Australia: Statutory unconscionable conduct clarified – exploitation of a vulnerability or disadvantage is not required

Background

Quantum Housing Group Pty Ltd (“Quantum”) was in the business of arranging investments in properties that qualified for incentives under the National Rental Affordability Scheme (“NRAS”). As an approved participant in the NRAS, Quantum entered into agreements with investors wishing to be involved in the Scheme. It was commonplace for a property manager to be appointed to manage the investor’s property in a manner that ensured ongoing qualification for the NRAS incentive.

From February 2017 to July 2018, Quantum implemented a plan which involved, amongst other things, pressuring investors to accept property management services from managers that had a commercial association with Quantum, without disclosing that relationship to the investors. Quantum also unilaterally imposed accreditation guidelines on its investors, which required the investor’s property manager to pay a security deposit of $10,000 if the investor did not transfer the management of their property to a Quantum approved manager. If a property manager refused to pay the security deposit, Quantum used that refusal as a basis to refuse to renew agreements and then to pressure investors to appoint a Quantum approved property manager.

At first instance, the hearing proceeded on the basis of an agreement between the ACCC and Quantum that there had been misrepresentations and unconscionable conduct by Quantum. Detailed facts and penalties were agreed between the parties for consideration by the Court.

At first instance, Justice Colvin declared that Quantum had engaged in misleading and deceptive conduct and made false representations in contravention of ss 18(1) and 29(1) of the ACL but, despite Quantum’s admissions, found that Quantum’s the conduct did not constitute unconscionable conduct under s 21.

His Honour reached this conclusion in reliance on the High Court decision in Australian Securities Investment Commission v Kobelt [2019] HCA 18 (“Kobelt”), which he held required that the party engaging in the conduct had taken advantage of or exploited some pre-existing vulnerability, disability or disadvantage on the part of the consumer or business to whom the conduct was directed. He found that there was no evidence that the investors in Quantum could be characterised as being vulnerable or in a position of disadvantage of a kind that might expose them to being exploited or victimised and that accordingly, the conduct was not unconscionable.

Despite his finding on unconscionable conduct, His Honour did not reduce the agreed penalties, but indicated that if there had been exploitation of some vulnerability or disadvantage of the investors, the agreed penalties would have been inadequate.

The ACCC appealed the first instance decision on unconscionability but did not appeal the penalty amounts. Quantum, which went into liquidation in December 2019, and its sole director, did not participate in the appeal (although a contradictor was appointed to assist the Court).

Pre-existing vulnerability, disability or disadvantage

On appeal, the Full Federal Court found that the trial judge had erred in his interpretation of Kobelt. Crucially, the Full Court found that:

• s 21 is not limited by the unwritten law. That alone is sufficient to deny the proposition that a special disadvantage or vulnerability, as recognised in equity, of which advantage is taken, is an essential requirement of statutory unconscionability.
• Whilst some form of exploitation of or predation upon some vulnerability, disability or disadvantage of people will often be a feature of conduct which satisfies the characterisation of unconscionable conduct under s 21, it is not a necessary feature of the meaning of the statutory phrase.
• “Unconscionable” has an ordinary and natural meaning of doing what should not be done in good conscience that is derived from the inner human sense of doing right.
• The task is to evaluate 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 or to offend conscience and so be characterised as unconscionable”.

The Full Court emphasised that unconscionable conduct is not limited, by definition, to one kind of conduct that is against or offends conscience, or to conduct that is of the “worst kind”. Rather, there will be examples of unconscionable behaviour that are more or less serious, and that will reflect in penalty.

The Full Court found that Quantum had engaged in conduct that “sufficiently departed from acceptable business standards as to be against or to offend conscience”, by “systematically misusing its superior bargaining position, dishonestly misleading its counterparties and pressuring them by unjustified and unnecessary commercial requirements” and accordingly, found that they had engaged in unconscionable conduct .

Key takeaways

The decision in Quantum provides important clarification of the law on unconscionable conduct. It has been welcomed by the ACCC and will likely lead to a broadening of the types of cases that it commences in this area.

Contraventions of s 21 can result in very hefty penalties and significant reputational damage. The potential risks should be front of mind during the negotiation and execution of commercial agreements and formulation of business strategies, even in circumstances where a counter-party appears to be relatively sophisticated and well-informed. In particular, businesses in a superior bargaining position or who are dealing with consumers and small businesses should take care to ensure that conduct does not depart from the norms of acceptable commercial behaviour and community expectations.

This alert was prepared with the assistance of Andrew Attard.