Terms of trade holding customers liable for recovery costs on unpaid accounts is not licence to simply add a flat percentage to recoveries as proxy for actual costs incurred, the High Court ruled. Enforcement costs must be itemised. Only actual and reasonable costs can be recovered.
The High Court threw out as unreasonable a twenty-five per cent loading charged on attempts to recover a $29,900 debt, dismissing later explanations for recovery costs billed at $7900 as being implausible.
When asked for an explanation, the debt collection agency responsible itemised its $7900 charge as including ‘initial contact attempts’ for thirty phone calls at fifteen minutes each plus work drafting and sending follow up notices at a charge-out rate of $75.00 per hour. In addition, there were vague claims of time spent on ‘field activities’ requiring property visits and asset inspections.
The original debt arose from engineering services provided to a client by Christchurch-based T M Consultants Ltd. She was threatened with bankruptcy for non-payment of the original debt plus debt collection costs to date.
Subsequently, the amount claimed for debt collection costs was contested.
T M Consultants’ trade terms allow it to recover all ‘external costs’ in recovering unpaid accounts, including ‘all legal costs.’
It farmed out to a debt collection agency the job of recovering $29,900 remaining unpaid, later including these debt collection costs as a further debt due when attempting to bankrupt its former customer.
In the High Court, Associate Judge Lester ruled what appeared to be a blanket twenty-five per cent debt collection charge could not be considered ‘actual’ costs incurred.
No final decision was reached on what would be reasonable in this case. The court was told an out of court agreement had been reached.
Judge Lester further ruled that when businesses such as T M Consultants, which are GST registered, claim recovery costs from defaulting clients, GST should be deducted from any GST-inclusive debt collection charges. Unpaid creditors in the position of T M Consultants will be claiming a deduction for this GST paid to debt collectors; it is no longer a ‘cost’ incurred, requiring reimbursement by a defaulting customer.
Judge Lester cautioned the legal profession that it cannot just lump collection charges into undefended requests for default judgments on unpaid trade accounts; formal proof is required of actual costs incurred where terms of trade hold customers liable for collection charges.
T M Consultants Ltd v. Morgan – High Court (5.09.25)
25.197