Oppressive contracts - protections for borrowers

This fact sheet provides an overview of how borrowers and guarantors are protected from oppression and explains a court's power to deal with oppressive contracts or behaviour.

Note: New Zealand credit law has changed. This information relates to contracts entered into before 6 June 2015. We are progressively updating our guidance to reflect these changes.

The Credit Contracts and Consumer Finance Act (CCCF Act) gives borrowers and guarantors protection from what it calls "oppressive" contracts and from oppressive behaviour by lenders.

The CCCF Act defines oppressive as "harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice". In layman's terms this means the contract is extremely unfair or unreasonable. It is a court that determines if a contract or a lender's behaviour is oppressive.

What is a guarantor?

A guarantor is someone who agrees at the beginning of a contract to pay back a borrower's debts if the borrower doesn't.

 

How are borrowers and guarantors protected?

Under the CCCF Act, a borrower or guarantor who thinks that the terms of the contract they entered are oppressive or that the lender has acted oppressively may go to the court for help.

The CCCF Act lets the court "reopen" contracts and fix any oppressive elements of the transaction. In effect, the contracts are undone and the court rewrites any parts it thinks are oppressive.

The reopening powers can be used to remedy any credit contract (whether it is a consumer credit contract or not), consumer lease or buy-back transaction the court believes is oppressive.

The court can reopen a contract if it believes:

  • the contract is oppressive
  • a lender used oppressive means to persuade a borrower or guarantor to sign up to the contract
  • a lender has or intends to use their rights or powers under the contract in an oppressive way.

Rights and obligations

A credit contract sets out certain rights and obligations for both borrowers and lenders. For example, a lender agrees to provide credit which a borrower agrees to repay. The contract records this part of the "bargain" between lender and borrower and sets out what they each must do. It can also set out what happens if either of them doesn't meet their end of the bargain.

Lenders will also have some other legal obligations to borrowers. These obligations are imposed by the law, for example by the CCCF Act. It is important that both lenders and borrowers understand their rights and obligations under the contract and under law.

 

Where the court finds a contract is oppressive or a lender has acted oppressively, it can make orders to remedy the situation. This can include:

  • cancelling all or parts of the contract
  • changing parts of the contract
  • ordering one party to pay the other party a sum of money
  • transferring goods or property between the lender and the borrower.

The court can also make orders against people who are not parties to the contract but who have either an interest in the contract or have shared in the profits.

How does the court decide whether a contract is oppressive?

When the court is deciding whether a contract is oppressive it must look at all the circumstances about how the contract was made, how the lender used their rights or powers under a contract or how the borrower agreed to the contract.

The court must also consider a number of other matters if they are relevant to the particular contract.

  • Is the amount the borrower has to pay under the contract oppressive?
  • If the borrower is in default, how much time has the lender given the borrower to pay back the money and is this oppressive? If the court looks at this, it must also look at the lender's likely loss from the default and try to fairly balance the lender's and borrower's interests.
  • Does the borrower have to pay the lender any extra amount if they pay back the contract early? This is known as full prepayment. If the court looks at this, it must also look at the lender's likely costs and losses from prepayment and try to fairly balance the lender's and the borrower's interests.
  • Is the lender refusing to release a security interest or wanting to put conditions on releasing a security interest and if so, what are the circumstances? In particular, the court will look at whether the lender would still have sufficient security under the contract.  

A court may also consider other factors such as:

  • whether the lender and borrower were on unequal footing when they made the agreement, and if so, whether this meant the lender should have taken extra care in dealing with the borrower
  • if the terms of the contract were outside normal market practices
  • if the lender behaved in a way that was outside normal market practices
  • if the lender took advantage of the borrower in some way
  • if the borrower had independent advice (such as legal advice) about the transaction
  • what steps the lender and borrower both took to protect their own interests
  • if the way the lender used their rights or powers under the contract was oppressive.

When can a court reopen an oppressive contract?

A borrower can ask the court to reopen a contract on the grounds it is oppressive at any time during the course of the contract.

After the contract has ended, a borrower can still ask the court to reopen a contract on the grounds that it was oppressive. There is, however, a time limit.

  • For a credit contract or consumer lease, a borrower has one yearfrom when either:
    • the contract is terminated by either the lender or borrower

or

  • the last obligation under the contract was due to be performed, such as the borrower making a final payment, or the lender discharging the mortgage.
  • For a buy-back transaction, the occupier has three years from the time the last obligation under the contract was due to be performed.  

More than just unfair or unreasonable

Generally, borrowers and lenders enter into loan agreements that suit both of their needs. Borrowers make many choices when getting a loan. They choose to borrow, who to borrow from, how much to borrow, and what type of loan to get. Lenders have commercial decisions to make. Courts recognise a need to balance to interests of both parties and will not want to change those agreements unless there are very good reasons to do so.

Lenders and borrowers

The CCCF Act uses a number of different terms to describe lenders and borrowers, depending on the transaction:

  • consumer credit contracts - creditors and debtors
  • consumer leases - lessors and lessees
  • buy-back transactions - transferees and occupiers.

In these fact sheets we use the terms lender and borrower to talk generally about credit transactions, but use the specific terms for consumer leases and buy-back transactions where it makes things clearer.

 

 

 

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