Analysis of Unconscionable Conduct: Trade Practices Act, Sections 51AA, 51AB, and 51AC, Study notes of Law

Download Analysis of Unconscionable Conduct: Trade Practices Act, Sections 51AA, 51AB, and 51AC and more Study notes Law in PDF only on Docsity! Chapter 2 'Unconscionable conduct' and the Trade Practices Act 'Unconscionable conduct' as currently codified in the TPA 2.1 Currently, there are three separate subsections of Part IVA of the Trade Practices Act 1974 that deal with 'unconscionable conduct'; 51AA, 51AB and 51AC. Section 51AA deals with 'procedural unconscionability' which relates to the formation of a contract; sections 51AB and 51AC deal with 'substantive unconscionability' which relates to the actual operation of a contract. 2.2 Introduced in 1992, subsection 51AA states 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 and Territories'. 'Unwritten law' refers to the law developed by the courts of common law and equity. The reference to unconscionability in section 51AA stems from the traditional equitable doctrine of unconscionability relating to unconscionable bargains and special disadvantage.1 2.3 The equitable doctrine of unconscionability was expounded by Justice Mason in Commercial Bank of Australia Ltd v Amadio (1983) who referred to 'special disadvantage' 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 special disability or is placed in some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink.2 2.4 Significantly, the High Court made clear that a mere disparity in bargaining power between the two parties would not, in itself, be considered a 'special disability'. One of the parties must be affected in their ability to make a judgment as to his or her own best interests. The Amadio judgment also established that it is only the setting in which a contract is made that is relevant to a finding of unconscionability: if the operation of the contract is harsh, it cannot be impeached on the grounds of unconscionability.3 1 See paragraph 1.3 2 (1983) 151 CLR 447 at 461. 3 Liam Brown, 'The impact of section 51AC of the Trade Practices Act 1974 (Cth) on commercial certainty', Melbourne University Law Review, vol 28, 2004, p. 595. Page 4 2.5 Subsection 51AB was the original provision in the TPA on 'unconscionable' conduct. It was first inserted in section 52 of the Act in 19864 but was shifted to section 51AB as part of the 1992 amendments.5 Subsection 51AB(1) states that 'a corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person, engage in conduct that is, in all the circumstances, unconscionable'. Subsection 51AB(2) states the matters to which a court may have regard in determining whether a corporation has contravened subsection 1. These include: • the relative strengths of the bargaining positions of the corporation and the consumer; • whether the consumer was required to comply with the conditions that were not reasonably necessary for the protection of the legitimate interests of the corporation; • whether the consumer was able to understand any documents relating to supply of the goods or services; • whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the corporation in relation to the supply of goods or services; and • the amount for which the consumer could have acquired identical or equivalent goods or services from a person other than the corporation. 2.6 Section 51AC was introduced in 1998 to protect small business from unconscionable conduct.6 Similar to s51AB(2), subsections s51AC(3) and 51AC(4) list a number of factors that the courts may consider in determining whether the conduct of the 'supplier' (51AC(3)) or the 'acquirer' (51AC(4)) is unconscionable (without in any way limiting the matters to which the Court may have regard). These include the five factors listed in section 51AB(2) (above) in addition to the following factors: • the consistency of the conduct with similar transactions; • the requirements of any applicable industry code; • the non-disclosure of conduct which might affect the person's interest; • the extent of negotiation of a contract; • whether the supplier / acquirer has a contractual right to vary unilaterally a term or condition of a contract; and 4 Trade Practices Revision Act 1986, No. 17 5 Trade Practices Legislation Amendment Act 1992, No. 222 6 The amendment was based on a recommendation by the House of Representatives Standing Committee on Industry, Science and Technology in its May 1997 report into fair trading: Finding a Balance: Towards Fair Trading in Australia (also known as the 'Reid Report'). Page 7 contract that is harsh in its operation'.13 Associate Professor Zumbo has described this ruling as the 'final nail in the coffin' for section 51AC.14 2.17 Case law therefore establishes 'serious misconduct' as the threshold for a finding of unconscionable conduct. It is not adequate for a small business plaintiff to cite conduct contrary to one (or various) of the factors listed in 51AC.15 There must be evidence of procedural misbehaviour in contract formation or an absence of 'good faith'.16 There is an important issue, however, as to whether the courts and the regulator have been overly cautious in developing section 51AC case law. The legal view of 'unconscionability' 2.18 Several commentators have noted that the 'unconscionable conduct' provisions in Australian law are very case-specific. Justice Paul Finn has noted that while there are unconscionable conduct provisions in the TPA, the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 (section 12CA–12CC): The one thing we can say with confidence is that it does not have a uniform meaning in the various sections it inhabits.17 2.19 In similar vein, Professor Bryan Horrigan has observed: Unconscionability may be considered a "descriptive theme" for the grouping together of various strands of doctrine, but the theme itself cannot be used as some kind of overarching test.18 2.20 In a 2007 article, James Davidson explained this issue in the following way: The use of the umbrella term 'unconscionable' is convenient but then to try and fit circumstances into the doctrine on the basis that they seem 'unconscionable' or 'unfair' within the popular meaning of those words would be to misunderstand the applicability of the doctrine. Put simply, the logic is that a set of circumstances between two parties which give rise to relief under the doctrine of unconscionability may also be the circumstances which are unfair and unconscionable in the popular sense of the word, but 13 Liam Brown, 'The impact of section 51AC of the Trade Practices Act 1974 (Cth) on commercial certainty', Melbourne University Law Review, vol 28, 2004, p. 616. 14 Associate Professor Zumbo, Proof Committee Hansard, 3 November 2008, p. 4. 15 This is what Liam Brown has referred to as the 'scattergun' approach. He notes that it is not surprising that these cases have rarely succeeded. 'The impact of section 51AC of the Trade Practices Act 1974 (Cth) on commercial certainty', Melbourne University Law Review, vol 28, 2004, p. 613. 16 Liam Brown, 'The impact of section 51AC of the Trade Practices Act 1974 (Cth) on commercial certainty', Melbourne University Law Review, vol 28, 2004, p. 621. 17 Justice Paul Finn, 'Unconscionable conduct?', UNISA Trade Practices Workshop – 2006 18 Professor Bryan Horrigan, 'The expansion of fairness-based business regulation', Australian Business Law Review, vol 32, 2004, p. 169. Page 8 popularly held precepts of unfairness or unconscionability will not on their own invoke the doctrine.19 2.21 Indeed, in their submission to this inquiry, the ACCC emphasised that what is 'unconscionable' will depend on the facts of the case and the particular circumstances in which the conduct occurs. In other words, 'the same conduct may be characterised differently depending on the circumstances in which it occurs'.20 The structure of the report 2.22 The crux of this inquiry is whether or not section 51AC of the TPA is working according to its legislative intent. There are two broad views. 2.23 The first is that the development of case law on section 51AC has been disappointing and that the section is therefore not working. In other words, there are many more unfair contract terms ('substantive unconscionability') operating in Australia than what the prosecution record would indicate. Accordingly, the courts need greater guidance in interpreting the Act which could be achieved through a definition or examples of 'unconscionable conduct'. Chapter 3 of this report examines these views. 2.24 The opposing view is that section 51AC has worked, and is working well. The lack of successful prosecutions is evidence that business is complying with the law. Any amendment to section 51AC of the TPA would create uncertainty, confusion and less flexibility for the courts to adjudicate on 'unconscionable conduct' cases. Chapter 4 of this report examines this argument. 2.25 Chapter 5 presents the committee's view on the need to amend section 51AC of the TPA and the scope and content of these amendments. 19 James Davidson, 'Unfair contract terms and the consumer: A case for proactive regulation?', Competition and Consumer Law Journal, vol. 15, No. 1, August 2007, pp. 74–92. 20 Australian Competition and Consumer Commission, Submission 27, p. 2.