Important ruling on credit contracts

In a significant ruling for the Commission, the High Court has held that courts can decide to re-open credit contracts of their own volition if they consider that the contract may be oppressive.

In a significant ruling for the Commission, the High Court has held that courts can decide to re-open credit contracts of their own volition if they consider that the contract may be oppressive.

The case concerned a single Diners Club credit card debt, but has much wider implications for credit issuers, borrowers and the Commission.

“The Commission wasn’t a party to this matter, but we were granted leave to intervene because the issues in this case were so closely connected to our role in monitoring credit markets and enforcing consumer credit rules,” said Mary-Anne Borrowdale, the Commission’s General Counsel, Competition and Consumer.

Diners had applied for default judgment against a Mr Brooker, who had not paid his debt and who did not defend the claim.

The Court Registrar, applying guidelines issued by the Chief District Court Judge in consultation with the Ministry of Justice, noted the high interest rate and long period over which interest had been charged, and referred it to a Judge. The Judge set the matter down for a “formal proof” hearing, wanting to be satisfied that the interest rate and other terms were not oppressive.

Diners brought High Court proceedings challenging the Court’s decision not to enter judgment in its favour.

Justice Katz ruled that courts do have jurisdiction to reopen credit contracts of their own volition. She noted that the outcome sought by Diners “would require a court to seal default judgment on every undefended liquidated claim. Creditors would receive a judgment of the court no matter how obvious it might be that their lending practices were oppressive and in breach of the [Credit Contracts and Consumer Finance] Act.”

Ms Borrowdale said the Commission welcomed the ruling. “It is important that the courts are able to refuse to rubber-stamp lenders’ applications for judgment and to ask them to provide further information about the amounts they are seeking,” she said. “There are many reasons that borrowers do not respond to court action initiated by lenders. The courts play an important role in making sure that lenders are not acting oppressively in circumstances where borrowers are not in a position to test that themselves.”

Justice Katz also considered what evidence the court would need to be satisfied that a contract or an amount claimed was oppressive. She observed that a court would not need evidence to conclude that “an interest rate of 500 percent in a routine consumer contract was oppressive.”

“As we are now regularly seeing payday lender contracts with rates as high or higher, the Diners case may have further significance in the Commission’s work,” said Ms Borrowdale.