In Australian Securities and Investments Commission v Darranda Pty Ltd (Liability) [2024] FCA 1015 the Federal Court of Australia decided that Darranda’s contracts with its customers were credit contracts being a sale of goods by instalment, and not consumer leases, and therefore subject to an annual cost cap of 48% and responsible lending obligations as well as certain disclosure requirements under the National Credit Code. Background.
The key issue was whether the 516 relevant contracts were consumer leases. That issue depended on whether, under the contract, the hirer has a right or obligation to purchase the goods.
Goods leases with an option to purchase include sale of goods by instalments agreements which are deemed to be credit contracts in terms of section 9 of the Credit Code.
Consumer leases are contracts for the hire or rental of goods for a set period, where the consumer does not have a right or obligation to purchase the goods as defined in section 169 of the Credit Code.
The pre contractual and contractual disclosure obligations for consumer leases and credit contracts (i.e. goods lease) are different.
Darranda is a franchisee of Rent4Keeps (Aust) Pty Ltd which rents personal use and household items (such as appliances and furniture) to customers.
Darranda used Centrepay to collect payments on many of its leases.
The Rent4Keeps business model was that at the end of the rental term Rent4Keeps may, at its discretion, gift the goods which are the subject of the rental agreement to a person nominated by the lessee.
The trial judge found that the contract operated to automatically transfer ownership to the nominated giftee if the hirer complied with the hirer’s obligations under the contract and therefore were not consumer leases.
It followed that Darranda as a credit provider party to those contracts, contravened:
(a) ss 23(1) and 24(1)(a) of the Code;
(b) s 32A(1) of the Code;
(c) s 17(3)(c), (4)(a), (5) and (6) of the Code.
As a result of the contraventions of the Code, Darranda failed to comply with the credit legislation and was therefore in breach of s 47(1)(d) of the Credit Act.
The trial judge also found that Rent4Keeps (Aust) Pty Ltd as master franchisor had contravened the Credit Act.
The trial judge observed:
“Whilst I do not find that the controlling minds of Darranda intended to mislead customers or intended to breach the Credit Act or the Code, there was a lack of honesty in that Darranda should have been well aware of the deficiencies in its systems. It had been put on notice that its terms were at least confusing but took inadequate steps to clarify the terms. It was dealing with a financially vulnerable group of customers, offering a product to them that was highly nuanced. Although there was no subjective intention on the part of Darranda’s controlling minds to take unfair advantage of its customers, failing to have systems in place that effectively monitored the terms and conditions being used in the business, and whether those terms and conditions reflected the advice that had been received by Darranda, fell short of what may be considered to be “ethically sound”.
The nuanced nature of the product it sought to offer was not properly understood by those responsible for Darranda’s marketing communications (which were essentially outsourced to Rent4Keeps (Aust)). In sending communications to customers that were not consistent with the terms of the rental agreement, Darranda failed to ensure that its credit activities were engaged in “efficiently, honestly and fairly” as required by s 47(1)(a) of the Credit Act.
Darranda’s breach of its licence condition requiring it to have a “key person” is not to be dismissed as a mere oversight. It had been subject to a licence cancellation hearing as a result of ASIC concerns in relation to its compliance with responsible lending obligations in 2016 yet continued to fail to have in place a system for monitoring compliance with its licence conditions in 2019. The failure to comply was a result of a breach of the standard of competence required to engage in licensed credit activities “efficiently, honestly and fairly”….
In so far as Darranda’s contravention of s 47(1)(a) of the Credit Act is concerned, the factual element of that contravention was the deficiency in the systems, processes and marketing services. Each of those were functions which Darranda had outsourced to Rent4Keeps (Aust) and which Rent4Keeps (Aust) had assumed responsibility for designing. As a franchisee, Darranda was encouraged, if not obligated, to adopt, implement and rely upon those systems, processes and procedures. Mr Payne and Mr Boucher not only knew of the elements and features of the processes and procedures but were ultimately responsible for the design and delivery of those systems, processes and procedures to franchisees, including Darranda.
On the facts, Darranda’s failure to meet its general obligation under s 47(1)(a) cannot be divorced from the actions and conduct of Rent4Keeps (Aust). As a consequence, Rent4Keeps (Aust) was involved in Darranda’s breach of its obligations under s 47(1)(a) of the Credit Act and is taken to have contravened s 47(1)(a), pursuant to s 169 of the Credit Act.”
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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.
