Unconscionable Conduct

Unconscionable Conduct

In this article we will look at unconscionable conduct under section 20 and section 21 of the Australian Consumer Law. 

 

Contents

What is unconscionable conduct?

Unconscionable conduct under the Australian Consumer Law

Good Faith

Examples of unconscionable conduct

What remedies are available?

Key Takeaways

 

What is Unconscionable Conduct?

Unconscionable conduct does not have a specific or precise legal definition.

Generally speaking, unconscionable conduct is conduct which is outside of the normal standard of good conscience. 

 

In Kakavas v Crown Melbourne [2013] HCA 25 the court stated at 118:

there should be an unconscientious taking advantage by one party of some disabling condition or circumstance that seriously affects the ability of the other party to make a rational judgment as to his or her own best interests. It may well be that an unconscientious taking of advantage will not always be manifest in a demonstrated inequality of bargaining power or in a demonstrated inadequacy in the consideration moving from the stronger party to the weaker; but the abiding rationale of the principle is to ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the impugned transaction.

 

Equitable Unconscionable Conduct - s20 ACL

Section 20 of the Australian Consumer Law (the ACL) prohibits a person from engaging in unconscionable conduct in trade or commerce "within the meaning of the unwritten law". 

Section 20 of the ACL only applies if section 21 of the ACL does not apply. 

Unconscionable Conduct under section 20 of the ACL refers to "unconscionable conduct" as that term has developed through general or  common law (for example in Kakvas v Crown Melbourne referred to above). It is known as "equitable" unconscionable conduct.

 

Statutory Unconscionable Conduct - s21 ACL

Section 21 of the ACL prohibits unconscionable conduct in connection with the supply or possible supply of goods or services or the acquisition or possible acquisition of goods or services.

Unconscionable conduct under section 21 of the ACL is known as "statutory" unconscionable conduct.

The Explanatory Memorandum to the ACL states in relation to statutory unconscionable conduct under section 21:

Paragraph 21(4)(a) of the ACL makes it clear, on the face of the statute, that statutory unconscionable conduct may, where appropriate, continue to develop independently from the equitable and common law doctrines.

 

Consequently what is considered as unconscionable conduct under section 21 of the ACL, may not be unconscionable at general or common law.

While statutory unconscionable conduct does not have a precise legal definition, in determining whether conduct is unconscionable under section 21 of the ACL, section 22 of the ACL provides that the Court can have regard to matters such as:

• the relative strengths of the bargaining positions of the parties (s22(1)(a));

• 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 (s22(1)(b));

• whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services (s22(1)(c));

• 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 (s22(1)(d));

• 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 (s22(1)(e));

• 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 (s22(1)(f));

• the requirements of any applicable industry code (s22(1)(g));

• the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code (s22(1)(h));

• the extent to which the supplier unreasonably failed to disclose to the customer:
  • any intended conduct of the supplier that might affect the interests of the customer; and
  • any risks to the customer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer) (s22(1)(i));

• 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; 
  • the terms and conditions of the contract; 
  • the conduct of the supplier and the customer in complying with the terms and conditions of the contract; 
  • any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract (s22(1)(j)); 

• 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 (s22(1)(k)); and

• the extent to which the supplier and the customer acted in good faith (s22(1)(l)).

 

Good Faith

When considering whether a party has engaged in unconscionable conduct, the Court will often consider whether that party acted in good faith.

The High Court of Australia has held that good faith involves "fairness in dealings between contracting parties" (Commonwealth Bank of Australia v Barker [2014] HCA 32).

 

Similarly, the Federal Court of Australia has held that the obligation to act in good faith means to

act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at time conflict) and to the provisions, aims and purposes of the contract, objectively ascertained (Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50).

Elements of the obligation to act in good faith include:

 

Examples of Unconscionable Conduct - s21 ACL

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 attract 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 inequality 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.

 

Case Study - Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40

QHG was in the business of arranging investments in properties that qualified for incentives under the National Rental Affordability Scheme (NRAS) established by the Government in 2008.  Through the NRAS, financial incentives were offered to Approved Participants to build and offer rental accommodation to low and middle income earners by way of a subsidy. From 2017 QHG's management devised a plan, described as the Roll Up Plan. The Roll Up Plan had the following characteristics:

1. QHG was in a superior bargaining position in dealing with investors by reason that it was the Approved Participant in the NRAS and received the incentives.
2. Under the arrangements for the NRAS, investors were dependent on QHG in order to receive their incentive.
3. The bargaining position of QHG was enhanced by the fact that under the arrangements for the NRAS at the relevant time, investors could not change to another Approved Participant.
4. QHG took advantage of the fact that investors relied upon QHG in order to continue receiving their NRAS incentive by formulating the Roll Up Plan.
5. The aim of the Roll Up Plan was to pressure all of the investors who had agreements with QHG to arrange to obtain property management services from property managers identified as approved by QHG.
6. QHG did not disclose to investors its commercial associations with the approved property managers.
7. QHG issued rounds of misleading correspondence to at least 450 investors that were designed to interfere with the contractual relationships between the investors and their property managers by unduly pressuring investors to terminate their relationships with the property managers and change to a property manager approved by QHG.
8. As part of the implementation of the Roll Up Plan, QHG unilaterally imposed Accreditation Guidelines on its investors.
9. Amongst other things, the Accreditation Guidelines required the property manager of an investor to pay a security deposit of $10,000 if the investor did not transfer management of their property at QHG to a QHG approved property manager.
10. The implementation of the security deposit was directed to excluding property managers who were not approved by QHG.
11. The security deposit was without any commercial justification or purpose.

The primary judge took the view that QHG had not engaged in unconscionable conduct because the investors could not be characterised as being "vulnerable or in a position of disadvantage of a kind that might expose them to being exploited or victimised".

The full court disagreed with the approach taken by the primary judge and took the view that a vulnerability or disadvantage is not a necessary feature of unconscionable conduct under s21 of the ACL.

The full court stated at [91]:

"Unconscionable" is the language of business morality and unconscionable conduct is referable to considerations expressed and recognised by the statute. The word is not limited to one kind of conduct that is against or offends conscience. Surely to predate on vulnerable consumers or small business people is unconscionable. But why is it not also unconscionable to act in a way that is systematically dishonest, entirely in bad faith in undermining a bargain, involving misrepresentation, commercial bullying or pressure and sharp practice, using a superior bargaining position, behaving contrary to an industry code, using significant market power  in a way to extract an undisclosed benefit that will harm others who are commercially related to the counterparty? The proposition that such conduct (not all of which might be seen to be present here) is not unconscionable by an Australian statutory business standard of conscience because the counterparty to the business transaction suffered from no relevant pre-existing disadvantage, disability or vulnerability (other than, perhaps, having a decent degree of trust and faith in its business counterparty's honesty and good faith) is difficult to accept, unless one posits a narrow defined meaning of "unconscionable" that remains hinged in some way to the structural form of the equitable doctrine as expressed on cases such as Kakavas. The history, text and structure of the Act is contrary to such a conclusion. It is not to be derived from the meaning of the word "unconscionable".

 

What remedies are available?

If a Court determines that a person has engaged in unconscionable conduct, the remedies available include:

• compensation for loss or damage;
• having the contract declared void or set aside;
• financial penalties.

 

Key Takeaways

• Unconscionable conduct under section 20 of the ACL requires that one party has knowingly exploited or taken advantage of some disadvantage or special vulnerability of the other party;
• Unconscionable conduct under section 20 of the ACL requires more than an element of unfairness;
• Equitable unconscionable conduct under section 20 of the ACL is different from statutory unconscionable conduct under section 21 of the ACL;
• Unconscionable conduct under section 21 of the ACL does not require one party to exploit or take advantage of a disadvantage or special vulnerability of the other party.  

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.