What is “unconscionable conduct”? Australian court offers guidance

26 March 2021

​​​​In a judgment issued last week, the Full Federal Court of Australia shed partial light on the scope of the prohibition against “unconscionable conduct" under Australia's consumer protection law. 

While the Court offered no concrete definition of the term, it held that it does not require establishing the exploitation of some disadvantage or vulnerability (although this may often be the case) and could arise even where no such vulnerability exists.

The Australian Competition and Consumer Commission (ACCC), which brought the claim, has described the result as “an extremely important decision for all Australian consumers and businesses." The judgment may also be significant for businesses in New Zealand, given that an equivalent prohibition on unconscionable conduct has been proposed under the Fair Trading Amendment Bill. The case will therefore be of interest to those looking to understand the potential impact of the proposed amendments.

Summary of th​​e case

The facts

The defendant, Quantum Homes (Quantum), arranged investments in properties that qualified for financial incentives under the Australian Government's National Rental Affordability Scheme (NRAS). The NRAS offered tax and cash incentives to providers of new dwellings provided they were rented to low and moderate income households at below-market rates. Quantum was an approved participant under the NRAS.

Various private investors purchased rental properties from Quantum, under agreements which provided for sharing of the financial incentives under the NRAS. Property managers were typically appointed to manage the properties in a manner that ensured ongoing qualification for the NRAS incentive.

From 2017, Quantum implemented a scheme unde​​r which:

  • It recommended that investors terminate their agreements with existing property managers, and replace them with a select list of other “approved" property managers designate​d by Quantum. Quantum had a commercial relationship with the “approved" managers (but did not disclose that to the investors).
  • It also pressured investors into replacing their property managers by requiring that any non-approved property managers had to pay a “security deposit" of AUD$10,000. If property managers refused to pay the security deposit, Quantum refused to renew agreements with the investors.
  • Eventually investors who had not changed to a Quantum-preferred property manager were issued with notices stating that they were in default under their agreements with Quantum, which governed their entitlement to the incentive under the NRAS.

As a result, 260 investors terminated their arrangements with property managers and appointed one of Quantum's approved managers (unaware that Quantum had a commercial relationship with thos​​​e managers).

The claim

The ACCC alleged that Quantum had engaged in unconscionable conduct by exploiting its superior bargaining position. As the participant under the NRAS, it received the incentives, so investors were therefore depending on Quantum to receive their incentive (and could not, under the terms of the NRAS, change to another participant). Abusing this position to pressure investors into replacing their property managers with Quantum's preferred managers was, alleged the ACCC, unconscionable.

In June 2020, the Court declared that Quantum had made false or misleading representations, but was not satisfied that it had engaged in unconscionable conduct because it had not been demonstrated that the investors were at a disadvantage or had some vulnerability which had been exploited by Quantum (which the Court found to be an essential ingredient of unconscionable conduct).

Despite its overall success, the ACCC appealed that decision to clarify whether a special disadvantage was necessary to establish unconscionable conduct.

Appeal decision

On appeal, the Full Federal Court found that while exploitation of vulnerability will often be a feature of unconscionable conduct, that did not “exhaust the meaning" of unconscionable conduct. Rather, the Court preferred to avoid imposing narrow requirements on the term:

“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 Court described its task as being to assess whether the conduct “is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience and so be characterised as unconscionable".

The Court also rejected the notion that unconscionable conduct was “hinged in some way to the structural form of the equitable doctrine" – and noted that the history, text and structure of the relevant statute was contrary to such a conclusion.

In Quantum's case, the Court found that the conduct was unconscionable because it had engaged in “deliberate systematic conduct of misusing their superior bargaining position by dishonestly misleading commercial counterparties… and pressuring the investors by imposing entirely unjustified and unnecessary requirements upon the investors" and because the scheme was implemented to achieve “financial benefits which were surreptitious and undisclosed to the investors."

New Zealand impl​​​ications

The Fair Trading Amendment Bill, in its current form, includes an equivalent prohibition on unconscionable conduct in trade.1​ ​​​The Bill does not define unconscionable conduct, and courts will have to assess whether conduct is unconscionable on a case by case basis.

However, the explanatory note to the Bill does at least describe unconscionable conduct as “serious misconduct that goes far beyond being commercially necessary or appropriate" and the Bill lists certain factors which a Court may consider (including the balance of bargaining power, the use of standard form contracts, and the transparency of terms). The proposed provisions have been intentionally introduced to align with the Australian regime, and therefore the Quantum Homes judgment is likely to provide relevant guidance to a New Zealand Court approaching the new prohibition, if enacted. Unfortunately, the case will do little to mollify various submitters on the Bill who submitted that the standard imposed is imprecise and overly broad. The findings of the Full Federal Court (in particular, its comment that businesses “need no definition to assist them") will doubtless aggravate such concerns.

The Bill is currently awaiting its second reading (after being discharged from the Select Committee in August 2020 without amendment, despite extensive submissions). Bell Gully is closely monitoring the legislative process, including calls for the Bill to be referred back to Select Committee in order to further consider the extensive submissions received.

If you have any questions about the matters r​​aised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.

1The Bill will also amend the Fair Trading Act in other material ways, including extending the current restrictions on unfair contract terms to also apply to certain business-to-business contracts, and enhancing restrictions on uninvited direct sales (see our update on that h​​​​ere).​

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.