The concept of ‘unconscionable conduct’ under the Australian Consumer Law, and the difference between sections 20 and 21
The Australian Consumer Law (ACL) contains provisions prohibiting unconscionable conduct in the course of trade or commerce. Chief amongst those are sections 20 and 21. There are a number of differences between those provisions both in their text and in the way the common law responds to them. These differences are not necessarily commonly understood.
In Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd (Good Living Company),[1] an appeal relating to a claim of unconscionable conduct, the Full Court of the Federal Court described not only the principles relating to unconscionable conduct generally but also the different approaches to determining contraventions of sections 20 and 21.
Background
In hearing a claim of unconscionable conduct under the ACL, a court will closely scrutinise the facts in order to ascertain whether in all the circumstances the claim can succeed. The Full Court in Good Living Company set out the facts of the case in considerable detail. The key points are as follows.
Key facts
The respondents owned premises in Blight Street, Sydney. The respondents leased the premises to Chop 1 Pty Ltd (Chop 1), which ran a restaurant. The lease included terms that:
Chop 1 was to provide an unconditional bank guarantee to secure performance of its obligations under the lease;
Chop 1 would be in default if a manager or receiver were appointed to any of its assets; and
if Chop 1 defaulted, the respondents were entitled to call upon the bank guarantee in whole or in part and without notice to Chop 1.
In December 2012 and pursuant to the terms of the lease, the Commonwealth Bank issued a bank guarantee in favour of the respondents in the sum of $100,000.
In August 2014, the appellants — a corporate group — acquired Chop 1. The respondents did not know of this acquisition until some time later. As part of the acquisition, the appellants guaranteed Chop 1’s performance under the bank guarantee.
In June 2016, managers and receivers were appointed over each of the companies in the appellants’ corporate group, including Chop 1. In time, the managers and receivers sought to sell Chop 1’s restaurant business and, in doing so, to create a new lease or assign the existing lease of the premises. There were protracted, and ultimately fruitless, negotiations between the respondents and the receivers and managers to this end.
In October 2016, the respondents notified both Chop 1 and its managers and receivers that because Chop 1 had become subject to receivership it had defaulted under the terms of the lease. The respondents signalled an intention to terminate the lease.
Between October and December 2016, the respondents negotiated with a new tenant for the premises. During the course of those negotiations, the receivers and managers agreed to pay the respondents $500,000 upon sale of Chop 1’s business to the new tenant. According to the respondents, this payment was intended to compensate the respondents for various expenses and losses the respondents claimed they had suffered as a result of Chop 1’s default. The money was to be paid pursuant to the terms of a deed of settlement and release which was scheduled for completion on 19 December 2016.
On 16 December 2016 — a few days before the deed of settlement and release was due for completion — the respondents signalled their intention to call upon the bank guarantee. In their evidence at trial, the respondents maintained that both the $500,000 settlement sum and the ability to call upon the $100,000 bank guarantee were part of a ‘package deal’.
In dealing with Chop 1’s managers and receivers, the respondents did not know of Chop 1’s acquisition by the appellants until after negotiating the above arrangements, nor of the appellants’ guarantee of Chop 1’s performance under the bank guarantee.
In January 2017 and following disagreement with the receivers and managers about the respondents’ entitlement to do so, the respondents formally called upon the bank guarantee by hand-delivering it to the Commonwealth Bank and obtaining a cheque for $100,000. Soon after, the Bank demanded payment of that amount from Chop 1 pursuant to the terms of the guarantee.
Ultimately, in January 2018, the appellants paid the guaranteed moneys to the Bank plus interest which had accrued over the year since the guarantee was called upon.
The appellants’ claim
The appellants commenced proceedings in the Federal Court, claiming the respondents had engaged in unconscionable conduct in contravention of sections 20 and 21 of the ACL by:
continuing to demand, and not withdrawing their call upon, the guarantee in circumstances where they had received $500,000 pursuant to the deed of settlement and release; and
collecting and retaining the $100,000 from the bank guarantee.
The appellants also alleged, in related fashion, that the respondents had been unjustly enriched in their receipt and retention of the guaranteed moneys.
The primary judge rejected the claim of unconscionable conduct on both bases. The judge held that there was no inequality in bargaining power and nor any special disadvantage which had been exploited. The judge held that the claim under section 20 could not succeed for the same reasons it could not succeed under section 21. The appellants appealed to the Full Court.
On appeal
The matter was heard before Allsop CJ, Besanko and Jagot JJ. In giving separate reasons, their Honours were unanimous in their dismissal of the appeal. A number of key matters are apparent from the reasons.
Subjectively and objectively reasonable actions
Jagot J gave a substantive judgment which included a detailed outline of the facts to which the other judges referred. In dismissing the appeal, her Honour held that there were two ‘essential problems’ in the appellants’ case.
First, the respondents had ‘good reasons’ to call upon the guarantee in December 2016. Her Honour considered that such reasons were both subjective — that is, based on the belief of the particular individual charged with making the decision on behalf of the respondents to call upon the guarantee — and objective — namely, that ‘the respondents as parties to a commercial deal … remained at real commercial risk until all “pieces of the puzzle” [as the respondents had described it] had been finalised’.[2]
Second, the appellants had executed the deed of settlement and release (which provided for payment of the $500,000) while knowing about the respondents’ position with respect to the guarantee; the terms of the lease permitted the respondents to call upon the guarantee. The appellants submitted that because the respondents could call on the guarantee without notice to Chop 1, the appellants were at a significant disadvantage and the respondents exploited this. In rejecting this submission, Jagot J cited Gleeson CJ in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd,[3] where the Chief Justice said:
‘A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests.’[4]
Jagot J noted that the appellants ‘knew that they were providing security for an unconditional bank guarantee which could be exercised without notice to Chop 1 in the event of default’;[5] the respondents, it seems, had not acted unconscionably simply because they insisted on their rights under the terms of the lease with Chop 1 in a way which ultimately affected the appellants due to the appellants having guaranteed Chop 1’s performance.
The relevance of the source of power said to have been exercised unconscionably
Besanko J, in his Honour’s judgment, noted that ‘the nature of the commercial instrument containing the power, the exercise of which is said to involve unconscionable conduct, is clearly relevant.’[6] Based on the evidence and the nature of the guarantee itself, his Honour could identify no bad faith nor improper purpose in the respondents’ decision to call upon the guarantee. His Honour quoted the earlier decision of the Full Court in Clough Engineering Limited v Oil and Natural Gas Corporation Limited,[7] where it was said:
‘The wide purpose of the performance bank guarantees and their character as reflecting an allocation of risk and a provision of security to their holder militate against any argument as to disproportion in their exercise’.[8]
His Honour conceded that that the respondents had enjoyed ‘a good, if not very good, commercial bargain’ in being able to claim the $500,000 under the deed of settlement and release in addition to the $100,000 the subject of the bank guarantee.[9] However, without any other element which might trigger the Court’s equitable jurisdiction — unfair dealing, trickery, bad faith or misleading conduct — the respondents’ ability to craft and benefit from a good commercial bargain did not render their actions unconscionable.
Other key principles
In the Chief Justice’s separate reasons, Allsop CJ set out several factors informing the decision to dismiss the appeal. A number of those factors reflect principles relating to claims of unconscionable conduct generally, and of the differences between sections 20 and 21 specifically. Those principles, as drawn from his Honour’s judgment, are:
Whether a claim is brought under section 20 or 21, ‘the proper judicial technique involved is the technique of equity described in [authorities including the decision in Paciocco v Australia and New Zealand Banking Group Limited (Paciocco)[10]]’ — namely, that a court must pay close attention to the facts.[11]
The Full Court has ‘expressed in a consistent way in at least seven … judgments’ the principles of the application of section 21 and statutory unconscionability including, again, in Paciocco.[12]
‘[U]ntil the High Court says otherwise the principles informing s 20 and the unwritten law, and those informing s 21 and the concept of statutory unconscionability are related but distinct and different.’ In particular, ‘the principles of equity governing the setting aside of transactions by reason of unconscionable conduct [in cases such as Commercial Bank of Australia Limited v Amadio[13]] inform but do not control s 21.’ His Honour noted that the specific difference is that whereas section 20 requires the presence of a special disability which the stronger party unconscientiously exploits, section 21 ‘involves an evaluative inquiry which is not so limited’.[14]
In rejecting the appellants’ claim under section 21, his Honour quoted a passage from an earlier Full Court decision in Unique International College Pty Ltd v Australian Competition and Consumer Commission[15] where the Full Court described what was meant by the notion of behaving ‘unconscionably’. Allsop CJ observed that the Full Court in that case ‘did not introduce a notion of moral obloquy or a requirement for any pre-existing disability or vulnerability. Rather, it recognised the seriousness of an evaluative judgment that conduct was against or offended good conscience’.[16]
In determining whether there has been unconscionable conduct for the purposes of section 21, a court is to consider ‘the totality of the circumstances’ which include the matters set out in section 22 of the ACL and ‘the values of the common law and equity in which context the statute sits’.[17]
Finally, the legislative regime contemplates that the threshold for unconscionable conduct is high:
‘[T]he conduct must depart sufficiently from societal norms of acceptable commercial behaviour as to be characterised as against or as offending conscience, recognising that such is a matter which Parliament has considered sufficient to warrant censure by the imposition of a civil penalty to deter such conduct. There may be more or less serious manifestations of unconscionable conduct’.[18]
Turning to the facts of the case, his Honour held that there had been no unconscionable conduct under either provision of the ACL. His Honour noted that ‘[t]he appellants were not the respondents’ commercial counterparties, and were not known to the respondents … until after the negotiation of the relevant arrangements’.[19] Allsop CJ considered that the respondents ‘acted in their own interests, without sharp practice, honestly and openly, even if in an uncompromising way’.[20]
Unjust enrichment, as distinct from unconscionability
Finally, with respect to the appellants’ claim that the respondents, in cashing in the bank cheque and retaining the money, had been unjustly enriched, Allsop CJ was keen to draw a distinction between the concepts of unjust enrichment and unconscionable conduct. His Honour stated:
‘That unjust enrichment, if present, may play a part in the evaluation of all the circumstances as to whether conduct is or is not unconscionable is a far cry from equating the presence of unjust enrichment with the consequence of unconscionable conduct.’[21]
Comment
While the success of a claim of unconscionable conduct under the ACL will depend on all the facts of a case, and while a court in determining such a claim will have broad equitable discretion, Good Living Company sets out a number of principles worth bearing in mind when making, or defending, such a claim. Besides the several factors apparent from the judgment of Allsop CJ — including the distinction between sections 20 and 21 and that the latter provision calls for a broader enquiry — the other judges’ reasons suggest:
the importance of looking to the reasonableness of the actions of the defending party, both subjectively and objectively; and
the relevance of the particular source of power said to have been exercised unconscionably.
[1]: [2021] FCAFC 33.
[2]: Ibid [98].
[3]: (2003) 214 CLR 51.
[4]: Ibid 157 (emphasis added).
[5]: Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33, [114].
[6]: Ibid [20].
[7]: [2008] FCAFC 136.
[8]: Ibid [138].
[9]: Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33, [23].
[10]: (2015) 236 FCR 199.
[11]: Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33, [2].
[12]: Ibid [3].
[13]: (1983) 151 CLR 447.
[14]: Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33, [4].
[15]: (2018) 266 FCR 631.
[16]: Good Living Company Pty Ltd as trustee for the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2021] FCAFC 33, [7].
[17]: Ibid [8].
[18]: Ibid [10].
[19]: Ibid [11].
[20]: Ibid.
[21]: Ibid [12] (emphasis added).