Australian Consumer Law – does statutory unconscionable conduct require some vulnerability or disadvantage?

On 19 March 2021, the Full Court of the Federal Court of Australia handed down its decision in Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40 (ACCC v Quantum), finding that, while exploitation of some vulnerability or disadvantage will often be a feature of unconscionable conduct, such conduct is not necessary in order to establish that a party has engaged in statutory unconscionable conduct.

What is statutory unconscionable conduct?

Section 21 of the Australian Consumer Law (ACL) provides that parties, must not, in trade or commerce, in connection with the supply or acquisition of goods or services, engage in conduct that is, in all the circumstances unconscionable. This is often called ‘statutory unconscionable conduct’.

There is also a prohibition, under section 20 of the ACL, against engaging in conduct, in trade or commerce, that is unconscionable within the meaning of the ‘unwritten law’. This is often called ‘equitable unconscionability’.

A party is entitled to relief under the ACL if it has suffered loss as a result of another party’s unconscionable conduct.

It is well established that ‘equitable unconscionability’ requires that the wrongdoer has knowingly exploited or taken advantage of some special vulnerability or disadvantage of the other party. This means that there can usually be no finding of equitable unconscionable conduct where both parties to a transaction are sophisticated commercial operators, who are taken by the courts to have the experience and means to protect and advance their own interests.

There has been a question as to whether there is a similar requirement for the purposes of statutory unconscionable conduct under section 21 of the ACL. The court in ACCC v Quantum resolved this controversy, finding that it is not necessary for a party to have exploited some special vulnerability or disadvantage for it to have engaged in statutory unconscionable conduct.

ACCC v Quantum

The facts

The dispute in ACCC v Quantum arose out a business that Quantum Housing Group Pty Ltd (QHG) ran that involved arranging investments in properties that qualified for an affordable housing scheme run by the Federal Government. Under the scheme, incentives were made available for parties that built or offered affordable rental accommodation.

QHG’s business used a model where QHG received incentives directly from the government and then passed them on to its investors. This put QHG in a superior bargaining position, as it meant investors were reliant on QHG to receive their incentive. QHG had separate agreements with each investor. Under these agreements, there was a requirement to have a property manager that ensured continued compliance with the government scheme.

QHG developed a plan to use its superior bargaining power to pressure investors to obtain property management services from ‘approved’ property managers, with which it had undisclosed commercial associations. The plan involved:

• issuing correspondence to investors that pressured them to terminate relationships with existing property managers and change to an approved property manager
• imposing accreditation guidelines on investors that required property managers to transfer security deposits of $10,000 to QHG unless they were an approved property manager
• issuing default notices to investors who had not changed to an approved property manager, asserting that they were in default under their agreements (that governed their entitlement to the incentive) with QHG.

As a result of this pressure, a number of investors transferred responsibility for the management of their property to an approved manager.

The issues

The ACCC brought proceedings against QHG, alleging, among other things, that by implementing its plan QHG had engaged in unconscionable conduct.

The judge at first instance held that QHG had not engaged in unconscionable conduct because there was no vulnerability or disadvantage on the part of the investors that QHG had taken advantage of or exploited; the investors had sufficient financial standing and sophistication to look after their own interests and understand the nature of their dealings with QHG.

The findings

On appeal, the Full Court of the Federal Court of Australia disagreed, finding that, even though the investors were sophisticated commercial parties who were not subject to any special vulnerability or disadvantage, QHG had nevertheless engaged in unconscionable conduct in breach of section 21 of the ACL.

The Court held that QHG had ‘systematically’ misused its superior bargaining position by ‘misleading its counterparties and pressuring them’ in a way that reflected ‘a dishonest lack of good faith in undermining bargains previously reached in order to extract surreptitious and undisclosed financial benefits’ and that this constituted unconscionable conduct.

In coming to this decision, the Court emphasised that the key consideration in assessing whether a party has engaged in statutory unconscionable conduct, is whether a party’s conduct has sufficiently departed from the norms of acceptable commercial behaviour, so as to offend conscience. Examples of such potentially unconscionable behaviour identified by the Court included:

• acting in a way that is systematically dishonest
• acting in bad faith in undermining a bargain
• commercial bullying or pressure or sharp practice
• behaving contrary to an industry code
• using significant market power in a way to extract an undisclosed benefit.

How has this been applied by the courts?

Since ACCC v Quantum was handed down, it has been applied by the New South Wales District Court in Insurance Australia Ltd v Holden [2021] NSWDC 142.

In that case, the Court accepted that there was no need for a claimant to show some special vulnerability or disadvantage in order to establish statutory unconscionably conduct, but emphasised that there still needed to be some causal connection between the alleged unconscionable conduct and the claimed loss. The claimant was not able to show that they had suffered loss as a result of anything that the other party had done or not done. Accordingly, their claim for unconscionable conduct did not succeed.

This case illustrates that succeeding in a claim for unconscionable conduct will still depend on the specific circumstances of the case.

Practical implications

ACCC v Quantum provides an important clarification that it is not just vulnerable or disadvantaged parties that are protected by the provisions against unconscionable conduct. Sophisticated commercial entities can also bring a claim under section 21 of the ACL if they have suffered loss as a result of another party’s unconscionable conduct.

This decision is also likely to have implications for sophisticated parties operating in the financial services industry, as there is an equivalent provision under the Australian Securities and Investments Commission Act 2001 (ASIC Act) that prohibits unconscionable conduct in relation to financial services.

Ultimately, be it a claim under the ACL or under the ASIC Act, whether a party has engaged in unconscionable conduct will still depend on the specific circumstances of the case.

If you would like more information about these issues, please contact Rocco Russo, Katharine Bligh or another member of our litigation and dispute resolution team.