Unconscionable conduct rules a little clearer... and stricter

What you need to know

• On 19 March 2021 the Full Court of the Federal Court (Full Court) clarified, at least for now, the law on statutory unconscionable conduct under the Australian Consumer Law (ACL) by deciding that unconscionability does not require the offender to take advantage of, or exploit, a vulnerability, disability or disadvantage of the victim.
• The Full Court found that Quantum Housing Group Pty Ltd (Quantum Housing) engaged in unconscionable conduct by pressuring investors with rental dwellings in the National Rental Affordability Scheme (NRAS) to switch property managers to Quantum Housing-approved property managers, without needing to find that Quantum Housing exploited any particular vulnerability, disability or disadvantage of those investors.
• This helps clarifies, at least for now, the uncertainty on that issue following the High Court's five separate and divided judgements in ASIC v Kobelt (2019) 267 CLR 1 (Kobelt). However, we expect this aspect of the reasoning to be tested again in the future.

What you need to do

• Unconscionable conduct continues to be a priority for the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investments Commission (ASIC). Be careful about engaging in behaviour that may be characterised as acting in bad faith, involving commercial bullying or pressure, taking strong advantage of a superior bargaining position, or using market power to extract benefits, especially undisclosed benefits, even if your counterparty does not have a clear disadvantage.
• Continue actively training employees, particularly frontline sales and customer service staff, in relation to unconscionable conduct.

Background on the prohibitions against unconscionable conduct

The ACL (and other similar laws, for example the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) contains two prohibitions against unconscionable conduct.

The first prohibits unconscionability "within the meaning of the unwritten law" (ie equitable unconscionability) and gives the ACCC, ASIC and private litigants access to the smorgasbord of statutory remedies available under the ACL or ASIC Act (including damages and injunctions, and pecuniary penalties and banning orders for the regulators) (section 20 of the ACL and section 12CA of the ASIC Act). Equitable unconscionability occurs where the stronger party knowingly exploits the "special disadvantage" of another. This special disadvantage may be a constitutional disadvantage, which arises from a party's weakness or deficiency, or a situational disadvantage, resulting from the legal or commercial circumstances in which the parties find themselves. This means the focus is often on the way the stronger party conducted itself, more than the fairness of any resulting transaction.

The second prohibits what is commonly referred to as "statutory unconscionability" (section 21 of the ACL) and prohibits a person from engaging in unconscionable conduct in connection with the (possible) supply or acquisition of goods or services. Statutory unconscionability under the ACL is wider in scope than the equitable doctrine of unconscionable conduct. It was previously subject to a monetary limit, but is now available to any business except for a listed corporation. (Of course, a claim can be made against a listed corporation.)

Section 21 is framed in broad terms, and invites the court to consider the conduct in all of the circumstances, including not only the way the stronger party conducted itself, but also the fairness of the resulting transaction. Further, section 21(4) results in the prohibition applying to a system of conduct or pattern of behaviour, whether or not the "victim" is identified as having been disadvantaged by the conduct or behaviour.

The extent to which statutory unconscionability is broader than equitable unconscionability has been uncertain. This was recently considered by the High Court in Kobelt, which tested the equivalent provision in section 12CB of the ASIC Act. Kobelt resulted in five separate judgments, a 4:3 majority, and continuing uncertainty. The narrow view of unconscionability from Kobelt relied heavily on the equitable doctrine, including the requirement for exploitation of a special disadvantage. At the other end of the spectrum, the broad view of unconscionability from Kobelt was grounded in the evolving values, norms and practices of good business conscience, and acknowledges the close association between unconscionability and terms such as "unfairness" or "lack of good faith", without any reference to a special disadvantage of the counterparty.

The ACCC's appeal in ACCC v Quantum Housing Group provided an opportunity for the Full Court to reconcile the judgments in Kobelt and, to some extent, clarify the statutory test for unconscionability and reduce the continuing uncertainty created by the prohibitions in both the ACL and the ASIC Act.

Quantum Housing's conduct

Prior to its liquidation, Quantum Housing arranged investments in properties that qualified for incentives under the NRAS. Investors relied on Quantum Housing, as an approved participant in the NRAS, to lodge property compliance forms on their behalf, in order to receive their NRAS incentives.

Between February 2017 and July 2018, Quantum Housing used various means to pressure investors, who had rental dwellings participating in the NRAS, to terminate arrangements with their existing property managers in favour of property managers approved by Quantum Housing. Quantum Housing's conduct included:

• issuing rounds of misleading correspondence to at least 450 investors who had rental properties participating in the NRAS scheme, designed to interfere with the contractual relationships between investors and their property managers;
• unilaterally imposing accreditation guidelines on investors that required payments if investors did not appoint a Quantum Housing preferred manager. Where investors did not change to Quantum Housing preferred property managers, Quantum Housing issued notices stating that the investors risked losing their NRAS incentives. This was not true;
• falsely informing investors that their existing property manager had not properly managed compliance with the NRAS, when this was not true; and
• failing to disclose Quantum Housing's commercial links with the property managers it recommended.

The ACCC commenced proceedings against Quantum Housing and its sole director and secretary at the time, alleging contraventions of sections 18(1), 29(1)(l), 29(1)(m) and 21 of the ACL.

Initial penalties for false or misleading conduct

At first instance, in relation to the alleged false or misleading conduct, Quantum Housing was ordered to pay a penalty of $700,000, and its director was ordered to pay a personal penalty of $50,000 and was disqualified from managing corporations for three years.

After considering the different judgements of the High Court in Kobelt, and despite Quantum Housing's admissions in the parties' agreed statement of facts, the judge at first instance did not find that Quantum Housing had engaged in unconscionable conduct. It was found that the conduct did not depend on exploiting vulnerability or special disadvantage on the part of investors, and therefore was not unconscionable.

No requirement for vulnerability or disadvantage

On appeal, a central issue for the Full Court to consider was whether a finding of statutory unconscionability first required a finding of pre-existing vulnerability, disability or disadvantage of some kind (and, if so, what kind), and the exploitation or taking advantage of that vulnerability.

On this issue, the majority of the Full Court found that there was no requirement for statutory unconscionable conduct to involve some form of pre-existing disability, vulnerability or disadvantage on the part of the victim. Further, the majority of the Full Court found that even where there was a special disadvantage, there was no requirement for the offender to take advantage of that fact. Importantly, while the High Court in Kobelt considered whether there was a vulnerability or disadvantage exploited in that case, with the exception of one judge, this was due to the way ASIC had conducted its case at trial, and not to address a general statutory requirement.

The Full Court held that, while statutory unconscionability may often involve a pre-existing vulnerability or disadvantage on the part of the victim, it does not require such vulnerability or disadvantage to exist, or be exploited. Rather, statutory unconscionability only requires a finding that conduct is "against or offends conscience" informed by values and norms of acceptable commercial behaviour, such as honesty, fairness when dealing with customers, and performance of bargains and promises freely made.

From the Full Court's finding, even where the "victim" does not suffer from any pre-existing disadvantage, vulnerability or disability, a broader range of conduct may result in a breach of the prohibition against statutory unconscionability, for example:

• business processes or marketing that intentionally operates or relies on false or exaggerated information to attract customers, even if those processes are automated;
• intentionally undermining the informed decision-making of counterparties, such as directing them to consider only certain false or ambiguous information;
• pressuring counterparties to enter bargains on the basis of false information or deliberate misrepresentations of official standards or certifications; and
• artificially limiting the choices available to counterparties on the basis of false or misleading reasons, forcing them to enter arrangements that are preferable for the offender in any way.

Any conduct of this nature will be considered more serious where the party engaging in the conduct receives a benefit for its actions, particularly if that benefit is unknown or not made clear to the party impacted by the conduct.

Quantum Housing's conduct was unconscionable

Following from its conclusion in relation to the approach to statutory unconscionability, the Full Court found that on the basis of the agreed facts Quantum Housing engaged in conduct that was unconscionable, but explicitly stated that it was not because Quantum Housing took advantage or exploited a vulnerability, disadvantage or disability suffered by the investors.

Rather, the Full Court considered that Quantum Housing engaged in deliberate systematic conduct by misusing its superior bargaining position to dishonestly mislead commercial investors. Those investors suffered from no proven particular vulnerability other than from their position in the relevant commercial circumstances. Further, Quantum Housing pressured the investors by imposing entirely unjustified and unnecessary requirements. This conduct exhibited a dishonest lack of good faith by Quantum Housing, in order to extract financial benefits which were surreptitious and undisclosed to the investors.

For these reasons, the Full Court allowed the ACCC's appeal and made declarations that Quantum Housing had contravened section 21 of the ACL, and that its former director and secretary was knowingly concerned in Quantum Housing's contraventions. The ACCC did not seek any additional monetary penalty on appeal.

Good Living Company Pty Ltd v Kingsmeade Pty Ltd

On 16 March 2021, the Full Court also delivered the judgement in Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33 (with Allsop CJ and Besanko J sitting on both cases) concerning unconscionable conduct.

Good Living Company Pty Ltd guaranteed the obligations of a lessee, who had breached its lease to Kingsmeade Pty Ltd. Good Living Company Pty Ltd alleged that by calling on, and collecting the money that was the subject of, the unconditional guarantee, Kingsmeade Pty Ltd had engaged in unconscionable conduct in contravention of sections 20 and 21 of the ACL.

The Full Court found that Good Living Company Pty Ltd did not engage in unconscionable conduct contrary to sections 20 or 21 of the ACL, but did not undertake the same detailed discussion of unconscionability. On the facts, it was found that:

• Kingsmeade Pty Ltd had acted in its own interests (and even in an uncompromising way), but that it had acted openly and honestly in the relevant negotiations concerning the lessee; and

• in any event, Good Living Company Pty Ltd and Kingsmeade Pty Ltd were not commercial counterparties or even known to each other, until after the relevant arrangements had been negotiated.

In coming to this view, the Full Court also briefly acknowledged, like in ACCC v Quantum Housing, that the equitable and statutory concepts of unconscionability are related, but distinct and different – in that the principles of equity inform, but do not control, the statutory prohibition.

Authors: Justin Jones, Partner; Rowan Kendall, Senior Associate; Jessica Apel, Lawyer; and Judy Zhao, Lawyer.