Points of Law: Nick's Case

I thought it would be a good exercise to write out certain issues that are brought to my attention through family and friends, discuss some of the legal issues involved and review what the remedy might be.

I also thought it might be interesting in a few years to read back over these little posts and laugh at my younger self for being naive/overzealous/ill-informed.

We shall see.

The first case comes from my own dearly beloved, Nick.

It involves a large, national building company that charges people heaps of money to be a part of its franchise. Its franchisor has been able to survive numerous liquidations to his own franchises with few consequences to himself while hundreds of contract builders and tradies are stuck with significant unpaid bills.

Let's take a closer look shall we?

The franchisor charges franchisees a staggering yearly fee to remain part of the franchise whether they turn a profit or not.

If the franchisee goes broke, the franchisor sails in with his back up crew of builders, finishes the home and the happy home owner is in no way inconvenienced by the death of the franchisee's dream.

This is not illegal or deceitful. The franchisee knows the terms when they sign on and runs the risk with this knowledge.

This is not what we will focus on here, it merely ads to the unlikeablility factor of the franchisor.

What happened to Nick was that he completed $60,000 worth of work for the franchisor. When Nick handed over his bill he was informed that the franchise was being liquidated and it was unlikely he would ever get paid.

He and a bunch of other unpaid tradespeople ended up in a meeting with the franchisor where he admitted that he had been in debt for a long time and knew the liquidation was coming.

The franchisor hired Nick and the others knowing he wouldn't be able to pay them.

He then liquidated his buisness and walked away.

Since he had plenty of income coming in from his other franchisees, his personal finances were safe and sound.

A background note:

Many people believe a house is built by one company with one set of builders but this is rarely the case.

The build is actually completed by a host of sub contractors who usually do one or a couple of sections of the build.

Usually, the concrete pourer is independent of the foundation builder who is independent of the plumber and electrician and the roofer and the painter and people who put up the drywall.

Often times, when one guy is contracted to build a section of the house he has to go and get the materials on credit from the supplier and arrange for any other subcontractors that he needs to help him get his section done.

While this is going on he also has to pay the weekly wages and taxes for his employees.

The contract builder is taking a huge gamble that the person he has contracted with will pay him in full and in a timely manner.

In order to stay in business the contract builder must constantly be completing jobs for building companies and be getting paid on time.

If the building company decides to dicker around on the amount owed then the contract builder will either have to cut his losses or pay out a large sum to go to court and make the building company pay.

If the building company decides to liquidate then the contract builder has little recourse.

The contract builder can actually lose his own business because one too many companies didn't pay up and now he has debts and employees he can't pay.

The whole business is risky and a lot of good guys are bankrupted because they believed in the soundness of their contracts.

They had no way of foreseeing the ease with which someone could dispute the contract terms or simply go out of business and leave them in the lurch.

Back to the case:

The franchisor's business partner is a lawyer which made many of the people he owed money feel even more helpless about its recovery.

On their own, none of sub contractors could afford the legal fees to go up against the franchisor.

Nick went to see a lawyer and was basically told that any money he got out of the guy would go to pay the lawyer's fees and that the rest would be snapped up by other creditors.

I didn't think that sounded right. I don't know how a court could award money to creditors when the person suing for it is the one who has made the case for payment to him or herself.

I asked if the lawyer had many any mention of a class action suit and Nick said he had not.

From what I have learned so far, class actions are rare in New Zealand.

A 2014 article published by the New Zealand Law Society states,

"There are a number of reasons why class actions have been slow to emerge as a feature of the New Zealand landscape. One is the absence of clear rules for such litigation. The Rules Committee released a draft Class Actions Bill and Rules for consultation in 2008. A final draft was sent to the Secretary for Justice in 2009. In 2012, in its report on its inquiry into the finance company failures, the Commerce Committee recommended that the Government give priority to the introduction of a class actions regime. It appears that no further progress has been made.

In New Zealand, however, a group can bring litigation by way of representative action under the High Court Rules. High Court Rule 4.24 provides that one or more persons may sue on behalf of, or for the benefit of, all persons “with the same interest in the subject matter of a proceeding” either with the consent of the represented parties or with court approval. The courts have permitted plaintiffs to use this mechanism to commence class actions.

Other deterrents are the continued existence of the torts of maintenance and champerty, restrictions on contingency fees and the very modest level of awards of exemplary or punitive damages."

Also, there aren't an abundance of litigation funders in New Zealand so, as is often the case, money is a major barrier in getting access to justice. 

New Zealand is a really great place for dispute resolution and can handle disputes involving tenancy and contract with realitive ease. 

The benefits of this system are that both parties are expected to prepare and present their side of the issue without legal representation. The cost to file is reasonable and the wait time for the hearing is short.

The problem for Nick is that the tribunal can only deal with contract claims of $15,000.00 or less (or $20,000.00 with the agreement of both parties) so this process is closed to him.

The appropriate venue for his claim would be the District Court which can deal with claims of up to $200,000.00. The problem there of course is that he will require legal representation and face expensive filing fees for his case. With no guarantee of a successful outcome, and the potential to lose all your winnings to your counsel, why would you bother?

I case you'd like more details of this case, here's a little summary of the story for the Dominion Post:

Boss of Failed Firm Back in Business                                                                            28 April 2012

Hawke's Bay tradesmen and businesses have been told they're unlikely to see a cent of the $1 million owed to them by Signature Homes owner Gavin Hunt.

To make matters worse, they will have to put up with watching him drum up more business on TV advertisements most nights.

Hastings joiner Greg Harman, one of more than 80 creditors left out of pocket by Hunt, says it is infuriating for him and others to have to see Hunt fronting his company when he still owes so much.

Hunt, who owns franchisor company Signature Homes, owned the Hawke's Bay Signature Homes franchise from 2006 until it went into liquidation last June owing creditors more than $1.02m.

"We've been told by the liquidator that we're unlikely to see anything," Harman said.

"It came as a bit of a shock when the outfit went under last year because in May 2010 we all got an email asking us to forgo half of what we were owed, and telling us `the future prospects are excellent'."

Harman said he agreed to write off about $3300, along with other creditors, in a bid to keep the company going.

At that stage they were told by Signature chief executive Phillip Howe that the company's future was bright, with 18 jobs planned for the year.

Harman is now owed more than $33,000.

Home buyers are covered by a guarantee with Signature Homes Guarantees Ltd, ensuring their home is completed, but tradesmen have no such option.

Harman said he was pleased those people who bought houses were covered by a guarantee and got them built.

"It's just a shame that tradesmen and others weren't able to do as well and I'd certainly encourage anyone working for Signature to make sure they weren't too exposed."

The collapse of the Hawke's Bay franchise followed the liquidation of Signature Homes Manawatu in November 2010.

More than 90 creditors of the company behind it, Karacrombie Enterprises, were unlikely to receive a cent of the $1.3m they were owed.

In November last year the company behind the Southland Signature Homes franchise, Cunningham Building and Construction, went into receivership owing 108 creditors more than $960,000.

They have also been told they are unlikely to recover any money.

Signature Homes began in the 1970s and is one of New Zealand's largest residential housing companies. There are 13 franchises operating.

Hunt did not return calls.

It seems to me that getting a remedy at law for this sort of issue will literally take an act of Parliament.

So, I guess if we want to see our cause advanced we will have to gather up any and all contract builders who have ever been dicked over by a building company and tell them all to write their MPs demanding less leniency and ease in liquidating a company and more regulation to make sure that contracts are honored and payments are made on time.

No big deal, right?