How would you feel if a court declared that your business had acted unconscionably towards its customers or suppliers?
Chances are that the reputational harm would be as damaging to your business as any fines that might be imposed.
And yet despite having such serious consequences, the prohibitions against engaging in unconscionable conduct under the Australian Consumer Law have played a relatively modest role in the ACCC’s enforcement arsenal to date. This is due partly to the uncertainty for regulators, courts, and industry players alike regarding the scope of the unconscionable conduct provision under the Australian Consumer Law. In particular, there has been ongoing debate over the extent to which unconscionable conduct for Australian Consumer Law purposes differs from equitable unconscionability.
At the end of March 2021, the Full Federal Court handed down a landmark decision in relation to unconscionable conduct in the appeal by the ACCC against Quantum Housing1 . In this decision, the Full Federal Court confirmed that, unlike in the case of equitable unconscionability, for unconscionable conduct under the Australian Consumer Law to occur, it does not require proof of some form of exploitation of or predation upon vulnerability or disadvantage. Rather, the prohibition on unconscionable conduct under the Australian Consumer Law focuses on whether the conduct itself reflects a sufficient departure from the norms of acceptable commercial behaviour to be “against conscience”.
In practice, this means that businesses will need to take particular care when engaging in “hard bargaining” with their everyday customers and with other businesses, even where such counterparties are reasonably sophisticated and not in any obvious position of disadvantage, to ensure that they do not end up falling foul of the statutory prohibition against unconscionable conduct.
Background
In June 2020, a trial judge of the Federal Court found by consent that Quantum Housing Group Pty Ltd (Quantum Housing) had made false and misleading claims in breach of the Australian Consumer Law, and ordered Quantum Housing to pay $700,000 in penalties2. In addition, the trial judge ordered the company’s sole director, Cheryl Howe, to pay a penalty of $50,000 for being knowingly concerned in the conduct, and banned Ms Howe from managing a corporation for three years.
Quantum Housing, now under external administration, was in the business of arranging investments in properties that qualified for incentives under the National Rental Affordability Scheme (NRAS). Between February 2017 and July 2018, the parties agreed that Quantum Housing had engaged in a pattern of behaviour pressuring residential property investors participating in the NRAS to terminate their agreements with real estate agents contracted to manage their properties, and instead engage one of Quantum Housing’s “approved property managers”. In particular, Quantum Housing had made false claims to investors and their property managers which included statements such as that the investor would be in default of their NRAS Agreement if they did not terminate their property manager and appoint a Quantum Housing-approved property manager.
However, the trial judge held that the admitted conduct was not unconscionable under section 21 of the Australian Consumer Law since the conduct did not depend on exploiting any special disadvantage or vulnerability on the part of the investors. The trial judge relied on the decision of the High Court in Kobelt3 as authority for this principle.
On 8 July 2020, the ACCC appealed the decision.
The appeal was upheld by the Full Federal Court in late March 2021. Having undertaken a detailed analysis of the Kobelt decision, the Full Federal Court found, with the exception of Justice Keane, that none of the justices of the High Court in Kobelt had expressed the view that, for conduct to be unconscionable under section 21 of the Australian Consumer Law (or the corresponding provisions in relation to financial products and services under the ASIC Act),4 there must be some form of pre-existing disability, vulnerability or disadvantage of which the other person had taken advantage. Accordingly, the Full Federal Court considered that it was not bound by precedent to refrain from making a finding of unconscionable conduct in the absence of such factors.
The Full Federal Court held further that:
Conduct by a commercial entity which, as here, systematically 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.
Accordingly, the Full Federal Court found that Quantum Housing had engaged in an unconscionable system of conduct in breach of section 21 of the Australian Consumer Law.
What is the unconscionable conduct prohibition under the Australian Consumer Law?
There are two prohibitions against unconscionable conduct under the Australian Consumer Law:
- Unconscionable conduct within the doctrine of the “unwritten law” (section 20), which draws on equitable and common law principles; and
- Statutory unconscionable conduct (section 21), being conduct in connection with the supply or acquisition of goods or services which is “in all the circumstances” unconscionable. This doctrine of unconscionability has been described by the Federal Court as a “statutory standard to be developed judicially”,5 and was relied upon by the ACCC in order to establish unconscionable conduct in Quantum Housing.
There is no definition of “unconscionable conduct” under the Australian Consumer Law. However, the main approach in recent times has been to interpret it as meaning “conduct that is so far outside norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience”.6 Since statutory unconscionable conduct is required to be assessed “in all the circumstances”, any finding of whether or not conduct falls within the scope of the prohibition will depend very much on the facts at hand.
Section 22 of the Australian Consumer Law sets out a list of non-exhaustive factors that may be relevant to determining whether conduct is unconscionable under section 21. These include the extent to which the parties acted in good faith, the relative strength of each party’s bargaining position, whether the customer was required to comply with conditions not reasonably necessary to protect the supplier’s legitimate interests, whether the conduct involved any undue influence or pressure or unfair tactics, and the extent to which the supplier unreasonably failed to make certain disclosures regarding risks to the customer’s interests.
In addition, the Full Federal Court in Quantum Housing gave the following examples of business conduct that might be considered unconscionable:
- conduct which is systematically dishonest;
- conduct which is entirely in bad faith in undermining a bargain;
- conduct involving misrepresentation, commercial bullying or pressure and sharp practice;
- conduct which is contrary to an industry code;
- conduct which involves using significant market power in a way to extract an undisclosed benefit that will harm others who are commercially related to the counterparty.
What does this mean for you?
The appeal decision of the Full Federal Court in Quantum Housing has been praised by Rod Sims, Chair of the ACCC, as “an extremely important decision for all Australian consumers and businesses” which “extends the reach of the statutory unconscionable conduct prohibition so that it will protect more consumers and small businesses against egregious conduct by corporations”7.
However, the decision should also sound as a warning bell to businesses. This is because it confirms that business conduct may be challenged even when it is directed towards ordinary customers and businesses that do not have a clearly identifiable disadvantage or vulnerability.
As mentioned earlier, the term “unconscionable” is not clearly defined under the Australian Consumer Law and any finding of statutory unconscionable conduct will depend very much on the facts at hand. However, there are some overlaps between factors likely to be associated with statutory unconscionable conduct and those which relate to other key provisions under the Australian Consumer Law. These reflect fundamental principles for business conduct in Australia. For instance, whether a condition is reasonably necessary for the protection of a supplier’s legitimate interests will be relevant both in determining whether a term is unfair and whether a business has acted unconscionably. Also, the extent to which a business makes sufficient and honest disclosures about key information affecting a customer’s rights will be relevant both to the question of whether the business has engaged in misleading or deceptive conduct and also whether it has acted unconscionably.
Our advice for businesses is therefore to approach their obligations under the Australian Consumer Law in a holistic sense, using principles such as good faith, transparency, and reasonableness as guidelines for commercial conduct. There is no place for tactics such as one-sided contracts, misleading disclosures, and commercial bullying in an Australian business context. As a reminder, the maximum penalties available for breaching key provisions of the Australian Consumer Law (which include the prohibitions against unconscionable conduct) are the greater of $10 million; 3x the benefit of the breach; and 10% of the company’s annual turnover, per breach.
We have no doubt that given its success in the Quantum Housing case, the ACCC will be keen to continue testing the scope of the unconscionable conduct prohibition in the Australian Consumer Law in cases to come.
1ACCC v Quantum Housing Group Pty Ltd [2021] FCAFC 40.
2ACCC v Quantum Housing Group Pty Ltd (No 2) [2020] FCA 802.
3ASIC v Kobelt [2019] HCA 18.
4See sections 12CB and 12CC of the ASIC Act 2001 (Cth).
5ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90.
6ASIC v Kobelt [2019] HCA 18, [92] (Gageler J).
7ACCC, Media Release, ‘Full Federal Court ruling provides vital clarification of the law on statutory unconscionable conduct’ (22 March 2021).
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