Update on Unconscionable Conduct and Good Faith Developments in Australian Law - Presentation for Prof Justin Malbon's Consumer Law Class, Monash University Faculty of Law, 19.05.10

1. Terms of Reference Clarifying role v ‘clean slate’ review of statutory unconscionable conduct (ie unfinished business from previous governmental inquiries) Whether ‘a statement of principles concerning unconscionable conduct’ or ‘a list of examples that all parties agree constitute unconscionable conduct’ should be included in the TPA Whether Franchising Code of Conduct needs anything more to address five identified and potentially problematic franchising behaviours 1

2. Unconscionability Relates to … Various equitable (and some common law) causes of action and bases for relief Statutory unconscionability under Trade Practices Act Statutory unconscionability under Fair Trading Acts Statutory unconscionability in financial services under ASIC Act Unconscionable financial services licensee conduct under Corporations Act Unjust contracts laws (eg some Fair Trading Acts, NSW Contracts Review Act) Related consumer credit laws Industry codes (eg Banking/Franchising Codes) State retail/commercial leasing laws 2

4. ASICA s 12CA (in financial services)

6. ASICA s 12CB

8. ASICA s 12CC

9. Some Fair Trading Acts

10. Some commercial/retail leasing Acts3

11. Unconscionability Under TPA s51AA & ASICA s12CA “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.” “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.” 4

12. FSR Legislation & Unconscionability (s991A(1) CA) “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.”

13. Unconscionability Under TPA s51AB & ASICA s12CB TPA: “A corporation shall not, in trade or commerce, in connection with the supply [but not supply for purposes of re-supply or using up / transforming in trade or commerce] .. of goods or services [of a kind ordinarily acquired for personal, domestic, or household use or consumption] engage in conduct that is, in all the circumstances, unconscionable” ASICA: supply of financial services

14. Unconscionability Under TPA s51AC (cf s12CC ASIC Act) “A person/corp must not, in trade or commerce, in connection with (a) the supply .. of goods or services to a corp/person (other than a listed corporation) [for purposes of trade or commerce] or (b) the acquisition or .. goods or services from a corp/person (other than a listed corporation) [for purposes of trade or commerce], engage in conduct that is, in all the circumstances, unconscionable.” (s51AC TPA) ASICA: supply of financial services

15. Unconscionability under TPA s51AB & AC & s12CB & CC ASIC Act – indicators Parties’ relative bargaining strengths Whether conditions extend beyond what is reasonably necessary to protect legitimate interests Understanding of the documents Any undue influence, pressure, or unfair tactics by a party or someone acting on their behalf Comparative prices and terms for availability of goods and services elsewhere Sections 51AC & s12CC only: Consistent with treatment of similar parties/transactions Compliance with any relevant industry codes Unreasonable failure to disclose (i) intended conduct which might affect the other party’s interests and (ii) risks to the other party arising from that conduct which reasonably they might not foresee Willingness to negotiate terms and conditions Whether parties act in good faith Whether contractual right exists to vary unilaterally a term or condition of a contract

18. ‘special disadvantage’ rule (egAmadio)

19. Others (egBridgewater v Leahy)[4] Unconscionability as a direct ground of relief in its own right, unmediated by conventional doctrines (egLenah Game Meats v ABC) 9

20. Full Fed Ct in ACCC v Samton Holdings (2002) Unconscientious exploitation of a party’s special disadvantage (egAmadio) Defective understanding, relationship of influence, and absence of independent explanation (egGarcia) Unconscionable departure from previous representation (egestoppel – Verwayen, Waltons Stores v Maher) Relief against forfeiture and penalty (egLegione v Hateley and Stern v McArthur) Rescind contracts for unilateral mistake (egTaylor v Johnson) 10

21. Important High Court Instruction Affecting Statutory and Non-Statutory Interpretation Farah Constructions v Say-Dee [2007] HCA 22 at [135]: ‘Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law.’ 11

22. ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 The [tenants] suffered what might be called a ‘situational’ as distinct from a ‘constitutional’ disadvantage. That is to say it did not stem from any inherent infirmity or weakness or deficiency. It arose out of the intersection of the legal and commercial circumstances in which they found themselves. That disadvantage, not being constitutional in character, was not able to be mitigated by the fact of legal representation which they had available to them at all material times.

23. Unconscionable Conduct Senate Economics Committee outcomes Government’s response Implications of TPA reforms for ASIC Act and cognate state laws on statutory unconscionable conduct Pros and cons of legislated examples Different kinds of principles Pros and cons of different kinds of principles 13

24. Recommendation on Examples ‘In many circumstances, statutory unconscionable conduct can be difficult for stakeholders to understand and for the courts to apply, which contributes to a lack of certainty and confidence surrounding the effect of the provisions.’ ‘A list of examples will not improve understanding or implementation of the provisions.’ Scope for the ACCC, ASIC, and state regulators under a single national law on statutory unconscionable conduct (ie ACL) to include examples and other guidance. 14

25. Recommendation on Principles ‘Interpretative principles, as an aid to interpretation of the provisions, would assist the courts in interpreting the provisions, stakeholders in understanding them, and regulators in enforcing them.’ ‘The principles should recognise that section 51AC (and, arguably, section 51AB) of the TPA and equivalent provisions of the ASIC Act are intended to go beyond the scope of the equitable and common law doctrines of unconscionability, and are not confined by them.’ 15

26. Recommendation of Principles of Interpretation Sections 51AB and 51AC go beyond common law and equity AND not limited by them Apply to terms and progress of a contract – ie not just what happens at execution Apply to systems/patterns of business behaviour – ie not just particular incidents Amadio-like special disadvantage not needed to access the statutory provisions/remedies 16

27. Other Unconscionability-Related Reforms Harmonisation of sections 51AB and 51Ac to be considered by Government Given single national ACL + increased regulatory enforcement powers, need for uniform national regulatory guidance by ACCC, ASIC, and state regulators on statutory unconscionable conduct (similar to proposals under unfair contracts regime) Nature of the regulatory guidance on unconscionable conduct Regulators to bring more test cases on the interpretative principles and other reforms Non-government test case support/encouragement too (see later advocacy, pro bono, and research recommendations) 17

28. Five Identified Franchising Behaviours Unilateral variation (eg via operations manual) Unforeseen capital expenditure End-of-term changes/arrangements Attribution of legal costs Confidentiality agreements 18

29. Getting the Right Balance Availability of evidence/expertise Availability of sample clauses Connection between identified behaviours Spectrum of cost recovery circumstances Spectrum of regulatory options: Absolute ban Contingent ban Compensation/consultation right Structure for opening/closing relationships Benefits/limits of enhanced disclosure 19

30. Other Franchising Matters Additional ‘Plain English’ up front disclosure document Treatment of ‘Good Faith’ ACCC’s function as regulator v mediator Need for Cth/State governmental attention to wider issue of mechanisms for early dispute resolution intervention Attribution of legal costs to be examined more extensively within that review process Government and ACCC to work with franchising sector to develop better education, training, and research on franchising 20

31. Future Regulatory Guidance, Advice, and ‘Test Case’ Litigation Flow-through impact of everything in the context of a changed regulatory landscape: Pre-report governmental decisions to reform statutory unconscionable conduct and FCC One single national law on statutory unconscionable conduct Enhanced regulatory powers (eg infringement notices) Recent ACCC/ASIC court wins and renewed impetus for test cases Ongoing test cases on scope of statutory unconscionability in other contexts (eg share margin calls – Goodridge case; excessive bank charges as penalties: current litigation) Framing regulatory guidance beyond decided cases Potential harmonisation and impact of business/consumer provisions on unconscionable conduct Further judicial rationalisation of unconscionability doctrines (flagged by French J in Berbatis) Academic/judicial development of framework for statutory unconscionable conduct transcending existing non-statutory bases for relief Unresolved legal questions for ‘test case’ advice/litigation about: Spread of unconscionability doctrines across ss51AA-51AC Statutory extensions beyond those doctrines Application of ‘special disadvantage’ to B2B contexts (egBell Group v Westpac and Optus v Telstra litigation) Existence, scope, and application of ‘situational’ forms of special disadvantage Meaning, scope, and application of good faith as an indicator of statutory unconscionability Interaction with ongoing academic/judicial disputes about the content and tests for good faith under contract law 21

32. Good Faith Issues Twin tracks in commercial matters – contract + TPA Content of good faith? Matter of implication of terms or construction through doctrine? Tests for good faith? Current judicial position on good faith Related obligations (eg cooperation, best endeavours, not hinder etc) Relevant clauses (eg entire agreement, negation of implied terms, sole discretion, etc) Negotiating and drafting options on good faith 22