INSIGHT

Full Federal Court clarifies law on statutory unconscionable conduct

By Rosannah Healy, Georgia Sands
ACCC Competition law Consumer law

Be mindful of the key consumer law prohibitions 7 min read

The Full Federal Court has provided important clarification on the circumstances in which conduct will be unconscionable under section 21 of the Australian Consumer Law. For a company's actions to be unconscionable, they do not need to take advantage of a person's pre-existing disability, vulnerability or disadvantage. Rather, the question is whether the conduct, in all the circumstances, departed seriously from acceptable norms of business behaviour.

The case is a reminder that businesses need to take care in their dealings with all counterparties, especially small businesses and consumers.

Key takeaways

  • For a business's actions to be unconscionable, the business does not need to be taking advantage of a person's special vulnerability or disadvantage. While exploitation of vulnerability is often a feature of statutory unconscionable conduct, it is not a necessary element.
  • To establish unconscionable conduct under section 21, the question is whether the business's conduct departed so far from the norms of acceptable commercial conduct that it is against conscience.
  • Notwithstanding this decision, the ACCC is likely to continue to advocate for other reforms designed to address unfair dealing, such as the introduction of a general unfair trading practices prohibition.

Federal Court trial decision: exploitation of disadvantage by a stronger party is required

Background

The ACCC commenced proceedings against Quantum Housing Group Pty Ltd (Quantum) in April 2019, alleging that Quantum made false or misleading representations and engaged in systemic unconscionable conduct.

It was alleged that Quantum engaged in a system of unconscionable conduct by pressuring investors in the National Rental Affordability Scheme (NRAS) to terminate arrangements with existing property mangers and enter into new agreements with Quantum-approved property managers. Quantum did not disclose to investors that the Quantum-approved managers were commercially linked to Quantum.

It was also alleged that Quantum made false or misleading representations to investors that if they did not use Quantum-approved property managers, they would be in breach of their agreement with Quantum and risk losing their NRAS incentives.

A narrow definition of unconscionable conduct

In an agreed statement of facts, the liquidators for Quantum admitted to a number of contraventions, including unconscionable conduct and misleading representations.

Justice Colvin of the Federal Court accepted that Quantum had engaged in misleading conduct (and that its sole director, Cheryle Howe, had been knowingly involved in that conduct). However, Justice Colvin did not find that Quantum had engaged in unconscionable conduct. This was because Quantum's conduct did not involve 'dealing with those who are vulnerable in a manner that exploits that vulnerability by engaging in conduct that may be plainly or obviously criticised when viewed through the lens of an understanding of proper commercial behaviour according to prevailing norms and standards' (at [29]).

Justice Colvin based this aspect of his reasoning on the High Court's 2019 decision in ASIC v Kobelt. His Honour interpreted the majority in that case as adopting a standard of unconscionable conduct 'that requires exploitation of disadvantage by a party in a stronger position by conduct that is well outside the bounds of what is generally seen to be moral, right or acceptable commercial behaviour' (at [29]). Based on this reasoning, Justice Colvin found that Quantum's dealings with investors were not unconscionable because the financial and other circumstances of the investors meant they were not vulnerable or disadvantaged in way that might expose them to exploitation. His Honour also highlighted that it did not appear the investors suffered any financial disadvantage as a result of Quantum's actions; instead this fell on the property managers whose services were terminated.

As a result of the Federal Court's findings against Quantum, Justice Colvin:

  • imposed a penalty of $700,000 on Quantum;
  • required Quantum to email investors a court-ordered notice regarding its wrongdoing;
  • imposed a penalty of $50,000 on Ms Howe, the sole director and a management employee; and
  • disqualified Ms Howe from managing a corporation for a period of three years.

Full Federal Court appeal decision: no special disadvantage necessary for statutory unconscionability

The ACCC appeal

The ACCC swiftly appealed the decision handed down by Justice Colvin, seeking clarity from the Full Federal Court on whether the ACL requires the target or victim of the conduct to be at a special disadvantage for conduct to be unconscionable. The ACCC did not appeal the penalties imposed by the Federal Court.

Rejection of 'special disadvantage' requirement

The Full Federal Court overturned Justice Colvin's decision regarding unconscionable conduct in a judgment handed down on 19 March 2021.

The Full Court re-examined the High Court's decision in ASIC v Kobelt and concluded that the majority of the High Court in Kobelt did not require that in every case of statutory unconscionable conduct, the stronger party must take advantage of some form of pre-existing disability, vulnerability or disadvantage. The court also relied on other judgments from the Federal Court and other intermediate appellate courts which supported this approach, such as ACCC v Lux Distributors, Unique International College v ACCC and ACCC v Medibank Private.

The court also highlighted that the legislature has expressly outlined that s21 of the ACL is not limited by the unwritten law. The court considered that this alone was sufficient to reject the concept that the concept of special disability or vulnerability, a concept recognised in equity, is an essential requirement of statutory unconscionable conduct. The court also focused on the absence of a concept of special disadvantage in the list of considerations in s22 of the ACL, meaning it would be contrary to the legislation to imply such a requirement.

Conduct by a commercial entity which, as here, systemically misuses its superior bargaining position by dishonestly misleading its counterparties and pressuring them by unjustified and unnecessary commercial requirements in a way that reflects a dishonest lack of good faith in undermining bargains previously reached in order to extract surreptitious and undisclosed financial benefits is against and offends an Australian business conscience…It is an offence to honesty…

- Full Federal Court, ACCC v Quantum Housing (No 2)

As a result, the court found that Quantum's plan to encourage investors to transfer property management to managers associated with Quantum, and implementation of this in a planned, deliberate and sustained manner, was an unconscionable system of conduct. The court highlighted that Quantum's conduct knowingly took advantage of its superior bargaining position and that it made deliberately false representations to a large number of investors about property manager requirements under its NRAS agreements with investors.

The ACCC's continuing focus on unfairness

The case marks a return to the traditional view that unconscionable conduct under s21 of the ACL does not require exploitation of a special disadvantage. Shortly after the decision was handed down, ACCC Chair Rod Sims commented to the Australian Financial Review that: 'This has been coming and going for a while, and hopefully now we've got this sorted out… This has very far-reaching implications.'

For several years now, the ACCC has advocated for reform in the form of a new principles-based unfair practices prohibition due to the bar of statutory unconscionability being set too high. Recent ACCC inquiries into digital platforms, customer loyalty schemes and perishable agricultural goods have all recommended the introduction of an unfair trading practices prohibition.1 The Consumer Affairs Forum has also commenced a regulation impact assessment process on the prohibition, and Rod Sims has indicated recently that he will have more to say on the topic shortly.

Notwithstanding the Full Federal Court's decision in Quantum, the ACCC is likely to continue advocating for an unfair trading practices prohibition.

How does this affect you?

  • Businesses need to be careful in their dealings with customers and other businesses, particularly where there could be an imbalance in the relative bargaining position of the parties. It could be helpful to ask: is what we are doing likely to be seen by people as generally acceptable commercial behaviour?
  • Businesses should be particularly alert about representations made to small businesses and suppliers, and interactions with small businesses where the business has few (or no) alternatives to dealing with your business.
  • The ACCC closely monitors complaints from consumers and businesses and continues to regularly investigate and litigate unconscionable conduct and unfair contract term cases. It is important that relevant teams in your business are trained and aware of the key consumer law prohibitions, including those against unconscionable conduct and misleading conduct.