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‘Unconscionable Conduct and Good Faith in the Small Business, Leasing, and

Franchising Sectors – The Way Ahead’

ByProfessor Bryan Horrigan

Report Co-Author, Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct, Australian Treasury, 2010

Louis Waller Chair of Law, Monash Law FacultyAssociate Dean (Research), Monash Law Faculty

Consultant, Allens Arthur RobinsonAuthor, Corporate Social Responsibility in the 21st Century (Edward Elgar, 2010)

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OverviewLead-up to the Panel’s inquiry and appointmentFocus and conduct of inquiryOutcomes of inquiryGovernment’s responseFlow-on regulatory impact and workLessons for lawyersCaveats up front

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Terms of ReferenceClarifying 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

Unconscionability Relates to …Various equitable (and some common law) causes of action

and bases for reliefStatutory unconscionability under Trade Practices ActStatutory unconscionability under Fair Trading ActsStatutory unconscionability in financial services under ASIC

ActUnconscionable financial services licensee conduct under

Corporations ActUnjust contracts laws (eg some Fair Trading Acts, NSW

Contracts Review Act)Related consumer credit lawsIndustry codes (eg Banking/Franchising Codes)State retail/commercial leasing laws

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Three Basic Forms of Statutory Unconscionability General prohibition on unconscionable conduct by corporations:

- TPA s 51AA (in trade practices generally)- ASICA s 12CA (in financial services)- Corporations Act s 991A (financial services licencees)

Unconscionable conduct in retail/personal/consumer contexts:- TPA s 51AB- ASICA s 12CB- Consumer Credit Code / Contracts Review Act (NSW)

Unconscionable conduct in big/small business contexts:- TPA s 51AC- ASICA s 12CC- Some Fair Trading Acts- Some commercial/retail leasing Acts

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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.”

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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.”

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

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

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

Meanings & Levels of Unconscionability Regulation

Under ‘the Unwritten Law’ (4 categories as described by Paul Finn): [1] Unconscionability as the underlying concept for Equity as a whole

[2] Unconscionability as an element or finding that is essential for specific equitable/other actions (eg estoppel, relief against forfeiture, unconscionable dealings, unilateral mistake etc)- Coercion/exploitation/advantage-taking- Unconscionable exercise of rights, retention of benefits etc

[3] Doctrines & remedies associated with unconscionable dealings & exploitation, advantage-taking, and defective understanding:– ‘spousal guarantees’ rules (eg Yerkey v Jones, Garcia)– ‘special disadvantage’ rule (eg Amadio)– Others (eg Bridgewater v Leahy)

[4] Unconscionability as a direct ground of relief in its own right, unmediated by conventional doctrines (eg Lenah Game Meats v ABC)

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Full Fed Ct in ACCC v Samton Holdings (2002)

Unconscientious exploitation of a party’s special disadvantage (eg Amadio)

Defective understanding, relationship of influence, and absence of independent explanation (eg Garcia)

Unconscionable departure from previous representation (eg estoppel – Verwayen, Waltons Stores v Maher)

Relief against forfeiture and penalty (eg Legione v Hateley and Stern v McArthur)

Rescind contracts for unilateral mistake (eg Taylor v Johnson)

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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.’

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.

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Unconscionable ConductSenate Economics Committee outcomesGovernment’s responseImplications of TPA reforms for ASIC Act and

cognate state laws on statutory unconscionable conduct

Pros and cons of legislated examplesDifferent kinds of principlesPros and cons of different kinds of principles

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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.

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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.’

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Recommendation of Principles of InterpretationSections 51AB and 51AC go beyond common law and equity

AND not limited by themApply to terms and progress of a contract – ie not just what

happens at executionApply to systems/patterns of business behaviour – ie not just

particular incidentsAmadio-like special disadvantage not needed to access the

statutory provisions/remedies

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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 conductRegulators to bring more test cases on the interpretative principles

and other reformsNon-government test case support/encouragement too (see later

advocacy, pro bono, and research recommendations)

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Five Identified Franchising BehavioursUnilateral variation (eg via operations manual)Unforeseen capital expenditureEnd-of-term changes/arrangementsAttribution of legal costsConfidentiality agreements

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Getting the Right BalanceAvailability of evidence/expertiseAvailability of sample clausesConnection between identified behavioursSpectrum of cost recovery circumstancesSpectrum of regulatory options:

Absolute banContingent banCompensation/consultation rightStructure for opening/closing relationshipsBenefits/limits of enhanced disclosure

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Other Franchising MattersAdditional ‘Plain English’ up front disclosure documentTreatment of ‘Good Faith’ACCC’s function as regulator v mediatorNeed for Cth/State governmental attention to wider issue of

mechanisms for early dispute resolution interventionAttribution of legal costs to be examined more extensively

within that review processGovernment and ACCC to work with franchising sector to

develop better education, training, and research on franchising

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Research, Advocacy, and Pro Bono WorkPro bono legal work to support further research, advocacy,

and test cases for small business on both statutory unconscionability and franchising

Alignment with existing government policies and processes on pro bono work by lawyers and consumer research and advocacy

Evidence-based research needed to inform next review of these reforms and all other recent TPA/FCC changes

Allow period of 3-5 years for current changes (including those arising from the Panel’s Report) to take effect

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Some Lessons for Lawyers in All Arms of the Profession Solutions to most major regulatory problems require more than doctrinal legal skills and

knowledge Significance of representative bodies as stakeholders in legal regulatory reform process and

assistance to them Realities and sophistication of the policy and reform development process Importance of legal submissions to public inquiries:

Influencing the ‘rules of the game’ for big/small business Practical legal expertise beyond governmental expertise Insights into problems/traps beyond governmental expertise Meaningful examples of clauses/practices/safeguards Connections to CSR, pro bono, government procurement, business regulation impact, and

other ‘business case’ issues for lawyers as client services providers Non-submission and post-submission complacency traps Non-submission avenues of influence Significance of legal/public commentary/analysis Insights on the internal governmental processes for major reforms Gap between research needs of one arm of government and what other arms of government

recognise in research funding/rankings

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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 (eg Bell 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

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Good Faith IssuesTwin tracks in commercial matters – contract + TPAContent of good faith?Matter of implication of terms or construction through

doctrine?Tests for good faith?Current judicial position on good faithRelated 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