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The effect of State tribunals on commercial finance contracts

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3 Aug 2018

NCAT, QCAT, VCAT, and equivalents in other States are acronyms for the respective State-based Civil & Administrative Tribunals. Their basic purpose is to enable individuals and small businesses to pursue resolution of lesser legal disputes away from the formalities and costs of the law courts.

The tribunals deal with disputes in such areas as residential tenancy, home building and commercial and consumer complaints. Generally speaking, no lawyers are involved. Apart from a considerable amount of electronic form-filling, the affected individual will have little to pay or do other than apply for a hearing date, argue his or her case on the day and anticipate a decision in approximately six weeks.

However, taking a complaint to NCAT is obviously not completely cost-free and it will still have its own legal risks, particularly if one of the parties is a business. A financier defendant is particularly at risk if it is dragged before a tribunal. As a result of a recent tribunal decision, a finance company involved in the specialised area of equipment leasing will have particular cause for concern.

In Abraham v Gogetta Equipment Funding Pty Ltd [2017] NSWCATCD, the NSW Civil and Administrative Tribunal (“NCAT”) commented that a typical ‘net rental’ clause was not necessary to protect the legitimate interests of the financier. The context was the new business-to-business unfair contract laws. The Tribunal went on to observe that any loss the financier might incur from the lessee ceasing to pay rent could be offset from legal action against the vendor/supplier for defective goods.

This view is completely at odds with long-standing practice in equipment lease transactions. The lease agreements invariably include a net rental (unconditional payment) obligation as the cornerstone of the bargain. Come ‘hell or high water’, the lessee must pay its installments on time and in full. Because of the financier’s own funding arrangements, the lessee must never miss a payment date.

The Abraham v Gogetta case was ultimately decided against the lessee on grounds other than its payment obligations being deemed unfair, so no harm was done. However, NCAT’s comments are unsettling, for the reason given above. They are also illustrative of the risks to which parties are exposed when a dispute is adjudicated outside the traditional legal system.

However, as a timely curb on the potential overreach of State tribunals, in the recent case of Burns v Corbett [2018] HCA 15, the High Court ruled that on constitutional grounds that State tribunals are not permitted to hear disputes between residents of different States.  They can only decide disputes where both parties are located in the same State.

So the decision in Burns v Corbett effectively closes off the low-cost route if one of the parties is based interstate. In the case of NSW, a recent amendment to the NCAT Act will permit a dispute to be a referred to a court if NCAT lacks jurisdiction in such a case. However, referring a tribunal matter to court means that the issues of time and costs again become prominent.