Unconscionability: The Pub Test is Back

8 APRIL 2021

The Full Federal Court has significantly expanded conduct that may be considered unconscionable in the recent decision of ACCC v Quantum Housing Group[1] which is likely to have wide ranging implications for consumer protections.

In a noteworthy judgment, the Full Court has overturned a decision from a single judge last year which applied what was widely accepted to be the traditional approach to unconscionable conduct, namely, relying on ASIC v Kobelt[2], that “unconscionable conduct involves dealing with those who are vulnerable in a manner that exploits that vulnerability”.[3]

Instead, the Full Court opted to throw open the definition of unconscionable by adopting a plain meaning, noting that “Business people understand such things, as do ordinary people. They need no definition to assist them.”[4]

Quantum Entanglement

ACCC v Quantum Housing Group involves an allegation by the Australian Competition and Consumer Commission (ACCC) that Quantum Housing Group (QHG) engaged in misleading and deceptive conduct in contravention of section 21 of the Australian Consumer Law (ACL).

QHG was a property management company that was in the business of managing investments in properties that qualified for incentives under the National Rental Affordability Scheme (NRAS). Under the NRAS, investors could hire a property manager to ensure that the property remained eligible for the scheme. In 2017, QHG devised a plan to encourage investors to transfer the management of their investment properties to QHG approved property managers (Approved Property Managers). However, in doing so, QHG did not disclose its pre-existing relationship with the Approved Property Managers to the investors, made representations to investors about the potential losses to expect if they did not appoint the Approved Property Managers and pressured investors to terminate their existing property management agreements and retain the Approved Property Managers.

On 9 June 2020, at first instance, the Federal Court ordered QHG to pay a $700,000 penalty for making false or misleading representations to investors in breach of ss 18(1) and 29(1) of the ACL. Another penalty of $50,000 was levelled at QHG’s director. However, the Court declined to make a finding of unconscionable conduct on the basis that no applicable vulnerability was being exploited.

On appeal, the Full Court confirmed the findings that QHG and associated persons and entities, by engaging in their plan, had, amongst other breaches:

• Knowingly taken advantage of their superior bargaining position given that QHG was the entity qualified for NRAS incentives;
• Deliberately made false representations to 450 investors which placed escalating undue pressure on them;
• Failed to disclose its commercial associations to the investors;
• Unilaterally shut out not-related property managers including by requiring them to pay a $10,000 security deposit; and
• Incorrectly threatened investors that they would lose eligibility if they did not switch to the Approved Property Managers.[5]
  
  

Unconscionable Conduct

Allsop CJ, Besanko and McKerracher JJ in a joint judgment, rejected the narrow interpretation of unconscionable conduct being that “at its highest, the vulnerability or disadvantage had to be a special disadvantage as would be required in the equitable doctrine of unconscionability in setting aside a transaction” or alternatively that there was the existence of a vulnerability that was intrinsically tied to the alleged conduct.[6]  This was the position as understood previously and articulated in cases like CBA v Amadio in which a bank was found to have taken advantage of parties’ lack of English and knowledge of financial products or in Kakavas v Crown Melbourne in which a casino was considered to have acted unconscionably by taking advantage of someone with a gambling problem.

Referring to the trial judge’s reliance on Kobelt, the Full Court stated at [78]:

“we reject the proposition that ratio or seriously considered obiter dicta of a majority of the High Court, indeed, of any justice of the Court in Kobelt (other than Keane J) requires in any case that for conduct to be unconscionable by reference to ss 12CB and 12CC of the ASIC Act (or ss 21 and 22 of the ACL) there must be found some form of pre-existing disability, vulnerability or disadvantage of which advantage was taken.”

Instead, the Court re-stated the relevant principle is a much broader sense:

“Unconscionable” is the language of business morality and unconscionable conduct is referable to considerations expressed and recognised by the statute. The word is not limited to one kind of conduct that is against or offends conscience. Surely to predate on vulnerable consumers or small business people is unconscionable. But why is it not also unconscionable to act in a way that is systematically dishonest, entirely in bad faith in undermining a bargain, involving misrepresentation, commercial bullying or pressure and sharp practice, using a superior bargaining position, behaving contrary to an industry code, using significant market power in a way to extract an undisclosed benefit that will harm others who are commercially related to the counterparty? The proposition that such conduct (not all of which might be seen to be present here) is not unconscionable by an Australian statutory business standard of conscience because the counterparty to the business transaction suffered from no relevant pre-existing disadvantage, disability or vulnerability (other than, perhaps, having a decent degree of trust and faith in its business counterparty’s honesty and good faith) is difficult to accept, unless one posits a narrow defined meaning of “unconscionable” that remains hinged in some way to the structural form of the equitable doctrine as expressed in cases such as Kakavas 250 CLR at 439–440 [161]. The history, text and structure of the Act is contrary to such a conclusion. It is not to be derived from the meaning of the word “unconscionable”.

Implications

ACCC chair Rod Sims has welcomed this “extremely important decision”, noting that the norms of acceptable commercial behaviour is the correct approach to finding statutory unconscionability as opposed to being required to demonstrate the exploitation of a particular vulnerability.

While the full implications of this development will not likely be known without further judicial guidance from the court, there is no doubt that the expanded interpretation of the statutory unconscionability will encourage further litigation and will catch out many businesses that fail to adapt to the new required standard.

[1] Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40

[2] [2019] HCA 18

[3] [29]

[4] [91]

[5] [4]

[6] [2]

[7] [91]