Unconscionable Conduct

Section 20 of the Australian Consumer Law prohibits a person from engaging in unconscionable conduct in connection with the supply or possible supply of goods or services.

The Australian Consumer Law does not define “unconscionable conduct”, but prohibits a person or corporation engaging in conduct that is unconscionable “within the meaning of the unwritten law”.

Unconscionable conduct requires more than an element of unfairness. Parties are not prevented from engaging in tough commercial dealing. Generally, the stronger party must attempt to enforce or retain the benefit of dealing with a person under a special disadvantage. A special disadvantage does not arise just because there is inequality in bargaining power between the parties.

The Australian Consumer Law allows the court to find unconscionable conduct in commercial dealings with regard to matters such as:

  • the relative strengths of the bargaining positions of the parties;
  • whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
  • whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services;
  • whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services;
  • the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier;
  • the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers;
  • the requirements of any applicable industry code;
  • if there is a contract between the supplier and the customer for the supply of the goods or services:
  • the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and
  • the terms and conditions of the contract; and
  • the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and 
  • any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and
  • whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
  • the extent to which the supplier and the customer acted in good faith.

The unequal relationship between franchisors and franchisees may give rise to unconscionable conduct allegations.

Case Study – Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA 25

Coverall was the Victorian operator of a cleaning franchise business. The ACCC alleged that Coverall had engaged in unconscionable conduct by:

  • entering into franchise agreements without disclosing matters required to be disclosed under the Franchising Code of Conduct;
  • engaging in misleading and deceptive conduct;
  • failing to remit payments to the franchisees for the cleaning services provided in circumstances where Coverall had received payment from the customer;
  • unfairly relying on the terms of the franchise agreements to require the franchisees to make payment of various fees and loan repayments and preventing them from terminating the agreements.

The Federal Court found that Coverall had engaged in unconscionable conduct. The Honourable Justice Murphy held that the Court’s task involved evaluating conduct by reference to a normative standard of conscience which may develop and change over time and which must be understood and applied in the context in which the circumstances of the case arise. In determining whether Coverall had engaged in unconscionable conduct, it was relevant to consider its misleading conduct towards the franchisees in contravention of the Australian Consumer Law and its contraventions of the Franchising Code of Conduct.

Looking at the entire circumstances of Coverall’s conduct towards each of the franchisees, his Honour found that Coverall did not act in good faith towards the franchisees and had sought to take advantage of its significantly stronger bargaining position at every step.

 

Case Study – Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) (2019)

Geowash was the operator of a car wash franchise business. The ACCC alleged that Geowash had engaged in unconscionable conduct by:

  • negotiating the sale of franchises to prospective franchisees who were typically unsophisticated when it came to owning and operating a business;
  • ascertaining from the prospective franchisee their maximum budget;
  • negotiating with prospective franchisees as if a franchise  could be acquired for a lump sum, being typically the maximum budget;
  • engaging in the above conduct despite it being inconsistent with the terms of the franchise agreement and disclosure document;
  • representing that the prospective franchisee would be able to acquire an operating Geowash franchise within the discussed budget;
  • invoicing for lump sums under franchise agreements when there was no right to do so;
  • demanding and pressing for urgent payment of lump sums that were usually more that the budget that had been discussed;
  • failing to deliver an operating car wash to the majority of its franchisees; and
  • spending a significant portion of the funds received from franchisees for purposes that were not permitted under the franchise agreements, including payment of general operating expenses of Geowash, the payment of commissions to Ms Ali and Mr Cameron and transferring funds into assets directly or indirectly controlled by Ms Ali or Mr Cameron.

The Federal Court found that Geowash had engaged in unconscionable conduct. The unconscionable nature of the conduct was that the business model was inherently dishonest. The franchisor demanded amounts from the franchisee as being the amounts which were necessary to meet the costs of the fit out of the franchise when the intention was that a large part of the monies were not to be used for that purpose at all.

The Federal Court also noted that the nature of the franchise was that it was likely to people with little business experience. Although the unconscionable nature of the conduct was not in taking advantage of any gullibility or inexperience.

The Federal Court further referred to the much cited paragraph of Allsop CJ in Paciocco of modern Australian commercial business or trade conscience:

The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inquality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of a equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon.

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