At the end of our previous article on unconscionability, we noted that ACCC had filed an appeal to the Full Federal Court in relation to its proceedings against Quantum Housing Group which concerns allegations of statutory unconscionable conduct.[1] The case will provide an opportunity for the Full Federal Court to consider the issues and variations of approach raised by the High Court in Kobelt[2].

The case will concern whether statutory unconscionable conduct under the Australian Consumer Law requires the targets of the conduct to be under a special disadvantage.  Unconscionable conduct under the Australian Consumer Law is couched in essentially the same terms as under the ASIC Act.

The outcome of the appeal will be of great importance to financial service providers, by providing guidance as to the precise scope of their statutory obligations.

In this article, we look at the relationship between unconscionable conduct and bargaining power, specifically:

• at what point conduct can be considered unconscionable, and when is a "disadvantage" a "special disadvantage", having regard to the recent Quantum Housing decision; and
• how the concept of special disadvantage may be understood from the point of view of superannuation funds, managed investment schemes, insurers and other financial service providers.

Unconscionable conduct and bargaining power

As the outcomes of both Kobelt and the first instance decision in Quantum Housing show, not every instance where a person leverages their stronger commercial position to gain an advantage over a person in a weaker bargaining position is going to have constitute unconscionable conduct.

Commercial behaviour falls on a spectrum. On one end, we find healthy marketplace competition, on the other end, we find behaviour that is downright predatory. The critical question for financial services providers is: at what point does capitalising on a commercial advantage actually become unconscionable?

At first instance in Quantum Housing, Colvin J had held that on the facts “[t]here is no description of the financial or other circumstances of the investors that would enable them to be characterised as being vulnerable or in a position of disadvantage of a kind that might expose them to being exploited or victimised”.[4]

The ACCC is appealing the decision on the basis that unconscionable conduct under statute does not require the existence and exploitation of a special disadvantage.[3] (We discuss the High Court's consideration of the differences between equitable and statutory unconscionable conduct in Kobelt here).

What makes a "disadvantage" a "special disadvantage"?

Assuming that statutory unconscionable conduct does require the exploitation of a special disadvantage, at what point does taking advantage of a situation become unconscionable?

In Quantum Housing, Colvin J held:

Therefore, the majority view [of Kobelt] supports the adoption of a standard that requires exploitation of disadvantage by a party in a stronger position by conduct that is well outside the bounds of what is generally seen to be moral, right or acceptable commercial behaviour. It is not every instance where a person in a stronger commercial position gains an advantage by reason of that position over a person in a weaker or disadvantaged position that is unconscionable. It is not enough that the dealing might be described as unfair or unreasonable. Rather, unconscionable conduct involves dealing with those who are vulnerable in a manner that exploits that vulnerability by engaging in conduct that may be plainly or obviously criticised when viewed through the lens of an understanding of proper commercial behaviour according to prevailing norms and standards.[5]

It is worth unpacking this final sentence.

First, Colvin J speaks of “a vulnerability that is exploited”. This is a necessary but insufficient condition of unconscionability. As we have discussed, a healthy marketplace requires commercial actors to seek to gain advantages to some extent.  Clearly something more is required.

Second, Colvin J states that the conduct is of a kind that “may be plainly or obviously criticised”. The idea that criticism of the conduct must be plain or obvious is a troubling one, because cases concerning unconscionability are so often borderline. The fact that the High Court split 4:3 in Kobelt (and that five separate and difficult to reconcile judgments were delivered) demonstrates that what may be ‘obviously’ criticisable to some, may not be to others.  Criticism as a standard for unacceptable conduct is a fluid yardstick.  Nevertheless, what is clear is that the threshold is a high one.

Third, in order to ground this concept of criticism in some sort of objective standard, Colvin J adds that the criticism must be plain or obvious “when viewed through the lens of an understanding of proper commercial behaviour according to prevailing norms and standards”. While Colvin J chooses to avoid the language of “moral obloquy” (a wise decision, in our view), it is clear that unconscionable conduct requires the action to be in breach of some sort of societal norm or community standard. This generally accords with the position in Kobelt.

Proper commercial behaviour

Crucially, Colvin J did not write “proper behaviour”, but rather “proper commercial behaviour”. This recognises that there is no expectation that actors in a marketplace need necessarily forgo their own commercial interest. But it also shows how the propriety of any behaviour must be understood against the backdrop of the commercial relationship between the parties. The ability of a party to pursue their own interests but not to the degree of unduly harming the counterparty is an element also evident in the contractual duty of good faith.

This is intuitive. Notwithstanding the final result of Kobelt, it is clear that the norms and standards underpinning the commercial behaviour expected from a credit provider lending to members of two remote Aboriginal communities will be different to a situation in which the borrower is a sophisticated multinational corporation. It is critical to assess the entirety of the relationship of the parties.

However, when considering the entirety of a commercial relationship, it is not enough to simply look at circumstantial factors such as sophistication.  It is equally as important to consider the nature of the relationship as a matter of law.

Superfunds, managed investment schemes, and other trustees/fiduciaries

For superannuation funds and managed investment schemes, the existence of a trust relationship between the fund and its members will influence what is proper commercial behaviour in those circumstances.

While being a beneficiary may not necessarily put a person at a special disadvantage in relation to the trustee, trust relationships exist precisely because one party is entrusting another to hold property on his or her behalf. Beneficiaries are therefore more vulnerable to exploitation by a trustee than, say, one contractual counterparty is to another. (As an analogy, consider that in equity a beneficiary cannot be considered to be contributorily liable for the wrongdoing of a trustee, precisely because trust/fiduciary relationships are inherently asymmetric, unlike the duty of care.)

Because a trust relationship is not, at least as a legal precept, a relationship between two equals (much less a relationship between two competitors), the existence of a trust will impact the norms and standards that determine what commercial behaviour is proper in those circumstances. Exploitation of a member’s vulnerability that is plainly criticisable when viewed through the lens of proper commercial behaviour in these circumstances will be unconscionable.

Insurers and other financial service providers

For financial service providers that are not trustees or other fiduciaries of a person, but simply maintain a contractual relationship, the expected standards of proper commercial behaviour may be lower. Unlike fiduciary duties, the duty of good faith does not prevent a party from seeking its own commercial advantage in the relationship, as we observed early.

However, it will still be necessary to determine the precise nature of the legal relationship between the parties. For instance, the existence of a duty of utmost good faith between an insurer and insured reflects the informational asymmetries and other vulnerabilities that can arise in insurance relationships. A breach of the duty of utmost good faith by an insurer is potentially more likely to be unconscionable than a typical breach of good faith outside of the context of insurance.

We will keep our readers apprised of the outcome of the ACCC appeal in Quantum Housing. In the meantime, please reach out to the HSF FSR Team if you have any questions relating to unconscionable conduct or the regulators' approaches to it.

[1] ACCC v Quantum Housing Group Pty Ltd (No 2) [2020] FCA 802 ('Quantum Housing').

[2] ASIC v Kobelt [2019] HCA 18 ('Kobelt').

[3] https://www.accc.gov.au/media-release/quantum-housing-decision-appealed-over-unconscionable-conduct.

[4] Quantum Housing, [32] (Colvin J).

[5] Quantum Housing, [29] (Colvin J).