High Court finds removing customer safeguards can lead to unconscionable conduct
12 September 2024
12 September 2024
Productivity Partners Pty Ltd v ACCC; Wills v ACCC [2024] HCA 27.
Productivity Partners Pty Ltd, trading as Captain Cook College (the College), provided online vocational education and training (VET) courses, which were funded through a Commonwealth scheme. Mr Blake Wills was Chief Operating Officer of the College's parent company, Site Group International Ltd (Site Group). From November 2015 to January 2016, he was also acting Chief Executive Officer of the College.
The Commonwealth funding scheme provided that students would incur a debt representing the fees the Commonwealth paid to the VET provider if they enrolled in a course and remained enrolled past the "census date". In 2014 and 2015, a Senate inquiry and media reports had publicly identified risks that VET providers would enrol students who did not understand the requirement to pay the course fees or have the ability to complete the courses.
On 7 September 2015, to increase profitability, the College removed the following two safeguards from its enrolment processes:
These safeguards mitigated the known risks of unwitting or unsuitable students becoming and remaining enrolled at the census date, and thereby incurring substantial fees for courses which they would not commence. Therefore, removing these safeguards enabled students to be enrolled more quickly and easily, and ensured that they passed through census in greater numbers.
During the year following September 2015, the effects of removing the safeguards were significant: the College's enrolments increased by a factor of ~20; the percentage of students who withdrew or were withdrawn prior to census declined to ~20%; and the percentage of enrolled students who did not complete the course increased from ~93% to nearly 100%.
The Australian Competition and Consumer Commission (ACCC) brought proceedings in the Federal Court. The ACCC alleged that the College's conduct in removing the enrolment safeguards was in all the circumstances unconscionable contrary to s 21(1) of the ACL. The ACCC also alleged that Mr Wills (and, through him, Site Group) was knowingly concerned in, or a party to, the College's unconscionable conduct and therefore liable for a pecuniary penalty under s 224(1)(e) of the ACL, and disqualification from managing corporations under s 248.
The ACCC succeeded before the Federal Court (Stewart J) at first instance, and before a majority of the Full Court of the Federal Court (Wigney and O'Bryan JJ, Downes J dissenting) on appeal.
As explained below, the primary judge, and the majority of the Full Court, found that the College had engaged in a system of conduct or a pattern of behaviour that was unconscionable. Mr Wills (and, through him, Site Group) was also found to be knowingly concerned in and liable for the College's systemic unconscionable conduct.
The College engaged "course advisers" to market to and recruit potential students, and paid the advisers a commission of 20 per cent of the applicable course fees when students passed their census dates. The College knew of the risk that these course advisers might engage in unethical or careless conduct in recruiting students. For instance, over a two-year period, the College recorded more than 200 complaints of misconduct by course advisers.
The College also knew of the risk of enrolling students who lacked the requisite literacy or numeracy skills, or technology access or skills, to undertake the online courses in which they were enrolled. For instance, an internal audit of one of the College's "online campuses" revealed high rates of disengaged students being enrolled. During the relevant enrolment period, around 85 per cent of students who were enrolled at that campus and passed their census date never accessed the online learning management system.
Therefore, the lower courts held that the College acted unconscionably by removing two safeguards in circumstances where they knew of the risks of harm to students. In doing so, the College took advantage of students who had enrolled as a result of course adviser misconduct, or were unsuitable for their chosen course of study.
The lower courts also held that Mr Wills was knowingly concerned in the College's unconscionable conduct and therefore also liable for it. He was a key driver of changes to improve the College's financial performance and, while he was not the architect of removing the safeguards, the relevant decisions to do so were reported to him and he oversaw their implementation.
Mr Wills also had knowledge of the risks of removing the safeguards. He knew that the changes were meant to enable students to be enrolled more quickly and easily, and to ensure that they passed through census in greater numbers by abolishing a significant contribution to attrition.
However, the Full Federal Court overturned one aspect of the primary judge's ruling on accessorial liability. The Full Court held that Mr Wills was an accessory not from 7 September 2015, but only from when he became acting CEO of the College in November 2015. This was on the basis that Mr Wills was not aware on 7 September 2015 of the full consequences that removing the safeguards would have on the enrolment of unsuitable students.
The College and Mr Wills unsuccessfully appealed to the High Court, which broadly considered two issues. First, did the College engage in unconscionable conduct? Second, if so, was Mr Wills knowingly concerned in the College's unconscionable conduct and therefore liable as an accessory to that conduct?
The High Court unanimously dismissed the appeals of the College and Mr Wills. Across six judgments, the Court addressed in particular the following issues.
The College argued that it did not act unconscionably in removing the enrolment safeguards because it did not intend for the relevant risks ameliorated by the safeguards (ie the risks of unwitting or unsuitable students becoming and remaining enrolled at the census date) to eventuate.
All members of the Court rejected this argument, but with different emphases in their reasoning:
Mr Wills argued that he was not an accessory to the College's unconscionable conduct because he did not know that the College's conduct was "unconscionable" as a matter of legal characterisation (ie that the conduct involved taking advantage of consumers or was otherwise against conscience).
The High Court affirmed that the test of whether a person is "knowingly concerned" in a civil contravention of a statutory prohibition requires the following:
The various judgments provided different (but broadly consistent) guidance on how the "essential facts, matters or circumstances" of a particular contravention can be identified:
It remains unclear whether these formulations are substantively different once applied to specific contraventions of the law. All members of the Court held that the characterisation of the College's conduct as "unconscionable" was not one of the essential matters, facts or circumstances which made up the College's unconscionable conduct. And all members of the Court resolved a related debate among lower courts by holding that accessorial liability for misleading or deceptive conduct (at least in cases based on a false representation) requires a person to know that an impugned representation is false.
The Court held that Mr Wills had the requisite knowledge to be an accessory to unconscionable conduct because he knew: there were ongoing risks of unwitting or unsuitable students being enrolled in their courses; the enrolment safeguards had been in place to protect against those risks; and removing the enrolment safeguards as a means of improving the College's profitability would increase those risks. While Mr Wills did not know the precise effect of the safeguards against these risks, he knew that abolishing the safeguards would lead to an increase in the number and proportion of students who would be enrolled and receive no benefit from their enrolment — he had seen audit results of a related education provider which made this effect clear. On the issue of timing, the Court overturned the Full Federal Court, finding that Mr Wills knew of these essential matters by 7 September 2015 when the safeguards were removed.
The judgments provide some guidance in considering how the prohibition on unconscionable conduct applies to the mitigation of risks inherent in a particular business model.
Where it is known or reasonably foreseeable to a service provider that there are manifest, common or prevalent risks of harm to consumers, it may be insufficient for the service provider to show they:
But the judgment of Gageler CJ and Jagot J distinguishes such cases from that of a "mere risk" (or possibility) involved in a commercial judgment that is later proven incorrect. This provides some comfort that good faith decisions as to risk management, made amid genuine uncertainty as to the likelihood of risks eventuating, would not constitute unconscionable conduct.
The decision provides specific guidance on the knowledge required for accessorial liability in relation to unconscionable conduct and misleading or deceptive conduct, which are prohibited by both the ACL and the ASIC Act. Decision makers who oversee particular corporate conduct that is found by a court to be unconscionable (or misleading or deceptive) may be liable as accessories to that conduct, even if they are not aware that the conduct can be legally characterised as "unconscionable" (or "misleading or deceptive").
However, there may still be difficulties in determining what are the "essential facts" of other, more complex contraventions. This is an important consideration given the use of the "knowingly concerned" language across a range of Commonwealth civil penalty prohibitions.
Still, the following general proposition appears to be true: accessorial liability arises when you know enough about a person's conduct that you should know the risk that the law prohibits that conduct, but you assist with the conduct (including by overseeing the conduct) anyway. A person, knowing that their business is making a false statement, or is increasing its profits by allowing unsuitable students to incur significant debts, should know the risk that the law would prohibit that conduct, even if they do not know of the exact prohibitions on misleading or deceptive and unconscionable conduct.
Therefore, decision makers should understand the risks associated with the corporate conduct that is within their remit, and be proactive in querying the merits of conduct that increases the risk of detriment to external stakeholders such as consumers or investors.
Authors: Justin Jones, Partner; Mark Bradley, Partner; Matthew Harper, Senior Associate and Oscar Han, Lawyer.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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