Court of Appeal affirms broad view of credit contracts in context of peer-to-peer lending
Last week, the Court of Appeal released its eagerly anticipated decision in Harmoney Limited v Commerce Commission  NZCA 275, affirming the High Court’s conclusion that fees charged to borrowers for arranging peer-to-peer (P2P) loans are “credit fees” under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and must not be unreasonable. The decision confirms the wide application of the CCCFA to the Harmoney P2P platform and shows the courts’ willingness to take an expansive approach to the interpretation of the CCCFA.
Briefly, Harmoney’s business model operated as follows:
- Prospective borrowers would register with Harmoney through its website. They would enter into a “Borrower Agreement” with Harmoney and Harmoney Investor Trustee Limited (HITL), a subsidiary of Harmoney, that set out the terms on which borrowers could access and use Harmoney’s website. Crucially, this agreement created an obligation to pay Harmoney a “Platform Fee”.
- Users would then apply for a loan, with those applications assessed (and financial particulars determined) by Harmoney.
- Once approved, a loan would enter Harmoney’s online marketplace where investors could elect to contribute a portion. When the full amount of the loan was reached, Harmoney would transfer the investor funds to an account operated by HITL, which held the funds as bare trustee for the investors.
- Harmoney would provide to the borrower a “Loan Disclosure” document, setting out the terms of the loan as required by s 17 of the CCCFA. The “Loan Contract”, a brief document to which the borrower and HITL were parties, was stated to come into force at the time the Loan Disclosure was sent to the borrower.
- After settlement, HITL would transfer the loan to the borrower minus the Platform Fee, which was transferred back to Harmoney. HITL was the lender of record.
Harmoney administered the loans, including receiving payments and undertaking recovery action, in exchange for a service fee charged to investors.
The Commission alleged that the Platform Fee charged by Harmoney was a credit fee in terms of section 5 of the CCCFA and therefore regulated by section 41, which provides that such fees must not be “unreasonable”, in the strict CCCFA sense of that term. Harmoney disputed this. The High Court concluded that the Platform Fee was a credit fee. Harmoney appealed to the Court of Appeal and the Commission cross-appealed certain findings against it.
Issues on appeal
The key issue was whether the Platform Fee was a credit fee under section 5 of the CCCFA. Section 5 defines “credit fee” to mean a fee or charge payable by the debtor:
- under a credit contract; or
- to the creditor in connection with a credit contract; or
- for the benefit of the creditor in connection with a credit contract.
Was the Platform Fee payable under a credit contract?
Harmoney argued that the “credit contract” was contained only in the Loan Contract. The Commission argued that the credit contract also included the Loan Disclosure and the Borrower Agreement. The High Court found that the Loan Disclosure was part of the credit contract but that the Borrower Agreement was not. Notwithstanding that finding, the Court concluded that the Platform Fee arose under the credit contract largely because it was paid from the loan monies under the Loan Contract, even though the obligation was found in the Borrower Agreement.
The Court of Appeal took a broader view of the credit contract. It agreed that the Loan Disclosure formed part of the credit contract, as it recorded key terms of the arrangement (e.g. the amount, term and rate of interest), to which the Loan Contract expressly referred.
It then went further, finding that the Borrower Agreement was also a component of the credit contract. In reaching this view, it placed little weight on the fact that the Borrower Agreement covered “general matters”, not directly related to the loan, and could be executed by a borrower who never ultimately takes out a loan — both of which the High Court found persuasive. Ultimately, despite Harmoney’s “readily apparent” intent to omit any reference to the Platform Fee in the Loan Contract, it found that a reasonable observer would read the Borrower Agreement as operating alongside the Loan Contract including because definitions of relevant terms were contained in that agreement.
It followed naturally from that conclusion that the Platform Fee was payable under a credit contract and therefore it was a credit fee under the first limb of the definition.
Was Harmoney a creditor?
In the Court of Appeal, the Commission’s primary argument was that Harmoney was a creditor because it granted borrowers the right to incur a debt by setting up the platform, defining the terms of the loan and placing applications on its website. The Court was sufficiently persuaded that these functions comprised a significant part of the granting of the right to incur a debt so as to bring Harmoney within the definition of creditor in the CCCFA. This was in addition to HITL (the identified lender and party to whom the debt was owed), whom both parties (and the Court) accepted was a creditor.
Were investors creditors?
Despite neither party arguing that the underlying investors in Harmoney were themselves creditors, the High Court found that they were also creditors on the basis that they were beneficially entitled to the loan repayments. The Court of Appeal agreed with the joint position adopted by the parties that the investors were not creditors and overruled this finding.
For the most part, this decision is confined to its facts. The Court closely examined a suite of documents constituting Harmoney’s P2P lending arrangements and determined how the CCCFA applied to that particular arrangement. It does, however, demonstrate that regulators and courts are willing to look through complex contractual arrangements to ensure that parties do not avoid New Zealand’s strong consumer financial protection legislation. Other P2P platforms should consider whether they are fully compliant with the CCCFA.
Perhaps the more significant aspect of the Court’s decision was its reversal of the High Court’s finding that Harmoney’s underlying investors were also creditors. The High Court’s decision on this point was troubling for many P2P platforms and other similar nominee models. Even though the Court of Appeal spent little time on this issue (since both parties agreed the investors were not creditors), its decision helps to mitigate the unintended consequences of this finding as investors are not in a position to discharge the responsibilities of lenders.