Legal Insights

Unconscionable conduct and the Quantum realm

By Shaun Temby, Christopher Marsh & Naini Rautela

• 06 July 2021 • 5 min read

In a decision clarifying and arguably broadening the scope of unconscionable conduct in Australia, the Full Federal Court has held that, for conduct to be ‘unconscionable’ under the Australian Consumer Law, vulnerability or disadvantage is not an essential element.

The Full Court upheld the ACCC’s appeal of the trial Judge’s decision concerning the conduct of Quantum Housing Pty Ltd (Quantum Housing) and reinforced, when assessing whether conduct is unconscionable, the key consideration is the extent to which the conduct differs from the norms of commercial behaviour.

Background

Quantum Housing was an approved participant of the Commonwealth Government’s National Rental Affordability Scheme (NRAS). The NRAS offered incentives to ‘approved participants’ such as Quantum Housing to build and offer rental accommodation to low and middle income earners by way of a subsidy. As part of its business, private investors purchased rental properties from Quantum Housing and negotiated the terms by which the financial incentives of the NRAS were passed on to them. The agreements were usually in a standard-form and it was common for a property manager to be appointed to manage the investor’s property and ensure its ongoing qualification with the NRAS scheme.

In 2017, Quantum Housing’s management devised a Roll Up Plan to encourage investors to transfer the management of properties that qualified for incentives under NRAS to property managers approved by Quantum Housing. The investors were unaware that Quantum Housing had commercial links with these approved property managers. Quantum Housing’s plan created a sustained and deliberate method for taking advantage of their superior bargaining power relative to the investors. Under the Plan, Quantum Housing:

  • pressured at least 450 investors to change property managers by issuing several letters with false and misleading facts
  • imposed a requirement of a $10,000 security deposit for any property managers not approved by Quantum Housing
  • refused to renew Portfolio Management agreements with any property manager who would not pay the $10,000 deposit
  • threatened investors who had not changed to a Quantum Housing approved property manager that they had breached their agreement with Quantum Housing.

There was no legitimate reason behind any of these actions, except to coerce investors to switch property managers. Consequently, at least 260 investors switched to a Quantum Housing approved property manager.

The ACCC instituted proceedings against Quantum Housing in April 2019 alleging that Quantum Housing made misleading and deceptive representations and engaged in unconscionable conduct.

Decision at trial

Prior to trial, Quantum Housing admitted it had made false and misleading representations to investors and engaged in unconscionable conduct. While the trial Judge found Quantum Housing had made false and misleading representations, he did not agree with the parties’ position that Quantum Housing had engaged in unconscionable conduct. The trial Judge:

  • formed the view that an earlier High Court decision meant that exploitation of a pre-existing vulnerability or disadvantage was a necessary element of unconscionable conduct
  • took the view that investors were neither vulnerable or in a position of disadvantage in any relevant circumstance (that were capable of being exploited) and investors were capable of looking after their own interests and understanding the nature of their dealings with Quantum Housing
  • given these findings, was unwilling to hold Quantum Housing’s conduct as unconscionable.

ACCC’s appeal

On appeal, the ACCC argued that the trial Judge’s decision that Quantum Housing’s conduct was not unconscionable was incorrect and that the Court had erred in deciding that unconscionable conduct:

  • requires, in every case, exploitation by the stronger party of the weaker party’s vulnerability or special disadvantage
  • must cause the weaker party to suffer financial disadvantage
  • requires, in every case, exploitation of some vulnerability or disadvantage.

The Full Court dismissed the first two grounds as they were based on an incorrect reading and interpretation of the trial Judge’s reasoning. In assessing the remaining arguments, the Full Court closely analysed a number of recent Court decisions and, in doing so, confirmed that the High Court had previously rejected the argument that taking advantage of the vulnerability of a party was a vital element of unconscionability. Following this analysis, the Full Federal Court found that:

  • while a pre-existing vulnerability or disadvantage may exist in many cases of unconscionable conduct, such vulnerability or disability is not an essential element or requirement for a finding of unconscionable conduct to be made
  • to identify unconscionable conduct, the Court must evaluate the impugned conduct to ascertain whether it has shifted away from normal commercial behaviour and conduct
  • in all of the circumstances, Quantum Housing had sufficiently departed from acceptable business standards (in particular, because it misused its superior bargaining position by dishonestly misleading and pressuring investors by imposing unnecessary commercial requirements) so as to amount to unconscionable conduct.

In doing so, the Full Court upheld the ACCC’s appeal.

To consider

The Full Federal Court’s decision clarifies how unconscionability should be assessed with the focus now clearly shifting away from an analysis of the parties’ disadvantage and vulnerability, to a consideration of whether or not acceptable business standards have been met. Regrettably, the Full Federal Court has not expressly stated how it will define and assess acceptable business standards, which has the potential to create significant uncertainty for businesses.

The Full Federal Court’s judgment has broadened the scope for unconscionable conduct, as more allegations will be able to meet these new requirements. Consequently, parties must consider all of the circumstances surrounding their conduct, the parties’ relative strengths, the existence of any relative code of conduct and identify whether any of the elements of unconscionability outlined in the ACL are present in their proposed conduct. Businesses must now, more than ever ensure that all staff members are aware of these new risks and understand the importance of adhering to industry standards.

Want to know more on conscionable conduct under Australian Consumer Law?

Get in touch with our Consumer Markets & Franchising team.

By Shaun Temby, Christopher Marsh & Naini Rautela

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