When you seek a lawyer’s help to resolve a breach of contract dispute, the first step is to analyse the agreement between the parties. In some cases, strict application of contract clauses can cause one party to suffer loss in manifestly unjust or unfair circumstances. Nevertheless, the contract the two parties made is technically legal because it’s not a fraud or some other crime. Under the ‘law of equity’, however, a Court can set aside a contract where one party knowingly and unconscientiously takes advantage of a party with a special vulnerability or disadvantage because of illness, ignorance, or other circumstances affecting their ability to guard their own interests. Taking advantage like that is called “unconscionable conduct” in the law of equity.
Recent case law shows that statutory unconscionable conduct under the Australian Consumer Law can occur even where both parties to a transaction are sophisticated commercial operators.
The classical type of unconscionable conduct
Selling encyclopedias at triple the going rate to people who can’t read on a hire-purchase contract would qualify as unconscionable. So would any other case where the vulnerable party to the contract is being ‘taken for a ride’ to such a ridiculous extent that no decent person could morally approve the transaction.
In these equity cases, the stronger party must show that the contract or bargain was fair, just, and reasonable and therefore not tainted by unconscionability. When close examination of the circumstances shows that the stronger party has not behaved honestly, fairly, and without deception or unfair pressure, a Court can rescind the contract, not enforce it, or order other remedies tailored to the case.
Statutory unconscionable conduct covers a lot more situations
The Australian Consumer Law1 also prohibits that classical type of unconscionable conduct where the person being ripped off is demonstrably at a special disadvantage (section 20). In addition, the Australian Consumer Law now prohibits a new version of unconscionable conduct where being significantly ripped off by a predatory person or business is enough, and where vulnerability doesn’t have to be involved (section 21). Section 21(4)(b) states quite plainly that the Parliament intended the prohibition to extend to any predatory scheme conducted by a business, regardless of whom they are ripping off.
So, although almost nobody but lawyers use it, a lot hinges on that word ‘unconscionable’! It applies even in a commercial context where both parties can look after their own interests and understand the nature of the transaction. In many parts of commercial and consumer law, if the conduct of somebody you are dealing with is so awful as to be ‘unconscionable’, under the Australian Consumer Law, you can often recover damages from them2 or void or vary the contract.3 Such behaviour can also attract a fine.
It can be challenging to get a judgement and damages in your favour in complicated and lengthy commercial litigation involving equity law, so any tightening of the statutory law around the unfair or predatory behaviour of corporations towards smaller businesses or individuals is welcome. Recent cases reflect the Australian Consumer Law’s extended protections for ordinary investors.
Lack of Disclosure of a Conflict of Interest – Quantum Housing’s Dishonesty
Quantum Housing Group Pty Ltd (Quantum) sold and managed investment rental properties eligible for twenty-percent rebates on rent under the Commonwealth Government’s National Rental Affordability Scheme. Quantum wrote to investors, demanding they use a particular property management company for their properties. Quantum failed to disclose its commercial association with this ‘approved’ property manager.
Quantum, not the investors, received the Government’s incentive payments directly and then passed them on to the investors. Investors relied on Quantum to receive their payments, placing Quantum in a superior bargaining position. Such pressure resulted in several investors transferring responsibility for their property management to an ‘approved’ manager. If an investor did not change to an ‘approved’ property manager, Quantum issued default notices asserting the investor was in default under the agreements that governed their entitlement to the incentive.
When the Australian Competition and Consumer Commission (ACCC) prosecuted Quantum, the Judge found Quantum’s communication to investors was misleading and deceptive conduct because investors were unaware that the ‘approved’ property manager was linked to the directors of Quantum. But the Judge found that this was not unconscionable conduct because the victims were relatively sophisticated investors capable of looking after their own interests and understanding the nature of the dealings.
In many past cases, the courts have emphasised parties’ relative lack of power or vulnerability through age, disability, or lack of business experience and knowledge. The ACCC brought an appeal to the Full Court purely on the point of law about that word, ‘unconscionable’. In their judgement on the ACCC’s appeal, the Full Federal Court found that conduct could be unconscionable under section 21 even where, as here, the other parties to the dealings were investors who were not vulnerable people, because Quantum’s conduct sufficiently departed from the norms of acceptable commercial behaviour so as to offend good conscience.4
Free Laptops with Bonus Undisclosed Debt.
In two recent cases brought by the ACCC, educational providers ensnared vulnerable consumers into enrolling in online courses covered by the federal government’s vocational training ‘Fee Help’ scheme of deferred course fees. They did so with false representations that the courses were free when in fact they would attract deferred fees of up to $20,000. AIPE Pty Ltd and Phoenix Institute gave prospective students a ‘free’ laptop. In most cases, these prospective students would not have even been able to undertake or complete the courses.
The Federal Court found that the dishonesty in both cases was severe enough to be ‘unconscionable conduct’. The federal government paid AIPE Pty Ltd more than $210 million for enrolling 16,000 people, and AIPE was fined $153 million.5 Phoenix Institute received $106 million for enrolling 12,000 students.6 The Court has not yet announced the fine for its unconscionable conduct, but a ‘slap on the wrist’ penalty in this area is a thing of the past.
Telecommunications Giant Fails to Communicate
In a sign of some contrition, Telstra admitted to unconscionable conduct in signing up more than a hundred Indigenous customers to mobile phone contracts, which they did not understand and could not afford. Many of these customers only spoke English as a second or third language and could not read or write. Telstra also entered into enforceable undertakings to compensate the customers and improve its sales procedures in future. The Court found that Telstra employees misrepresented the costs of phone contracts and manipulated credit-check procedures. Telstra was fined $50 million.7
Insurance Rip-Off
Select AFSL was an insurer offering accident, life, and funeral insurance. The Australian Securities & Investments Commission (ASIC) brought a case against Select for fast-talking and steamrollering vulnerable consumers. The Federal Court found that Select had used high-pressure tactics on vulnerable people, including Indigenous people for whom English was not their first language, to sell them insurance products they did not need and could not afford.8
The Court found that insurance products were not properly explained and that sales agents rushed through sales phone calls, sometimes finalising deals on complex policies within 20 minutes. When these consumers raised objections or complained about the ongoing burden of payments, they were subjected to pushy and persistent phone calls to prevent them from cancelling. Notably, the Court mentioned Select’s heavyhanded inhouse sales culture where non-sellers were publicly humiliated, and big sellers were given all sorts of bonuses and incentives. Of course, having a US-style sales culture doesn’t prove that you are ripping customers off, but the message here is that if you have a culture like that, your business should be extra careful that sales are being done fairly and within the law.
Please don’t hesitate to contact us about the specific circumstances of your case.
References:
- Part 2-2 of the Australian Consumer Law contained in the Competition and Consumer Act 2010 (Cth), Schedule 2;
- Sections 236 and 237 of the Australian Consumer Law;
- Section 243 of the Australian Consumer Law;
- Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40 (19 March 2021), since applied by the NSW District Court in Insurance Australia Limited v Holden & Ors [2021] NSWDC 142 (30 April 2021);
- Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) (No 5) [2021] FCA 1516 (3 December 2021);
- Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (Subject to Deed of Company Arrangement) [2021] FCA 956 (13 August 2021);
- Australian Competition and Consumer Commission v Telstra Corporation Limited [2021] FCA 502 (13 May 2021).
- Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786, Abraham J (8 July 2022).
