Unconscionable conduct: an update from the High Court
Stubbings v Jams 2 Pty Ltd,[1] a case involving asset-based lending, a finding of unconscionable conduct at trial, a reversal on intermediate appeal and, ultimately, a decision by the High Court to uphold the trial judgment, provides some valuable lessons for those involved in consumer lending. The case also features a number of clear developments in the law of unconscionable conduct, even if incremental, which are capable of applying to a variety of situations.
The facts
The respondents engaged in asset-based lending. As part of their business model, they used an intermediary working at a law firm who would meet and negotiate the terms of loans with borrowers. The intermediary effectively acted as the respondents’ agent.
Stubbings, the appellant, was unemployed and without a regular income. He sought to borrow against two properties he owned — both of which were subject to mortgages — in order to fund the purchase of a third.
There being an intermediary, Stubbings never dealt directly with the respondents. As part of the lending process, the intermediary prepared two certificates — coined an ‘Independent Financial Advice’ certificate and an ‘Independent Legal Advice’ certificate — which were to be signed by an accountant and a lawyer, respectively, and to whom the intermediary referred Stubbings for consultation.
Ultimately, the respondents agreed to lend money to a company controlled by Stubbings and to use all three properties as security. Stubbings provided a guarantee. His company later defaulted on the loan.
The respondents sought to enforce Stubbings’ personal guarantee and commenced proceedings in the Supreme Court of Victoria seeking orders to that effect. Stubbings, in his defence, alleged that the respondents had acted unconscionably within the scope of the Australian Consumer Law s 21, the Australian Securities and Investments Commission Act 2001 (‘ASIC Act’) s 12CB, and/or equitable principles (that is, at general law).
The trial judge found the respondents to have engaged in unconscionable conduct according to equitable principles.[2] The Court of Appeal, in overturning that decision,[3] ruled that there was nothing inherently unconscionable about asset-based lending, that the respondents possessed neither actual nor constructive knowledge of Stubbings’ circumstances which otherwise might have rendered their behaviour unconscionable, and that the respondents were entitled to rely on the ‘Financial Advice’ and ‘Legal Advice’ certificates in order to absolve them of any duty to enquire further into Stubbings’ situation.
Stubbings sought and obtained special leave to appeal to the High Court.
Before the High Court
The High Court, constituted by Kiefel CJ, Keane, Gordon, Steward and Gleeson JJ, allowed the appeal and upheld the trial judge’s finding that the respondents had engaged in unconscionable conduct. Gordon J and Steward J, concurring in the result, gave separate reasons. This seems primarily to have reflected their Honours’ differing views as to the applicable legal basis for a finding of unconscionability on the facts.
There was no dispute that Stubbings had been at a special disadvantage vis-à-vis the respondents. The issue was whether the respondents had exploited that disadvantage. It was of importance to that question that, by virtue of the respondents’ way of doing business, the ‘dangerous nature of the loans’ was evident to the intermediary but not to Stubbings himself.[4] Given his position as agent, whatever knowledge the intermediary possessed could be attributed to the respondents.
Kiefel CJ, Keane and Gleeson JJ, in their Honour’s joint judgment, articulated the Court’s view that the respondents ‘sufficiently appreciated [the] reality that the exercise of their rights under the mortgages to turn the appellant’s disadvantages to their own profit was unconscionable’.[5] So far as concerned the question of knowledge — and, it followed, any conscious exploitation of Stubbings’ situation by the respondents — their Honours held:
A case for relief against an unconscionable attempt to enforce legal rights is established in this case because [the intermediary] had sufficient appreciation of the appellant's vulnerability, and the disaster awaiting him under the mortgages, that his conduct in procuring the execution of the mortgages is justly described as unconscientious.[6]
Observations
The High Court’s decision suggests the following practicalities to a case involving an allegation of unconscionable conduct.
Preferring a trial judge’s assessment of (oral) evidence. The High Court was mildly critical of the Court of Appeal’s decision, in reaching its view that there had been no unconscionability, to apparently disregard some key pieces of evidence. The High Court also favoured the trial judge’s assessment of the evidence relating to the intermediary’s (and therefore the respondents’) knowledge about Stubbings’ special disadvantage. As Kiefel CJ, Keane and Gleeson JJ noted, ‘[t]he findings of the primary judge pertaining to [the intermediary’s] state of knowledge were made after having had the benefit of hearing [him] in person over several days’.[7] The trial judge, it should be noted, had characterised the intermediary’s oral evidence as having been given with ‘apparent smugness’.[8]
Seeing past a person’s efforts to shield themselves from liability. The High Court was unforgiving of the respondents’ somewhat artificial (if not cynical) efforts to relieve themselves from having to further enquire about Stubbings’ circumstances, including his company’s fitness to service the loan. This was with respect not only of the respondents’ use of an intermediary — the effect of which was that the respondent wilfully could be oblivious to Stubbings’ circumstances — but also of the ‘Financial Advice’ and ‘Legal Advice’ certificates. The High Court characterised the certificates as ‘mere “window dressing”’ and an ‘artifice’.[9] Adopting an expression used by the trial judge, the High Court variously described the respondents as having taken steps to ‘immunise’ themselves against any finding of unconscionability.[10]
Liability-distancing measures can have the opposite effect. Again on the point of the certificates, and whereas they may have been designed to shield the respondents from having to make further enquiries about Stubbings’ circumstances (and, in that sense, to avoid any attribution of knowledge which could found a case of unconscientious exploitation), the High Court considered that the certificates in fact had the opposite effect; ‘one might regard the deployment of such artifices in a context where the lender or its agent deliberately distances itself from evidence that must confirm the dangerous nature of the transaction for the borrower or its guarantor as evidence pointing to an exploitative state of mind on the part of the lender’.[11]
Guidance on the application of the ASIC Act s 12CB. Kiefel CJ, Keane and Gleeson JJ (and, separately, Steward J) ruled that the trial judge had been correct in his finding of unconscionable conduct at general law. For that reason, their Honours considered it unnecessary to determine whether the conduct also had contravened the ASIC Act s 12CB. (That section prohibits conduct in connection with the provision or possible provision of financial services which is in all the circumstances unconscionable.)
Gordon J, giving separate reasons, applied s 12CB and held that the respondents’ conduct breached that section in addition to the general law prohibition on unconscionable conduct. By virtue of the ASIC Act s 12CB(4)(b) — which is capable of founding unconscionable conduct in the context of ‘a system of conduct or pattern of behaviour’ — Gordon J noted that there need not be loss or disadvantage in order for a system of conduct to be unconscionable. Her Honour held of the relevant ‘system’ employed by the respondents:
[The respondents] recognised a likely, although not certain, vulnerability and yet designed a system of lending against a guarantor’s property, suspecting that they had no income or capacity to service the loan, and deliberately avoid[ed] information as to the guarantor’s financial or personal circumstances in order to ‘immunise’ themselves from knowledge of the vulnerability.[12]
Her Honour also held that the respondents’ system ‘was not reasonably necessary to protect [their] legitimate interests’.[13]
Not focusing excessively on the type of lending or transaction. Steward J found it necessary only to determine that there had been unconscionable conduct according to equitable principles (in the general law) rather than pursuant to the Australian Consumer Law or the ASIC Act.
In disagreeing with its assessment of the case, his Honour was critical of the Court of Appeal’s apparent focus on the type of lending which had occurred. In response to the Court of Appeal’s finding that the respondents had no knowledge of Stubbings’ personal and financial circumstances — his circumstances being such that default under the loans was inevitable — his Honour stated that ‘the Court of Appeal may have been distracted by the “concept” of asset-based lending’.[14] His Honour stated:
In the first place … there is not one ‘type’ of asset‑based lending. In that regard, determining whether identified conduct is unconscionable cannot turn upon some a priori categorisation of a product — here a type of lending — as being either immune from, or subject to, equitable remedies. Observing that asset‑based lending ‘by itself’ is not unconscionable conduct is not, with respect, a useful proposition. Rather, in every matter there must be ‘close consideration of the facts of each case’.[15]
In response to what his Honour perceived to have been the error in the Court of Appeal’s approach, his Honour went on to give a telling reminder that ‘in every matter there must be a “close consideration of the facts of each case”’.[16]
[1]: [2022] HCA 6.
[2]: Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150.
[3]: Jams 2 Pty Ltd v Stubbings [2020] VSCA 200.
[4]: Stubbings v Jams 2 Pty Ltd [2022] HCA 6, [43] (Kiefel CJ, Keane and Gleeson JJ).
[5]: Ibid [5].
[6]: Ibid [46].
[7]: Ibid [47].
[8]: Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150, [313]. Steward J, in his Honour’s separate judgment, noted this impression by the trial judge: see Stubbings v Jams 2 Pty Ltd [2022] HCA 6, [103], [123], [142].
[9]: Stubbings v Jams 2 Pty Ltd [2022] HCA 6, [49] (Kiefel CJ, Keane and Gleeson JJ).
[10]: Ibid [59], [77], [80], [83] (Gordon J), [123], [152], [154] (Steward J). Kiefel CJ, Keane and Gleeson JJ, while not adopting that expression, were similarly critical of the apparent purpose of the certificates: see [49].
[11]: Ibid [49] (Kiefel CJ, Keane and Gleeson JJ).
[12]: Ibid [77].
[13]: Ibid [80].
[14]: Ibid [151].
[15]: Ibid [152].
[16]: Ibid, quoting Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392, 400.