Wine Country Credit Union v Rayner HC Napier CIV 2007-441-416

[2008] NZHC 101

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IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV 2007-441-416

BETWEEN  WINE COUNTRY CREDIT UNION Appellant

ANDKERRY CHARLES RAYNER AND CARMEN ROSE TUHUA Respondents

Hearing:         1 October 2007

Appearances: E M Bates for appellant

J McDowell for respondents

Judgment:      11 February 2008

JUDGMENT OF ALLAN J

Solicitors:

Hansen & Bate, PO Box 235, Hastings

J McDowell, Wellesley Chambers, 100 Wellesley Road, Napier

WINE COUNTRY CREDIT UNION V KERRY CHARLES RAYNER AND ANOR HC NAP CIV 2007-441-

416  11 February 2008

[1]      This appeal from a judgment of Judge Noble, given in the Napier District Court on 11 May 2007, provides one of the few occasions upon which the provisions of the Minors Contracts Act 1969 (the Act) have been considered in this Court.  In his reserved judgment, the learned District Court Judge dismissed the appellant’s claim under the Act for a declaration as to enforceability, and for judgment for

$11,969.47 plus interest, or alternatively an order for restitution. The proceeding followed the repossession and resale of a motor vehicle.

Factual background

[2]      The  Judge’s  factual  findings  are  not  materially  disputed.     By  a  loan agreement dated 4 May 2003, the appellant advanced to the defendants a total sum of

$15,612 on the security of, and in payment for, a motor car which they wished to purchase from DMT Cars.  The car was impounded by the police within a matter of weeks  because  Mr  Rayner  was  apprehended  whilst  driving  without  a  driver’s licence.   It was eventually repossessed and resold.   Following resale, a balance of

$11,969.47, together with interest, remains outstanding.

[3]      Mr Rayner was born on 12 August 1985, and so was 17 years 9 months at the time of the contract.  Ms Tuhua was born on 23 November 1985, and was about 17 years 6 months at that time.

[4]      The loan application was prepared by an employee of the car dealer.   The respondents took the completed form to the offices of the appellant, which is a credit union with a substantial business in the Hawkes  Bay region.   There they were interviewed by Ms James, who was then employed by the plaintiff as a loans officer. Although  the  respondents’  dates  of  birth  were  correctly  set  out  in  the  loan application, Ms James mistakenly miscalculated their ages as 18 years, and therefore gave no thought to the provisions of the Minors Contracts Act.

[5]      The application disclosed Mr Rayner’s weekly income as being $460, and

Ms Tuhua’s as being $350.  Ms James said in evidence in the District Court that she

did a quick calculation on a scrap of paper and concluded that the respondents could easily afford the weekly instalments of $103.86.  The respondents had indicated in their application that they were living together in a de facto relationship.

[6]      The respondents made no payments.  On or about 17 July 2003, Mr Rayner was apprehended by the police.  The car was impounded.  The respondents had no money to pay the  release  fee  of $470.    On  20  July 2003  they made  a  further application to the appellant for a supplementary loan of $2,000, which was intended to cover the impounding fees, a further sum said to be owing to the dealer, and the arrears owing to the appellant.  That supplementary application recorded Ms Tuhua as “not working at present normally apple picking” and “starts work trade course at WINZ”.

[7]      The appellant declined the supplementary application.  The Judge found that to be unsurprising, given the limited income disclosed in that application and the fact that no weekly instalments had been paid since the initial loan was made.

[8]      The   Judge   was   unimpressed   by  the   respondents   as   witnesses.      He characterised Mr Rayner as evasive and tending to gloss over detail.   The Judge formed the view that in May 2003 Mr Rayner “just had to have that car”.  Mr Rayner conceded that he had been dishonest with the car dealer and/or Ms James regarding his lack of a driver’s licence.   The Judge considered him to be an unconvincing witness.   Likewise, the Judge was unimpressed by Ms Tuhua’s explanation as to how, although she was at the time she was earning just $60 per week part time, the application included a statement to the effect that she was earning $350 per week. He found the respondents to be:

…not unintelligent young people, not necessarily naïve as Mr McDowell contended for, and if anything well aware of what they had bargained for, only to become disenchanted by Mr Rayner’s subsequent actions and what followed.

[9]      He also found, although little perhaps turns on the point, that it was doubtful whether the respondents were living in a de facto relationship.  It was conceded that they had  known  each  other  for  only some  three  weeks  at  the  time.    Later  the respondents had a child together, but they have now separated.

The Minors Contracts Act

[10]     Section 5 of the Act provides that a contract with a minor (of or over the age of 18 years) is enforceable as if the minor were of full age, unless the Court is satisfied that the consideration for the minor’s promise or act was so inadequate as to be unconscionable, or that the obligations it imposes on the minor are harsh or oppressive, in which case the Court is given a discretion, expressed in broad terms, to cancel or vary the contract.

[11]   By comparison, a contract with a minor under the age of 18 years is unenforceable against the minor, unless the Court is satisfied that the contract was fair and reasonable, in which case it is given a discretion to enforce the contract in whole or in part.

[12]     The Court’s jurisdiction in respect of minors under the age of 18 years is to be found in s 6 of the Act which as relevant reads:

6     Contracts of minors

(1)      Subject to the provisions of this section, every contract (other than a contract to which paragraph (b) or paragraph (c) of subsection 5(1) applies) entered into by a minor is unenforceable against the minor but otherwise has effect as if the minor were of full age.

(2)      The Court may, in the course of any proceedings or on application made for the purpose, inquire into the fairness and reasonableness of any contract  to  which  subsection  (1)  of  this  section  applies  at  the  time  the contract was entered into and—

(a)       if it finds that any such contract was fair and reasonable at that time it  shall  not  be  obliged  to  make  any  order  but  it  may  in  its discretion—

(i)       enforce the contract against the minor:

(ii)      declare that the contract is binding on the minor, whether in whole or in part:

(iii)      make such order entitling the other parties to the contract, on such conditions as the Court thinks just, to cancel the contract:

(iv)      make  such  order  as  to  compensation  or  restitution  of property under section 7 of this Act as it thinks just; and

(b)       if it finds that any such contract was not fair and reasonable at that time it shall not be obliged to make any order but it may in its discretion—

(i)       cancel the contract:

(ii)      make such order entitling the minor, on such conditions as the Court thinks just, to cancel the contract:

(iii)     make  such  order  as  to  compensation  or  restitution  of property under section 7 of this Act as it thinks just.

(3)       In exercising its discretion under subsection (2) of this section the

Court shall have regard to—

(a)      the circumstances surrounding the making of the contract: (b)       the subject-matter and nature of the contract:

(c)in the case of a contract relating to property, the nature and the value of the property:

(d)      the age and the means (if any) of the minor: (e)     all other relevant circumstances.

[13]     Section 6 empowers the Court to order such compensation or restitution of property under s 7 as it “thinks just”.

[14]     Section 7 reads:

7     Compensation or restitution

(1)       Where the Court exercises any of the powers conferred on it by subsection (2) of section 5 of this Act or where it may exercise any of the powers conferred on it by subsection (2) of section 6 of this Act (whether or not it exercises any of those powers), the Court may grant to—

(a)       any party to the contract; or

(b)a  guarantor  or  indemnifier  under  a  contract  of  guarantee  or indemnity relating to a contract to which subsection (1) of section 5 or subsection (1) of section 6 of this Act applies; or

(c)any person claiming through or under or on behalf of any such party, guarantor, or indemnifier,

such relief by way of compensation or restitution of property as the Court in its discretion thinks just.

(2)       The Court may by any order made pursuant to subsection (1) of this section vest the whole or any part of any property that was the subject of, or the whole or any part of the consideration for, the contract in any party to the

proceedings or may direct any such party to transfer or assign any such property to any other party to the proceedings.

The District Court decision

[15]     The Judge concluded that:

… while the making of the contract may have been fair in the sense that it was an otherwise ordinary contract, it cannot be said in my assessment for the reasons given that it was reasonable at the time it was made.

[16]     He then held that in the light of that finding, the Court was unable to exercise its discretion under either ss 6 or 7.  Neither was it necessary for him to consider a further argument, advanced on behalf of the respondents, as to the alleged failure of the appellant to serve notices in terms of s 8 of the Credit (Repossession) Act 1997.

The competing arguments

[17]     Mr  Bate  raised  three  separate  arguments  in  his  written  synopsis.    He contended that the Judge was in error in:

a)       taking  into   account,   in  determining  whether   the   contract   was reasonable at the time it was made, factors that were relevant to the making of the contract rather than its content.

b)holding that it followed from the finding of unreasonableness that the Court was unable to exercise its discretion under s 6.  Mr Bate chose not to proceed with this argument at the hearing of the appeal but he nevertheless attacked the analysis that led to the Court’s refusal to exercise its discretion.

c)       holding that jurisdiction to award compensation or restitution under s

7  was  likewise  precluded  by  a  finding  of  unreasonableness.    He sought an order under s 7 requiring the respondents to pay the outstanding amount by way of restitution.

[18]     Mr  Bate  further  developed  something  of  a  floodgates  argument.     He submitted that if the appellant was not entitled to relief in a case such as this, there “

… would be an incentive and an opportunity for young persons to attempt to borrow money by any means in the knowledge that they will not have to repay any of it”.

[19]     Mr McDowell submitted that both the outcome and the Judge’s reasoning were correct.

Discussion

[20]     The only reported case in this Court, relevant to the issues which arise on this appeal, is the judgment of Thorp J in Morrow & Benjamin Ltd v Whittington [1989]

3 NZLR 122. There, the Judge usefully summarised the background and effect of the legislation at p 124:

Our law relating to minors' contracts was completely reformed by the enactment of the Minors' Contract Act 1969, which declared itself to be a code replacing the rules of common law and equity as to the contractual capacity of minors and the effect and validity of contracts entered into by them: see s 15(1).

Counsel were unaware of any decision on the relevant sections in the 1969

Act, or of any other Commonwealth statute in similar terms.

Subsequent investigation has confirmed that the 1969 legislation is indeed a uniquely  New  Zealand  response  to  the  age-old  problem  of  preventing persons   taking   advantage   of   youthful   inexperience   without   unduly interfering with the ordinary course of commerce and the rights of innocent adults.

Not only does it depart entirely from the common law distinction between contracts for necessaries and other types of contract, it takes a quite different path from that chosen in the United Kingdom and most of the Australian states, where enforceability against infants now depends primarily on the nature of the contract and the extent to which it appears to be in the infant's interest.  Such factors are not necessarily irrelevant under the 1969 Act, but its basic scheme, even though heavily encumbered by exceptions and provisos, is that contracts with infants under 18 are presumptively unenforceable against them, while contracts with infants 18 and over are presumptively enforceable.

It is not easy to discern from the scheme of the language of the statute the rationale for this approach.   Its most detailed examination to date is in an article written by Dr JF Burrows in 1973 and published in (1973) 47 ALJ

657.  This stopped short of identifying the essential policy of the legislation,

but emphasised the breadth of judicial discretion involved in the practical application of the two rebuttable presumptions, and opined that:

"Until the courts have had time to build up principles for the exercise of the discretions (a slow process) there are likely to be inconsistent decisions, something which does not inspire public confidence;"

[21]     As Thorp J observed, it took almost 20 years from the enactment of the legislation for the first case to reach this Court.  It has taken almost 20 years more for the Court to be engaged in a consideration of the Act on a second occasion.  That tends to suggest, perhaps, that the misgivings articulated by Dr Burrows in 1973 were unduly pessimistic.   It is proper to draw the inference that the commercial community has coped well with the requirements of the Act and that the District Court has apparently been able to resolve any disputed matters.

[22]     The issues for consideration on the present appeal are not unlike those with which Thorp J was confronted in Morrow & Benjamin.   It is therefore useful to engage in  a brief  review  of that  judgment.    There,  the  plaintiff  was  a  firm  of Auckland stockbrokers which sought payment of an account of $30,250.55 owed in respect of transactions conducted by the student defendant, who at the relevant time was aged between 15 and 17 years.  His father and certain of the plaintiff’s directors were friends.   Against that background, he was permitted to purchase shares on credit and to trade on a speculative basis during 1986 and 1987.   When the sharemarket collapsed on 20 October 1987, he was indebted to the plaintiff for a sum in excess of $35,000.  The plaintiff knew that the defendant had limited resources, that his only funding was a sum of $10,000 provided to him by his father, and that in essence he was engaged in a course of speculative trading aimed at utilising the proceeds of share sales in a rising market in order to purchase further shares.  His ability to do that ceased when the market collapsed.

[23]     In his discussion of the Act, Thorp J expressly recorded his view that each case was likely to depend principally upon its own facts, and that it was accordingly undesirable that fetters be imposed upon the broad language the Legislature had chosen.

[24]     In determining whether the contracts with which he was concerned should be classified as “fair and reasonable”, Thorp J saw nothing in the way in which they were entered into which would justify their being held to be “unfair” but he had more difficulty on the issue of reasonableness.  As he points out, there is something of a dissonance within s 6(2), in that:

… most of the matters which would ordinarily be considered in assessing the reasonableness of a contract between an infant and an adult are specifically listed in s 6(3) as matters to be considered by the Court after it has concluded that a contract is fair and reasonable, as matters affecting the discretion to decide whether or not the contract should be enforced.

[25]   Faced with that difficulty, the Judge found it convenient to leave the determination of the s 6(2) “threshold question” in the meantime, and turned to look at the various matters to which s 6(3) directs the Court’s attention.  He discussed the issues arising under s 6(3) in the following way:

(a)  The  circumstances  surrounding  the  making  of  the  contract  –  The contracts in question were entered into by a substantial firm of stockbrokers which was fully aware of the minority of the defendant and that its rights to enforce contracts against minors were limited, and at a time when, to quote from Mr Benjamin's evidence, the stock market was "totally mad and out of control";

(b) The subject-matter and nature of the contract – The contracts were in each case for the purchase on credit of ordinary shares or share options, approximately   three-quarters   being   purchases   of   options   in   Chase Corporation Ltd;

(c) The nature and value of the property – The speculative nature of the investments is indicated by the fact that the stocks purchased for $36,000 in September and October were sold in December for less than $4000;

(d) The age and means if any of the minor – The defendant's age, at 17, was sufficiently close to the relative maturity of 18 to point towards the exercise of discretion, were there no indicia the other way.  The only evidence as to his means is of the comment in 1986 that he had received $10,000 from his father for share investment.   Since that date transactions far in excess of

$10,000 had occurred;

(e) All other relevant circumstances – Those relevant to fairness and reasonableness seem to me to be:

(i) That the difficulty of completing share contracts and obtaining scrip within a reasonable time were well known to the defendant, both being matters adding to the normal risks of dealing in such commodities, especially in the case of a purchaser such as the defendant who was known to be relying on resale to cover his purchase costs: and

(ii) That while the plaintiff had been aware for some time that an element of credit risk was involved in dealing with the defendant, whom it regarded as "casual and arrogant", it failed to implement its normal credit controls.

[26]      At the conclusion of that review, the Judge restated his opinion that the term “reasonable” should “have its normal significance” with the result that circumstances surrounding the making of the contract would be relevant to the determination of the question  of  whether  the  contract  was  fair  and  reasonable.    On  that  basis,  he concluded that the contracts between the plaintiffs and the defendant in that case could not be so classified.

[27]     In  my  view  the  Judge  was  plainly  right.    The  Legislature  cannot  have intended that the factors set out in s 6(3) should be excluded from an assessment of what was “reasonable” if that word is to be accorded its ordinary meaning.

[28]     During the course of argument Mr Bate accepted, despite the narrowness with which his first ground of appeal was framed, that that was the proper approach. He argued nevertheless that the District Court Judge was in error, because in his assessment of the necessary factors he had concentrated virtually exclusively on those factors which were adverse to the appellant.   In order to appreciate the significance of that submission, it is necessary to reproduce that part of the judgment in the Court below, in which the Judge set out his discussion of the s 6(3) factors:

[29]      Counsel helpfully made submissions upon each of the five factors set out in s 6(3) to which the Court is bound to have regard in exercising its discretion.  I deal with each in turn:

(a)  The circumstances surrounding the making of the contract:

Mr Bate submitted that the plaintiff is a small to medium sized lender which entered into the contract with no actual knowledge of the defendants’ minority.  I reject that submission, finding that the defendants’  true  dates  of  birth  were  on  the  application  and  if Ms James had seriously turned her mind to the issue their state of minority would have become plain.   From my assessment of her evidence I conclude that any more than a casual inquiry would have quickly  elicited  the  recency  of  their  relationship;    the  seasonal and/or part time nature of their jobs;  who had in fact written in the personal details in the loan application they had signed;   and the undisputed fact that both were under 18.

I accept that Mr Rayner’s weekly income stated in the application was overstated and Ms Tuhua’s plain wrong, but in my assessment, while hard on the plaintiff, illustrates the need for care in dealing with loan applications filed by the young and unreliable.

Similarly with the reality of their living arrangements, Mrs Daniel’s evidence supported the recency of that arrangement (if in fact they were   living   together   at   all).      The   ultimate   fragility   of   the arrangement has been referred to.  In many years of experience in another jurisdiction I am never surprised by counsel for some young felon explaining in mitigation that their client has been in a ‘stable de facto relationship for the last three weeks’.

I reject Mr McDowell’s submission that the defendants never intended to buy the car and were (effectively) overwhelmed by events. That is the impression they chose to give in evidence but the dealer was not called, and they did not mention that to Ms James.

I do accept Mr McDowell’s submission that the loan was for the full value of the car against no other viable assets.

(b) The subject matter and nature of the contract. (c)  The nature and value of the property.

The contract and resultant debt and the security for it were otherwise ordinary.

(d) The age and means if any of the minors.

Mr McDowell submits the defendants were never in a position to service the loan.  I accept that was the real position.  The opposite would likely have  been the  case  had the income  figures  on  the application been accurate and the jobs of a full time nature.

I have dealt with ages.

(e)  All other relevant circumstances.

Mr Bate raised an issue about non-service of the repossession notice and the defendants giving up the car, but I am not persuaded that is relevant to the exercise of the Court’s discretion.

Mr McDowell submits that the plaintiff ought to have exercised a greater   degree   of   care   in   contracting   with   the   defendants, particularly when the plaintiff’s reaction to the second loan application is taken into account when the defendants’ financial circumstances were in fact unchanged.

[30]     From my findings on the evidence I conclude on the probabilities that those circumstances relevant to fairness and reasonableness are:

(i)       The plaintiff ought to have known that both defendants were under 18 years of age.

(ii)      A more than cursory examination of the defendants would have made it abundantly clear to the plaintiff that they were highly likely to have been unable to meet the repayments, but no such examination was made.

(iii)      From the plaintiff’s rejection of the second claim application some three weeks later, there is a clear inference that if appropriate inquiries had been directed towards the defendants on 9 May 2003 and verification made, the advance would never have been made.

[29]     Mr Bate’s submission is that in the exercise of what he accepts is a judicial discretion, the Judge has wrongly focused (in [30]) on those factors adverse to the appellant, and has failed to weigh in the balance the other matters (some of which are adverse to the respondents).   Moreover, he contends, [29] tends not to reflect the same degree of moral blame ascribed by the Judge to the respondents in the earlier part of the judgment, when dealing with the circumstances in which the respondents’ income was mis-stated.  Further, Mr Bate argues, the Judge was wrong to adopt what counsel says is an unduly causative approach to the exercise of his discretion (in [30]) and he has failed to weigh up all of the factors and circumstances in the manner required by the Act.

[30]     Mr McDowell refers in response to the significant challenge facing a party who asks an appellate Court to interfere with the exercise of a judicial discretion.  As was said by Fisher J in Wilson v Neva Holdings Ltd [1994] 1 NZLR 481 at 485:

An appellate Court refrains from substituting its own discretion for that of the original Judge in the absence of positive grounds for intervention.  The criteria for intervention have been variously described but in the long run require error of principle or a result which is plainly wrong: Pay v Pay [1968] NZLR 140, 147; Havelock-Green v Westhaven Cabaret Ltd [1976]

1 NZLR 728, 730. This is often helpfully broken down into the four requirements that "an appellant must show that the Judge acted on a wrong

principle; or that he failed to take into account some relevant matter or that

he took account of some irrelevant matter or that he was plainly wrong" per McMullin J in May v May (1982) 1 NZFLR 165, 170.  To that one can add the introduction of significant new evidence or argument on appeal.   The authorities are legion and need not be repeated.

[31]     In my view, the appellant’s challenge to the exercise of the Judge’s discretion is bound to fail.  The Judge expressly referred to the judgment of Thorp J in Morrow

& Benjamin and he discussed each of the factors set out in s 6(3).   His factual findings, as such, are not attacked.  The appellant’s complaint is that ultimately the

Judge has ascribed particular importance to the fact that Ms James ought to have correctly ascertained the respondents’ ages (she had the relevant material before her), that having done so she would have made further inquiries about the respondents’ means, and in the course of doing so, she would have ascertained the respondents’ true financial position.  Had that been done, the Judge found, the loan would never have been made.   He supported that finding by reference to the rejection of the second loan application, but of course by then there was a history of non-payment, coupled with the impounding of the vehicle  and the disclosure of Mr Rayner’s unlicensed status.  So the failure of the second application is perhaps unsurprising.

[32]     Quite apart from that circumstance, however, the Judge was quite entitled in his consideration of all of the factual material, to lay primary stress upon the errors made by Ms James.  Quite simply the appellant was careless in its treatment of the respondents, and the Judge was entitled to decide, having taken all other relevant material into account, that the appellant ought not to succeed.

[33]     I do not accept Mr Bate’s argument that the Judge has simply closed his mind to material which appears in [29] and not in [30].  He went to some pains to set out in [16]-[19] and then in [29]-[30] factual matters which he believed to be of some relevance.   While the opening words of [30] could perhaps have been better expressed, there is no doubt, in my view, that the Judge undertook the necessary analysis in a manner which was open to him.  Accordingly, Mr Bate’s first argument fails.

[34]     It is unnecessary to spend significant time on his second argument, which is to the effect that the appellant was entitled to restitution under s 7, despite a finding of unenforceability.   Technically it is open to a Court to award compensation or make an order for restitution under s 7 where a contract has been held to be unenforceable under s 6(2)(b), but as a matter of common sense it will be rare for the Court to hold on the one hand, that a contract was not fair and reasonable, and on the other hand, to award restitution in order to place the parties in the same position as if the contract was fully binding.  Where a contract is held not to be fair and reasonable at the time it was entered into, then in ordinary circumstances the orders that follow will tend to reflect that primary conclusion.  For the most part s 7 will be utilised by

the Court where a contract has been held to be unenforceable, in order to regularise the position between the parties.   For example, it may be necessary, in order to achieve justice,  for the Court to direct that  a minor  must  reassign  to  the other contracting party, property acquired by the minor but not paid for.

[35]     On the facts of this case, in my view, the District Court Judge was quite right to decline relief under s 7.  To do so would to derogate from the Judge’s primary finding, and in effect, to hold the contract to be partially enforceable.   Mr Bate’s second argument therefore also fails.

[36]     Finally I should say something about Mr Bate’s floodgates argument.   I do not share his concern.  The facts of this case are quite unusual.  Had Ms James not made her initial mistake, this loan, as the Judge found, would never have been made. Mr Bate envisages a situation in which persons under 18 might deliberately mis-state their ages, and thereby avoid liability.    But to do that would amount to fraud.  A finding of deliberate dishonesty is likely to lead to a finding that the contract was enforceable against the minor concerned.  As did Thorp J in 1989, I express the view that cases under the Act will continue to be relatively few and far between.

Result

[37]     The appeal fails and is accordingly dismissed.  The respondents are entitled to costs.  Counsel may file memoranda if they are unable to agree.

C J Allan J