“Only ever be guarantor for hire purchases for your own kids; because if they don’t pay the loan, you can kick their butts.” I worked my way through university as a salesperson for a big-ticket-item retailer and I will always remember that advice from one of my customers. From law school, I now know it to be good advice. There are a number of cases about things going horribly wrong with finance contracts and young people. But it’s not just parents or guarantors who lose out. In a recent case a finance company lost about $10,000 in unrecovered payments after it gave a car loan to a 17-year-old, but couldn’t enforce the contract when the borrower defaulted.
In New Zealand, a minor is a person who has not yet attained the age of 18 years. We have an act called the Minors Contracts Act 1969 that sets out rules for enforcing contracts against minors: For most contracts, including loan contracts, there is a rule that the contract cannot be enforced against the minor unless the court first gives permission. The court can choose to permit enforcement of the contract only if it is satisfied that the contract was fair and reasonable at the time when it was entered into. However, this is at the court’s discretion, and it can choose to say no.
Who would give a loan to a 17-year-old? A person who made a mistake in the paperwork would. The finance company’s loans officer correctly wrote down the borrower’s date of birth, but then wrongly calculated that person’s age as 18 when he was really only 17. After the loan was made, the borrower missed all of the repayments on the car. The finance company repossessed and sold the car. The sale price wasn’t enough to cover the loan; so the finance company wanted to sue the borrower for the balance.
The finance company had to ask for the court’s permission before it could enforce the contract against the borrower. It had to show that the contract was fair and reasonable. The finance company lost in the District Court, so it appealed to the High Court. The High Court looked at the facts and found that the finance company ought to have known that the borrower was under 18 – it had the correct information in hand. The court also found that a more than cursory check of the borrower would have shown that he was highly unlikely to be able to make repayments because of his low income. In the end, the High Court agreed with the District Court judge’s decision and the finance company was not permitted to take action against the borrower.
Note: employment contracts, called contracts of service in the act, and many life insurance contracts are special cases. There are different rules in the act for those types of contract.
What this case clearly shows is that if you need to enforce a contract against a minor, you are entirely at the mercy of the courts. Even if you have a good case that enforcement would be fair and reasonable, the court might still refuse to let you enforce.
What does this mean in practice? You should never put yourself in a position where you might need to take enforcement action against a minor. It’s a risk that is hardly ever worth taking. And, unlike my friend the retail customer, you don’t even get the pleasure of (metaphorically) kicking anybody’s butt.
Richard Anstice is a staff solicitor in Rae Nield’s office. This article is intended for general information, and should not be relied on as specific legal advice. You should consult a lawyer for advice relating to your own specific legal problems. Rae and Richard can be contacted at email@example.com.