Directors' Counsel

Professor Bob Baxt outlines a recent court ruling that saw the High Court pour cold water on a broad reading of unconscionability.

Unconscionable conduct: has the High Court “muddied” the interpretation?

One of the most significant recent amendments made to our statutory regime governing business transactions and relationships was the introduction of the statutory remedy for “unconscionability” into what was then the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth) (the Act)). A similar prohibition against unconscionability was also introduced into the Australian Securities and Investments Commissions Act 2001 (Cth) (ASIC Act) (section 12 CB) and other legislation.

When the Harper Panel was asked to review competition law and policy, it concluded that there was no need to amend the statutory prohibitions contained in the Act in relation to unconscionability. This position was strengthened by the decision of the Full Federal Court in Australian Competition and Consumer Commission v Lux Distributors Pty Ltd (No 2) [2015] FCA 903 (Lux).

I, however, believed that there was still some unwillingness on the part of our judges to give the statutory provisions a broader reading that they may justifiably be given in certain circumstances. The legislation should be further amended to ensure that the courts are given clearer guidelines in interpreting this important extension of the common law. Evidence of that was illustrated in the Victorian Court of Appeal’s decision in Director of Consumer Affairs vs. Scully [2013] VSCA 292, decided a few weeks after Lux.

Now, by virtue of two strong judgments from Justice Keane and Justice Gageler of the High Court of Australia in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 (Paciocco), the prospects of our courts taking a broader interpretation of the statutory unconscionable conduct remedy has been significantly dampened.

Paciocco case

The decision in the Paciocco case ultimately turned on broader and arguably more significant questions than the interpretation of unconscionability. By a majority of four judges to one (Justice Nettle dissenting), the High Court of Australia ruled that the fees imposed on customers who made late payments in respect of certain accounts they had opened up with the Australia and New Zealand Bank (the bank) were not penalties under the general law. In that regard, the High Court upheld the decision of the Full Federal Court in Paciocco v Australia & New Zealand Banking Group Limited (2015) 236 FCR 199 (the Full Federal Court decision). In doing so, the majority of the High Court provided a broad interpretation of the common law “definition” of what amounted to a penalty under contract law provided in Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Co Limited [1915] AC 79 (Dunlop). It is unnecessary for the purposes of this short note to delve into a detailed discussion of the House of Lords decision and Australian decisions on this important legal question.

In an interesting case, Kakavas v Crown Melbourne Limited [2013] HCA 25, unconscionability had been relied on by an inveterate gambler in his action against the Crown Casino organisation in Victoria, which had forbidden him access to its gambling facilities. Noting that “moral obloquy” had been required by lower courts to evaluate whether unconscionable conduct existed, the High Court of Australia confirmed in dicta that it was required in that case. Despite the broader reading of what needed to be established in an unconscionability claim, as ruled on by the Full Federal Court in the Lux case, the two Justices Keane and Gageler in the High Court in Paciocco have certainly poured “cold water” on the broader interpretation in considering one of the arguments relied by the plaintiffs in Paciocco.

Justice Keane made it clear that he was not impressed by the argument put forward by the plaintiffs, that the bargaining power of the two parties, in this case by the class members, who had accounts with the bank. In his view the argument did not meet the requirements of the legislation. He added at paragraph 293: “While a disparity in bargaining power may be necessary to attract the operation of the [unconscionability conduct provision], the mere existence of the disparity is not sufficient to do so. The existence of a disparity in bargaining power, which is an all-pervading feature of a capitalist economy, does not establish that the party which enjoys the superior power acts unconscionably by exercising it.’

He added (at paragraph 294) that it would be wrong to require the courts to evaluate facts such as those that existed in this case: “On the basis that [the relevant fee charged by the bank] was not set at an amount limited to cost recovery only must be rejected, because of its erroneously narrow assumption as to the legitimate interests [of the bank]. Further, to focus upon the relative strengths of the bargaining positions of the [two parties] is to ignore the requirement [of the relevant section] to consider ‘all the circumstances’. [The relevant section] does not proscribe the existence of a disparity in bargaining power as opposed to the manner of its exercise.”

In a separate judgment, Justice Gageler focused rather unfortunately, in my respectful view, on the concept of “moral obloquy”, after dismissed the arguments that the relevant fees charged amounted to penalties (relying on his interpretation of the Dunlop case). This is most disappointing.

The Full Federal Court Lux decision had clearly removed the importance of the concept of moral obloquy, which has driven so many negative judgments against claims made by the regulators and by civil plaintiffs in cases of unconscionability, by noting that the concept of moral obloquy was not something that should be given the high level of importance, provided by Chief Justice Spigelman in the New South Wales Court of Appeal decision of Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583. At paragraph 188 of his judgment, Justice Gageler noted that the statutory question raised in the case brought by Paciocco (and others in the class) against the bank, was that when the bank: “entered into and then implemented its standard contractual stipulation for the charging of the late payment fee, whether that conduct was objectively to be characterised as ‘unconscionable’ according to the ordinary meaning of that term, requiring as it does ‘a high level of moral obloquy’ on the part of the person said to have acted unconscionably (paragraph 190)”.

In his view, this placed too harsh an imposition on the parties wishing to assess the relevant conduct. It was not relevant for the party alleging unconscionability to pick and choose one of the areas of conduct that is specified in the relevant legislation (including the question of equality of bargaining power). In his view, the fact that a late payment fee was to be made had been disclosed to Paciocco in relevant communications.

I have no difficulty with the court evaluating all of the evidence (the court always has the discretion to consider the evidence and to evaluate it in accordance with the way in which it is presented to the court). What I am concerned about is the re-introduction of the concept of moral obloquy into a consideration of unconscionability. When read together with Justice Keane’s decision, referred to earlier in this note, one can discern a very clear move away from the broader interpretation, which the Full Federal Court in Lux suggested should be applied in such matters.

It is my view that the concept of unconscionability was introduced into the relevant statutes because Parliament felt that consumers needed additional protection in situations where parties with less power in the market can be subject to undue pressure in negotiations and other relationships. It is unfortunate that Parliament decided to extend the unconscionable conduct prohibitions to small businesses, where the disparity is, in my view, of little or no consequence in the ordinary context of contractual behaviour.

The decision in Paciocco is one that will be strongly supported by the business and legal communities. It will cause our regulators to think very carefully about how they frame future unconscionable conduct claims, even on behalf of consumers (remembering that the Paciocco case was a class action and it would have been difficult for the court to have found unconscionability in respect of every single member without looking at all of the relevant facts). What is encouraging, is the High Court’s interpretation of penalties in the context of contractual arrangements that may be entered into in our business community. It gives confidence to contracting parties that a contract will not be set aside or interfered with unless there are extraordinary circumstances, which may require the court to do so.