement ceased. Many of Abbot’s customers failed to pay, and Auto Funds subsequently sued Abbot for $555,172.87.
The issue is whether Abbott's liability to account for his purchasers' repayment defaults was subject to a guarantee, or to an indemnity. In general, a verbal contract is binding. However, guarantees are an exception. Section 2(2) of the Contracts Enforcement Act 1956 provides that no contract for guarantee shall be enforceable unless it is in writing and signed. However, a contract of indemnity need not be in writing.
The difference between a guarantee and an indemnity is not always obvious to non-lawyers. If the contract was one of guarantee, Abbot would only have been liable for the default of the borrower. The borrower would have remained primarily liable to Auto Funds. If the borrower didn’t have to pay, say because he was a minor and the contract was therefore unenforceable, Abbot wouldn’t have to pay.
A contract of indemnity, on the other hand, would have made Abbot would have been liable whether or not the borrower had to pay.
In this case, the important point is that an indemnity need not have been in writing. If the verbal contract was an indemnity, Abbot would be liable to Auto Funds. If it was a guarantee, he wouldn’t be liable.
Clause 9 in Auto Funds’ Memorandum to Dealers says,
Dealer recourse
The dealer is responsible for the hire purchase contracts they write. Vehicle finance will only be accepted on full recourse to the dealer.
In the judge’s view, the language in the clause provided for an indemnity, not a guarantee. It required Mr Abbott to be responsible for the full amount paid to him, including that part of it which was advanced to a vehicle purchaser. It didn’t say that he only assumed liability if the hire purchase payments were not met. “The clear wording of clause 9 is to impose full responsibility. It does not make responsibility contingent on any default.”
The judge did not have evidence before him to allow him to award summary judgment for the value of default interest charged ($76,853.47) over which there appeared to be a dispute. However, he gave summary judgment in favour of Auto Funds against Abbott for the remainder, a total of $478,319.40.
