If you think that unconscionability is just a worry for banks, and only when they are dealing with someone who's drunk, illiterate, or aged as in Amadio, think again.[1] The ACCC has been pursuing test cases on unconscionability in various industry sectors, the most recent of which in February 2002 indicated that unconscionability is much wider and much more commercially potent than that. A bank or other commercial party can now be at risk of unconscionability regulation in ways which would not have seemed possible a few years ago, including situations where both parties are well-advised commercial entities. The Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’) both have general unconscionability provisions, so the ACCC test cases are relevant for financial services advice and litigation too. In addition, the amplified provisions on unconscionable conduct and small business in the Trade Practices Act now appear in the ASIC Act after the Financial Services Reform Act, as do new provisions regulating unconscionable conduct by financial services licensees under the Corporations Act. The old and new unconscionability provisions have application to contexts as various as financial services advice and conduct, banking transactions, ‘book up’ credit arrangements,[2] insurance contracts and advice to disadvantaged groups (eg Indigenous communities - ASIC has already won a test case on this), leasing renewals, medical and health service providers, franchising arrangements, and many other forms of commercial and business conduct.
The key practical messages are that commercial parties are being required to take account of the interests of others to a greater degree than previously, that the ground has moved under commercial parties and their advisers in the last 12-18 months and especially after the ACCC test cases and the financial services reform laws, that many more commercial transactions than previously must be looked at in that new light to avoid new legal liability, and that ‘take it or leave it’ or ‘i've got you over a commercial barrel’ situations need to be more carefully monitored than ever before. Advisers who do not change their mindsets for advice and update their working knowledge of unconscionability regulation to include the latest and evolving possibilities risk being negligent in advice, transactions, and litigation both for and against commercial parties.
New developments in unconscionability, good faith, and statutory reform of trade practices and financial services regulation make it easier to hold banks and other corporations in the private and public sectors accountable in general and to overturn or rewrite contracts and securities in particular. In brief, the statutory and non-statutory forms of unconscionability are undergoing revision and expansion simultaneously across all of these dimensions or alternatively in conjunction with these related developments:
| 1) | Potential expansion of the special protection for spouses under the doctrines in Garcia[3] and Yerkey v Jones[4] to include other relationships based on trust and confidence, in both family contexts (eg husbands,[5] ex-spouses,[6] de facto partners,[7] in-laws,[8] siblings,[9] children, extended family, friends etc) and commercial contexts (eg employer-employee relationships[10]); |
| 2) | Expansion of the notion of ‘special disadvantage’ for the purpose of unconscionability under the general law and cognate provisions in the Trade Practices Act and the ASIC Act to include situational disadvantage arising from a party’s legal and financial circumstances or from an informational disadvantage,[11] as well as from personal characteristics and circumstances (eg illiteracy, age, and language difficulties); |
| 3) | Potential use of doctrines of duress, undue influence, and unconscionability by corporations as victims to avoid obligations like contracts (eg corporate guarantees) with third parties (eg banks), through the unconscionable and unfair treatment or the special disadvantage of a major corporate officer (eg a controlling director) being sheeted home to the company to the third party’s detriment;[12] |
| 4) | Expansion of the indicia of unconscionability for the purpose of section 51AC of the Trade Practices Act and now section 12CC of the ASIC Act beyond the conventional indicia of unconscionability under the general law, potentially widening the range of corporate and commercial conduct subjected to this standard; |
| 5) | Ongoing debate about whether unconscionability under section 51AA of the Trade Practices Act and section 12CA of the ASIC Act embraces unconscionability in the first-order sense of the underlying principle according to which the law of equity intervenes; the second-order sense of the touchstone for specific equitable doctrines and remedies such as imposing a constructive trust, finding economic duress, creating an estoppel, allowing relief against forfeiture, or construing a contractual clause as an unenforceable penalty clause; or the third-order sense of the specific equitable cause of action associated with doctrines like inequality of bargaining power, unconscionable dealings, and taking advantage of someone’s special disadvantage – the latter being the most common candidate under the current law;[13] |
| 6) | The recent spate of ACCC test cases on unconscionability in the retailing, franchising, banking, and medical services sectors;[14] |
| 7) | Expansions in ‘good faith’ jurisprudence in a range of commercial contexts, not limited to government tendering, and the yet to be explored interaction between good faith under the general law and good faith under section 51AC of the Trade Practices Act and section 12CC of the ASIC Act; |
| 8) | Recent cases testing the outer boundaries of liability for legal advisers who wrongly advise or facilitate trade practices breaches, or who wrongly advise personal or corporate guarantors or alternatively financiers;[15] and |
| 9) | Three landmark Anglo-Australian cases in the last decade on wives and guarantees, culminating in the House of Lords’ recent decision in Royal Bank of Scotland v Etridge,[16] which might become a benchmark for the balance of responsibilities between banks and solicitors advising guarantors as well as for the areas of advice for solicitors undertaking this advisory role – notwithstanding differences in English and Australian law and banking practice.[17] |
The judicial and legislative development of sections 51AA, 51AC, and 52 of the Trade Practices Act mirrors that Act’s transformation from an Act primarily regulating anti-competitive conduct and abuse of market power to one which equally regulates commercially unfair, self-interested, and opportunistic conduct whatever its impact on competition and markets.[18] The recent extension of unconscionability to embrace “situational” disadvantage[19] based on a party’s legal and financial position as well as “constitutional” (or inherent) disadvantage arising from a person’s health or lack of understanding has as much potential to interrupt corporate and commercial dealings as the expansion of indicia of statutory unconscionability and ACCC test cases on its scope. The expanded indicia of unconscionability in section 51AC clearly extend unconscionability even further beyond its orthodox equitable boundaries and its meaning in section 51AA.[20]
Inherent personal difficulties relating to language difficulties, infirmity, and other hardships which characterise the link between unconscionability and notions of special disability or special disadvantage in landmark cases like Blomley v Ryan[21] and Commercial Bank of Australia Ltd v Amadio[22] do not exhaust unconscionability’s reach in banking and commercial contexts.[23] That reach extends to conduct between commercial parties, including corporations which are in a disadvantageous position relative to governments and government business enterprises.[24] While the immediate concern after Garcia is whether the familial relationships of trust and confidence which might attract unconscionability’s intervention in financing and security contexts extend beyond wives to include husbands, heterosexual and homosexual co-habitees, and extended family and friends, a wider concern is whether unconscionability can strike at commercial relationships involving trust and confidence (eg banker-customer, landlord-tenant, and employer-employee relationships).[25] As outlined below, there is also the possibility that corporations might avail themselves of doctrines like unconscionability, undue influence, and duress.
Strong judicial support exists for extending unconscionability in section 51AA beyond its conventional equitable boundaries, with clear potential application to a broad band of commercial conduct beyond Amadio-like situations and to dealings between commercial parties in the public and private sectors.[26] That development has implications for cognate unconscionability provisions like those in the ASIC Act. The relocation of unconscionability in relation to ‘financial services’ from the Trade Practices Act to the ASIC Act is now complete.
Some commentators believe that the post-CLERP corporate law reforms are manageable in practice in normal circumstances for directors and officers, and that the more troublesome areas of expanding regulation lie elsewhere, such as in the expanding scope of unconscionability regulation. Consider, for example, former TPC Commissioner Bob Baxt’s comments on this:[27]
The entrepreneur, in my view, should be able to act with some degree of confidence provided we do not embrace statutory reforms of a rather eccentric nature. They will know that in essence whilst any decision taken can in appropriate circumstances be second guessed; provided they have taken relevant advice, balanced the appropriate interests that need to be balanced in the circumstances, and avoid at all costs the possibility that they may gain personally from the transaction (unless they have obtained clear and independent approval of that action from directors or shareholders), they need not lose too much sleep.
Greater danger, it seems, lies in the possibility that the general law of negligence, the law of unconscionability, and other consumer protection laws, will expose directors to a range of actions by ‘busy bodies’ and others in circumstances that were not countenanced even 20 years ago . It is clear that we must not sacrifice the interests of those who are the more vulnerable members of society (including stakeholders or potential stakeholders in companies such as employees) simply to pursue wealth; but the more we expose the company director, and others, to claims by persons who have no financial or other direct interest in the activities of the corporation without linking those actions to specific obligations imposed by the law, the more we expose the corporate entrepreneur to the kind of risks that will make it less and less attractive if not impossible for that person to take risks in Australia.
Regulating unconscionable, unfair, and other forms of self-interested conduct is a mushrooming area of statutory and judge-made regulation and also an area of growing concern for directors of government and non-government corporations alike. New developments in unconscionability, good faith, and statutory reform of trade practices and financial services regulation make it easier to hold banks and other corporations in the private and public sectors legally accountable. A number of statutory and non-statutory developments combine to limit abuse of corporate and public power and self-interested behaviour by corporations and governments in ways which might not have been imagined a decade ago. Particular interest focuses on procedural fairness, unconscionability, good faith, and other fairness-based arguments as well as rights-based arguments, in situations where the law enhances the legal imperative for one party – often a governmental or business organization wielding significant public or commercial power – to take account of the interests of another party.
Until recently, the law has adopted an orthodox and politically liberal laissez faire approach to corporate and commercial self-interest, stepping in only at the extremes to prevent clear abuses of power which result from a stronger party acting in their own economic self-interest, as in conventional situations of unconscionability involving a stronger party taking advantage of a weaker party’s illiteracy, stupidity, language difficulties, drunkenness, need for advice, or other personal indicia of being under a ‘special disadvantage’ a la Amadio.[28] However, the introduction of qualitatively different statutory indicia of unconscionability in section 51AC of the Trade Practices Act, together with the recent expansion of the notion of ‘special disadvantage’ for the purpose of section 51AA to include situational unconscionability stemming from a weaker commercial party’s legal and financial circumstances, both mean that corporations face new trade practices and financial services regulatory risks when they effectively hold someone over a barrel and extract a commercial concession. The gap between sharp conduct and unconscionable conduct has narrowed in the last 12-18 months.
Moreover, the latest round of financial services reform changes add new unconscionability provisions to the ASIC Act and the Corporations Act, including an equivalent of section 51AC of the Trade Practices Act in the ASIC Act (new section 12CC) to regulate unconscionable conduct in connection with small business and financial services. Recent publications like ASIC’s report on “book up” store credit arrangements in some rural and Indigenous communities illustrate the potential use of unconscionability laws to regulate the financial services industry. So, the recent spate of ACCC test cases across various industries (eg banking, franchising, retailing) have implications for clients and advisers involved in financial services under the equivalent and new unconscionability provisions in the ASIC Act.
Commercial operators are likely to face future litigation based on the recent extension of the general law on unconscionability (which is encapsulated to varying degrees now in the Trade Practices Act and other federal Acts) to regulate unconscientious exploitation of individuals or even other commercial parties who are in a weaker bargaining position and who might be characterised as suffering from a special disadvantage, which might now be financial, legal, or informational in nature (and hence more relevant in commercial contexts, as distinct from a personal disadvantage like illness or drunkenness, which is usually a remote consideration in most commercial transactions).[29] This expansion of both the reach of unconscionability and its increasing regulatory manifestations now in the trade practices, financial services, and corporate laws has equally significant implications for non-government corporations and regulators too.[30]
Section 51AA(1) of the Trade Practices Act 1974 says:
A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
The clear policy objective behind the introduction of this addition to consumer protection laws is not so much to create a new head of consumer protection but rather to extend the significant Trade Practices Act remedies to conduct which the common law and equity treat as "unconscionable".[31]
The same drafting technique more recently appears in section 12CA(1) of the ASIC Act:
A corporation must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
The same drafting technique has also been used in fair trading legislation in Victoria. Section 7(1) of the Fair Trading Act 1999 (Vic) says:[32]
A person must not, in trade or commerce, engage in conduct which is unconscionable, within the meaning of the unwritten law, from time to time.
Of course, the dynamic question concerns the meaning of unconscionability under judge-made law. The courts’ answer to that question is evolving beyond what Parliament probably intended when enacting provisions like section 51AA, subject to what the High Court finally decides about the statutory scope of unconscionability in the Berbatis appeal. The orthodox view of section 51AA is that it made amenable to Trade Practices Act remedies conduct which was unconscionable in the sense described in cases like Commercial Bank of Australia Ltd v Amadio.[33] On this view, the scope of unconscionable conduct regulated by the section would be confined to the equitable notion of unconscionability founded on one party to a commercial transaction being under a ‘special disability’ or a ‘special disadvantage’ and the other party taking advantage of that unconscientiously.
According to the Explanatory Memorandum accompanying section 51AA's introduction as law, section 51AA ‘embodies the equitable concept of unconscionable conduct as recognised by the High Court in Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 and Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447’.[34] It focuses clearly on the sense of unconscionability which envisages a party in a superior position taking advantage of a party under some special disability or special disadvantage, but also recognises that those categories cannot be described or catalogued ‘exhaustively’.[35] It contemplates that ‘the equitable principles of unconscionable conduct do not embrace conduct which, with nothing more is merely unfair or unreasonable, or which merely amounts to a hard bargain’.[36]
Importantly, it acknowledges that ‘(s)ection 51AA is not intended to extend the principles of unconscionable conduct beyond those recognised by the courts of this country under the laws of equity’.[37] Rather, the rationale for the introduction of section 51AA lies in the ‘advantages of providing a statutory prohibition for conduct which is already dealt with by equity . in the availability of remedies under the [Trade Practices] Act’.[38] Finally, the reference in section 51AA to the meaning of ‘conduct that is unconscionable within the meaning of the unwritten law’ is envisaged as being a reference to ‘the non-statutory law (ie the law which is not contained in statutes, instruments under statutes or prerogative instruments) as developed by the courts of common law and equity’.[39]
Strictly speaking, Sir Anthony Mason's extra-judicial exposition of the law of unconscionability might seem to embrace some of the wider senses of unconscionability while remaining grounded in the traditional equitable category of relief from unconscionable behaviour as a distinct ground of equitable relief:[40]
Relief against unconscionable bargains is granted when a transaction, considered in the light of the circumstances in which it was entered into, is so unconscionable that it cannot be allowed to stand. The power to grant relief on this ground was in the past largely confined to cases in which the party seeking relief was a person suffering from some special distinct disability or disadvantage, eg the expectant heir, or the inebriated plaintiff in Blomley v Ryan who was incapable of forming a rational judgment. But the principle according to which relief is granted is not so limited. What is required is that there be an unconscientious taking advantage of the disability or disadvantage of the person in the weaker bargaining position by procuring or retaining the benefit in question in a way that is both unreasonable and oppressive. .
Whether a plaintiff is entitled to relief on the ground of unconscionable conduct in the sense described above is very largely a question of fact and of value judgment. The cases provide little in the way of specific guidance, offering only very wide general propositions.
Prior to his elevation to the Federal Court bench, Professor Paul Finn identified at least four different and possibly overlapping meanings for unconscionability in the law. First, ‘unconscionability’ serves ‘simply as an organising idea informing specific equitable rules and doctrines which do not in terms refer to, or require an explicit finding of, unconscionable conduct’ such as ‘equity’s rules on stipulations as to time and notices to complete’.[41] The second meaning of ‘unconscionability’, which Finn says ‘involves a particularisation of the first’, concerns specific equitable doctrines like estoppel, unilateral mistake, relief against forfeiture and undue influence which are all predicated upon an explicit finding of unconscionable conduct.[42] Third, ‘unconscionability’ also refers to a specific ground of equitable relief, one in which equity ‘crystallises one species of unconscionable conduct in a discrete doctrine – that of unconscionable dealing’.[43] Finally, ‘unconscionability’ is sometimes used to establish a cause of action directly in giving ‘direct legal effect to a finding that a person has acted unconscionably’.[44] Related to or flowing through these four meanings is the notion of ‘unconscionability’ as a unifying concept or underlying rationale for a variety of equitable doctrines including the doctrine of penalties, economic duress, constructive trusts, restitution or unjust enrichment, and so on. Here, the primary rationale of equity to ensure that someone comes to equity with clean hands and otherwise acts in good conscience translates into a variety of more specific doctrines, not all of which necessarily ‘are united by the idea that equity will prevent an unconscionable insistence on strict legal rights’ even though they are clearly related to that central idea.[45]
Ongoing debate about the scope of section 51AA has troubled courts as well as the ACCC.[46] Federal Court decisions have opened up the possibility that the scope of unconscionable conduct under section 51AA might extend beyond Amadio and Yerkey v Jones contexts and apply also to conduct between commercial parties who might usually be thought to be operating at arm’s length.
While different courts and commentators frame this point in different ways, the reality is that unconscionability is not a mono-dimensional concept under judge-made law. It has at least three different levels of meaning. At the widest level, it enshrines the basic principle underlying much or all of the law of equity. At another level down, it also operates as the unifying rationale for a discrete set of equitable actions, such as duress, estoppel, relief against forfeiture, imposition of constructive trusts, and the doctrine of penalties. At a third level, it is most often associated with a distinct ground of equitable relief based on unconscionable dealing, inequality of bargaining power, and special disadvantage. While conventional wisdom associates section 51AA (and its equivalents in other Acts) with that third level of meaning, the latest ACCC test case leaves open the possibility that such provisions might embrace unconscionability at higher levels of meaning too.[47]
In addition, the constitutional validity of section 51AA (and, by implication, cognate unconscionability provisions like section 12CA of the Australian Securities and Investments Commission Act 1989 (Cth)) has been raised and settled judicially, at least for the time being.[48]
Like its counterpart for unconscionable small business transactions in section 51AC of the Trade Practices Act, the new section 12CC in the ASIC Act regulates unconscionable conduct concerning financial services in small business transactions. It says in section 12CC(1):
A person must not, in trade or commerce, in connection with:
a) the supply or possible supply of financial services . to another person (other than a listed public company); or
b) the acquisition or possible acquisition of financial services . from another person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
New section 991A of the Corporations Act regulates unconscionable conduct by financial services licensees and states:
991A Financial services licensee not to engage in unconscionable conduct
(1) A financial services licensee must not, in or in relation to the provision of a financial service, engage in conduct that is, in all the circumstances, unconscionable.
(2) If a person suffers loss or damage because a financial services licensee contravenes subsection (1), the person may recover the amount of the loss or damage by action against the licensee.
(3) An action under subsection (2) may be begun at any time within 6 years after the day on which the cause of action arose.
(4) This section does not affect any liability that a person has under any other law.
The other main trade practices provision imposing standards of commercial morality on companies, section 52 of the Trade Practices Act, states: ‘A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. It has equivalents affecting financial services regulation too.
These provisions have a demonstrated capacity to impose obligations on commercial parties to take account of the interests of others in business and consumer dealings. As the Trade Practices Act has extra-territorial application, the rise of transnational corporate activity needs to be kept in mind too. Some corporate officers and advisers who are familiar with international competition and anti-trust regulation already express wonder that they can be liable even if their corporate conduct is not monopolistic, anti-competitive, or negligent. Many of them would be equally incredulous if told that trade practices liability might attach to dealings between two well-advised commercial parties if the stronger party is able to extract a commercial concession from the weaker party because they have them over a barrel, at least if certain factors are present (such as situational disadvantage).
In recent times, Australian courts have started to develop a range of fairness-based legal limits on business behaviour. In different ways, these developments all focus on requiring commercial enterprises to have regard to the interests of others, at least to some degree, rather than simply acting in their own financial self-interest or otherwise resting on whatever rights they have locked up in a contract drafted in their favour. For example, many of the consumer protection provisions in Australia-wide trade practices and fair trading laws have this effect. Standard banking, insurance, and other business contracts usually are not completely neutral and evenly balanced documents, because they are drafted to protect the position of the business, whatever other concessions or benefits for the customers might be enshrined in them. Some cases have raised the possibility that notions of fairness, reasonableness, and good faith might even dictate how parties exercise their contractual rights, so that they must always exercise those rights for good rather than ulterior, capricious, or opportunistic reasons. In other words, no matter how good the drafting or what kind of consent is signed, the law might condition the exercise of contractual rights so that they are exercised fairly or at least not in exploitative ways.[49]
In Garry Rogers (Aust) Pty Ltd v Subaru (Aust) Pty Ltd,[50] Finkelstein J conflates issues of good faith, reasonableness, and legitimate interests, and also equates ‘unconscionability’ (under section 51AC of the Trade Practices Act) with ‘unfairness’ in a way which is vague but not completely open-ended:
In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.
. I do not regard the refusal by the first respondent to withdraw its notice of termination as unconscionable conduct. I take as the measure of unconscionability, conduct that might be described as unfair.
That last sentence should not be taken literally or out of context, as there is not yet any blanket rule in law that unfairness simply equates to unconscionability, although undoubtedly fairness-related doctrines inform both statutory and judge-made notions of unconscionability. Of course, broad standards of fairness are informing other regulatory moves too. For example, one recommendation from the recent review of the banking code of practice suggested incorporating a promise to act fairly and reasonably towards consumers and small business in banking transactions.
Australian law has started to imply obligations to treat another party fairly and in good faith in a wide variety of commercial situations ranging from franchises and motor dealerships to public tenders and national sporting competitions, although the High Court is yet to rule definitively on this development.[51] High Court Justice Ian Callinan has labeled as ‘far-reaching’ the legal contentions ‘whether both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith; and the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right’.[52] Still, Australian courts below the level of the High Court are also starting to apply laws regulating unconscientious conduct to situations where a stronger commercial party exploits the weaker position of another commercial party who is disadvantaged by the combination of legal, financial, and informational circumstances in which they find themselves.[53]
Be aware of the cross-over between good faith and unconscionability in both the Trade Practices Act and now the ASIC Act too, in their provisions regulating small business (ie s51AC of the Trade Practices Act and s12CC of the ASIC Act). Both include notions of good faith in their statutory indicia of unconscionable conduct. It is unclear whether these statutory references to ‘good faith’ mean exactly the same as ‘good faith’ in contract law. After all, these small business provisions already extend the indicia of unconscionability beyond its meaning under the general law. It is possible that the ‘good faith’ obligation might apply to post-execution conduct too. To what extent can notions of unconscionability, good faith, reasonableness, and other fairness-based doctrines condition the exercise of contractual rights and powers across the public and private sectors?[54] Future corporate and commercial litigation will test the boundaries of that possibility too.
Moreover, the linkage between good faith and what goes beyond a party’s legitimate interests as indicia of statutory and non-statutory forms of unconscionability has some resonance with the latest judicial thinking on implied terms of good faith, with strong implications for novel arguments about the outer boundaries of contractual and non-contractual causes of action.[55]
Two recent ACCC test cases on unconscionability are significant in testing the boundaries of unconscionability regulation in ways which resonate too for equivalent regulation of financial services and financial services licensees.
The sense of unconscionability under the general law and section 51AA of the Trade Practices Act which curbs unconscientious use of superior bargaining power to take advantage of someone suffering from a special disability or special disadvantage now includes a wider class of commercial conduct, in light of the expansion of the notion of ‘special disadvantage’ to cover “situational” disadvantage arising from the matrix of legal and commercial circumstances rather than from any inherent infirmity or inadequacy.[56] In Louth v Diprose,[57] Toohey J emphasised that courts are ‘exercising an equitable jurisdiction according to recognised principles’ and ‘are not armed with a general power to set aside bargains simply because, in the eyes of the judges, they appear to be unfair, harsh or unconscionable’. In the landmark 2000 Federal Court decision in ACCC v CG Berbatis Holdings Pty Ltd,[58] French J indicated that unconscionability has a primary meaning as the central principle underlying much of equity law as well as a secondary meaning as a distinct ground of equitable relief, most often associated with the notions of unconscionable dealing and specially disadvantaged parties (as in Amadio). French J also decided that unconscionability as a ground of relief can embrace ‘situational’ unconscionability arising from differences in the legal and financial positions of parties as well as ‘constitutional’ (or inherent) unconscionability stemming from inherent personal features like language difficulties, illness, drunkenness, illiteracy, need for explanation, and so on. Berbatis and subsequent cases discuss the application of s 51AA and/or s 51AC to contexts like retail leasing, franchising, and banking.
On 27 June 2001, the Full Federal Court overturned French J's finding of unconscionability under s 51AA of the Trade Practices Act against a landlord for unconscientious exploitation of tenants whose circumstances put them in a position of ‘special disadvantage’.[59] French J decided that the particular matrix of circumstances involving one of three sets of tenants led to them being under a ‘special disadvantage’ in the situational sense. He decided that the tenants were in a vulnerable position vis-à-vis the landlord because they needed a new or extended lease to maximise the sale price, they needed to sell so that they could look after their sick daughter, they were unable to look after their own financial interests because of their preoccupation with their daughter’s illness, the landlord and its agents knew all of this, and so making an extension or renewal of the lease conditional on the tenants’ abandonment of genuine claims in ancillary proceedings against the landlord amounted to extracting an irrelevant commercial concession from parties effectively ‘over a barrel’ and hence was exploitative. The Full Federal Court simply reached a different view on the facts about the latter aspect. The Court said nothing directly about the new idea of ‘situational’ disadvantage.
In short, while the appeal decision will make it harder to characterise landlord-tenant conduct as unconscionable, it does not directly counter the idea that unconscionable conduct can arise between commercial parties because of ‘situational’ disadvantage. So, it will still be necessary to consider this form of unconscionability in relation to extracting commercial concessions, settling disputes, etc. In addition, the case was fought on the basis of s51AA and not s51AC (which was not operative at the time), and s51AC clearly is wider in scope than Amadio-type unconscionability and clearly extends to "situational" disadvantage arising from the matrix of commercial and legal circumstances of the parties, at least in terms of the listed statutory indicia for unconscionability.
In a later ACCC test case in February 2002 involving landlords and commercial tenants, the Full Federal Court considered whether a landlord acted unconscionably by insisting on receiving a payment of $70,000 to give a lease to a tenant who lost the right to renew their lease through their own fault. Executive Bloodstock bought a Western Australian lunch-bar business next to a service station from New York Fries for $205,000. The existing lease had an option for an additional seven-year term which needed to be exercised by the incoming tenant a few months after taking over the business. The tenant’s corporate managers failed to exercise the option in time. After the landlords demanded an additional payment of $70,000 to renew the lease, the tenant eventually paid and accepted an assignment of a new lease from a company associated with the landlord, Samton Holdings. The ACCC launched another of its unconsiconability test cases against the landlord.[60] The trial judge accepted that the tenant was under a special disadvantage but concluded that, while the landlord’s conduct might be criticized as opportunistic, it fell just short of being unconscionable. The appeal court went even further and decided that the tenant was not under a special disadvantage for legal purposes at all.
This latest ACCC test case result contains both good news and bad news for commercial landlords, agents, and anyone else involved in property or leasing deals as an owner or their adviser. The good news is that this is the second major win in successive ACCC test case appeals in the Federal Court for landlords charged with acting unconscionably towards commercial tenants. In addition, it is now clear that simply being in an unequal or vulnerable commercial bargaining position as a tenant and taking advantage of a natural bargaining advantage as a landlord will not be enough to show that a landlord is acting unconscionably. Something more exploitative needs to be shown. Even assuming that the tenant was under a special disadvantage because of his financial position, that the landlord knew this, and that many fair-minded people might condemn extracting a $70,000 concession to restore him to the financial position lost through his mistake in not exercising his option in time, this was not enough for the judges to find that the landlord acted unconscionably. What clearly made the difference and underpinned the court’s judgment in the Samton Holdings appeal was that the tenant’s disadvantaged position stemmed from the tenant’s own mistake. Moreover, the tenant had no legal right to force the landlord to permit the option to be exercised late. The tenant was asked to pay a premium to regain the financial advantage lost through the tenant’s own fault, and this was done legally and in a way which avoided illegal payment of key money. The tenant made a commercial judgment that this was in the organisation’s business interests in the circumstances.
The bad news for landlords is that the result could well be different in a case where the weaker party has not lost rights through their own fault or where the conduct complained of does not relate to that party trying to retrieve their lost position but rather relates to something else. In addition, commercial and professional assessments of landlords and their advisers beforehand and the judgments of courts in hindsight about exactly what is and is not unconscionable behaviour are inherently evaluative and value-laden and not susceptible to black and white guidelines. These cases always depend on the matrix of circumstances. Moreover, this latest appeal makes it clear that the unconscionability provisions in the Trade Practices Act cover a wider class of commercial behaviour and circumstances than previously assumed by the Parliament which enacted them. This has clear implications for equivalent unconscionability provisions regulating financial services.
In particular, commercial parties who are usually in an inherently stronger bargaining position, such as landlords, could fall foul of these laws not only when dealing with someone under an inherent disadvantage because of something personal to them like a lack of education, drunkenness, or illness (which is rare), but also when dealing with someone in a weaker commercial position because of the legal and financial situation in which they find themselves (which is more common). Of course, the High Court is yet to have the final word on these developments.
There are already wider implications of these developments for directors, even if the High Court never refashions the notion of unconscionability in the way outlined above. In addition, a range of post-CLERP developments continue to affect corporate financing and security arrangements, including dealings between state corporatised entities and outsiders like financiers and contractors. Anomalies in the law of directors’ and officers’ duties, ultra vires, indoor management assumptions, and dealings with outsiders across the Corporations Act, the Commonwealth Authorities and Companies Act 1997 (Cth), and state corporatisation Acts regulating government business enterprises in New South Wales and Queensland affect the liability of corporate officials as well as the assumptions of those who deal with them. In both banking and commercial contexts, this critically affects an outside financier’s or contractor’s capacity to maximise reliance on legal ‘indoor management’ assumptions as well as other safeguards like directors’ resolutions and shareholder approval.
If, as Commonwealth Bank v Ridout Nominees accepts, ‘to a limited extent a corporation may itself suffer from a ‘special disadvantage’ and ‘what might in shorthand be referred to as ‘Amadio’ unconscionability will be available in respect of a corporation in some circumstances’,[61] there will be flow-on consequences for directors’ duties[62] as well as the capacity of outsiders (especially lenders) to enforce contracts (especially corporate securities) with corporations in reliance on the statutory ‘indoor management’ rules in the Corporations Act.[63] As Justice Wheeler concluded in Ridout Nominees:
As I have noted, the Garcia principles, and - it might be added - cases dealing with presumptions of undue influence, are grounded in the usual relations of natural persons, so that there are both practical and conceptual difficulties in applying them in respect of corporations. However, in the present case, all of the natural persons who were directors and shareholders of these two corporations were subject to the types of relationships of influence with which those cases are concerned. I am therefore prepared to find that each of these corporations was in a position of special disadvantage, in relation to companies controlled by George, for the purpose of the principles governing unconscientious use of superior bargaining power.[64]
This could be a concern in the case of controlling and domineering conduct by internal directors in a corporation, common directors in a corporate group who exert power over a subsidiary’s directors, or even outsiders (eg lenders) who bring significant pressure to bear upon a corporation’s directors.[65]
In terms of banking policy and practice, recent changes in statutory and judge-made laws on unconscionability mean the following:
| 1) | Some conventional banking assumptions need rethinking – eg what counts as a benefit flowing from a loan, whether someone on the record as a company officer is really involved in the business for unconscionability purposes, what counts as a ‘high risk’ category of relationship etc; |
| 2) | While nobody needs to hit the panic button yet in terms of standard banking policy and procedures, given the slow progress in extending the Garcia principles to other personal and business relationships, the recent extension of unconscionability criteria under sections 51AA and 51AC of the Trade Practices Act beyond the pre-existing law opens the way for more rather than less judicial review of banking conduct in both consumer and business transactions; |
| 3) | Banking policy should maintain strong reliance on suggesting and requesting evidence of independent legal and financial advice but should also recognize the limits of this safeguard; |
| 4) | Some banks might need to revisit the match between their current procedures, legal changes in the last 12-18 months, and how they classify and handle ‘high risk’ and ‘low risk’ transactions at the policy level; and |
| 5) | All banks should monitor the results of ongoing ACCC test cases on unconscionability and equivalent banking code changes. |
In a banking context, this means that unconscionability-based and fairness-based grounds for busting personal guarantees now include: (i) unconscionability under the general law, including but not limited to (a) Yerkey v Jones protection for guarantor wives, and (b) situations of special disadvantage, where a stronger party knowingly and unconscientiously exploits the special disadvantage of a weaker party; (ii) statutory unconscionability under the Trade Practices Act, including the expanded Berbatis sense of special disadvantage arising from personal, legal, financial, or informational disadvantages as well as expanded unconscionability criteria beyond those applicable under the general law; (iii) other non-statutory grounds based on undue influence, duress, misrepresentation, negligence, breach of contract etc; and (iv) other legislation like consumer credit laws and unfair contracts laws.
In addition, there are important recent developments in the law of unconscionability and personal guarantors which affect not only the liability of solicitors who advise guarantors or financiers, but also the assumptions of banks and their officials and lawyers about who can rely on Garcia principles in terms of not receiving a benefit from the transaction and being regarded legally as a volunteer. For example, can a wife who guarantees her husband’s business debts be a ‘volunteer’ capable of invoking the Garcia doctrine if she is a director and secretary of the business whose debts are secured, the loan is paid into a joint account but funds are immediately diverted elsewhere, they receive the benefit of the discharge of another liability, and there is some beneficial impact on their standard of living?[66] An intangible benefit flowing through to the family unit from a spousal guarantee is unlikely to undermine reliance on unconscionability to overturn the guarantee. Clearly, the expansion of the categories of people beyond wives who can invoke the Garcia doctrine and the loosening of the criteria for being characterized as a volunteer in ways disadvantageous to banks are significant twin developments which reinforce each other. Banks might need to revisit some standard assumptions and risk assessment criteria concerning categories of special disadvantage.
Does the Insurance Contracts Act 1984 (Cth) preclude the operation of the unconscionability provisions and remedies in other Acts like the Trade Practices Act and the ASIC Act? Section 15(1) of the Insurance Contracts Act ostensibly precludes remedies under other federal, state, and territory laws from applying to a contract of insurance. However, section 15(2) immediately qualifies this position. It does not preclude ‘relief in the form of compensatory damages’, but only precludes under other Acts ‘the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable’ or ‘relief for insureds from the consequences in law of making a misrepresentation’. Here, general statutory provisions regulating unconscionable conduct in trade practices and financial services contrast with specific legislation governing insurance contracts and their remedies.
What might be said of these provisions or – at the very least – what arguments might be advanced about them?[67] First, it would be surprising but not impossible to find that this single one-word reference to ‘unconscionability’ could embody all of the other statutory and non-statutory meanings of unconscionability and remove them completely from the equation. Second, what is precluded is judicial review on particular grounds and not necessarily all other forms of court review, although that might amount to splitting hairs. Third, the particular grounds listed are limited in nature and do not specifically mention other things like negligence, breach of statutory duty, estoppel, and so on. However, the purpose and scope of such wide-ranging references to ‘harsh etc’ conduct in unjust contracts laws must be kept in mind here. Fourth, while relief under other federal, state, and territory Acts is precluded under section 15(1), non-statutory relief based on equivalent notions of unconscionability under the law of equity, for example, is not specifically precluded. Finally, even if a contract of insurance itself cannot be attacked because of these qualifications, that might well be different from attacking unconscionable pre-contractual or post-contractual conduct relating to the contract. The latter argument has much potential.
Conversely, there is one major argument which counteracts at least some of the arguments above. As there is an obligation of utmost good faith in insurance contracts, then what work is left for notions like unconscionability and unfairness to do, whether under the Trade Practices Act, the ASIC Act, or state laws like the Contracts Review Act 1980 (NSW)? On the other hand, the crossover between good faith and unconscionability is not necessarily complete. In light of the recent developments in both precedent and statutory law concerning unconscionability, including its extension to situations of special disadvantage which is situational rather than personal as well as its appearance now in various federal Acts, the relation between all of these different references to unconscionability needs revisiting by regulators and law-makers, not least in defining the proper scope of each reference to unconscionability under the Insurance Contracts Act, the Trade Practices Act, the ASIC Act and the Corporations Act.
In plain English, you can be at risk of having the law say you are acting in bad faith, unfairly, or unconscionably if:[68]
| • | Your conduct amounts to more than simply striking a hard bargain and more than just ‘sharp’ conduct, but falls on the wrong side of the latter; |
| • | You engage in or facilitate (as a professional adviser) sharp business practices which do more than strike a hard bargain and which exploit other parties in some way; |
| • | You have someone over a commercial barrel and you make them an offer they can’t really refuse; |
| • | You treat some people differently from others without good reason; |
| • | You use your stronger bargaining position to extract a concession which is commercially valuable to you but which is either commercially irrelevant to the particular transaction (and hence beyond your legitimate expectations) or else relevant but ‘over the top’; |
| • | You exercise a legal right or discretion which you clearly have but you do so with an ulterior motive;[69] |
| • | You act in a way which won’t put you in breach of contract, strictly speaking, but which is designed to cause another party to terminate or fail to renew the agreement because you want to be rid of them; |
| • | You ‘stack the deck’ against someone in commercial decision-making or otherwise set them up for a fall; |
| • | You are involved in a joint enterprise with others and set up guidelines or criteria which look neutral on their face but which will really disadvantage one of the parties involved in the joint enterprise; |
| • | You refuse to negotiate at all over your standard terms and conditions; or |
| • | You have knowledge which, if the other party knew it too, would make them think twice about signing up. |
Wider danger areas in practice include:
| 1) | Representations in face-to-face dealings between customers, debtors, guarantors, financiers, advisers, and investors; |
| 2) | Terms for settling disputes between commercial parties (eg landlord-tenant disputes); |
| 3) | Creating artificial situations or using technicalities to take unfair advantage of contractual rights or benefits (eg triggering default, termination, and buy-out/buy-back clauses); |
| 4) | Failing to afford another contractual party due process (eg exercising a broad termination right to cancel a contract and take over the work without calling on the contractor to show cause or otherwise rectify the situation); |
| 5) | Exploiting weaker commercial parties with a personal or situational (ie legal, financial, informational, or other circumstantial) ‘special disadvantage’ (eg as when a bank wants more security, it knows more than the customers, the financial situation is perilous, and the customers are given little choice but to comply with the bank’s request); and |
| 6) | Extracting extraneous or irrelevant commercial concessions. |
In particular, commercial parties and their advisers have greater need than ever before to monitor transactions between stronger and weaker commercial parties where the stronger party’s position amounts to a ‘take it or leave it’, ‘we’ve got you over a barrel’, ‘we’ll make you an offer you can’t really refuse’, or ‘you’ve got a choice between two evils’ option. This does not translate to a simplistic warning that every extraction of a concession by a stronger party will now be unconscionable, that every deal where one party is over a commercial barrel will be suspect, or that every settlement of a dispute which is tied to an ongoing contractual relationship will be challengeable. There are a number of checkpoints before that characterisation can properly be made. There must be a real situation of “special disadvantage” and not simply a normal commercial vulnerability like being a tenant needing a renewal of a lease, for example.[70]
Accordingly, parties and their advisers might now ask themselves some key questions to establish whether proposed conduct is at risk of being characterised as unconscionable, at least in the sense of unconscientious exploitation of a situational ‘special disadvantage’, eg:
| 1) | Are you in a stronger bargaining position?; |
| 2) | Is that simply a result of the ordinary commercial context (eg normal landlord-tenant dynamics)?; |
| 3) | Above and beyond that, however, do you also have the other party at a special disadvantage which is personal (eg illiteracy, drunkenness, or other clear need for advice) or situational (eg arising from the matrix of legal, financial, informational, or other circumstances)?; |
| 4) | Are you making an offer, giving an instruction, extracting a concession, or exercising a right which effectively leaves the other party with no option other than to comply?; and |
Is what you are doing the best or only realistic commercial course open to you (ie can you justify your conduct independently on a commercial basis, as distinct from having an ulterior motive or knowing that the transaction really cannot pass the so-called “smell test” in substance)?
[*] Professor, School of Law, University of Canberra; Director, National Centre for Corporate Law and Policy Research; Deputy Director, National Institute for Governance; Consultant, Allens Arthur Robinson. Bryan Horrigan can be contacted by email (bth@management.canberra.edu.au) and phone (02 6201 5790).
[1] Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447.
[2] See ASIC’s recent ‘Book Up: Some Consumer Problems’ report, accessible via the ASIC web site (www.asic.gov.au).
[4] Yerkey v Jones [1939] HCA 3; (1940) 63 CLR 649; and Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395.
[5] Eg see, in relation to undue influence, CBA v Longo [2001] VSC 191.
[6] Eg Westpac Banking Corporation v Paterson [2001] FCA 556; reversed, on appeal, in Westpac Banking Corporation v Paterson [2001] FCA 1630.
[7] Eg State Bank of NSW v Hibbert [2000] NSWSC 628.
[8] Eg NAB v Starbronze Ltd [2000] VSC 325.
[9] Eg Equuscorp Pty Ltd v Worts [2000] VSC 179.
[10] See the discussion of this aspect in Royal Bank of Scotland v Etridge [2001] UKHL 44.
[11] Murphy v Overton Investments Pty Ltd [2001] FCA 500 at [158] and the cases cited there showing that ‘there is support in the authorities for the contention . that an imbalance of information, together with other factors, may constitute special disadvantage’ for unconscionability purposes. See also ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 (‘Berbatis’). At the time of writing, the High Court had granted the ACCC special leave to appeal in the Berbatis case, to settle the meaning of unconscionability for the purpose of s 51AA of the Trade Practices Act and – by extension – section 12CA of the ASIC Act.
[12] The possibility of corporate use of one or more of these grounds is assumed or discussed in: Brooks v Sunlife Properties Pty Ltd (unreported, Western Australian Supreme Court, Scott J, 21 February 1996); NZI Capital Corporation Ltd v Fulton [1998] FCA 667; HECEC Australia Pty Ltd v Hydro-Electric Corp (1999) ATPR 46-196; Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37; and Celia Hammond, ‘Can a Company be the ‘Victim’ of Undue Influence and Unconscionability?’ (2001) 19 Company and Securities Law Journal 74.
[13] See the discussion of whether these statutory forms of unconscionability can embrace estoppel in GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761; also see: Rayner v ANZ Banking Group Ltd [2001] WASCA 396. However, also see the potential use of second-order notions of unconscionability in these statutory provisions, as flagged by the Full Federal Court in ACCC v Samton Holdings Pty Ltd [2002] FCA 62.
[14] At the time of writing, the latest ACCC test case proceeding in the Federal Court concerned banks, marketers, and two-tiered pricing of coastal properties.
[15] See, for example: (i) the inititial inclusion of legal advisers as parties allegedly involved in trade practices breaches in the litigation in ACCC v Samton Holdings Pty Ltd [2000] FCA 1725; (ii) the recent assessment of the liability of a solicitor advising a party in connection with third party securities in Teachers Health Investments v Julian [2001] NSWSC 231; (iii) the actions against legal advisers in connection with corporate financing and security arrangements in Maronis Holdings v Nippon Credit Australia Ltd [2001] NSWSC 448; and (iv) the unsuccessful action against a solicitor for advice about a director’s guarantee in Gablepath Pty Ltd v Murdoch [2001] NSWSC 871.
[16] [2001] UKHL 44. See also: Barclays Bank v O’Brien [1993] UKHL 6; [1994] 1 AC 180; and Garcia v National Australia Bank [1998] HCA 48.
[17] For a recent discussion of Royal Bank of Scotland v Etridge [2001] UKHL 44 and its Australian implications, see: Janine Pascoe, ‘Wives, Lenders and Guarantees – New Law in the UK and Lessons for Australia’ (2002) 17:8 Australian Banking and Finance Law Bulletin 117.
[18] I am grateful to my academic colleague Stephen Corones for discussion of this emerging dichotomy in trade practices regulation and also of interactions between trade practices provisions and good faith.
[19] ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376.
[20] See: Berbatis; ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; and ACCC v Leelee Pty Ltd [1999] FCA 1121.
[23] See: Yerkey v Jones [1939] HCA 3; (1940) 63 CLR 649; Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395; Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457; ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 2; and ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376.
[24] Eg HECEC Australia Pty Ltd v Hydro-Electric Corp [1999] FCA 822 at [42]- [43].
[25] The orthodox treatment of such relationships under presumptions of undue influence might differ from their treatment under revitalised notions of unconscionability. See: Barclays Bank plc v O’Brien [1993] UKHL 6; [1994] 1 AC 180 and Smith v Bank of Scotland [1997] UKHL 26 (spouses and co-habitees); Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 (wives and perhaps husbands and co-habitees); Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144 (employers and employees); State Bank of New South Wales v Hibbert (wives and husbands); and National Australia Bank v Starbronze Ltd [2000] VSC 325 (brothers-in-law).
[26] For recent discussion, see: Pritchard v Racecage Pty Ltd [1997] FCA 27; (1997) 142 ALR 527; HECEC Australia Pty Ltd v Hydro-Electric Corp (1999) ATPR 46-196; ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; Berbatis; GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2000] FCA 875; and ACCC v Samton Holdings Pty Ltd [2002] FCA 62.
[27] Professor Bob Baxt, ‘Directors’ Duty of Care and the New Business Judgment Rule in the 21st Century Environment’, Seminar Paper, Seminar on Key Developments in Corporate Law & Equity, Melbourne, March 2001.
[28] Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447.
[29] On this potential expansion of unconscionability, see: Murphy v Overton Investments Pty Ltd [2001] FCA 500 at [158]; HECEC Australia Pty Ltd Hydro-Electric Corp (1999) ATPR 46-196; and French J’s distinction between ‘personal’ and ‘situational’ special disadvantage in ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 (but also see, on appeal, CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757). The Full Federal Court accepted in ACCC v Samton Holdings [2002] FCA 62 that section 51AA unconscionability might extend to situations beyond “special disadvantage” cases and confirmed that the ‘disadvantage’ could be either ‘personal’ or ‘situational’, but also indicated that ‘there must . be something more than commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage’ for this purpose.
[30] Eg ASIC secured consent court orders in the Federal Court in 1999 after alleging unconscionable conduct in the marketing and taking of insurance policies in remote Aboriginal communities: see “ASIC Obtains Court Orders Relating to Sale of Insurance in Remote Aboriginal Communities”, ASIC Media Release, 24 September 1999. (I am grateful to ASIC staff for information about this matter, which informs some of the discussion below about the Insurance Contracts Act.) The legal development of notions of disadvantage, superior bargaining position, and unjustified exploitation of both will be critical in future unconscionability litigation concerning trade practices generally and financial services in particular.
[31] Cf Russell Miller, Miller’s Annotated Trade Practices Act, (19th ed, 1998), 261, [755.10].
[32] Of course, any fatal constitutional objection to such provisions at the Commonwealth level because of the federal separation of powers enshrined in the Australian Constitution might not be duplicated at the State level.
[37] Ibid, clause 44. This will not prevent expansion or reformulation of equitable doctrines of unconscionability beyond their current boundaries and the correlative expansion of unconscionability’s scope under provisions like section 51AA of the Trade Practices Act.
[40] Sir Anthony Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 Law Quarterly Review 238, 248-249.
[42] See: Finn, above n 41, 38; and cases cited by Finn in this context including Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (on equitable estoppel), Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489 (on relief against forfeiture), and Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 (on unilateral mistake).
[43] See: Finn, above n 41, 39; and cases referred to by Finn in this context including Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447, Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621; and section 51AB of the Trade Practices Act.
[44] See: Finn, above n 41, 39; and the case cited by Finn in this context, Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137.
[45] Cf Finn’s second meaning for ‘unconscionability’: see Finn, above n 41, 38. Note the Full Federal Court’s important reference to Finn’s categorisations in ACCC v Samton Holdings Pty Ltd [2002] FCA 62.
[46] ACCC, Unconscionable Conduct in Commercial Dealings – A Guide to Section 51AA of the Trade Practices Act, (accessible via http://www.accc.gov.au).
[47] Eg ACCC v Samton Holdings Pty Ltd [2002] FCA 62.
[48] See: ACCC v CG Berbatis Holdings Pty Ltd [1999] FCA 1151; Blacker v National Australia Bank Ltd [2000] FCA 681; and ACCC v Samton Holdings [2000] FCA 1725; but cf Re Colina; Ex parte Torney [1999] HCA 57; (1999) 166 ALR 545.
[49] The law has not yet reached this point.
[51] Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; cf Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151, Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; (1998) 44 NSWLR 349, and Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187.
[52] Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5.
[53] ACCC v CG Berbatis Holdings Pty Ltd (No 2) [2000] FCA 2; (2000) 96 FCR 491; CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757; and ACCC v Samton Holdings Pty Ltd [2002] FCA 62.
[54] For recent examples, see: Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 146 ALR 1 (good faith); Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; (1998) 44 NSWLR 349 (unconscionability and good faith); Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 (unconscionability and good faith); Asia Television Ltd v Yau’s Entertainment Pty Ltd [2000] FCA 254; (good faith); Advance Fitness Corporation Pty Ltd v Bondi Diggers Memorial & Sporting Club Ltd [1999] NSWSC 264 (good faith and reasonableness); Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 (good faith); Western Metals Resources Ltd v Murrin Murrin East Pty Ltd [1999] WASC 257 (reasonableness); and South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541 (good faith). Interestingly, the non-statutory doctrine of unconscionability in the sense of unconscientious dealings (eg ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376), the statutory doctrines of unconscionability and good faith for trade practices purposes (eg use of and references to one or both of these notions in sections 51AA, 51AB, and 51AC of the Trade Practices Act and cognate provisions in Fair Trading Acts and the ASIC Act), the general doctrine of good faith in contract law (eg South Sydney District Rugby League Football Club ltd v News Ltd [2000] FCA 1541 at [394] and [426]-[428]), and the doctrine of reasonableness in contract law (eg Western Metals Resources) are all grounded in notions of what is within and beyond a party’s legitimate interests. For example, section 51AC(3)(b) of the Trade Practices Act embodies this idea. So does French J’s conclusion in Berbatis that ‘(u)nfair exploitation of disadvantage amounting to unconscionable conduct may occur when an owner uses its bargaining power to extract a concession from the tenant that is commercially irrelevant to the terms and conditions of any proposed new lease’. To like effect are Finkelstein J’s statement in Garry Rogers v Subaru at [37] that good faith ‘would not operate so as to restrict actions designed to promote the legitimate interests of [a] party’ and Finn J’s acknowledgement in South Sydney v News at [394] that ‘the implied duty of good faith and fair dealing ordinarily would not operate so as to restrict decisions and actions, reasonably taken, which are designed to promote the legitimate interests of a party and which are not otherwise in breach of an express contractual term’. This points the way to further judicial convergence of contractual and non-contractual principles which regulate actions beyond a party’s legitimate interests. Of course, this leaves much scope for additional argument about what counts as a legitimate interest for these purposes.
[55] See: Berbatis; Trade Practices Act sections 51AC(3)(b) and 51AC(3)(k); and South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541.
[59] CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757.
[60] Allens Arthur Robinson, ‘Unconscionable Conduct: Part III’, Focus: Leasing – February 2002, (accessible via ).
[61] Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37, [55] and [61].
[62] For example, will a director of a corporation whose legal susceptibility to influence or pressure is sheeted home to the corporation, enabling it to claim the benefit of unconscionability or even undue influence or duress, be in breach of their directors’ duties or relieved of that liability in these circumstances? In addition, how will this development impact upon judicial relief from liability for directors under provisions like section 1317S and 1318 of the Corporations Act?
[63] For example, what degree of notice, knowledge, or bad faith will disentitle the outsider (eg lender) from avoiding the consequences of unconscionability, above and beyond the exception to the statutory assumption of compliance with duties owed to the company (Corporations Act, sections 128 and 129), which now focuses upon knowing or suspecting that the assumption is wrong? Moreover, does the statutory assumption of compliance with duties owed to the company pick up all statutory and non-statutory directors’ duties for this purpose? What must lenders and other outsiders do to guard against this threat to enforceability of corporate securities and contracts? On these points, see Hammond, above n 13.
[64] Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37, [212].
[65] On these points, see: Hammond, above n 13.
[66] Bylander v Multilink [2001] NSWCA 53.
[67] I am grateful to my academic colleague Brendan Pentony for discussion of some aspects of the Insurance Contracts Act.
[68] Of course, the following shorthand descriptions simplify and conflate some of these notions, for the purpose of conveying a general sense of what is at stake.
[69] Eg see: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; and Jeannie Paterson, ‘Duty of Good Faith – Does it Have a Place In Contract Law?’ [2000] LawIJV 228; (2000) 74:6 Law Institute Journal 47.
[70] Eg ACCC v Samton Holdings Pty Ltd [2002] FCA 62.