The District Court’s changing approach to contractual collection costs and interest.
While a verbal contract, according to Sam, may not be worth the paper it’s printed on, even a written contract, freely negotiated between parties of equal bargaining power, can end up being less than binding in certain circumstances.
Most suppliers of goods and services require their customers to sign terms of trade or a credit account application before supplying them with goods and services on credit. Invariably, these contain a penalty interest rate that would be charged on overdue invoices. Another common feature is a clause entitling the supplier to recoup debt collection charges and legal fees incurred in attempting to recover outstanding accounts. At face value, this appears to be a sensible arrangement, entered into by freely contracting parties and contractually binding. However, recent developments, including a national directive from the Chief District Court Judge, has changed the way that the Court approaches the question of contractual collection costs and penalty interest.
Previously, if a supplier issued proceedings in the District Court, the Statement of Claim would, if the supplier’s terms of trade or contract permitted it, include a claim for “collection costs’. This is a figure, agreed between the supplier and its collection agency, designed to recompense the supplier for commission payable to the collection agency on recovery of the debt. Previously, the calculation of collection costs was based on a fixed percentage of the original debt. As the suppliers terms of trade or contract allowed these collection costs to be passed on to the Debtor, there appeared to be no issue with having collection costs awarded.
Increasingly, however the Courts have begun to question the quantum of collection costs, and have been reducing the amount awarded or striking collection costs out altogether if they deem them to be excessive in the circumstances. Notwithstanding the existence of a binding legal contract between freely contracting parties, the Court has an overriding discretion to do so. Pursuant to Section 120 of the Credit Contracts and Consumer Finance Act 2003, the Court can reopen a credit contract that it considers is oppressive or being enforced in an oppressive manner.
Decisions of the various Courts to date have varied. Some Courts continue to grant collection costs calculated on a percentage basis, but this is becoming increasingly rare. More and more, Judges are striking out percentage based collection costs. The Courts now require a definite link between the quantum of collection costs sought and the attendances carried out in attempting to collect the debt. The underlying question being asked is “Can the Plaintiff justify to the Court that the work was done to support its claim for collection costs?” Collections costs based on a fixed hourly rate and charged on all attendances completed would appear to have a better chance of being granted by the Courts and less chance of being deemed oppressive than percentage based collection costs. We at EC Credit Control are currently trialling a new system for calculating collection costs which should reduce the Client’s risk of having collection costs struck out, and prevent them being put to the expense and delay of having to justify the collection costs claimed at a formal proof hearing.
Collection costs are not the only grounds upon which the Courts are looking to reopen contracts. The Courts are also examining penalty interest rates to see if the rates charged are oppressive or being applied in an oppressive manner. A common rate of penalty interest is 2.5% per calendar month or 30% per annum. Judges have noted that while same may be a contractual rate as expressly agreed between the parties, the rate is comparatively high. In a recent Tauranga decision, Judge Blackie substituted the rate of 11% per annum for the contractual rate of 30%. Other Courts have substituted the rate of 15% per annum as a reasonable rate for late payment. Still others continue to grant interest at 30% if it appears appropriate in the circumstances. As is evident, the Court’s discretion is applied in a wide range of ways and it should be borne in mind that having a contractual penalty interest rate in place is no guarantee that same will be upheld by the Courts.
Another concern expressed by the Courts is the period of time that Creditors allow interest to accrue. In a recent Hamilton decision, penalty interest at 30% per annum accrued on a $5,000.00 debt from January 2014 until September 2015. The Judge raised concerns about the 18 months delay in bringing matters to trial and suggested that Interest at 30% for six months and Interest at the District Courts Act rate of 5% per annum thereafter was appropriate. However, a Memorandum of Counsel detailing the reasons for the delay convinced the Court that the higher rate was appropriate and judgment was duly sealed.
As can be seen from the above, having a signed credit application or terms of trade is by no means a guarantee that you will recover all of the costs and interest allowed for by the contract. Ultimately, a Judge’s discretion is wide and can applied in any number of ways. What cannot be denied is that, while not a perfect solution, having a signed credit contract or terms of trade offers far greater protection to the supplier than not having a signed contract or terms of trade. Creditors without a signed contract or terms of trade are precluded from claiming any collection costs at all and are restricted to claiming interest at the District Courts Act rate of 5% per annum (The award of such interest is solely at the Court’s discretion and is rarely granted). A signed credit application or terms of trade is a “must have” for every prudent supplier of goods or services