New Zealand Credit Law Bulletin - Vol 5, No 4, May 2005
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@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:
- Construction company stops work until late progress payment made
Arbitrator orders payment and orders work to restart, but no payment made - A landlord's nightmare
Tenant who owes $1500 sues landlord for $100,000+ - "I know you’re the sort of person who wants to pay his bills"
1. Construction company stops work until late progress payment made
Primary Health Remuera v Avoca (CA44/04, 10 September 2004)
On 5 December 2001 Avoca Residential Construction Ltd won a tender to construct a substantial town house complex on Remuera Road, Auckland. Primary Health Remuera Ltd was the developer.
The tender provided for progress payments. (A separate formal contract for construction was never signed.) Avoca was to get the assigned architect to inspect the progress of construction and issue a progress payment certificate. The architect was to assess the value of the work completed, making deductions for poor quality or late progress, and pass the certificate to Primary Health. Primary Health was to pay Avoca the certified amount within 7 days. Failure to pay would incur penalty interest and give Avoca the right to suspend work on the project.
Things ran smoothly for the first 14 progress payment certificates. Problems arose with certificate number 15, for $215,000. Primary Health raised a dispute and did not pay. Avoca therefore suspended work.
A meeting between Primary Health and Avoca took place on 6 May 2003 and resolved to appoint Max Russell as an arbitrator. He had the power to hear all disputes and give a ruling on them. They also agreed at this meeting that Avoca were to proceed with construction "through to practical completion" and Primary Health would pay as soon as the town house settlements had commenced and funds became available. Russell, in hearing the dispute between the parties, ruled that Primary Health must also pay the an additional $473,000 + GST.
Practical completion of the development occured in June 2003, but Primary Health still refused to pay. It argued that Avoca owed them more than $215,000 in damages for delays in construction.
On 7 August 2003 Avoca served a statutory demand on Primary Health for payment of certificate 15 and the arbitration award. Primary Health applied to the High Court to have the demand set aside. The next day Avoca stopped performing the required maintanence work on the units.
Section 290(4) of the Companies Act states that statutory demands may be set aside on various grounds. There are two main grounds. First, if the court is satisfied that there is a substantial dispute over the debt. Secondly, if the company appears to have a counterclaim.
At the first trial, the High Court ruled that there was no dispute as to the amount payable under certificate 15 and that Primary Health therefore had to pay this or be wound up. However, there might be a counterclaim to the larger sum ($473,000).
The judge noted that Primary Health’s claim for late progress damages was at odds with the facts. It was the job of the architect to factor into the certificate valuation any damages for delays. The contract required payment within seven days after the certificate was given to Primary Health. The court said Avoca had a contractual right to payment and therefore the statutory demand was not set aside.
Primary Health appealed. The Court of Appeal was unanimous in their finding against Primary Health. The court stated that, in addition to the original contract requiring payment, Primary Health had a further contractual obligation to pay Avoca on the terms of the 6 May meeting. Primary Health therefore had to pay the $215,000. If they couldn't, Avoca could apply to place Primary Health in liquidation.
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3. A landlord's nightmare
Goston v Jamieson (2001) 15 PRNZ 325
The Gostons rented a residential unit from the Jamiesons. They fell behind in the rent, so the Jamiesons took the matter to the Tenancy Tribunal. The Gostons didn’t show up for the hearing so the Tribunal made an award of $1500. The Gostons didn’t pay so the Jamiesons applied for a distress warrant. A bailiff wheel-clamped the Gostons car.
They then applied to the Tribunal for a rehearing on the grounds that they hadn’t been served. The Tribunal turned them down so they went to the District Court where a judge accepted their claim and set aside the previous orders. The matter went back to the Tenancy Tribunal for rehearing. However, before it could be resolved, the Gostons started proceedings in the High Court against the Jamiesons and the Tenancy Tribunal. They claimed the adjudicator had a conflict of interest and, among other things, claimed damages of $100,000 under the Bill of Rights.
The Jamiesons asked for security for costs. The Court could order this under rule 60(1)(b) of the High Court Rules if there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful.
The Gostons had another judgment against them for $25,000 and a bankruptcy notice had been served on Mr Goston. The judge said that in his affidavit Mr Goston “appeared deliberately to have avoided giving any substantial information about his and his wife’s financial position.” He concluded that the plaintiffs wouldn’t be able to pay costs if they were unsuccessful.
However, the judge said, “the discretion is to be exercised in the interests of justice… Of paramount importance to the exercise of discretion are the merits of the plaintiffs’ claim and the prospects of success.” He concluded that the Gostons’ chances of succeeding were slim. “This is quintessentially a case which the plaintiffs should be permitted to pursue only if they are prepared to provide the defendants with some security for their costs.”
The Gostons were ordered to give security for costs of $5000 for the Jamiesons and $10,000 for the Tribunal.
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2. A landlord's nightmare
Goston v Jamieson (2001) 15 PRNZ 325
The Gostons rented a residential unit from the Jamiesons. They fell behind in the rent, so the Jamiesons took the matter to the Tenancy Tribunal. The Gostons didn’t show up for the hearing so the Tribunal made an award of $1500. The Gostons didn’t pay so the Jamiesons applied for a distress warrant. A bailiff wheel-clamped the Gostons car.
They then applied to the Tribunal for a rehearing on the grounds that they hadn’t been served. The Tribunal turned them down so they went to the District Court where a judge accepted their claim and set aside the previous orders. The matter went back to the Tenancy Tribunal for rehearing. However, before it could be resolved, the Gostons started proceedings in the High Court against the Jamiesons and the Tenancy Tribunal. They claimed the adjudicator had a conflict of interest and, among other things, claimed damages of $100,000 under the Bill of Rights.
The Jamiesons asked for security for costs. The Court could order this under rule 60(1)(b) of the High Court Rules if there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful.
The Gostons had another judgment against them for $25,000 and a bankruptcy notice had been served on Mr Goston. The judge said that in his affidavit Mr Goston “appeared deliberately to have avoided giving any substantial information about his and his wife’s financial position.” He concluded that the plaintiffs wouldn’t be able to pay costs if they were unsuccessful.
However, the judge said, “the discretion is to be exercised in the interests of justice… Of paramount importance to the exercise of discretion are the merits of the plaintiffs’ claim and the prospects of success.” He concluded that the Gostons’ chances of succeeding were slim. “This is quintessentially a case which the plaintiffs should be permitted to pursue only if they are prepared to provide the defendants with some security for their costs.”
The Gostons were ordered to give security for costs of $5000 for the Jamiesons and $10,000 for the Tribunal.
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3. "I know you’re the sort of person who wants to pay his bills"
Here’s a question we ask people in some of our seminars. Which is more likely to improve little Jonnie’s maths?
The teacher says, you should be good at maths. (Persuasion)
The teacher says, you really work hard in maths. (Attribution)
The teacher says, you’ve made excellent progress in maths. (Reinforcement)
Have you made your decision?
Invariably, everyone picks the reinforcement comment. Reinforcement is good, but not as good as attribution comments. In a study, a group of children were given these different types of comments by teachers after a maths test. When they sat another maths test two weeks later, the kids who got the attribution comments improved slightly more than those who got the reinforcement comments. Both improved substantially more than those who got the persuasion comments.
We always want to know how other people see us. If someone tells us something about how we are viewed, we take notice. Think about this. What happens if you’re always telling your son, “you’re a bad boy! ... You’re a bad boy! ... You’re a bad boy! ... You’re a bad boy!”
The chances are that he gets the impression that – prepare to be astounded – HE’S A BAD BOY! That’s the vision he has of himself. “I am a bad boy.” The way he sees himself affects his behaviour. Even if he really wasn’t a bad boy initially, the chances are that he starts acting bad. By telling him he is bad, you actually bring about bad behaviour.
Conversely, if you are always telling your son, “you’re a good boy! ... You’re a good boy! ... You’re a good boy! ... You’re a good boy!” you may actually bring about good behaviour. (You’re probably reading this and thinking, “that’s just commonsense,” but there are lots of parents out there who don’t seem to realise it. This article will come back to credit management soon but before we do, here’s an important message to parents: If you talk about your child to other parents in front of that child, the kid can hear you! When you say, “Tom is very shy,” the child takes the message, “I am a shy person,” which of course makes him even more likely to be shy.)
Okay, let’s apply some of this to credit management. Here are some attribution comments. “The great thing about dealing with South Islanders like yourself is that they’re so honest and reliable.” “I know you're a good payer - you've never missed one before.” And of course, the classic phrase is, “I know you’re the sort of person who wants to pay his bills.”
You use this to convince your debtor that this is the way the world sees him (or her), in order to influence his view of himself. The more he sees himself as a person who pays his bills, the more likely he is to commit to paying you and to keep his promise to pay you.
You might be asking, why would a debtor believe me when I say, “I know you’re the sort of person who wants to pay his bills.”
The obvious reason is that it may well be so. It may surprise you to find that the vast majority of debtors consider that they are good people who basically want to do the right thing. If you tell them they are the sort of people who want to pay their bills, you won’t get any argument from them.” Even if your customers don’t appear to be people who want to pay their bills, in their own minds they probably are.
We are generally more likely to believe the nice things we hear about ourselves than the bad things. If you can add evidence as to why you believe that, it’s much more powerful. “I can see from your payment history that you’re the sort of person who pays their bills.” If you repeat the message, it may also be more likely to be believed. If two people both appear to have come to the same conclusion, that’s even more likely to be believed.
This may seem somewhat manipulative but I think it falls into the category of white lies. After all, you’re trying to convince people to do the right thing.
Nothing in collection is guaranteed to work every time. This won’t always work, but the use of this approach makes it more likely that people will commit to paying and keep their promises to pay. It is also the approach you should be using on your children.
This article first appeared in the Mercantile Gazette in October 2004. It deals with an issue covered in our seminar, Psychology of Credit Management 2, which is being run in Auckland on 16 June.
