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What is "unconscionable conduct"? The Australian definition morphs again

Home Insights What is "unconscionable conduct"? The Australian definition morphs again

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Contributed by: Troy Pilkington, Joe Edwards, Sarah Keene and Victoria Piatov

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Published on: April 20, 2021

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As we identified in our Alert last week, the Fair Trading Amendment Bill (Bill) will be considered when Parliament next sits in May, in what will be the Bill's second reading. 
 
One of the key changes introduced by the Bill will be the introduction of a prohibition on "unconscionable conduct" in trade. We have long had concerns that an imprecisely scoped prohibition on unconscionable conduct will inevitably risk morphing into a de facto prohibition on unfair conduct - which, is uncertain and subjective - every person has a different view of what unfairness is.
 
A number of submissions raising similar concerns were made to the Economic Development, Science and Innovation Select Committee (Committee) following the Bill's first reading. Unfortunately, on 12 August 2020, the Bill was discharged by the Committee without a report from the Committee, and so will be moving to its second reading without the benefit of amendments recommended by the Committee in light of those submissions. 
 
As things currently stand, it seems New Zealand will need to turn to the case law from Australia for guidance on what type of conduct is intended to be captured by a prohibition on unconscionable conduct in trade – and Australia itself has suffered from a shifting and broadening legal standard for the definition of unconscionable conduct.   

The latest in that long line of cases came on 19 March 2021 when the Full Federal Court of Australia, over turning the Federal Court, found that the scope of the "unconscionable conduct" prohibition does not require establishing that the offender took advantage of, or exploited, a pre-existing disadvantage, disability or vulnerability of the counterparty.1 This broadens the already wide scope of unconscionable conduct in Australia. 

Specifically, while the Federal Court had held that unconscionable conduct requires dealing with those who are vulnerable in a manner that exploits that vulnerability, the Full Court disagreed – noting that while the so-called victim of the conduct will often bring to the relationship an attribute of vulnerability, it is not a requirement of statutory unconscionability that such vulnerability exists. 
 
Rather, the Full Court said that to determine whether conduct falls within the ambit of statutory unconscionability requires an evaluation of the impugned conduct, to assess whether it is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience and so be characterised as unconscionable, and that predation on vulnerability, taking advantage of disability or disadvantage and victimisation does not exhaust the meaning of unconscionability. 
 
The Full Court suggests, through a series of rhetorical questions, that in addition to predating on vulnerable consumers or small businesses it may also be unconscionable to act in a way that:

  • is systematically dishonest;

  • is entirely in bad faith in undermining a bargain;

  • involves misrepresentation;

  • involves commercial bullying or pressure and sharp practice;

  • uses a superior bargaining position;

  • behaves contrary to an industry code; and

  • uses significant market power in a way to extract an undisclosed benefit that will harm others who are commercially related to the counterparty.

Australia Competition and Consumer Commission Chair Rod Sims said that the decision is an extremely important decision for all Australian consumers and businesses – noting: "Because this decision makes it clear that it is not necessary to demonstrate exploitation of vulnerability, it extends the reach of the statutory unconscionable conduct prohibition so that it will protect more consumers and small businesses against egregious conduct by corporations".2

New Zealand significance

A driving force behind the impetus for a prohibition on "unconscionable conduct" in New Zealand has been a desire for harmonisation with Australia. Given that, and the fact that no additional clarity has been proposed for the Bill's drafting, it seems inevitable that this decision will also have implications for New Zealand's law when the Bill is enacted. 
 
This is likely to open the door not only for more unconscionable conduct cases, but also more uncertainty and subjectivity in New Zealand law, given there will not be a requirement for any identifiable disadvantage or vulnerability (which will mean this new prohibition is a further departure from the long-standing equitable doctrine of unconscionability in New Zealand).
 
Inevitably there will be disagreements between businesses as to:

  • what is "bad faith" or "sharp practice";

  • whether "market power" has been used to extract a benefit;

  • whether behaviour is "dishonest", or

  • whether community expectations or acceptable norms have been transgressed.

Whether that is an appropriate level of certainty for a new criminal prohibition was not a question addressed by the Committee.  

Next steps

Russell McVeagh will provide further updates on the progress of the Bill as it advances. In the meantime, if you have any questions on the implications for your business, please contact Joe Edwards, Troy Pilkington, or Sarah Keene.

 

FOOTNOTES

  1. Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40.
  2. https://www.accc.gov.au/media-release/full-federal-court-ruling-provides-vital-clarification-of-the-law-on-statutory-unconscionable-conduct.
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