Adverse ruling by Tribunal for wrappers

Hi everyone,

Are people aware of the decision by the Consumer, Tenancy and Trader Tribunal of NSW in July 2005, Lewis v Ormes (Commercial) [2005] NSWCTTT 481? It is of concern for wrappers for the following reasons.

In that case, the Consumer, Tenancy and Trader Tribunal (CTTT) ordered a wrapper to repay almost half of the instalments (amounting to almost $30k) he had received over a period of years to the purchasers of the property (the wrapper’s clients) on the basis that the wrap contract was “unjust”. The Tribunal calculated the amount of compensation based on the difference between the amount charged under the wrap contract, and what the rental cost of the property would have been. The Tribunal made its decision notwithstanding the fact that the purchasers had sought independent legal advice, and had been told that the wrap contract should be avoided.

This case gives rise to a possibility that all wrap contracts could be so treated if a purchaser defaulted and decided to litigate the issue. The decision lists various factors that are taken into account in determining whether a contract is “unjust” (at para 17). It seems that to guard against an adverse finding such as was made in this case, wrappers should (amongst other things):

• ensure their clients receive independant legal and/or financial advice,
• genuinely negotiate the terms/ interest rate in the wrap contract,
• make sure the contract is in plain English,
• accurately and fully explain the effect of the contract and the transaction to the client,
• ensure no pressure is put on the client to accept,
• ensure that the mental condition of the client is such that the client is capable of protecting his or her interests, and
• ensure that the contract is affordable for the client.

If these matters are attended to, such an adverse decision may be avoided, but it is of note that the Tribunal did not directly address any of the factors it listed specifically.

However, it did discuss at length that the provisions of cl 9.5 of the wrap contract (which provided that the deposit and instalments were forfeited by the clients on default), and observed that they were “draconian”. It went on to decide that, in its opinion, the contract was “unjust”. It should be noted that there was also a question in the case about one of the purchasers’ mental capacity.

The fact the CTTT considered cl 9.5 to be “draconian” is of particular concern. The effect of the decision is of course a sum of its facts, but I wonder whether it may in future be necessary to sell the property as in an ordinary loan contract with a bank when a client has defaulted, and refund any balance to the client after all expenses have been paid (including paying out the balance of the contract with the wrapper’s financier).

Has anyone else come across this decision, and if so, have they formulated a commercial response to it? As far as I can tell, the decision has not been appealed. The decision can be accessed at http://www.austlii.edu.au/cgi-bin/disp.pl/au/cases/nsw/NSWCTTT/2005/481.html

Cheers,
Josh

Disclaimer: the preceding is not legal advice and should not be treated as such. If you have legal concerns, please direct them to a wrap savvy solicitor.