The expansion of statutory unconscionable conduct risk in commercial transactions

Where a statute proscribes unconscionable conduct in business, a company can be liable whether or not the person to whom the allegedly unconscionable conduct is directed is vulnerable or at a special disadvantage.

In ACCC v Quantum Housing Group Pty Ltd, handed down on 19 March 2021, the Full Federal Court placed the focus in unconscionable conduct cases squarely on the actions of the allegedly offending company and highlighted the potential hazards for companies when taking advantage of a superior bargaining position, whether dealing with consumers, partners or any smaller company.

Key takeaways

• Statutory unconscionable conduct laws do not just protect those who are unlikely to be able to raise complaint or otherwise advocate in their own interests but any commercial counterparty affected by a dishonest lack of good faith in a bargain used to extract a benefit, where the conduct is so far outside norms of acceptable commercial behaviour as to be condemned as offensive to conscience.
• Whereas conduct has primarily been found to be unconscionable by courts in the past where a party has taken advantage of some inherent vulnerability or disadvantage in their counterparty, the Full Court found that unconscionable conduct can exist purely on the basis of an attribute or feature of the parties’ commercial or contractual relationship.
• The primary judge found that Quantum Housing took advantage of the power conferred by the nature of the commercial and contractual arrangements with property investors and in doing so did not engage in unconscionable conduct as a vulnerability or disadvantage on the part of the investors was not exploited.
• Overturning that decision, the Full Court found that Quantum Housing’s conduct in deliberately misusing a superior bargaining position by dishonestly misleading commercial counterparties (who had no proven vulnerability other than their place in the commercial dynamic) was sufficient in the circumstances for the conduct to be declared unconscionable.
• This decision is likely to open the door wider for more allegations of unconscionable conduct to be made in commercial disputes as well as cases pursued by ASIC and the ACCC.
• This decision may not be the final word on the matter, however, as the primary judge held the court was bound by High Court authority to find that the conduct was not unconscionable and the Full Court interpreted the decision quite differently meaning the point could be tested further in the High Court.

Statutory prohibition on unconscionable conduct

There are wide prohibitions on engaging in conduct that is, in all the circumstances, unconscionable in connection with the supply or acquisition of goods or services (under the Australian Consumer Law (ACL)) and the supply or acquisition of financial services (under the Australian Securities and Investments Commission Act 2001 (Cth)).

The risks related to breaches of unconscionable conduct prohibitions are significant, including criminal liability and penalties – the maximum penalty that can be imposed for unconscionable conduct is $500,000 for individuals or up to $10 million or three times the benefit received or 10% of its annual turnover (whichever is greater), in the case of a body corporate.

These statutory prohibitions are not limited by the unwritten law of unconscionable conduct and they are applied by the courts on their terms, rather than pursuant to the body of case law that developed the concept of unconscionable conduct in other contexts. There have been a number of decisions in recent years regarding the application of statutory unconscionable conduct in different factual scenarios and the scope of their application has steadily been clarified.

For example, in 2018 the NSW Court of Appeal held that a wholesaler of satellite broadband services engaged in unconscionable conduct in its commercial price negotiations from a company that purchased bandwidth and user terminals from the wholesaler and onsold to end users. This is notable as for the most part statutory unconscionable conduct cases relate to actions affecting vulnerable consumers.

Quantum Housing – Factual matrix

Quantum Housing was an approved participant under the Commonwealth government’s National Rental Affordability Scheme (NRAS). Through that scheme, it received financial incentives to build and offer rental accommodation to low and middle income earners by way of a subsidy.

In turn, Quantum Housing entered into a number of agreements with private investors who wished to be involved in the NRAS by purchasing rental properties from an approved participant such as Quantum Housing. It was commonplace for a property manager to be appointed under those agreements to manage the investor’s property, to ensure ongoing qualification for the NRAS incentive.

Once the investors had entered into an agreement with Quantum Housing, they could not change to another approved participant. The investors were dependent on Quantum Housing to receive their incentives.

In 2017, Quantum Housing devised what was called a Roll Up plan. The ACCC alleged that the execution of that plan was an unconscionable contravention of section 21 of the ACL.

The Roll Up plan was designed to pressure the investors to obtain property management services from property managers identified by Quantum Housing.

This was achieved by

1. 1. issuing misleading correspondence to a number of investors, in an effort to unduly pressure them into changing to a property manager approved by Quantum Housing; and
   2. unilaterally requiring the investors’ property managers to pay a security deposit of $10,000 if the investor did not transfer management of their property to a property manager approved by Quantum Housing.

When the case came before the Court, the ACCC and Quantum Housing had already agreed that Quantum Housing had breached the statutory prohibition on unconscionable conduct (among other breaches) and a penalty amount for the Court’s consideration. However, the primary judge found that there was no evidence before him that there was any vulnerability or special disadvantage on the part of the investors and as a result Quantum Housing could not be found to have engaged in unconscionable conduct following recent High Court authority. If the primary judge had found that the conduct was unconscionable, his Honour said that the agreed penalty would have been too low.

The appeal concerned only the unconscionable conduct finding, not the quantum of the penalty. Quantum Housing did not participate in the appeal and instead, a contradictor was appointed to argue against the ACCC’s position.

Conflicting application of High Court authority

The primary judge based his decision on the High Court judgment in ASIC v Kobelt and held that the effect of Kobelt was that it is not sufficient that a dealing might be unfair or unreasonable. Rather, he held that unconscionable conduct involves dealing with those who are vulnerable in a way 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.

The Full Court disagreed. On examination of the decisions of each of the judges in Kobelt, it found that they had not found that unconscionable conduct could only arise where it related to the exploitation or victimisation of a vulnerable or disadvantaged person. The only exception being the Honourable Justice Keane, who explicitly said that it was limited to such circumstances.

Also, the Full Court noted that the High Court decided Kobelt on the basis of the case that was argued before it at that time. Namely, that the conduct presented to the court as being unconscionable was such because there had been an exploitation of a number of people with inherent vulnerabilities (in that the residents of remote communities in the Anangu Pitjantjatjara Yankunytjatjara Lands who were supplied credit by a storekeeper). Accordingly, it was not necessary for the High Court to approach the matter in another way.

In any event, the crux of each member of the High Court’s decision (again, save for Keane J) was that the focus is to be placed on the term ‘unconscionable conduct’. While that term requires conduct to be sufficiently grave before it can fall within its ambit, there is no obvious reason that there has to be some pre-existing disadvantage or special disadvantage or vulnerability.

By reference to the reasoning in Kobelt, the Full Court recognised that predation on vulnerability, taking advantage of disability or disadvantage or victimisation may be found in business and will often be unconscionable. However, that does not exhaust what business conduct may be unconscionable. The Full Court asked, rhetorically, why it is not also unconscionable to act in a way which:

1. 1. is systemically dishonest;
   2. is in bad faith in undermining bargaining;
   3. involves misrepresentation;
   4. amounts to commercial bullying or pressure and sharp practice;
   5. uses a superior bargaining position;
   6. is contrary to an industry code;
   7. uses significant market power in a way to extract an undisclosed benefit that will harm others commercially related to the counterparty.

The answer to the point at which such conduct is condemned as unconscionable may be a question for the High Court, however, given Quantum Housing is no longer involved in the proceedings it seems unlikely that this case will come before it.

Conclusion

Quantum Housing widens the already open door to claims of unconscionable conduct arising out of commercial relationships by clarifying that the counterparty does not need to have suffered from any inherent vulnerability or disadvantage for the claim to be made.

The facts leading to the decision in Quantum Housing are unique. However, the Full Court has, in framing the broad questions it did, left open the question of where lines will be drawn as to the way commercial parties can conduct themselves within the standard of business conduct that Australian law will tolerate.

It seems likely that in the wake of Quantum Housing there will be more claims (and perhaps more creative claims) alleging unconscionable conduct arising out of commercial relationships.

As successfully run cases, or ones where the conduct is sufficiently grave, may also bring with them the spectre of the involvement of a regulator and the possibility of a high pecuniary penalty, the risks around sharp commercial practices will loom large for any companies that choose to engage in them.

Authored by:

Edward Martin, Partner
James Macdonald, Senior Associate