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Misuse of Market Power

&

Unconscionable ConductFiona Crosbie & Bashi Kumar

Allens Arthur Robinson

27 February 2003

qyks S0111068114v3 203297041 6.3.2003

Misuse of Market Power

&

Unconscionable Conduct

Fiona Crosbie & Bashi Kumar

Allens Arthur Robinson

27 February 2003

"Competition, by its very nature, is deliberate and ruthless."[Mason CJ & Wilson J, Queensland Wire]

When, and in what circumstances, will a company misuse either its market power in contravention

of section 46 of the Trade Practices Act 1974 (TPA) or its superior bargaining power in

contravention of the unconscionable conduct provisions of the TPA? While the ACCC bemoans

what it sees as judicial emasculation of section 46, some commentators have argued that the

unconscionable conduct provisions should step in to deal with misuses of market power involving

small businesses.

The effectiveness of section 46 was hotly debated before the Inquiry into the TPA, chaired by

former High Court Justice Darryl Dawson last year (Dawson Inquiry) and promises to feature in

the report that will issue.

This paper reviews the current state of the law on both section 46 and the unconscionable conduct

provisions. In particular, we address the following:

1. Misuse of market power under section 46 of the TPA:

• what is market power?

• when or in what circumstances will a company misuse its market power?

• the implications of recent decisions such as Boral and Melway.

2. Unconscionable conduct under sections 51AA and 51AC of the TPA:

• what is it and where are the provisions headed?

3. The Dawson Inquiry and what to expect from it.

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1. Section 46 of the TPA: when is a corporation misusing market power?

1.1 THE LEGISLATION

Section 46(1) provides:

“(1) A corporation that has substantial degree of power in a market shall not take

advantage of that power for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body

corporate that is related to the corporation in that or any other market; or

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or

any other market.”

1.2 OVERVIEW OF LEGISLATIVE REQUIREMENTS

To put it simply, a corporation will breach section 46 of the Act if it:

• has a substantial degree of power in a market;

• takes advantage of that market power; and

• does so for a prohibited purpose.

Note that section 46 only applies to the conduct of a corporation or, a corporation and its

related entities.

1.3 MARKET DEFINITION

To determine whether a corporation has a substantial degree of market power, the market

must first be defined. Once the outer boundaries of a market are delineated, a company's

power within that market may be ascertained.

As highlighted by McHugh J in Boral Besser Masonry Limited v ACCC (Boral)1:

“There is an inverse relationship between market definition and market

power. If the relevant market is defined widely, it will ordinarily result in a

finding that a firm has less market power than if the market is defined

narrowly”

Not surprisingly, market definition is rigorously disputed in court.

(a) DEFINING THE MARKET

A market is delineated by reference to product, geographic and functional dimensions.

Starting with the goods and services of the corporation whose conduct is under scrutiny, a

court will then determine the degree of demand and supply side substitution to determine

the relevant market.2 The High Court in Queensland Wire Industries Pty Ltd v Broken Hill

1 [2003] HCA 5 at [255].

2 See, for instance, Re QCMA and Defiance Holdings (1976) 25 FLR 169 at 190; see also Re Tooth & Co Ltd; Re TooheysLtd (1979) ATPR 40-113; Arnotts Ltd v TPC (1990) ATPR 41-061.

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Co Ltd3 (Queensland Wire) confirmed that the market was appropriately defined as the

area of close competition, determined by the substitutability of goods both on the supplyand demand side.

Ø Boral Besser Masonry Limited v ACCC4

Facts

The Boral case provides an example on point. The ACCC claimed that between April 1994

and October 1996, BBM, a wholly owned subsidiary of Boral Ltd, had taken advantage of

its market power in the market for concrete masonry products (CMP) in the Melbourne

metropolitan area. During the relevant time, there was excess capacity in the CMP

industry and a price war arose between the major players, Boral, Rocla and Pioneer. Boral

also made attempts to increase its capacity by offering to purchase the highly efficient

“Hess” plant of one of its competitors (this never eventuated) and by upgrading its Deer

Park facilities.

Federal Court

At first instance, Heerey J found that the relevant market was the market for materials used

in the construction of walls and paving in the Melbourne metropolitan area. 5 Heerey J

considered there was sufficient evidence of actual and potential substitution between CMP

and alternative products such as tilt-up, clay brick and plasterboard. 6 It followed that BBM

did not have market power. 7

Full Federal Court

On appeal, the Full Federal Court overturned the decision of Heerey J, concluding instead

that the relevant market was the narrower market for the supply of CMP, in which BBM had

substantial market power. 8 Justice Beaumont concluded that although there was some

substitution between CMP and alternative products, it was ”not sufficiently intense, or long-

lasting, to warrant the description “close”".9 Justice Beaumont also thought it was

significant that internal documents showed that BBM treated the relevant market as themarket for the supply of CMP.10

3 (1989) 167 CLR 177.

4 [2003] HCA 5 at [255].

5 Boral, [2003] HCA 5 at [101-102] (Gleeson CJ & Callinan J).

6 Ibid.

7 Boral, [2003] HCA 5 at 103 (Gleeson CJ & Callinan J).

8 Australian Competition and Consumer Commission v Boral (2002) 106 FCR 328 (ACCC v Boral) at 377-378 (BeaumontJ), 384 (Merkel J) and 410 (Finkelstein J).

9 ACCC v Boral , (2002) 106 FCR 328 at 377-378 (Beaumont J).

10 Ibid.

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High Court

On appeal, the High Court accepted the Full Federal Court's market definition. 11 McHugh J

defined the market as12:

“the area of actual and potential, and not purely theoretical, interaction

between producers and consumers where given the right incentive – a

change in price or terms of sale – substitution will occur.”

Interestingly, despite the narrower market, the majority of the High Court concluded that

Boral did not have substantial market power. Justice Kirby dissented. This will be

discussed further below.

1.4 SUBSTANTIAL DEGREE OF MARKET POWER

Having defined the market, it is necessary to consider whether a person has a substantial

degree of power in that market.

(a) WHAT IS MARKET POWER?

Section 46(3) of the TPA defines market power as essentially the ability to behave in a

manner unconstrained by competitors in a market. Mason CJ and Wilson J said in

Queensland Wire13:

“Market power can be defined as the ability of a firm to raise prices abovethe supply cost without rivals taking away customers in due time, supply

cost being the minimum cost an efficient firm would incur in producing the

product.…”

Ø Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (Melway)14

In Melway, the High Court confirmed this definition of market power.

Facts

Melway concerned Melway Publishing's refusal to supply Auto Fashions Australia with its

directories. Melway Publishing had 80-90 percent of the wholesale street directory market

in Melbourne. Auto Fashions claimed that Melway Publishing misused its market power bymaintaining a policy of exclusive distribution whereby wholesalers could only sell to

particular segments of the retail market. Melway Publishing did this to prevent Auto

Fashions from competing in the downstream market for the retail supply of street

directories.

11 Boral, [2003] HCA 5 at [134] (Gleeson CJ & Callinan J), 155 (Gaudron, Gummow & Hayne JJ), 259 (McHugh J) and 330(Kirby J).

12 Boral, [2003] HCA 5 at [252].

13 Queensland Wire, (1989) 167 CLR 177 at 188.

14 (2001) 205 CLR 1 at 17.

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Full Federal Court

The Full Federal Court held that Melway Publishing had market power after comparing

Melway Publishing's conduct with the way it would have behaved in a market without a

substantial degree of market power.

High Court

Although the High Court agreed that the Melway Publishing had market power15, the

majority criticised the Full Federal Court's reasoning in respect to market power. 16 The

majority of the High Court endorsed the approach taken in Queensland Wire and stated:

“…market power means the capacity to behave in a certain way (which

might include setting prices, granting or refusing to supply, arranging

systems of distribution), persistently, free from the constraints of

competition.”17

(b) THE SIGNIFICANCE OF MARKET SHARES

It was thought that a high market share was a significant indicator of the existence of a

substantial degree of market power. This, combined with countervailing factors such as

low barriers to entry or the threat of imports, formed the basis of an assessment for the

determining market power. Increasingly, however, a low market share is not necessarilyindicative of the absence of market power.


In Boral, much attention was devoted to establishing whether Boral had substantial market

power, despite its relatively low or fluctuating market share ranging between 18 – 33percent.

Full Federal Court

The Full Federal Court formed the view that the behaviour of Boral was evidence of market

power, having regard to the following:

• Boral’s market reputation as a source of market power19;

• Boral’s financial resources (or deep pockets) which enabled it to maintain prices atbelow marginal cost for a long period of time20; and

• dynamic or strategic barriers to entry.21

15 Melway, (2001) 205 CLR 1 at 20.

16 Melway, (2001) 205 CLR 1 at 24.

17 Melway, (2001) 205 CLR 1 at 27.

18 [2003] HCA 5.

19 ACCC v Boral , (2002) 106 FCR 328 at 378 (Beaumont J).

20 ACCC v Boral , (2002) 106 FCR 328 at 389-390 (Merkel J).

21 ACCC v Boral , (2002) 106 FCR 328 at 389 (Merkel J) and 415 (Finkelstein J).

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High Court

The majority of the High Court, however, came to a different conclusion. Gleeson CJ and

Callinan J were of the opinion that the Full Federal Court had confused financial strength

with market power and stated:

“The financial ability to survive a price war is not market power, or a

manifestation of characteristics that give marker power, if, when the price

war is over, the market is still highly competitive.”22

McHugh J concluded that Boral did not have a substantial degree of market power as:

• it was unable to raise prices to supra-competitive levels without losing customers;

and

• it was not in a position to recoup its losses once the price cutting had ended. 23

Ø ACCC v Universal Music Australia Pty Ltd24

In Universal Music, an important issue was whether the respondents had a substantial

degree of market power, notwithstanding their modest market shares.

Hill J stated:

“The case of a firm operating in an oligopolistic market with only 15%

market share and unable to fix prices in the overall market above the

competitive level but which has, as a result of a temporary monopoly power

over a limited number of products in that market, substantial power to

exclude competitor is not one which has been the subject of any authority

in Australia…”25

However, Hill J adopted what he considered to be a common sense approach to the

definition of market power and concluded that despite the limited market share of the

respondents, they had market power because:

• there were barriers to entry in the statutory requirement of copyright proof prior toparallel importation and the behaviour of incumbent firms; and

• many retailers would be unable to ignore the threat to refuse to supply from some ofthe major record companies because of the significance of chart music in the market.26

Universal Music has been appealed to the Full Federal Court. It will be very interesting to

see what impact the views of the majority of the High Court in Boral will have on the

Universal Music appeal having regard to the fact that market players in Boral had greater

percentage market shares than the market players in Universal Music.

22 Boral, [2003] HCA 5 at [138].

23 Boral, [2003] HCA 5 at [199].

24 (2001) 115 FCR 442.

25 Universal , (2001) 115 FCR 442 at 539-540.

26 Universal , (2001) 115 FCR 442 at 541-542.

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Ø ACCC v Australian Safeway Stores Pty Ltd (No 2)27

In Safeway, Safeway Stores only had a total market share of 16 percent in the market for

the wholesale acquisition of bread in Victoria. Goldberg J, however, concluded that

Safeway Stores had a substantial degree of market power because there were no

competitive constraints on Safeway Stores at the wholesale level.28 This was because:

• there were no alternative purchasers to whom the bakers could supply the breadrefused by Safeway Stores, and all three plant bakers had excess capacity;

• Safeway Stores had the ability to determine the terms of trade as well as the price;

• the distinct lack of product differentiation between the different bakers, all genericproducts being almost perfectly substitutable for Safeway Stores; and

• there were substantial strategic barriers to entry given that Safeway Stores would onlybe constrained by a competitor of a comparable size.

1.5 TAKING ADVANTAGE OF MARKET POWER

Corporations with a substantial degree of market power will only breach section 46 if they

take advantage of that market power for a proscribed purpose. The concept of "taking

advantage" is therefore extremely important. Of significance is whether there may becommercially rational or efficient explanations for the conduct that is said to constitute a

taking advantage of market power.

(a) WHAT IS "TAKING ADVANTAGE"?

The High Court in Queensland Wire clarified that to ‘take advantage’ means to ‘use’; aphrase devoid of moral or pejorative connotations.29 Mason CJ and Wilson J held that the

relevant question is whether BHP could have engaged in the conduct in a competitive

market.30 As almost anything could be done in either a competitive or non-competitive

environment, the view of Mason CJ and Wilson J makes satisfaction of the ‘take

advantage’ requirement a fait accompli. However, the preferred analysis of Deane,

Dawson & Toohey JJ was to apply the hypothetical question of what BHP would do in

order to compete more effectively in the long run. This test would more appropriately

require an examination of what a profit maximising company would actually do having

regard to potential efficiency gains from the conduct.

Ø Queensland Wire Industries Pty Ltd v Broken Hill Co Ltd31

Facts

In Queensland Wire, BHP constructively refused to supply Y-bar (an input into the

manufacture of star-picket fences) to Queensland Wire Industries (QWI). QWI alleged that

BHP took advantage of its market power in contravention of section 46.

27 [2001] FCA 1861.

28 Safeway [2001] FCA 1861 at [1100].

29 Queensland Wire (1989) 167 CLR 177 at 192.

30 Ibid.

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High Court

The High Court agreed, holding that BHP was able to refuse to supply Y-bar because of its

market power, doing so in order to prevent QWI from competing in the downstream rural

fencing market.


In Melway, the High Court confirmed the approach taken in Queensland Wire and stated

that:

“the expression “take advantage of” does not mean anything materially

different from “use”, and does not require conduct which is predatory or

morally blameworthy”.33

The question therefore becomes whether a company with market power would have

behaved in the same way without market power.34

The majority of the High Court found that on the balance of probabilities, Melway

Publishing would have denied supply even without market power. They gave the following

reasons for this finding:

• on the evidence, it did not appear that Melway Publishing would lose sales fromthe refusal to supply, as Auto Fashions was proposing to compete with existing

wholesale distributors;

• in a competitive market, a manufacturer does not necessarily increase total sales

by selling to everyone who seeks wholesale supply; and

• supplying the respondent would effectively amount to abandonment of Melway

Publishing’s exclusive distribution arrangement which it had successfully adopted

to secure a position of market dominance.

(b) THE NEXUS BETWEEN MARKET POWER AND "TAKING ADVANTAGE"

The High Court in Melway said that:

“...the Act requires, not merely the co-existence of market power, conduct ,

and proscribed purpose, but a connection such that the firm whose conduct

is in question can be said to be taking advantage of its power.”35

The High Court in Melway agreed that freedom from competitive constraint might make it

possible or easier for a corporation to refuse supply. However, it does not follow that a

company with freedom from competitive constraint which refuses to supply is displaying

connection between the freedom from competitive constraint (ie market power) and the

refusal to supply (taking advantage). The presence of competitive constraints might still in

31 (1989) 167 CLR 177.

32 (2001) 205 CLR 1 at 17.

33 Melway (2001) 205 CLR 1 at 17.

34 Melway (2001) 205 CLR 1 at 21.

35 Ibid.

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such circumstances be compatible with a similar refusal, especially if done to secure

business advantages which would normally exist in a competitive environment.36

Ø ACCC v Australian Safeway Stores Pty Ltd (No 2)37

Goldberg J sought to apply Melway to the circumstances in Safeway. Goldberg J said that

the appropriate test was whether Safeway Stores could have behaved in the same way in

a competitive environment.

Safeway Stores adopted and implemented a bread policy of deleting bread lines of bakers

which supplied bread to the company at prices higher than to Safeway Stores' competitors.

His Honour came to the conclusion that even if Safeway did not have market power, it

would have adopted and implemented its policy.38 He said that even in a competitive

market there would be no commercial imperative for Safeway to act any differently

because:

• the bakers would still wish to supply bread to Safeway;

• Safeway would still be able to substitute the products of one baker with another bakergiven the excess number of suppliers in the market; and

• Safeway would still have implemented the Policy even if the Policy did not have thedesired effect.

Safeway illustrates the difficulty in applying a counter factual in the absence of relevant

antecedent conduct. In Melway, the Court had the benefit of knowing the situation before

Melway Publishing obtained market power – Melway Publishing used a particular

distribution system to grow from a small business to a significant market player in

Melbourne. It was therefore an easy comparison to make. In Safeway, however, that

comparison was not available, so the Court was left to speculate how Safeway would have

acted without its market power.


Full Federal Court

In Boral, the Full Federal Court used Boral's conduct as evidence of both the taking

advantage limb and the market power limb. In doing so, the Court relied more on the

behaviour of market participants rather than the structure of the market to arrive at a

conclusion that market power exists.

High Court

On appeal, a majority of the High Court found that the Full Federal Court had inverted the

reasoning process by considering first the purpose of the conduct, and then the existence

of substantial market power. 40 The Full Federal Court was criticised for unduly

36 Melway (2001) 205 CLR 1 at 27-28.

37 [2001] FCA 1861.

38 Safeway [2001] FCA 1861.

39 [2003] HCA 5.

40 Boral, [2003] HCA 5 at [194] (Gaudron, Gummow & Hayne JJ) and [320] (McHugh J).

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concentrating on Boral's desire to hold or increase its market share41 and the “supply side”

of the market 42. The High Court held that it was important to “take account of the dynamicsresulting from the powerful position in which customers for CMP found themselves, partly

in consequence of the availability of substitute products”43 and to consider Boral's long term

prospects for raising prices to a supra–competitive level in order to recoup its losses.44

Kirby J (dissent)

However, in his dissenting judgment, Kirby J held that the ideas of “corporation”, “market”,“taking advantage”, “power” and “purpose” were interrelated. 45 His Honour said that

commonsense dictated the fact that power would be linked to purpose and the evidence in

the present case supported the conclusion that Boral had a proscribed purpose. 46 His

Honour went into considerable discussion about the concept of “recoupment” and

concluded that, given the wording of section 46, it was not necessary to establish

recoupment as an element of the impugned conduct.47 His Honour concluded that Boral’s

conduct was precisely the type of conduct that section 46 forbade and that the appeal

should be dismissed. 48

(c) THE SIGNIFICANCE OF FINANCIAL RESOURCES

As discussed above, the Full Federal Court in Boral held that Boral's wholly owned

subsidiary could supply concrete masonry products at extremely low prices because of

Boral's financial strength or deep pockets. Therefore, it was neither necessary nor likely

that the subsidiary would look to recoup its losses. The majority in the High Court

disagreed.

Ø Rural Press Ltd v ACCC (Rural Press) 49

Interestingly, the Full Federal Court took an approach to the issue of financial resources in

Rural Press that was different to its previous approach in Boral. The change in approach

may have been due to the High Court's guidance in Melway, which was handed down just

a few days after the Full Federal Court's decision in Boral.

Facts

Rural Press concerned the pressure exerted by Bridge Printing and Rural Press, the

publishers of the Murray Valley Standard (together, the publishers), on Waikerie Printing

which owned The River News, to keep to their respective territories.

41 Boral, [2003] HCA 5 at [263] (McHugh J).

42 Boral, [2003] HCA 5 at [60] (Gleeson CJ & Callinan J).

43 Ibid.

44 Boral, [2003] HCA 5 at [128-130] (Gleeson CJ & Callinan J).

45 Boral, [2003] HCA 5 at para [378].

46 Boral, [2003] HCA 5 at [389].

47 Boral, [2003] HCA 5 at [436].

48 Boral, [2003] HCA 5 at [448-449].

49 [2002] FCAFC 213 (Whitlam, Sackville & Gyles JJ).

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Federal Court

At first instance, Justice Mansfield upheld the ACCC’s allegations that the publishers had

misused their market power in the market for regional newspapers in Murray Bridge. His

Honour found that financial resources, existing publishing resources and expertise were

relevant to the measurement of market power. 50

Full Federal Court

On appeal, the Full Federal Court held that the publishers had not taken advantage of their

market power. The Court held that, with financial resources and excess capacity, the

publishers could have entered the Riverland market regardless of their market power in the

Murray Bridge market.51 As such, while the existence of financial resources could have

facilitated the use of market power, it did not constitute a use of market power and

therefore, was not a breach of section 46.52

It will be interesting to see whether this finding leads to a grant of special leave to appeal to

the High Court.

(d) MARKET POWER V OTHER POWER

Ø Stirling Harbour Services Pty Ltd v Bunbury Port Authority53 (Stirling Harbour)

In Stirling Harbour, the Full Federal Court distinguished market power from statutory

power.

Facts

The Bunbury Port Authority (BPA) exclusively provided port facilities and services in the

Port of Bunbury under the Port Authorities Act 1999 WA. In 1999, BPA called for tenders

for the grant of an exclusive licence for a five to seven year term to provide towage

services to shipping operators using the port. Stirling Marine Services (SMS), who had up

to this point been the sole provider of towage services at the Port under a non-exclusive

licence granted by BPA, alleged that BPA was using its market power to exclude SMS by

granting an exclusive licence to a competitor.

Federal Court

Justice French at first instance distinguished between statutory power and market power,

stating that:

“the exercise by [BPA] of a statutory power to licence the provision of

towage services in the Port of Bunbury is not an exercise of market powerbut rather the discharge of a regulatory function conferred upon it by the

legislature in the public interest”.54

50 Rural Press [2002] FCAFC 213 at [64-68].

51 Rural Press [2002] FCAFC 213 at [142].

52 Rural Press [2002] FCAFC 213 at [143].

53 [2000] FCA 1381.

54 Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 at [124] (French J).

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The Full Federal Court agreed with his Honour's approach. 55

Ø NT Power Generation Pty Ltd v Power & Water Authority56

In this case, however, Mansfield J came to a different view. His Honour held that Power &

Water Authority (PAWA) had taken advantage of its market power by refusing to provide

access to PAWA’s infrastructure, thereby preventing NT Power from selling electricity to

persons in the Northern Territory. Mansfield J held that PAWA’s market power stemmed

from its natural monopoly in infrastructure. His Honour stated further that:

[the decision]”…was made in the appreciation of the existence of that market

power, and of the capacity to exercise that market power to decline access to its

infrastructure. It was only by virtue of its control of the Market, and the absence of

other suppliers in the market, that PAWA could in a commercial sense withhold

access to its infrastructure.”57

This case is also subject to an application for a special leave to appeal before the High

Court.

1.6 FOR A PROHIBITED PURPOSE

Section 46 will only be breached if the business has used its market power for a proscribed

purpose.

Where there are multiple purposes, a court will look at the corporation's substantial

purpose for engaging in the conduct. If the substantial purpose is anti-competitive, it will be

sufficient to contravene section 46, irrespective of the existence of other substantial

purposes.58

(a) PURPOSE: SUBJECTIVE OR OBJECTIVE?

To establish purpose, the courts will look first at the subjective purpose of the corporation. 59

However, objective elements are also relevant to establishing subjective purpose. Section

46(7) of the TPA specifies that purpose must be established by direct evidence, or by

inference. In General Newspapers Pty Ltd v Telstra (1993) ATPR 41-274, the Courtstated that purpose will usually be inferred from the nature of the arrangement, the

circumstances in which it was made and its likely effect. The best evidence from a practical

perspective, however, is likely to come from pre-existing company documents or

statements from the witness box.

In Boral, for instance, purpose was easily inferred from Boral's internal memoranda and

company minutes which Finkelstein J aptly described on appeal as ‘smoking gun’

documents. The documents were said to contain details of Boral's business strategy,

including its stated goal to further reduce the number of manufacturers in the market.

55 Stirling Harbour [2000] FCA 1381 at [71-72] (Burchett & Hely JJ).

56 [2001] FCA 334.

57 Ibid at [357].

58 See Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) 75 ALR 581.

59 Dowling v Dalgety Australia Ltd (1992) 106 ALR 75.

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(b) PURPOSE IS ABOUT INTENTIONS, NOT OUTCOMES

As both a question of law and evidence, it is not necessary to show that the purpose was

achieved, provided purpose is established as a question of fact.60 In other words, section

46 is concerned with the intention to achieve a result, not the actual result.

Melway highlights this point. The adoption of a territorially cordoned distributor

arrangement may have the effect of excluding a company in a downstream market but it

does not necessarily have the requisite purpose. As the High Court said, the adoption of adistribution system by a manufacturer which imposes vertical restraints on wholesalers

does not necessarily contravene section 46 as it is just as likely to have been adopted for

pro-competitive purposes.61

(c) RATIONAL OR LEGITIMATE BUSINESS REASONS


The High Court in Boral cautioned against proceeding too quickly from a finding about

purpose to a conclusion about taking advantage of market power.63 McHugh J described

the Full Federal Court's approach as “inverted” – the Court started with Boral's stated

purpose to eliminate its competitors, and subsequently viewed its conduct as coloured by

that purpose. 64

Gleeson CJ and Callinan J stated that the concept of “hanging on” in the expectation that

one or more suppliers would “break first” may have been a rational commercial response,

rather than evidence of a purpose to damage or eliminate competitors. In the light of the

fiercely competitive market in which it was operating, Boral's pricing decisions and decision

to upgrade its facilities was completely rational.65

(d) NEXUS BETWEEN PROSCRIBED PURPOSE AND MARKET POWER

Implicit in the above mentioned reasoning is the need to show a causative link between the

proscribed purpose and the exercise of market power. A business will not have a

proscribed purpose if it undertakes conduct with a legitimate purpose, irrespective of

whether the conduct has the effect of damaging a competitor.

Ø Plume v Federal Airports Corp; Habib v Plume v Anor (Plume)66

For example, in Plume, the Federal Airports Corp (FAC) denied Plume the right to operate

a passenger bus service between Alice Springs Airport and the city centre by granting an

exclusive shuttle bus operating licence to a competitor. The effect was to damage Plumes'

business. However, the Court found that the FAC's purpose was not to prevent Plume from

60 Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43.

61 Melway (2001) 205 CLR 1 at 18.

62 [2003] HCA 5.

63 Boral, [2003] HCA 5 at [123] (Gleeson CJ and Callinan J) and [181] (Gaudron, Gummow & Hayne JJ).

64 Boral, [2003] HCA 5 at [320] (McHugh J).

65 Boral, [2003] HCA 5 at [142] (Gleeson CJ and Callinan J).

66 (1997) ATPR 41-589.

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engaging in competitive conduct, but to ensure that a commercially viable, efficient shuttle

bus service was put in place for the benefit of the public.67


Similarly, in Melway, the majority of the High Court held that Melway Publishing had a

number of legitimate business reasons for maintaining its distribution system, only one of

which was to restrict competition between distributors downstream.69 This did not make a

finding of a prohibited purpose inevitable. The majority in Melway held that there was nosuggestion that Melway Publishing acted with the purpose of preventing the respondent

from becoming a wholesaler of street directories. Melway Publishing was not the only

possible source of Melbourne street directories. Although Melway Publishing was the only

source of its own street directories, this would have been the case regardless of its market

power. 70

2. Unconscionable conduct

2.1 EQUITABLE PRINCIPLES OF UNCONSCIONABILITY

Unconscionability is an equitable principle. It allows a transaction to be set aside where

one party to a transaction takes unfair advantage of another party that is under a specialdisability, where the disability was sufficiently evident that the stronger party knew or ought

to have known about it. These basic principles were set out by Deane J in Commercial

Bank of Australia v Amadio (1983) 151 CLR 447 where he stated:

The jurisdiction is long established as extending generally to circumstances in which:

(i) a party to a transaction was under a special disability in dealing with the other party with theconsequence that there was an absence of any reasonable degree of equality betweenthem; and

(ii) that disability was sufficiently evident to the stronger party to make it prima facie “unfair” or“unconscientious” that he procure, or accept, the weaker party’s assent to the impugned

transaction in the circumstances in which he procured or accepted it.71

2.2 THE LEGISLATION

The TPA now incorporates the following prohibitions on unconscionable conduct:

Ø a general prohibition, usually involving a party with a "special disability" (section 51AA)

Ø a prohibition relating to consumer transactions (section 51AB); and

Ø a prohibition relating to transactions involving small business (section 51AC).

67 Ibid at 44132.

68 (2001) 205 CLR 1 at 17.

69 Melway (2001) 205 CLR 1 at 20.

70 Melway (2001) 205 CLR 1 at 18.

71 (1983) 151 CLR 447 at 474

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As well as giving the ACCC power to prosecute unconscionable conduct, individuals can

now seek the remedies under the TPA in relation to claims of unconscionable conduct.

Sections 51AA and 51AC are discussed in detail below.

2.3 SECTION 51AA OF THE TPA

(a) GENERAL PROHIBITION: S51AA

Section 51AA provides that:

"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 or Territories."

Amadio is considered the ‘cornerstone’ of the "unwritten law" referred to in section 51AA.

Mason J defined unconscionable conduct in Amadio as:

“the class of case in which a party makes unconscientious use of his

superior position or bargaining power to the detriment of a party who

suffers from some special disability or is placed in some special situation of

disadvantage.”72

The Amadios were an elderly Italian couple who were persuaded by their son to provide a

mortgage guarantee on the son's business debt to the Commercial Bank of Australia. The

couple mistakenly believed that the business was financially sound, and that their liability

was limited. The business failed, and the bank sought to enforce the mortgage against the

Amadios' assets. In a majority decision, the High Court held that the bank knew or should

have known of the Amadios' special disability and taken care to disclose all the relevant

facts prior to obtaining the guarantee. The guarantee was set aside on the grounds that

the bank had acted unconscionably in its dealings with the Amadios.

(b) WHAT IS A SPECIAL DISABILITY?

The circumstances giving rise to a special disability at general law have generally been

construed as those of a personal nature, such as illness, illiteracy, impaired faculties and

ignorance.73 The ACCC has recently sought to extend the notion of special disability to

circumstances whereby one party suffers financial, or some other form of commercial,

dependence. The judicial responses to this have been mixed.

Ø ACCC v Berbatis Holdings Pty Ltd74 (Berbatis)

Facts

In an action against a landlord of a shopping centre in Perth, the ACCC alleged that thelandlord acted unconscionably towards small business tenants by imposing a condition that

the tenant would only secure a new lease if it ceased litigation concerning the existing

lease. The ACCC argued that the tenants were at a special disadvantage because of their

financial dependence on the renewal of the lease. In particular, the ACCC claimed that the

72 Ibid at 461.

73 See Blomley v Ryan (1956) 99 CLR 362 at 404 (Fullagar J).

74 [2001] FCA 757.

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landlord knew that the Roberts (a tenant) wanted to renew their lease and sell their

business so that they could care for a sick child.

Federal Court

At first instance, French J held that the landlord's conduct in relation to the Roberts was a

contravention of section 51AA. This was because the Roberts were under a "situational

disadvantage" in relation to the landlord, who was unfairly exploiting the Roberts' position

of vulnerability. The Court was also influenced by the fact that the litigation against thelandlord concerned some bona fide or serious claims.

Full Federal Court

In a unanimous judgment, the Full Federal Court described the Roberts' situation as

dependant on a renewal of its lease so as to be in a position to sell the business. This, the

Court said, was a similar situation to that which is experienced by any other proprietorwhose business goodwill was dependent on location. 75 In other words, there was nothing

special about the disadvantage. The Full Federal Court stressed the distinction between

acting opportunistically to strike a hard bargain, and acting unconscionably. In this case,

the landlord was acting opportunistically.76

The decision of the Full Federal Court is currently on appeal to the High Court. Gummow

and Kirby JJ indicated during the hearing that the questions on appeal before the Court

would also be considered under section 51AC. 77

(c) ACCC v Samton Holdings Pty Ltd78 (Samton Holdings)

In Samton Holdings , the Ranaldis purchased a business which included a lease of

premises owned by Samton. The lease was due to expire in a few months, but the

Ranaldis could exercise an option to renew the lease provided sufficient notice was given.

The Ranaldis failed to exercise the option in time. Samton indicated that it would renew

the lease if the Ranaldis paid them $70, 000. The ACCC argued that the Ranaldis were in

a position of “special disadvantage” because their financial security depended upon thebusiness, which in turn required an extension of the lease.

Federal Court

At first instance, the Court agreed that the Ranaldis were in a position of special

disadvantage, and that Samton was aware of this position. However, the Court held that

Samton was not unconscionable in its dealings with the Ranaldis because it was under noobligation to extend the lease.

On appeal, the Full Federal Court agreed that Samton's conduct was not unconscionable.

However, the Court disagreed with the conclusion that the Ranaldis were in a position of

special disadvantage.

75 Berbatis, note 74 at [75].

76 Berbatis, note 74 at [81].

77 ACCC v GC Berbatis Holdings Pty Ltd & Ors (21 October 2002), High Court Transcript.

78 (2002) 117 FCR 301.

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The Full Federal Court held that:

“Characterisation of disadvantage as ''special'' involves the recognition that

it would be unconscionable knowingly to deal with the person so affected

without regard to his or her disability, be it constitutional, in the sense of

inherent, or situational, in the sense of arising from a particular set of

circumstances.”79

The Court acknowledged that the Ranaldis lacked bargaining power. However, it did notfollow that the Randaldis were at a special disadvantage given that their present

circumstances were the result of: 80

• considered commercial judgment; and

• an oversight in neglecting to exercise the option in good time.

The Court stated:

“At least in the case of an experienced business person there must, in our

opinion, be something more than commercial vulnerability (however

extreme) to elevate disadvantage into special disadvantage."81

2.4 SECTION 51AC OF THE TPA

(a) THE SMALL BUSINESS PROVISION: SECTION 51AC

Section 51AC(1) provides:

“A corporation must not, in trade or commerce, in connection with:

(a) the supply or possibly supply of goods or services to a person (other than a listed

public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a

listed public company);

engage in conduct that is, in all the circumstances, unconscionable.”

Section 51AC(1) deals with the supply to or acquisition of goods or services by acorporation to or from a person. Section 51AC(2) mirrors s51AC(1) in form but deals in

substance with the supply to or acquisition of goods and services to or from corporations

(other than listed public companies). Sections 51AC(3) and 51AC(4) describe the matters

to which a Court may have regard when supplying goods or services, such as the

following:

(a) the relative bargaining strengths of each party;

(b) whether a party was required to comply with conditions not reasonably necessary

for the protection of a company's legitimate interests;

79 Ibid, at 323.

80 Samton Holdings , note 78 at 322.

81 Ibid.

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(c) whether a party was able to understand any documents relating to the supply or

possible supply of the goods or services;

(d) whether a company exerted any undue influence or pressure on, or used any

unfair tactics against, a party;

(e) the amount for which, and the circumstances under which, identical or equivalent

goods or services could have been acquired from or supplied to another company;

(f) the extent to which a company discriminates between parties in similar

transactions;

(g) the requirements of any applicable industry code;

(h) the requirement of any other industry code, if a party acted on the reasonable

belief that the company would comply with that code;

(i) the extent to which a company unreasonably failed to disclose:

(j) intended conduct that may affect the interests of a party;

(k) risks arising from intended conduct;

(l) the extent to which a company was willing to negotiate with a party; and

(m) the extent to which all parties acted in good faith.

(b) THRESHOLD REQUIREMENT: SMALL BUSINESS TRANSACTIONS?

Section 51AC is different to s51AA in two key respects. First, section 51AC is directed to

protecting small businesses. The section applies to transactions involving the supply to or

acquisition of goods or services at a price not exceeding $3 million. Indeed, as part of its

election promise to the small business sector, the Federal Government provided the ACCC

with additional funding to enforce this provision.

However, there is authority to support the proposition that large corporations may avail

themselves of this provision.

Ø Reading Australia Leasing Pty Ltd v Roadshow Film Distributions Pty Ltd82

This case illustrates that the operation of section 51AC may not be limited to small

business transactions.

In early 2001, an independent cinema operator, Reading Entertainment (Aust) Pty Ltd (the

subsidiary of a significant US company) brought an action against film distributor

Roadshow (a subsidiary of Village Roadshow), alleging that Roadshow’s blanket refusal to

supply it with first release films was in breach of the Cinema Code of Conduct and

unconscionable within the meaning of section 51AC.

Reading argued that section 51AC applied as it was an unlisted company and the supply of

each first release film constituted a single transaction which fell within the then $1 million

threshold. Roadshow raised the point that:

82 Directions and Interlocutory Hearing before Justice Merkel in the Federal Court of Australia, Victorian District Registry, 28March 2001

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.. can it be said that this company which has shareholders’ funds of $US100 million,

is the sort of company that has been dealt with in an unconscionable fashion ...

Roadshow subsequently gave undertakings to the Court that it would comply with the

Cinema Code and assess the supply of first release films on a case by case basis, rather

than issuing a blanket refusal to supply.

Ø Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd83

Ford sought an injunction in response to a threat from ROH Automotive (a division of

Arrowcrest) to withhold supply unless Ford entered into a new long term supply contract.

Ford was successful in obtaining an interim mandatory injunction which required ROH

Automotive to resume and continue to supply products to Ford until 27 May 2002, thereby

avoiding an assembly line closure.

The injunction was awarded on the basis that there is a serious question to be tried thatROH Automotive’s conduct was unconscionable and in breach of section 51AC of the TPA.

Marshall J was satisfied that, given that Ford was not a listed company in Australia, and

that the remaining value of the contract was approximately $2 million, the arrangement

came within the ambit of section 51AC for the purposes of providing injunctive relief.

Interestingly, the $3 million threshold above which section 51AC does not apply was

interpreted by the Federal Court as relating to the remainder of the relevant contract rather

than the total value of the contract.

This decision has important ramifications for the application of section 51AC.

(c) CIRCUMSTANTIAL OR SITUATIONAL INEQUITY?

As discussed, the financial threshold is a significant difference between sections 51AA and

51AC of the TPA. The other significant difference is that section 51AC lists the relevant

factors a court may take into account when determining whether conduct is unconscionable

within section 51AC. This list broadly describes circumstances of commercial inequity or

disadvantage. Sections 51AC(3) and (4) require consideration of both the procedural andthe substantive fairness of a bargain, (see for example sections 51AC(3)(e) and (f)).

Ø ACCC v Simply No-Knead (Franchising) Pty Ltd84

This was a test case for section 51AC, where a franchisor was found to have acted

unconscionably when it:

• refused to deliver product to its franchisees;

• deleted franchisees telephone numbers from Telstra’s 013 Directory Assistance

service;

• refused to negotiate with franchisees with whom it was in dispute; and

• refused to provide disclosure documents as required under the Franchising Code.

83 Directions and Interlocutory Hearing before Justice Marshall in the Federal Court of Australia, Victorian District Registry,17 May 2002.

84 (2000) 104 FCR 253.

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Justice Sundberg described the conduct as “unfair, bullying and thuggish” and concluded

that it amounted to unconscionable conduct in contravention of section 51AC. 85. Much wasmade in the judgment about ‘unfair and unreasonable [behaviour] having regard to the

franchisor/franchisee relationship’.86

In so saying, Sundberg J appeared to be comparing Simply No-Knead's conduct with some

ideal or normative relationship between franchisor and franchisee. A difficulty with such an

approach is determining the outer parameters of the ideal or normative relationship in

cases to come.

In any event, the decision clarifies the interaction between section 51AA and section 51AC

and confirms that it is not necessary to show a judicially recognised form of ‘special

disadvantage’ to establish a contravention of section 51AC.

3. Dawson Inquiry issues

One of the key areas of debate before the Dawson Inquiry was the breadth and operation

of section 46 of the TPA. Not surprisingly the ACCC and representatives of small business

want to strengthen its scope, and believe that the unconscionability provisions of the TPA

have not served their purpose in protecting the commercial dealings of small businesses

with large companies.

In its submission to the Dawson Inquiry, the ACCC expressed its concerns with the

evidentiary difficulties of proving proscribed purpose under section 46 and advocated the

introduction of an "effects" test.

3.1 THE INTRODUCTION OF AN EFFECTS TEST

(a) ACCC SUBMISSION

An 'effects' test would allow a court to consider the effect of a corporation's conduct. The

ACCC submits that an effect test would:

• support the policy objectives of Part IV of the TPA to promote competition

(competition can be damaged irrespective of the purpose motivating that conduct);

• bring section 46 into line with the other provisions in Part IV of the TPA which also

consider the effect of the conduct on competition;

• overcome the forensic difficulties in proving purpose under section 46. (The ACCCclaimed to be unable to pursue many complaints because of an inability to obtain

sufficient evidence of proscribed purpose);

• be more effective than a purpose test in evaluating conduct in new technology

markets, where there are incentives for unilateral anticompetitive conduct such as

predatory pricing, exclusion or undesirable tying and bundling or when network

effects are present; and

85 Ibid, at 270.

86 Ibid, at 269.

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• bring section 46 into line with similar overseas provisions.87

(b) RESPONSE TO ACCC SUBMISSIONS

The submissions in response to the Dawson Inquiry suggested that an effects test could:

• encompass behaviour that has an adverse impact on a competitor rather than on

competition, regardless of the legitimate purpose behind the relevant behaviour.

Other provisions of the TPA which contain an “effects test” measure the effect on

competition, not just on an individual competitor;

• create judicial precedents which confuse the line drawn between anti-competitive

and strongly competitive conduct as it invites greater regulatory error than thecurrent purpose test given the necessity to examine complex market structures and

use forecasting; and

• have the following impact on competition:

(i) cause business activity to stagnate as companies prefer not to innovate or

move into new industries because of the uncertainty associated with

activities in new markets; and

(ii) force companies to predict the impact of and avoid vigorously competitive

conduct which has the effect of excluding or eliminating a competitor so as

not to risk breaching the law or being investigated by the ACCC. 88

3.2 DIVESTITURE ORDERS

The use of divestiture powers, in addition to the merger divestiture powers under section

50 of the TPA, was mooted before the Dawson Inquiry, with the ACCC arguing that such a

remedy warranted consideration.

This could be a powerful and fairly invasive remedy which would naturally require carefuland ongoing scrutiny. It may also prove impractical since it presumes that there is a willing

purchaser for the divested assets. The order may arguably have anti-competitive effects

as there is no guarantee that:

• the divested assets will be disposed for market value (note the possibility of a

constitutional challenge on these grounds); or

• the corporation will still be capable of efficient and competitive conduct (previously

enjoyed by economies of scale) once divested.

87 ACCC, Submission to the Review of the Trade Practices Act 1974 (Cth), 2002 at pages 63-105.

88 See, for instance, submissions from Business Council of Australia, the Law Council of Australia and Allens ArthurRobinson to the Review of the Trade Practices Act 1974 (Cth).

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